Tuesday, June 10, 2008

Oil economics

I was listening to NPR on the way home from work today, and there was a news blurb about the high price of crude oil (around $140/barrel lately). It said that, in an effort to reduce gas prices:
  • Democrats want to tax oil companies and give tax breaks on gas to working families.
  • Republicans want to tap ANWR and other currently off-limits domestic sources of oil to increase supply.
Both of these options sound pretty ridiculous—or perhaps I should say "unviable" or "unsustainable". We Americans don't have a God-given right to cheap petroleum, not even if our lawmakers say so. The factors that determine petroleum prices at any given time are complex, but there's one fundamental force at work in the long term: economics. And, despite Congress's desires, you can't legislate away economics. At least the energy secretary seems to understand that.


The Democrats want to tax oil companies (or reduce their tax breaks). NPR said that the petroleum industry receives $17B in tax breaks, but they didn't specify over what time period that was. Let's assume the best-case scenario (for consumers):
  • The $17B/year would be distributed back to taxpayers directly.
  • The profits of the three largest oil industry profits ($71B/year in 2007) would be returned to taxpayers.
That adds up to $88B/year in savings to consumers. The U.S. uses about 142B gallons of gasoline a year, so that comes out to a total savings of $0.62/gallon. The more realisitic option of eliminating tax breaks but leaving profits alone would produce a savings of only $0.12/gallon. These savings are significant, but not sustainable. More importantly, this solution doesn't fix the underlying economic problems. It's just a Band-Aid. (Sources and calculations.)

U.S. Oil Reserves

I don't need to construct a long argument for this one: currently available U.S. oil reserves would last about three years at current rates of consumption. Tapping currently off-limits areas would approximately double that. Band-Aid? You bet.

Option Three

Let me suggest a third option to add to the two lousy choices reported on NPR:
  • Reduce demand for petroleum, or face up to the high (and rising) prices.
The only sustainable, long-term solution is to use less oil, since it's a finite (and dwindling) resource. No matter how many laws Congress passes, they can't cause trillions more barrels of oil to appear in the ground. Rather than trying to hide the problem with Band-Aids and gimmicks, we should face reality.

Of course, politicians know that telling people the truth about economics doesn't get you elected—most of them, anyway. I've been very impressed with Barack Obama's position that we should not lower the gas tax. He argues that it doesn't make sense, and he's right. He's a politician who's arguing for what's right and reasonable instead of what's popular right now. That's impressive.

(As a side note, I took this post's photo in August 2006 and labeled it "Crazy gas prices in St. Mary, Montana" because the price was the highest I had seen in my life. These days, that price is "crazy" again, but because it's crazy cheap, not crazy expensive!)


jacob said...

You didn't mention anything about blowing up China. They are a huge consumer of oil. It's important to remember that this is a global problem. Do you really think if we took the oil company profits away from them, they would want to increase the supply in the U.S.? Or would they instead want to sell the oil elsewhere in the world where they could make more profit?

Anonymous said...

I agree with Jacob on this one. There's no way we can win with the oil co's pushing the buttons on how much they want to charge the public. And if the Gov't does try to tax them who do you think is going to end up paying the tax. I'll bet my last dime that it's not going to be the gas companies.They'll just add the tax to the price of the gas they sell to the consumer.Every-one should know by now that the big gas companies have got the usa bent over the barrel and they're sticking it to us. And if we want to continue to drive our gas guzzlers we're going to have to pay out of the ying-yang for that priviledge. It's not the gov'ts fault and it's not the gas companies fault either. If you want to blame someone look at yourself in a mirror. You're the one who voted for every representative we have in both the legislative and judicial offices in Washington, D.C. And as long as we the people let them run things it"s just going to continually get worse. What happened to gov't for the people and by the people that our fore-fathers wanted us the people to have??????????????????? WilmoJo 1 @aol.com

Anonymous said...

Some public policy options:
a) Take away profits from oil companies: remove incentive for them to try to expand the supply. (Depending on how they want to expand the supply of oil, this could be a good thing or a bad thing.) This seems likely to increase the cost of gasoline, also.

b) Eliminate taxes on gas sales: make some consumers feel good, help people keep driving as much as they used to, and take away billions of dollars of revenue from a government already drowning in debt.

c) Do as Europe and tax the heck out of gasoline: artificially accelerate the transition to alternative technologies, increase gov't revenues, make people really mad and don't get elected in November.

d) Let the market do its thing: continue the transition away from oil that has already begun, maintain current revenues for government, tick people off by your inaction and don't get elected in November, unless you're an incumbent congressman or a Democrat.

I support c) or d) but those are obviously the politically infeasible solutions. Oh well, the power of oil prices is a steam train that will crush any government policies or wishful thinking trying to stand in its way -- so start using something else. Let the dead and decaying paleo-junk that is fossil fuels rest in peace!

Good post, Bruce.

Bruce said...

Jacob: Great point! Let's blow up China! I don't know why I didn't think of that one before! Where's my Big Red Button?

As for profits, I wasn't advocating taking them away. I was making the point that taking them away wouldn't solve the problem. And the inevitable gravitation of these global companies away from the U.S. is one example of how it would fail to solve the problem.

anonymous dude: From what you wrote, it seems like you don't agree with Jacob. I think he was implying that we should leave oil companies alone, and you seem to be saying that we should impose controls on them.

I do share your frustration with the current political system, though. It's too bad that it's so difficult for anyone who's not a mainstream Democrat or Republican to get elected. An instant-runoff voting system would make candidates from smaller parties viable, but guess who makes the election laws?

Josh: Thanks for the thoughtful (as usual) response. I agree with you on options c) and d). It's a shame that The Man has so much control that those options aren't politically viable, although I suspect that option d) will win out in the end. The invisible hand is a very persistent opponent, and eventually it won't be worth fighting it anymore. I just hope we're not up a creek without a paddle at that point.