OK, now you can impeach him
Alright, I don’t mean that. But what on earth is George Bush doing?
Gas prices are spiking again. Global demand of oil is rising, global supply is uncertain. One of the world’s leading suppliers, Iran, is in theoretical danger of having sanctions placed upon it. In a worst-case scenario, it gets attacked militarily. Either of these events will disrupt the flow of oil, and send prices skyrocketing. Facing that prospect, prices in the short-term will rise as those who can “stock up” do, thereby increasing demand and raising prices.
Price is the antidote to shortage in a capitalist economy. As supply shrinks relative to demand, there must be an arbiter of who gets that precious supply. This can be done either by playing favorites and creating lists and preferred recipients, or it can be done via price, with the supply going to whoever is willing to pay for it.
So, the price of oil goes up and the price of oil byproducts (gasoline, heating oil) also go up. So the middle class gets annoyed, and when the middle class gets annoyed, don’t try to get between a politician and a TV camera. The Democrats are out for blood. Bush is an oil man. Cheney is an oil man. Exxon is posting huge profits. Gas prices would be a buck-fifty a gallon were it not for these nefarious “ties” between our government and Big Oil. It’s never mentioned exactly how a friendly government causes high prices, but we can only surmise that it’s because it has failed to tax the shit out anything making a profit.
Let’s simplify this whole oil situation a tad. Let’s say the market price for a barrel of oil is $50. Now let’s say you’re out in your back yard “shootin’ at some food, and up from the ground comes a bubblin’ crude.” It’s so close to the surface and easy to extract you could practically do it with supplies from Home Depot. Last I knew, it cost about $6 a barrel to get oil out of the ground in the Middle East. Let’s say it costs you $10 in your backyard. Remember, the market price is $50. You make $40 a barrel profit. Are you gouging? Why would anyone charge less than what the market will bear?
So now imagine that a major disruption in world supply occurs and oil is now $70 a barrel. It doesn’t cost you any more to get it out of the ground than when it was $50. Your profits have gone up nicely. Are you gouging now? Should you be required to sell for less? How much less? Should your “excess” profits be taxed more?
Let’s say your brother doesn’t have oil in his backyard, but he bought a do-it-yourself refinery on eBay that lets him turn oil into gasoline. The refining process is a fixed amount per gallon of gas produced, but his raw material costs will vary with the price of oil. As oil goes up, his costs go up, meaning his selling price of gasoline must go up. That does not mean his profits go up. He may not make any more money when oil is $70 a barrel than when it is $50. You do, but you have a different role in the process.
So now, finally, lets say your neighbor has both crude in his backyard and the eBay refinery. While your brother has to pay market price for his oil, your neighbor’s oil cost is relatively fixed. He’s getting it from the ground for $10. He could sell gasoline for significantly less money than your brother. But again, why would he? If enough people have to pay market price for oil to make gasoline, and thereby drive the market price for gasoline up, why charge less than that just because you can? Is your neighbor gouging in charging the same price for gas as your brother?
Now the government steps in and puts price controls on gas. Your neighbor is essentially selling oil to himself to make gasoline, and getting his money from gas consumers. So the refining cost is fixed. Your neighbor’s oil cost is fixed, and the price of gas is fixed, and your neighbor still makes a profit. What’s the problem? The problem is he is no longer receiving $70 per barrel of oil he produces. He may only be getting $50. Nothing wrong with that, but none of that changes the fact that the global market for oil is still $70 a barrel. In other words, he’s losing $20 a barrel in choosing to make gasoline instead of selling it to someone else.
If the government does not step in, your neighbor can still voluntarily lower his price of gas and make $50 a barrel on the oil. But the same principle applies. He’s losing money to do this. Why should he? Because he might be accused of gouging?
Fortunately, President Bush is an oil man and understands this, but his recent call for an investigation into price gouging is disappointing. He is a politician, after all, but why not stand on principle, especially when you don’t have to run for re-election? The problem is that Bush is a panderer at heart, and no small-government conservative. When people hurt, government moves. When the middle class is annoyed, Bush must move. Being an oil man, he won’t actually go the route of price controls, and a call to investigate gouging is just a little harmless grandstanding. However, Bush feels he has to do something, and that something is to sell out industry and the American consumer. From today’s Washington Post:
President Bush sought to show that he was responding to calls for action in the face of rising gasoline prices. While visiting a gasoline station in Biloxi, Miss., Bush renewed his call for Congress to give him the authority to "raise" mileage standards for all passenger cars.
If Americans want more fuel economy, they will buy it. SUVs would gather dust in dealer showrooms, and hybrids would take off. But right now, Americans want room for their stuff. They’ve always wanted room for their stuff, hence the big cars and big station wagons of yesteryear. So why are Americans driving 4wd SUV’s instead of station wagons today? There are no station wagons today, save a few “sport wagons” which hold about as much cargo as you can carry onto an airplane. Why are there no station wagons today? Because the federal government sought to raise mileage standards for all passenger cars years ago. The same standards did not apply to light trucks (you’re smart, you know where this is going). So a car manufacturer could actually increase its fleet’s average fuel economy by making (exempt) SUVs instead of station wagons, though SUVs are less fuel efficient.
Bottom line: when the government meddles, the unintended consequences are often worse than the original problem. When regulations are enacted, loopholes exist, and perverse incentives are created. George Bush knows this. It’s a pity that he doesn’t have the same stomach for criticism on domestic policy as he does for foreign policy. His good judgment appears to stop at the water’s [other] edge.
