Rhinocrisy

Long time since we made any mention of the black gold round these parts. When last we left it, profits were high, oil price was surging, and times were good for all and sundry except those people who happened to, for example, drive an automobile.

In recent days the price of oil has jumped up quite high - I regret not having marked the passage of that meaningless milestone when it crossed $100 per barrel. But it is worth noting that the price of oil is now ten times what it was in the late nineties, before it began to climb.

Some fraction of this rise in price may be due to the drop in the value of the dollar. Although from the American perspective this makes no difference in terms of economics, it is worthwhile to convince ourselves that there is a scarcity-driven increase in oil price, and not just a monetary one. To the right is the trend in oil price (West Texas Intermediate) in both Euros and Dollars. Assuming Europe as our economic baseline, there has at least been an almost seven-fold increase in oil price since 1999.

Gas prices are consequently running pretty high (by American standards), and as our nation has a singular reliance on the automobile for more or less every kind of activity, it is to be expected that this should have some sort of economic impact. But how much?

The usual way of measuring these things is energy intensity, a quantity which purports to capture the overall efficiency of the economy. The calculation is simple: total GDP divided by total energy consumption. If this goes up, your economy is becoming more energy efficient, and its total reliance on energy has decreased. The usual argument is that our economy is now very tech-heavy and not extremely energy-dependent, whereas before it was built on dinosaur-like technologies that burned a lot of oil. The Oil Drum has a good treatment of this question with lots of comments from parties more knowledgeable than myself.

Irregardless^*, there’s a definite consensus that high oil price is problematic, and something must be done about it. As a matter of public policy the question is framed in terms of “high gas prices”, but it has at least made some inroads into the ongoing presidential pie-slinging competition.

Probably the stupidest proposal to come out is John McCain’s “gas tax holiday” plan, which is to suspend the gas tax during the summer months. Dean Baker (amongst many others) lampooned this idea as bunk, pointing out that if you remove the gas tax, the price probably wouldn’t drop all that much - corporations would simply eat the difference, and maybe pass a few cents in savings on to the consumer.^† Hillary Clinton, ever favoring style over substance, jumped on board this brainless scheme, and also piled on with a “windfall profits tax”, which we previously discussed here. This formula is sure to result in exactly the scenario described above: if the “windfall profits tax” is identical in amount to the gas tax, as Clinton suggests it should be in order to make up for the loss in revenue, then oil companies will have zero incentive to pass savings on to consumers, and the change in gas price will be $0.0000.

Once again Obama proves himself to be the sharp tack in the bunch:

“That’s typical of how Washington works. There’s a problem: everybody’s upset about gas prices. Let’s find some short term, quick fix. That we can say we did something, even though we’re not really doing anything. Because if you actually took away the gas tax, what are the oil companies going to do? They’re gonna raise your gas by 5 cents. You’ll never see the savings. And then we pretend to do something.”

There are, of course, only two actual solutions to easing the price problem: increase supply, or decrease demand. The former is perhaps impossible; certainly in the short-term there’s nothing that can be done. The latter is the only reasonable course. Conservation can have dramatic effects on consumption. Between 1979 and 1983, US consumption dropped from 20 Mb/d to 15 Mb/d, while automobile fuel economy doubled in the same period. It’s quite clear that the technology exists to produce a similar contraction (and, let’s not forget, we have other motives to do so), and only a small nudge and tweak is needed to encourage it to happen.

^* Yes, irregardless is a word. My spell-check told me so.

^† McCain seems to be floating a whole barge of bad ideas; the more I’m exposed to his actual policy perspectives the less I respect him.