Bush and His Oil Buddies Have Decided to Ease the Pressure a Bit (But Maybe Only In My Town) Part 2
by Johann Robert Riet
With warm temperatures, the high volume of active drivers, and both heating oil and gasoline beginning to accumulate in their storage tanks, George and his oil buddies are in a pickle to say the least. I know that they get a big kick out of charging the public the highest possible price for gasoline and hate to lower it. The current situation is a crisis indeed. So, I begin to imagine George W. Bush getting on Air Force One, and flying to an undisclosed location where he meets with all of his oil buddies, who manage all of his refineries on a daily basis.
I imagined that after chewing all of his buddies out for letting this situation arise (he was not buying their excuses about a warmer-than-expected January), they got down to business. As cartels and conspiracies often do, they began to look at their options. The first option that was considered was to slow down the refineries so that inventories did not build. George was told that that might not be a good option. First they had obligations to buy crude oil for the short term, and if they slowed down refining, the crude would build up in their storage tanks, and they might not be able to store it all. Besides, refineries have certain fixed costs associated with them, and those costs are incurred at a stable level, even if the refinery is underutilized. George got really mad and wanted to know why they bought so much crude. They tried to explain that they wanted to have enough on hand to be sure that no one went without heat in the winter, in case the winter was severe. He wasn't buying that. If we can gouge the public on price, why can't we short them on supply and let them freeze.
Well, George is not one to dwell on a point too long, so they moved on. He suggested that perhaps we can lower the price of heating oil, and get the public to buy more. His flunky energy prognosticators quickly explained that while buyers have some discretion to use more heating oil by increasing their thermostats, if the weather is warm, it is warm. Regardless of a lower price, the demand will not increase very much unless the winter gets much colder. "Well, Damn," George shouts! "What can we do?" His flunkies quickly inform him that the public's discretion over the amount of driving they do is considerably more than over the amount of heat they use. They had told him all this before, but he forgets easily. One wonders how he got so rich. Wait a minute; he is not that rich (Bill Clinton is probably richer). But I digress.
The toadies recommend that he drops the price of gasoline and that will increase the quantity of gasoline demanded by the public. They were sure they could lower the price enough to bring the use of petroleum products in balance with the manufacturing of them. "Aw, heck, you know how I hate to lower the price of gasoline." His buddies quickly pointed out that he will actually get richer if he does so, because even at the lower price he still makes money on every additional gallon sold as utilization rises. A lower price for gasoline is a much better alternative for getting richer than slowing down the flow of products to keep the price high, and dealing with crude inventories and underutilized refineries. George scratched his head and said he had a hard time believing that. Anytime he spoke to anyone from the public, he noticed that they thought he got richer when he raised the price of gas. His flunky oil buddies asked him to trust them.
It is called supply and demand, George. When demand is high compared to supply, we can make more if we raise prices. We also match utilization of gasoline to our ability to manufacture it, by using the higher price as a rationing mechanism. So not only are we making more money, but we are saving our customers from the torture of long lines at the gas station, which would occur if we (George and his oil buddies) maintained a price so low that the utilization of gasoline would be greater than the ability of the refineries to produce. But those pesky consumers usually reduce their consumption when we raise our prices. That is OK by us, as long as we have alternative uses for our crude, but when we don't. such as now, it is downright troublesome.
That is our current problem. When consumer demand is lower than we wish it be, in order to utilize our current excess production, we can stimulate consumer demand by lowering price. We will still make more money, provided that we still sell it for more than it costs to make it, we only make less. George heard some highly esoteric discussion off to the side about something called elasticity of demand, but he never did follow that stuff. Suffice it to say, that George did not want his crude oil building up, and he had few options other than lowering the price of gas in order to match production to utilization.
