Arnold Kling  

Gasoline Hysteria

A Glimmer of Hope on Oil... Backwardation...

It's not just Democrats. National Review Online's James S. Robbins writes,

A strategic plan for secure and sustained energy would have many elements — shifting imports to more stable, friendlier countries, exploiting more domestic resources, pursuing alternative energy sources, and rapidly promoting the use of breakthrough technologies such as the thermal depolymerization process (that can extract crude oil from refuse ranging from old tires to agricultural waste) — but it will require leadership to set goals and coordinate action. Energy competition will be a key geopolitical factor in the 21st century — as it was in the last century. We need to get serious, before the decision is taken out of our hands.

This represents total ignorance of economics.

First, shifting oil imports from one country to another is pointless. It is all one oil market. Oil is oil.

As for alternative energy sources, the market will tell us when it is economical to deploy such technologies. I am sure that there are bureaucrats who are upset that "the decision is taken out of our hands" and given to the market, but that is what works best.

For Discussion. What is the track record of our past efforts to have government develop and promote alternative energy technologies?

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The author at Startup Skills in a related article titled Carnival of the Capitalists writes:
    This week StartupSkills is hosting the Carnival of the Capitalists. We're expecting a boost in traffic this week from plenty of new readers, so if this is your first time here ... Welcome! StartupSkills focuses on topics relevant to small... [Tracked on May 22, 2004 1:06 PM]
The author at Deinonychus antirrhopus in a related article titled Oil Is Oil writes:
    Check out this entry by Arnold Kling. Arnold looks at a recent proposal for a "strategic plan for secure and sustained energy." As is often the case with oil people's brain seems to fall out. Oil is oil (for the most part, Saudi oil is cheaper to refin... [Tracked on May 24, 2004 11:19 AM]
COMMENTS (15 to date)
Lee writes:

Oil is not oil. There are distinctly different externalities involved in buying oil from Saudi Arabia than from Mexico, for example. And since most of the oil industry operates as a cartel, it is not clear that a shift in demand for a particular country's oil is reflected in its price of oil. The same thing goes for buying oil from alternative energy sources. Because most oil is imported, we cannot tax to internalize these externalities. Therefore, regulation represents a legitimate, economically sound way of *lowering* the social costs of energy consumption.

Barry Posner writes:


Oil is oil. The world oil market is like one big bathtub, with some people dumping oil into it, and some people taking oil out. If we stop buying from the Gulf and buy from, say, Russia, then the people who used to buy from the Russians will buy from the Gulf. The end result is basically the same.

BTW, what are the social costs you speak of? Gasoline is taxed to pay for roads, so that kind of invalidates your argument.

To answer Arnold: given the market share of "alternative" energy, it's quite clear that government attempts to "steer" the market in that direction are a waste of time and money.

Norman Storwick writes:

In a very narrow perspective, Arnold is correct. The market will tell us when is the economically efficient time to shift to alternative energy.

However, there are significant externalities that frequently are overlooked through out this discussion.

Externality 1: Social costs of petroleum. The cost of roads is miniscule compared to the health/environmental costs of cars and trucks. The connection between particulate matter and diesel trucks appears pretty strong. And yet, there has been no effort, in the US, to begin taxing diesel fuel to pay for these effects.

Externality 2: Political costs of petroleum. I won't suggest that the US invaded Iraq because of oil. But I would suggest that we have a very poor track record of imposing regime change on dictators who don't live on top significant oil deposits. The fact that alternative energy could free us from the political dynamic that has claimed 750+ American soldiers makes the investment in alternative energy much more rational.

Boonton writes:

The economics of monopolies and cartels has been well studied, but they often assume 'rational' actors seeking their best self interests. What are the implications of an oil monopoly or cartel in the hands of an enemy whose motives are malevolent? (Or to rephrase that, an actor who sees harming the west as in their self interest rather than simply seeking to max. their economic profits)

Brad Hutchings writes:

Norman, I guaran-freakin-tee that when 2005 is totalled up, more than 750 people will be killed in accidents involving hybrid or alternative fuel vehicles. Also, counter-examples to your regime change theory (as best I can parse it) include: Germany, Japan, Panama, ...

The oil market, like all markets, punishes uncertainty. We opened a pretty big can of uncertainty when we invaded and occupied Iraq. Still, as pointed out in the comments of, gas prices at the pump account for a less significant portion of the TCO of a car than most would guess. For example, as a single 33 year old with no accidents and no tickets ever, driving a late model sports car about 10K miles this year, I will spend more on insurance than gasoline, even at these $2+ prices. Judging from the traffic still on the streets, I think people are realizing that things aren't terribly bad.

