June 13, 2006

The Economics of (Oil) Prices, and Long-term Oil Strategy

Posted in Business, Politics at 7:56 pm by mj

There’s a short entry on the economics of prices by Walter E Williams. Williams responds to the argument that charging today’s prices for oil that was bought cheaper a week ago is “price gouging,” and offers up the following scenario:

If you were really enthusiastic about not being a “price-gouger,” I’d have another proposition. You might own a house that you purchased for $55,000 in 1960 that you put on the market for a half-million dollars. I’d simply accuse you of price-gouging and demand that you sell me the house for what you paid for it, maybe adding on a bit for inflation since 1960. I’m betting you’d say, “Williams, if I sold you my house for what I paid for it in 1960, how will I be able to pay today’s prices for a house to live in?”

Williams is correct on that point. Such accusations are usually made by people who don’t understand basic economics.

But Williams continues and asserts, like so many do, that the real problem with high gas prices is the U.S. Congress:

Opening a tiny portion of the coastal plain of the Arctic National Wildlife Refuge in Alaska to oil and gas production, according to the U.S. Geological Survey’s mean estimate, would increase our proven domestic oil reserves by approximately 50 percent. The Pacific, Atlantic and eastern Gulf of Mexico offshore areas have enormous reserves of oil and natural gas, but like the Alaska reserves, they have been put off limits by Congress. Plus, the U.S. Office of Naval Petroleum and Oil Shale Reserves estimates the world supply of oil shale at 1.6 trillion barrels, of which 1.2 trillion barrels are in the United States.

If I may put on my astute politician hat for a bit, I think arguments like that miss the bigger point.

The untapped oil under U.S. jurisdiction can be seen as a bargaining tool against Opec. Knowing that the U.S. could commit itself to using its own domestic oil supplies–and, if that were to happen, we’d really commit to it–means the U.S. can bargain for cheaper prices (if not exactly cheap prices) now. It’s a bit of a threat: if we extract more oil, we can ruin the economies of several nations and make life miserable for some of the shiek-kings in Opec.

But what would happen if the U.S. committed itself to this route tomorrow? Well, after a ramp-up period which would probably involve higher taxes to subsidize the endeavour, we’d have cheaper oil prices. Much cheaper. But for how long? 90 years? (ANWR is 15 years, and the others?) And then? Then the U.S. would be backed against a wall.

In the long term battle for freedom, we’d better have some tricks up our sleeves to maintain our independence when the going gets really tough. Using up our oil at the first sign of a little trouble means those opposed to liberty–which most of the Opec nations represent–have a leg up in the long-term game.

My prediction is as soon as we establish a viable, scalable, long-term unmonopolized alternative to oil, we will tap our domestic reserves to get us through the turmoil that would undoubtedly follow, knowing that even if we tap it all, there’s an out (i.e., the proven alternative that is being rolled out). I don’t expect that to happen in my lifetime.

At least, if I were an astute politician–or, for that matter, even particularly politically astute at all–that would be my strategy.

(Link via Catallarchy.)

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