With that discussion over, and with George being more than a little miffed about having to lower the price, all of his buddies got out cigars, and gave one to George. One of his buddies, not wanting George to stay mad, mentioned that as soon as the winter was over, summer driving would be upon us again, and the utilization of gasoline will probably go back up. In addition, with Katrina behind us, George could force the industry back to making a zillion grades of gasoline instead of only a few thousand, so that the "environmentalist whackos" would be happy. Forcing refineries to make so many grades of gasoline affect production costs, and therefore raise the price of gas, demand and supply being held constant. They also mentioned that the demand out of India and China is projected to increase steadily out into the future, and so by the summer, George's buddies told him, we could once more raise the price of gas and all would be happy. Well maybe not the consumer who does not own oil stocks, and is not an "environmentalist whacko."
As they sat around and smoked their big cigars, George mentioned that he did not know if he really needed all the extra money that was coming in when he raised the price of gas. He asked his buddies whether there was not something they could do with the money that would benefit all around. "Well," his buddies told him, "we have to charge the higher prices, when our supplies are constrained, otherwise the consumer will have to sit on long lines at gas stations for dwindling supplies of gasoline. Without higher prices as a reason to reduce their driving, their demand for gasoline will outstrip our ability to supply it." Well no, George didn't mean that the consumers should not be charged a good market price for their gasoline. He was merely wondering out loud if something could not be done with the extra revenue other than to gussy up his ranch, or his buddies' ranches.
His buddies did not have any ideas, so George kept on wondering out loud. He wondered whether he and his buddies could use the money to drill for more oil, so that the supply of crude would increase, and thus the price of crude would decline. He remembered that 50% of the price of a gallon of gas was the price of crude and reasoned that the price of gas could come down - even though demand went up - if there was more crude oil available at lower prices. His buddies laughed out loud. One said, "Now if you want to talk about something more common and more inevitable than a rise in gasoline prices, let's talk about the opposition we will face from the left wing Democrats, and the RINO Republicans (some call them moderates). There is no way anyone is going to let you drill for more oil, at least not in this country." George wanted to know, can't we drill overseas. His buddies continued laughing and reminded George that he had just said that we should become less dependent on foreign oil, in his State of the Union speech.
George did not get to be President by being easily deterred. Perhaps we could build more refineries, and produce more gasoline from available supplies of crude. We could outbid the Indians and the Chinese if we had more refineries. By now his buddies are really rolling on the floor laughing. One of them asked, while howling, "Where are we going to build a new refinery?" Not in the U.S.! "Even if we could get the land, and the locals would allow it, the environmental regulations would make the costs prohibitive." George was still not defeated. "Well, maybe we could get into nuclear, and thereby save our crude oil for heating oil and gasoline, by not using it to generate electricity." His buddies' sides were now splitting... "In the U.S., with the Democrats and RINOs you have in government. Not a chance!" "Hey what about windmill farms?" By this time the buddies didn't think they could laugh any harder. "George, I am not surprised that you could not find those WMDs in Iraq. It would take 20+ lines of windmills from Boston to Miami, just to make up for one day's utilization of crude oil to generate energy in this country. Besides, the Kennedys had already put the kibosh on a large wind farm in Massachusetts, near their vacation homes. Also, the animal rights activists are getting pretty PO'd about all the birds that run into those windmills and get killed."
George just would not learn, so he asked about ethanol. His buddies could not control themselves at all. "That is one hell of a lot of corn! And what are we to do with all that money, and what are we, and of course, the people going to do when the supplies of crude and refined products begin fall short of demand, at some point in the future?" He told his buddies to remember how energy dependent our technological economy is, and how desperately we need energy to keep people warm, employed and generally satisfied. "Hell. We even use petroleum to grow our food." His buddies quit laughing for a moment, and soberly told him that they didn't have a clue, except to keep on gussying up their ranches.
George finished his cigar, and stood up and headed for the door. He turned and looked at his buddies, and said, "Well I guess we can always count on the free market to solve this problem." As he walked out the door, he could not understand why his buddies were rolling on the floor laughing harder than any other time during their meeting.
At that point traffic stopped in front of me, and I had to slam on the brakes, and come back to reality. I didn't figure anything out while daydreaming and driving, except it is a dangerous thing to do. I ran back over the possible forces controlling my access to affordable and available energy. There was the free market, but there appeared to be a lot of the public, and many in government, who did not trust the free market to do the job.