DG writes:

"It is all one oil market. Oil is oil."

This is manifestly untrue. Oil is categorized as "sweet" if it has a sulfur content not exceeding 0.5 percent or "sour" if it has a sulfur content greater than 0.5 percent but less than 2.0 percent. A good rule of thumb in the world of energy/crude oil trading is that WTI is a "better" crude oil than is Brent, for it is lighter and "sweeter" and therefore usually sells at a slight premium to Brent crude, which is traded in London. Brent’s sulfur content is slightly higher than that of WTI but is slightly less than is that of OPEC’s collective "basket" of crudes. Hence, all things being equal, WTI will trade at a premium to Brent, which will, in turn, trade at a premium to the "basket."

Barry Posner writes:


Converting sour oil to sweet oil is a fairly trivial exercise. All oil is not identical: some is slightly lighter or heavier, some contains a bit more sulfur or vanadium than others, but those differences are reflected in small differences in price. (Usually less than $2/bbl)

From a macro perspective, assuming that all oil is identical is not unreasonable. Take a $32 sour oil, add $2 or $3 worth of processing, and you have the same thing as a $35 sweet crude.

Paul Cox writes:

$41.50 close on NYSE for Oil.

Not bad, but has to be the deal of the past two millenium. (Normally I would reassert the $125 price, but I'll wait a while.)

Sandy P writes:

Keep an eye on cold fusion.

Fred Boness writes:

RE: The track record of our past efforts to have government develop and promote alternative energy technologies: We are still paying for Jimmy Carter's Synfuel boondoggle.

Every alternative energy scheme that is government subsidized is effectively using more energy than it produces.

There are a few articles starting to appear in the auto press that analyze the life cost of the battery in hybrid vehicles like the Toyota Prius. When the battery cost is factored into the per mile cost of the vehicle the hyper gas mileage benefits disappear. TANSTAAFL and all that.

Xavier writes:

I've never understood the argument that switching to alternative fuels would help to stabilize the political situation in the Middle East. Most of those economies are based on oil exports. If the rest of the world stops buying oil, it will plunge the Middle East (with the exception of Israel) into extreme poverty. Poverty and desperation tend to breed terrorism. I would think that switching to alternative fuels would make the Middle East even more violent and anti-American than it already is.

Lawrance George Lux writes:

The Government's record on alternative energy is actually not too bad. The measures they adopted because there was economic advantage worked well. Gasohol was promoted by Farm interests and Business for reasons of personal profit, not economic advantage, yet still worked relatively well--other than the cost to the Taxpayer.

I still have faith that there is an alternate energy source acceptable to replace Oil except as lubricant. It only requires the development of the technology. I am currently trying to research, without much success, the proposition that the burning of dried ocean sand deposits could be substituted for Coal-burning power plants, under the proper technological conditions. lgl

Dave Smith writes:
I would think that switching to alternative fuels would make the Middle East even more violent and anti-American than it already is.

True, but they would lack the capital to invest in their fanaticism. I'm sure that you can find lots of poor people in Africa who hate us for some reason, but without the money to invest in fighting us, who cares what they think?

I would have happily voted (if it were an option) to divert the $ needed to fund the political rebooting of Iraq toward alternative energy research. What is the government's track record on massive not-absolutely-necessary projects? I would say that the space program yielded handsome benefits.

Oil is oil, absolutely. Thanks to DG for the laughs. But the oil market isn't pure economics, it is political as well. If Russia and OPEC producers wanted to shut us down... THEY COULD. Yes, it would be at great expense to them, but are the leaders of OPEC nations necessarily rational agents?

don writes:

From Arnold's article in Techcentral:

As an economist, even if you told me that the policy objective is to reduce oil consumption, I would not opt for regulating the fuel economy of SUV's as my first choice. I would prefer a large gasoline tax (preferable phased in to give people time to adjust). This would give people a clear incentive to conserve, while allowing them to find the most efficient means to do so.

Don't you think that a large increase in gasoline taxes would lead to inflation and other wide-ranging effects on the economy? It takes trucks to get goods to markets, a particulary critical part of the gained efficiency from "just-in-time" and "made-to-order" manufacturing. All of these companies that cut back on warehouse space and unnecessary inventory might now have to rethink that strategy, leading to less-nimble reaction time to international competitors and markets. Am I nuts here?

sudhir writes:

Oil isn't quite oil when transactors in the markets aren't faceless and engage each other in repeated games of indeterminate length. I would suggest more $ poured into fusion (the 'hot' not the 'cold' variety) If we can shorten its development and commericial feasibility cycle by a half, then we would have enough energy to churn out enough hydrogen from seawater to make oil redundant.

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