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Gas Puzzler by Jim Davies
July 9, 2008 Soon after landing on
American soil, I found myself lining up for gasoline for 45 minutes, and
that told me something was wrong with this land of free enterprise. When
all the establishment media I could lay hands on failed to explain the
shortage, I knew it was worse. When only a fringe magazine (The
Libertarian Review, July/August 1979, with outstanding articles by D.T.
Armentano, Murray Rothbard, Roy Childs et al) offered a credible
explanation, I learned where to go for more good sense on all manner of
anomalies; and so in due course I encountered Strike The Root. This year, there aren't
any gas lines (though stay tuned), but the price seems outrageous; and in
particular, its rate of increase recently has been amazing. Once
again, establishment media offer no credible explanation; reports of gas
prices often follow weather information, which seems quite appropriate
since they have little idea what causes either. But this time, there's a
difference: I've not yet seen a fully credible explanation of what's going
on even in libertarian literature. That's a first. Fair warning: This
article doesn't explain it either. Instead, I thought to review a few of
the partial insights given recently by some of the economists who know
which way is up--including Professor Armentano, for whom I have a lot of
time. And first, let's take note of the facts of the matter: how bad is
it, exactly? Probably
not quite as bad as it seems. Two years ago I enquired What Gas Crunch? and reproduced the
valuable chart published by a public benefactor in Texas over the modest
title "Random Useless Information" and his recent update appears
below. Yes, the price of a gallon is now higher than at any time
since 1981, in real terms - about $1.35, in 1979 dollars. So we do, now,
have a real surge. Why?
Dom Armtentano
wrote about this on LewRockwell.com a few weeks back, but he focused
mainly on the future: What will prices most likely do during the next
year? He said they will fall, and gave an excellent rationale. In summary,
the present high price of oil is stimulating producers to uncap wells that
were uneconomic when prices were lower, and so market stimuli will
work--he expects a drop to about $80/barrel by early next year. I
certainly hope he's right. His account of why it is currently over $130 is
more sketchy; he says 20% of the hike comes from supply disruptions and
10% from the dollar debasement and
while he may be right, those look a bit like intelligent guesses and don't
correlate well to the speed of the hike; I wish he'd spent more time
analyzing the causes more systematically. If the market
can work in the manner he expects, I am left wondering why it has not
already worked; why did these marginal producers not rush to take off
their mothballs last November
when the price sprinted past $80? Markets always work, of course, but only
when allowed to; governments frequently prevent them working, by
force. In fact, that's all that governments ever do--it's their
distinguishing feature. And if government(s) have prevented markets
working so far for this commodity, what's to stop them continuing to do
so? Doug Casey
offers
a free, 5-part course in oil economics--well worth studying--and while his
focus is on how best to invest in the black stuff, he makes the argument
that oil prices have risen because all the low-hanging fruit has now been
picked; a similar theme was struck here this month by Glen Allport.
Plenty of oil is left, but it will cost more to extract. Casey relies in
its Part 1 on some reasoning by M.
King Hubbert of Peak Oil, said to prove that US supply capability reached
a peak in 1970 and that of the world, in 2006. Some impressive bell-curves
are shown, but to my mind there is a degree of circularity in the
reasoning, and even if it is sound, it still doesn't explain the speed
of the recent price hike. Oil may indeed be a good long-term investment,
if one has anything left over to invest after paying fuel bills, but I
doubt that this really answers our question. If I understand Casey right,
the formula he gives for the bell curve (P/Q vs. Q) is not correct, and
there's a technical critique of Hubbert's theory here. In any case, to measure the
leveling-off of production doesn't tell us why it leveled off; was
there no more oil to extract? Had its price reached a level beyond which
competing products eliminate demand? Did government regulations forbid
drilling offshore, or prohibit new refinery construction, or limit oil use
lest the globe be further warmed? Did terrorists bomb pipelines? Were
there no more oil tankers afloat? Any number of factors could be at play.
I did say earlier that this article comes without answers--but in case anybody wants to know, here's my tentative opinion. I will change it as soon as new facts or reasoning show it's mistaken. The premise
is that the rate of oil price increase proves that no free market is
operating. It has doubled in nine months, during which time all players
have repeatedly said with straight faces that there is no abnormal
pressure of either supply or demand. During those nine months the Iraq War
has cooled a bit, not heated up. So, when the market isn't working,
there's no point in pretending it is; we must look elsewhere for
causes--to government(s), which alone have the power to distort and
manipulate markets. Which government entities have the motive, means and
opportunity to inflate oil prices? Cui
bono? There's no
shortage of well-motivated governments. Bush and his friends have managed
to aggravate at least four major oil producing states in different ways: Iran,
Iraq, Venezuela
and Nigeria--and Russia, too, is a bit grumpy. If
they have the means to hurt the United States, they will. Do they?
It's not obvious to me that they do. The oil market is worldwide
and rather fungible; they can't easily target one group of customers with
a selective high price. Saudi Arabia,
Kuwait and the other Gulf suppliers are allegedly friendly, as is Mexico,
Norway, the UK and Canada--so presumably they would not wish to hurt us
anyway, especially as the former have few places to put extra money except
into US assets; so what would be the point of raising prices so high as to
damage those assets in a resulting recession? I don't see any bono
there. Could there,
finally, be a manipulation by powerful internal groups, allied with
government? How about the oil
companies, the cartel that actually extracts, refines and distributes the
stuff. Might they be using
their clout with government to hike prices? They are certainly drawing
ample benefit, as many a left-wing commentator has whined, and their
connections to the Bush family are well known. But it would be
extraordinary if the cartel had held the (increasing) line on prices this
long, for the instant any cartel makes any agreement, every individual
member has a powerful motivation to cheat and break it. Two other eminence
grises come to mind. One is the Green Lobby, which is desperate to
drive us all back to medieval living standards by curbing consumption of
carbon fuels (and any others likely to prolong our prosperity). It's
popular with the Dems, but I'd have thought its influence with the Mob
Family presently in power was minimal. Okay, so what about the Republican
Party, or some group within it like the reigning Neocon faction? There, at
last, may be a possibility; they have motive, opportunity and perhaps the
means. The motive is that if the Dems win a landslide in November, they
(the Neocons) are history; their name will be reviled for a generation.
However, by manipulating a wild rise in the price of gas today, which hits
every voter hard, the bleating of their Dem rivals about conservation and
global warming and oil-company greed will fall flat; idealism may count
for a little with America's voters, but will go up in a puff of oily smoke
when gas costs $4.50 and impossible winter fuel bills loom. They will
turn, however reluctantly, to a John McCain and his dull, steady-as-we-go
promises about finishing what "we" started in Iraq, stabilizing
the Middle East, opening ANWR and allowing offshore drilling, etc.; the
scintillating but vacuous oratory of his rival will be forgotten in the
mad scramble for something to keep them warm and mobile.
As McCain's poll numbers
rise, I would not be at all amazed if pump prices were to fall. Jim
Davies is a retired
businessman in New Hampshire who led
the development of an on-line school
of liberty in 2006, who expects to experience a free society in his
lifetime, and who in 2008 wrote the book "A
Vision of
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