Dave's Energy

Tuesday, April 29, 2008

Energy Policy. First Step: Admit You Have a Problem

I would like to propose two prerequisites for any political candidate:
#1) take at least one Economics Course
#2) Visit an AA meeting

As we continue to suffer the ridiculous rhetoric and glaring lack of economic understanding from our Presidential candidates on how to solve our energy issues, I am reminded that most alcoholics know how you start to fix an addiction. You first admit you have a problem. Our politicians haven't done so yet.

Instead, they want to blame everyone else: OPEC isn't producing enough; Big Oil is greedy, speculators are causing the problem; Detroit won't make the right cars; taxes are too low on energy producers (I love the stupidity of that one).

Back in the 1970's, my connection to the energy business was a modest one. I was a teenager working as a gas station attendant in California (before the days of "self-serve"). I have distinct memories of turning customers away during the days of gas rationing, which in California meant consumers could only buy gas every other day, based upon the last number (odd or even) of your license plate. I was 16 years old and I had the power to refuse service to people. Boy, did they hate that. People begged for just a gallon so they could get to work, school, etc. It was a terribly misguided energy policy, and it caused people to hoard gas, fill up more often, and even steal gas (people learned to siphon from other cars, and this led to the invention of something previously unseen: a locking gas cap).

That bad policy did nothing to help people during a shortage, and in fact probably exacerbated it, but what it did accomplish was that people started to admit they had a problem: an addiction to something with finite supply. At the same time, something very different than today was being discussed by our leaders... they actually said that oil would likely stay high in price and get worse over time. With oil at $30, they said it could go to $100! From our President (Jimmy Carter got on TV in his cardigan sweater and asked us to turn down our thermostats), to OPEC leaders, to academics, and everyone on the street, we heard a consistent song: Oil had spiked in price and was GOING HIGHER. This consistent message convinced us all we should change our behavior. We started buying smaller cars and paying attention to things like gas mileage. The Honda Civic had the most bland commercial on TV: it promised (and delivered) over 40 MPG.

Contrast this to today. Every day for the last 5 years you have been told that high oil prices are the fault of one group or another (but never the consumer). When oil hit $30/Bbl, you were told to just wait, because it would come back down. At $50, you were again told it was just speculators, that it would get better. At $70: same thing, and again at $100, and now at $118 or so. You are being fed the line that the politicians can fix it by calling Big Oil in front of Congress, by suspending gas taxes, by taxing oil companies for "excess profits". Not only is this ridiculous, but it allows the consumer to avoid coming to the conclusion that our HABITS MUST CHANGE. Instead....if you just wait one more week, one more month, one more year, they tell you it will all be fixed for you.

It won't. Certainly not by the proposals being floated by certain politicians.

In a commodity market where demand grows in linear fashion, but supply comes in discreet stair-step chunks (and only with massive investment over a long time), you get periods where PRICE is the only way the market finds balance. Price is the arbiter of who gets what, when. Price determines highest and best use.

In this type of market, there are two solutions to reduce price, an ONLY two solutions. One is to increase supply, and the other is to decrease demand. High price is the only signal to participants that causes them to either use less or produce more. If the price signal is not strong enough for either side of the equation, it continues to rise until one side finally moves. Right now, the oil companies are drilling at a historic pace, so they have responded to the price signals. But oil isn't discovered and brought to market the next day. It can take years. So, it is now the consumer who has not yet taken the price signal (both here and abroad). And instead of encouraging the consumer to do so, politicos are suggesting that we actually MUTE the signal by lowering gas taxes in the short run. And then they compound this by suggesting we increase taxes on producers of oil, which would lead to less drilling and production.

These misguided policies only serve to make the problem worse by decreasing supply and keeping demand high. Given that they have it exactly backwards (and I really don't think they are that stupid), I can only come to the conclusion that they don't really mean any of this, but it sells in an election year. The problem is that some people actually believe them, and I would hate to see us repeat the mistakes of the past on an even grander scale today.

So I say please to Ms. Clinton and Mr. McCain:
#1) take at least one Economics Course
#2) Visit an AA meeting

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