Picture of the Day - 2
Pfc. Samuel Rhodes, 25, from Albuquerque, N.M. of Delta Company, 4th Battalion, 31st Infantry Regiment, 2nd Brigade, 10th Mountain Division cuddles the company's mascot, Pork Chop, eleven days after a May 12 attack that left four U.S. soldiers and an Iraqi soldier dead and three comrades missing in Quarghuli village, near Youssifiyah, 12 miles south of Baghdad, Wednesday, May 23, 2007. (AP Photo/Maya Alleruzzo)
posted by mikevotes at
8:52 AM
10 Comments:
Hi,
I find it interesting that previously today I found a blog about the evils of oil company price gouging that included the admission that you don't understand economics, and when I returned to your blog, I found your orininal post as well as my reply, submitted in good faith to help enlighten you to economic theory, has disappeared.
Because I must assume you deleted your post before noticing my post, I will re-state it here:
I've heard several politicians spouting that oil companies are in essence raping the American public with artificially high refining costs, so your opinion has been garnered honestly based on news reports.
I majored in Economics in college, but now I am a travel agent, which shows how little economic sense I truly have when it applies to my own life. Speaking purely economically, I should be trying to maximize my profits rather than dealing in a low-paying service trade. The fact is, however, that I am privileged to enjoy my work, which is why everyone I meet not only thinks they can do my job but in fact wants my job instead of their high-stress careers. Because so many people are willing and able to do my job, I am unable to demand a high salary. That is supply and demand.
School teachers also face the same problem, although certainly not to the same extent. Not everyone wants to be a teacher, but enough people like the idea of lots of holiday breaks and summers off to keep the salaries of teachers from being "what they are worth" to society, but in fact, if the pay is remarkably too low, then people would stop getting their teaching credentials and become what they would really like to be....travel agents.
Politicians have lobbyists plow tens of millions of dollars into campaigns to get them elected to jobs that pay in the low six figures, so I guess you could say they are in the free market themselves as commodities. The perks of the job are numerous, and include those biggies Carl Jung speaks about so eloquently: money, power and prestige. I personally would love to have the retirement and medical care programs that Senators have. In order to get elected, however, it takes more than deep pockets of lobbyists. It requires pandering to the public to actually get votes.
There's no "truth in advertising" laws applied to politicians, so they smear their opponents using lies and half truths, so that even if their pandering fails to convince the public that they are on the side of the citizens, they can win because they at least are not as bad as that "other villain." I know you have no trouble believing this of President Bush, but it also applies to folks on your side.
If you are prepared to say that the oil companies make too much money refining oil, then it stands to reason that someone can make a profit by undercutting them. And yet, this doesn't seem to be happening. Why?
Primarily, the cost of entry into the business is too high for most of us to consider going into the field. There is the obvious fixed cost involved in buying the land and building the refinery, but there's also about ten years (this is just a guess) to get through the environmental impact and other studies required by THE GOVERNMENT to build the refinery. This limits the competition to something less than to being a travel agent, and so they make more money for their dirty job.
Interestingly, many of the same politicians also say that we consume too much oil, which they say is creating global warming. Supply and demand laws of economics translate into this simple truth: the higher the price, the less will be sold, but that only applies once equilibrium has been reached, at which point demand and supply have met perfectly. Apparently so far, the demand for oil is relatively inelastic relative to the price. Perhaps if gas in America cost the same as it does in Europe, then that would be sufficient to stop drivers from wasting as much fuel and polluting the air with CO2. How should this be accomplished? The government can impose greater taxes and then redistribute that income to their own favorite groups, or the people who take the risks and do the dirty job of providing gasoline can raise the prices and make profits.
The company employees take their paychecks and spend it on goods and services that employ other people, who again spend their money on things. About a year ago, it looked to me like gas prices were absurdly high, so I bought some Chevron stock in my IRA to replace some stock I owned in a restaurant chain that had recently been bought out. I had no inside information, but I figured that if I was paying over three dollars a gallon for gas, I wanted to be in that business instead of being a travel agent. My stock has gone up by about a third since then. Good for me!
The United States of America is the greatest country in the world, because all we need to do is look around and decide what we want to do. Some very intelligent people prefer to look around and see what they are NOT able to do, and as a result, they lead frustrating lives that makes them lash out at the injustices of capitalism and the free market system.
Politicians are happy to tell these people what they want to hear, which is that there definitely is a problem and the only solution in the hands of the politicians, and they will fly around the country in their private jets and take their private limos flanked by dozens of other gas guzzlers to go to a rally and tell you why you should cut back your consumption of fossil fuels and how the oil companies are evil for meeting your demand at a profit.
By
Wes, at 10:19 AM
Wes,
First, I didn't zap the post or your comment. It's here.
http://bornatthecrestoftheempire.blogspot.com/2007/05/questions-on-gas.html
I did retitle it, so maybe if you had a direct bookmark, that might be changed, I don't know, but it's there.
Second, thanks a ton for the long, obviously thoughtful comment.
Third, I'm in a bit of a hurry, so I can't give your comment the same length of response.
I would argue that the "true cost" of oil is not in fact being realized by the oil companies. The US government highly subsidizes them indirectly through foreign policy.
I would agree with your general point that demand is inelastic within the current pricing band and that a significant price increase, whether through taxes or whatever might stunt that demand somewhat, but part of the problem forcing that demand is within the very structure of our society itself.
I live in Houston, a city that largely developed within an era of cheap oil and its city structure reflects that with vast wide spread suburbs. There are some slow moves towards decentralization of offices and light manufacturing, but that's a very long process.
Frankly, I don't have a near term answer. We've gotten to wheere we are through a very long series of decisions that are not likely to be transformed in a year.
(Just as a disclaimer, I'm not really against the free market however, oil and gasoline do not exactly fit the free market model, from the environmental regulation you point out, as well as issues within the structure of our society, as well as oil companies not realizing some of their costs that are borne by our government.)
I'm not trying to engage in an argument, because frankly you sound quite set, but thank you for the thoughtful comment.
I absolutely LOVE well thought out criticism. You've added something to my thinking on this, so thanks a ton.
Mike
By
mikevotes, at 11:36 AM
Wes,
One more thought to act as sort of a secondary addition to your argument.
As a comparison for the difficulty in trying to get new refineries built, I would add the vicious "not in my back yard" efforts to block the much needed liquid natural gas import stations along the US West Coast.
Importing LNG overseas is hugely expensive, but we're nearing a longer term point where that will not only make sense but, eventually begin to be necessary.
But, the oil and gas companies are having a hell of a time placing the sea import facilities to bring gas from Russia and the Caspian because of local concerns about potential accidents at the proposed terminals.
If not resolved, that will create a somewhat similar supply problem down the road in a decade or two.
Mike
By
mikevotes, at 11:57 AM
Here is some informed comment on the subject
By
Praguetwin, at 5:25 PM
And one more
By
Praguetwin, at 5:30 PM
Thanks, praguetwin.
I certainly accept that supply is narrow.
My issue was more with the record profits that will likely be felt because of this imbalance, while my tax dollars are paying for oil company protection around the world.
In an indirect way, the US tax base is subsidizing those profits.
Mike
By
mikevotes, at 5:47 PM
Indeed they are. Market drives the price, but no one ever said it was a free market. Well, no one who knows better.
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