Gas prices are spiking again. Global demand of oil is rising, global supply is uncertain. One of the world’s leading suppliers, Iran, is in theoretical danger of having sanctions placed upon it. In a worst-case scenario, it gets attacked militarily. Either of these events will disrupt the flow of oil, and send prices skyrocketing. Facing that prospect, prices in the short-term will rise as those who can “stock up” do, thereby increasing demand and raising prices.
Price is the antidote to shortage in a capitalist economy. As supply shrinks relative to demand, there must be an arbiter of who gets that precious supply. This can be done either by playing favorites and creating lists and preferred recipients, or it can be done via price, with the supply going to whoever is willing to pay for it.
So, the price of oil goes up and the price of oil byproducts (gasoline, heating oil) also go up. So the middle class gets annoyed, and when the middle class gets annoyed, don’t try to get between a politician and a TV camera. The Democrats are out for blood. Bush is an oil man. Cheney is an oil man. Exxon is posting huge profits. Gas prices would be a buck-fifty a gallon were it not for these nefarious “ties” between our government and Big Oil. It’s never mentioned exactly how a friendly government causes high prices, but we can only surmise that it’s because it has failed to tax the shit out anything making a profit.
Let’s simplify this whole oil situation a tad. Let’s say the market price for a barrel of oil is $50. Now let’s say you’re out in your back yard “shootin’ at some food, and up from the ground comes a bubblin’ crude.” It’s so close to the surface and easy to extract you could practically do it with supplies from Home Depot. Last I knew, it cost about $6 a barrel to get oil out of the ground in the Middle East. Let’s say it costs you $10 in your backyard. Remember, the market price is $50. You make $40 a barrel profit. Are you gouging? Why would anyone charge less than what the market will bear?
So now imagine that a major disruption in world supply occurs and oil is now $70 a barrel. It doesn’t cost you any more to get it out of the ground than when it was $50. Your profits have gone up nicely. Are you gouging now? Should you be required to sell for less? How much less? Should your “excess” profits be taxed more?
Let’s say your brother doesn’t have oil in his backyard, but he bought a do-it-yourself refinery on eBay that lets him turn oil into gasoline. The refining process is a fixed amount per gallon of gas produced, but his raw material costs will vary with the price of oil. As oil goes up, his costs go up, meaning his selling price of gasoline must go up. That does not mean his profits go up. He may not make any more money when oil is $70 a barrel than when it is $50. You do, but you have a different role in the process.
So now, finally, lets say your neighbor has both crude in his backyard and the eBay refinery. While your brother has to pay market price for his oil, your neighbor’s oil cost is relatively fixed. He’s getting it from the ground for $10. He could sell gasoline for significantly less money than your brother. But again, why would he? If enough people have to pay market price for oil to make gasoline, and thereby drive the market price for gasoline up, why charge less than that just because you can? Is your neighbor gouging in charging the same price for gas as your brother?
Now the government steps in and puts price controls on gas. Your neighbor is essentially selling oil to himself to make gasoline, and getting his money from gas consumers. So the refining cost is fixed. Your neighbor’s oil cost is fixed, and the price of gas is fixed, and your neighbor still makes a profit. What’s the problem? The problem is he is no longer receiving $70 per barrel of oil he produces. He may only be getting $50. Nothing wrong with that, but none of that changes the fact that the global market for oil is still $70 a barrel. In other words, he’s losing $20 a barrel in choosing to make gasoline instead of selling it to someone else.
If the government does not step in, your neighbor can still voluntarily lower his price of gas and make $50 a barrel on the oil. But the same principle applies. He’s losing money to do this. Why should he? Because he might be accused of gouging?
Fortunately, President Bush is an oil man and understands this, but his recent call for an investigation into price gouging is disappointing. He is a politician, after all, but why not stand on principle, especially when you don’t have to run for re-election? The problem is that Bush is a panderer at heart, and no small-government conservative. When people hurt, government moves. When the middle class is annoyed, Bush must move. Being an oil man, he won’t actually go the route of price controls, and a call to investigate gouging is just a little harmless grandstanding. However, Bush feels he has to do something, and that something is to sell out industry and the American consumer. From today’s Washington Post:
President Bush sought to show that he was responding to calls for action in the face of rising gasoline prices. While visiting a gasoline station in Biloxi, Miss., Bush renewed his call for Congress to give him the authority to "raise" mileage standards for all passenger cars.
If Americans want more fuel economy, they will buy it. SUVs would gather dust in dealer showrooms, and hybrids would take off. But right now, Americans want room for their stuff. They’ve always wanted room for their stuff, hence the big cars and big station wagons of yesteryear. So why are Americans driving 4wd SUV’s instead of station wagons today? There are no station wagons today, save a few “sport wagons” which hold about as much cargo as you can carry onto an airplane. Why are there no station wagons today? Because the federal government sought to raise mileage standards for all passenger cars years ago. The same standards did not apply to light trucks (you’re smart, you know where this is going). So a car manufacturer could actually increase its fleet’s average fuel economy by making (exempt) SUVs instead of station wagons, though SUVs are less fuel efficient.
Bottom line: when the government meddles, the unintended consequences are often worse than the original problem. When regulations are enacted, loopholes exist, and perverse incentives are created. George Bush knows this. It’s a pity that he doesn’t have the same stomach for criticism on domestic policy as he does for foreign policy. His good judgment appears to stop at the water’s [other] edge.
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