Oil: Marginal vs. Average Cost

Would it be possible to institute price controls at this point, given the increasing demand from China and India?

Why don't we just impose our price controls on China and India too? Or forbid them from consuming any oil? Or, as we are violating basic laws of how the world works so we might as well throw aside thermodynamics too, just start costlessly changing salt water into light crude. The process has been available for decades but the greedy oil companies have supressed it. And a byproduct of this magical transformation process is a compound that is perfectly safe and causes people to become thinner and better looking. But it's being supressed by the fashion industry. And Microsoft.

I enjoy the site Arnold and appreciate the time you put into it, but price controls? Can we really get someone to argue the other side for something that is so obviously immoral and economically idiotic? Not that I doubt those people exist, but anyone browsing your site must have an open enough mind to recognize the blazingly obvious.

We should revert to Price controls to limit the demand for Oil, thereby reducing the Trade Deficit. Greedy Profiteer suppliers needs not enter into the discussion, except to spell "Relief" for American taxpayers (remembering I am in favor of major increases in Business taxes as well). lgl

lgl takes the challenge! Are we talking about the same price controls (ie, ceilings)? To reduce demand you would have to set an artificially high floor, which usually isn't what people mean by price "controls" (think price "supports"). Controls increase demand but reduce supply, which does reduce consumption but in an extremely inefficient way. Not as bad as simply outlawing the use of oil, but on the same track.

Unfortunately, there is no easy solution. If there were, we would have one already.

However, if we want to decrease the (quantity demanded)use of this commodity, the method is simple, and has already been discussed ad nausem, on this board and many countless others.

Coming of age during the price-controlled and shortage-infested 1970s, I can say unequivocally that the only good achieved by price controls is that they provide unequaled classroom examples for use by economics professors -- examples of outcomes that are obviously undesirable.

Bob,
We are indeed talking about ceilings. I would suggest a Dollar per gallon over Market-set value. Transport can be exempted as necessary travel--like the military, though I would suggest Airlines not get the exemption. It would never pass, but would be very effective. Most SUVs currently burn two tanks a week, and probably be reduced to one tank per week. This is considerably less traffic, at 15mpg. lgl

Price controls? As soon as domestic producers start making oil from farm products and tar sands in short-sighted response to the current high prices, I bet you'll start seeing support for "price floors" to "protect fledgling industries" so that the US gets closer to "energy independence". They'll call in Lee Iacoca to testify before Congress that the government would be saving itself money by propping up the price of oil, since the alternative will be paying unemployment and welfare to all the US energy industry workers destined to be fired.

"I would suggest a Dollar per gallon over Market-set value."

The problem is that this simply introduces a tax on the economy that would most severely impact working class people (at least outside the handful of centralized US cities w/ mass transit). The extra $80-100 a month per vehicle this tax would cost a working family would most likely drain a significant portion of their discresionary income. The main fallacy is that the tax does not acknowledge the largely static nature of short term energy demand. Work does not get any closer, most people cannot afford to replace their cars immediately etc. People just need to realize there are no short term fixes either on the demand or supply side. In the long run, improving the fuel effiency of the vehicle fleet needs to be done, but this will take 10-15 years to accomplish

lgl, I am confused. A price ceiling/max *above* the market price would have no impact on the price at the pump, right? Beyond, of course, sending the signal that the Gov is willing to meddle. I can see your logic if you mean a price floor/min (which, I believe, most of us are interpreting as a gas tax).

Why not just use ration coupons? It seems simpler than price controls, and it would have the same effect.

Dead and burried with Nixon a decade ago. There is absolutely no way either party could propose explicit price controls at any level without being called Girly Men. Much more likely that people could use the lgl logic above to demagogue SUV owners and legislate consumption limits. And even that isn't very likely. Politicians are smaller and more fragile than SUVs. OK, that was just a figurative statement, not a serious suggestion to run a meddling, regulating politican over.

What is the problem we are tyring to solve? We have a temporary surge in oil prices ... why the panic? Arnold makes an execellent point on marginal and average costs. The wedge between the two prices will fall as speculators are accomodated. One route would be to sell oil reserves and flush the system. The only trick is to convince governments to act with a profit motive and their citizens best interests.

I think the real problem is that OPEC keeps prices high by having "supply controls" instead of "price controls". When I say supply controls, I am referring to the fact that OPEC decides how many barrels of oil each country will produce.

I agree that we should NOT control prices. That would never work when there is a fixed supply.

Since the prices can't be controlled, the only solution is to increase supply. The only solution is to stop OPEC from ever again deciding upon the number of barrels of oil each country will produce.

With more oil exploration and drilling, oil companies could reduce the pressure on supply.

Like many things in economics, business and life, to drill or not to drill is not a simple question. Because the number of rigs is finite, the cost of drilling new wells goes up with the marginal prices of oil and gas. The dayrate (cost of leasing a drill rig for one day) is tracked by several services and reported to subscribers for a fee.

There is also good information available about the number of rigs in operation. This page has some interesting graphs showing the relationship between the number of active rigs and oil prices.

Jim, those charts are really interesting; I have learned a lot from this thread. Austin, is there any evidence that OPEC actually is effective in keeping the prices high? The arguments have been made that OPEC is basically maxed out anyway, and any further increases in oil output are lower quality, higher cost, and it's unlikely that output can increase significantly at the same marginal cost anytime soon.

Alex Tabarrok at Marginal Revolution has a post linking "price controls" to vaccine shortages.

Post Here

Personally, I am hard pressed to find situations where price controls in any form work very well.

All here seem to think little of my projected Gas tax idea, but the numbers are in and Oil imports increased over 12% in August, and not just in Dollar increases. We really have to initiate something to curtail SUV roaming, just like Cellphones. lgl

I think price controls are certainly a bad idea, and I suspect Arnold's question was posed tongue-in-cheek.

Still, the price of oil, while set in a market, is hardly set in the sort of competitive market that maximizes efficiency. There is a cartel and they do exert something similar to monopoly control, allowing for the usual inability of a cartel to have quite as much control as a true monopoly.

There are two issues here. The first is the purely economic one that in a monopoly market prices are set above marginal cost, leading to a deadweight loss. The second is political - much of the moey spent on oil goes to unattractive governments and surely some winds up supporting terrorism.

We can pretend these problems don't exist, but they do.

the price of energy cracked within 3 weeks of President Reagan's liberation of natural gas prices in 1981 -- six years later the price of crude FOB New York Harbor (or Bayway refinery) was around $8/bbl --

the energy crisis of the 1970's was caused by price controls.

Any time the government steps in to restrain the "greed" of one industry, it's really acting
on behalf of all the other industries that depend on it. It's interesting that all the large-scale antitrust actions in U.S. history involve infrastructures or resources that were central to the corporate economy as a whole. IOW, the very same industries that were nationalized under the European variant of state capitalism.

The state is executive committee of the state capitalists. When it intervenes to the detriment of some particular industry, it may use populist rhetoric to sell the policy to us suckers (with the help of court intellectuals like Art Schlesinger). But the real constituency it's serving is the rest of the corporate economy.

I was thinking about this today in relation to Congress opening up Alaska to drilling.

Does anybody know the difference in production cost of Alaskan Oil vs another standard cost benchmark?