These opponents of the free market are dead set against allowing it to function regardless of how many times it proves itself superior to a "managed economy." I could depend on the lefties, who fancied themselves smarter than anyone, including the combined wisdom of the free market, and the ones who believed in a managed economy. Unfortunately, there were the lefties in government, and their supporters in the public, who didn't want a refinery next door to anyone, or a wind farm next door, or a nuclear generating plant next door, or oil drilling platforms anywhere, or any wildlife disturbed. I figured with all of those constraints, they could not guarantee me affordable and available energy. Besides they keep screaming about conservation. This seems strange, because a lot of them drive really big cars and fly really nice airplanes. Then there were George and his oil buddies. The traffic had started to move, after wasting a bunch of precious fuel while sitting and idling away. I put my car in drive, and decided that I was much more comfortable with George and his oil buddies, than with the lefties, and the free market as interfered with by the lefties.
As I drove, I wondered a little more about the actual price of gas over the past few decades as opposed to the perceived experience over the past few decades. Thank heaven for cell phones, because I have a friend at a university who might just know such things. I gave him a call. When I asked him about the historical price of gasoline, he told me some surprising things:
First, during the past 25 years, the nominal price of gasoline (price not adjusted for inflation) has risen at an average annual rate of 5.2 percent; but the real price of gasoline (price adjusted for inflation) rose only one-fourth of a percent per year. What is this "adjusted for inflation stuff?" Sounds like you are trying to obfuscate. My friend explained that the purchasing power of the dollar doesn't stay constant over time. It generally loses purchasing power, so that in later years, it purchases less, and is worth less. So to equate prices in two periods of time, one must adjust one of the two dollars so they are equal, otherwise the comparison is faulty. After listening to my friend, I thought that the real price rose MUCH less each year than one would conclude if they used current dollar values at anytime they were evaluating prices.
Now that I was aware that I had to work in constant dollars to evaluate the price of anything over time, I was ready for more information from my friend. My friend continued. Gasoline prices in real (adjusted) dollars reached the highest peak in history in 1981, not including the recent period where Hurricane Katrina disrupted supply. Gasoline prices declined after 1981 despite a steady rise in real taxes, a reflection of world crude oil market movement. The nominal price of gasoline dropped about 31 percent between 1981 and 1986, a post-embargo low. The real price of gasoline dropped 43 percent between 1981 and 1986, and continued a slow decline for 2 years more. By 1988, the price of gasoline had declined 45 percent. So by 1988 prices had declined considerably from its 1981 high. After 1988, the price of gas increased modestly for a three to four year period, before generally declining for the next eight years, with intermittent increases and decreases, to a record low price, in real dollars, just above $1 a gallon.
After this period, gas did begin to rise, owing to sharp increases in the demand for crude oil in the world. Oddly, gasoline prices dropped almost to the 1998-99 lows, immediately after 9/11/01, due to the recession caused by the shock to the economy after the attacks. Once the economy began to recover, and the world demand for oil and gasoline began to climb once more, prices began to rise as would be expected when demand rises.
When Katrina hit in 2005, the disruptions to local supplies of crude and local refineries caused a new record high prices at places in the United States, although not all over the United States. As the effects of Katrina dissipated, the impact on the price of gasoline also subsided, and gasoline prices once more reflected the structural and economic realities in the current world petroleum markets.
I mentioned to my friend that all of this has to be watched by George Bush and his Oil Buddies so that they can keep prices where they want them. My friend said, "Huh?" I said you know, George and his Oil Buddies. They set the price of Oil and gasoline, so they must be involved in all of this stuff somehow. My friend said, "Huh?" I said, "Whew - Better then than me. I could not keep up with the demands of this job. Going out and telling the Indians and the Chinese to buy more crude and causing large hurricanes that hit our oil platforms and refineries. My friend said, "Huh?" I asked my friend why he kept saying, "Huh?" I heard a click on the other end of the line. I guess my cell phone lost him. Oh well, I will talk to him again sometime. But now, I have to get home.
