Friday, June 16, 2006

Gasoline Prices and the US Economy

There have been a number of stories in the news in recent days concerning the implications of Iran or Venezuela cutting back oil production in retaliation for US policies. Iran is threatening to slow oil production because they claim we are not respecting their sovereignty in our demands that they stop their Uranium enrichment program. Venezuela is threatening to shut off oil because Hugo Chavez is concerned the US might seek to overthrow his government. When confronted with tough issues, a man I respect very much always says, "Let's not faint over this. Let's walk around it and see if it can hold water." In this case, walking around these threats is a short walk. Any sane economist will tell you that neither of these countries could keep us from getting the oil we need. Prices would go up, but all nations of the world would also pay higher prices, including the nations of Iran and Venezuela. These two countries are now subsidizing the costs of petroleum to their citizens. Even though they are "growing their own," so to speak, the cost of their subsidies would skyrocket because of the concept of opportunity cost (The actual cost to them is not their cost, but the market price). In addition, the public in both of these nations is not 100% on the side of the leadership. There are reports everyday about unrest in Iran, and there is evidence of huge capital flows leaving Venezuela from the disenfranchised investor class in the country. Any cut in oil production by Iran and Venezuela will ultimately fall on their own people, and the citizens of these two countries are not so sure they want to be in the gun sights of the United States. The Wall Street Journal is claiming that oil could spike $11 per barrel if either country stopped exporting oil. An $11 a barrel hike would add about 15% to the price of oil and a similar amount to the price of gasoline. That would push gasoline toward $3.25 per gallon. That is a high price, but its effects on the US economy would be negligible. Oil prices hit that level right after Hurricane Katrina. In addition, for years gasoline prices in Europe have been 2-3 times what they are in the US with only modest negative effects on their economies. Citizens of England, France, and Germany are all now paying over $5.00 per US gallon (The difference is taxes. European nations just love to tax). The US economy is amazingly resilient because Americans are a free people who are very adept at making choices about where they want to spend their money. Americans won't wait on the government to solve their energy problems; they will conserve energy, substitute other energy sources, and move to new technologies. Even if oil prices were to rise to $100 per barrel, as some believe possible, I don't think the impact would be as harmful as it might seem. In addition to making changes in energy consumption, Americans are wonderfully innovative. Most of the big computer companies in this country were started in a garage or college dorm room. The founders of most of the big drug companies worked in kitchen sinks and basement labs. Thomas Edison, Alexander Graham Bell, and Bill Gates did not make their discoveries working for the government. As I write this, bright-innovative Americans working in garages, basements, college dorm rooms, yes, and even in corporate and governmental laboratories are focusing on finding a new source of energy. The current "OPEC energy-extortion" can not stand because one of these innovators is going to wake up one morning with an idea of how to produce motion in a new and different way. When he or she does, there will be no shortage of lawyers, accountants, bankers, and investment bankers to bring the new idea to the market. This is not pollyanna, this is the history of the United States. How can anyone be pessimistic about the future when we have such a long track record of "figuring things out." We are not a nation that looks to governments or kings and queens to solve our problems. Good grief, governments and kings and queens the world over seem to need our help solving their own problems. I note with great interest that this week the Bank of America announced that they will contribute up to $3000 to employees purchasing hybrid automobiles. This is just the beginning. I believe many companies will follow Bank of America's lead and offer incentives to their employees for energy conservation of all kinds. To believe that things won't change, that we are going to continue to be held hostage to by nutballs like Iran's Ahmadinejad or Venezuela's Chavez is to ignore American history. The New York Times may believe it (although I doubt they really do. They just like to hurl newsprint bombs to watch people scatter.), but even a short walk around the energy problem reveals that the medias' gloom and doom arguments don't hold water.