Oil Hits $50/Barrel: Era of "Cheap" Energy Over?

Great Debates
41

David Simmons said:

Governments act at glacial speeds compared to the market. The notion that government can prod and push the market to compensate for the market’s lack of speed just doesn’t fly.

Your examples so far (Cuban missile crisis, patriot act, etc) are off the mark, because they are dealing with totally different situations. The Cuban missile crisis involved a single individual action in a very well-defined arena. It’s exactly the kind of thing governments can respond to.

But economic problems take a long time to be felt, and the ramifications of meddling in the economy are very hard to predict. When you make changes, the effects of those changes cannot be detected at a macro level for a long time. The government’s measures come out once a quarter or once a month at best. It takes months to prepare a bill and enact it into law. Months for the effects of that bill to take place. Months to make changes to counteract the flaws in the first bill.

If you spend time watching the government try to measure the state of the economy, you’ll see just how slow it is. Hell, the government was still re-adjusting its GDP figures for 2001 in 2003! How do you expect them to plan intelligently when accurate information won’t be available for two years?

In contrast, the market can adapt to changes almost instantly. If there’s a disruption in the oil supply, it will affect oil prices within minutes or hours. And not just oil prices - prices of products that depend on oil. Auto stocks. etc.

Then there’s the problem that the market and society behaves unpredictably to change. No one predicted the changes to social mores brought upon by the automobile. No one predicted drive-in theaters and fast food outlets. Central planning of any sort is an utter failure when it comes to trying to manipulate the economy, because it can’t react to change. This is the law of unintended consequences. For example, if you force auto makers to spend $1000 putting airbags in cars, will auto travel be safer? No one knows. Factors that were totally unpredictable changed estimates of airbag’s effects. For instance, when people feel safer, they tend to drive faster. Plus, the added cost of new autos forced some people who would otherwise have bought a newer, safer car to stick with their old death traps.

And from the government’s perspective, effects like that last one are not only unforseeable, they are unknowable even after the fact. Because government simply doesn’t receive the kind of feedback that the market already has built into the price system. It operates blind.

Finally, all we have to do is look at the history of central planning to see what a dismal failure it has been. Look at Japan’s economy - Japan was the poster child of ‘enlightened intervention’ in the marketplace. State owned business, huge government-sponsored research consortiums like MITI, etc. All disasters. Japan’s economy has been a basket case for a decade. Remember the Concorde? That was France and Britain’s attempt to ‘go around the market’ because the market was too slow in adopting what everyone thought at the time was going to be wave of the future - SST air travel. They were sure of it. So if government gets involved to sidestep the ‘lag’ in the market adopting this obviously winning format, France and Britain can get a jump on the world! They’ll leapfrog Boing and McDonnell Douglas and take away their market share!

Well, no. Concorde was a financial disaster. It lost money every year it was in service.

In the U.S., there was Sematech, a chip-consortium sponsored by and partially funded by government to undertake projects that “the market doesn’t handle well”. Well, guess what? Sematech was a joke in the industry. Big waste of time for everyone involved.

Markets operate like a finely crafted watch. Government is more like a big club. The two do not mix very well. Sometimes government interference is necessary, but it should be done in as limited a fashion as possible, and only to fix egregious problems. Using government to push and prod markets into directions bureaucrats think they should go has been tried around the world. In the 1950’s through the 1980’s, govenrments in places like Canada and the U.K. were heavily involved in the market, owning businesses, setting wage and price controls, controlling the flow of goods, setting high tariffs to ‘tune’ the economy, etc. Central planning was ‘in’.

Today, that has all changed, because it didn’t work. Since governments began pulling out of the market, privatizing state businesses, lowering tariffs and regulations, the economies of those nations boomed. Let’s not go back to the bad old days.

42

Actually, I started my calculations expecting to agree with you…But, I am no longer so sure. Let’s say that the Prius gets 45 mpg overall. (I’m actually getting ~50 now but expect it to drop over the winter.) And, let’s say an equivalent car (automatic transmission, almost the size of a Camry) gets 25 mpg overall. Then, if you drive 120,000 miles over the life of the vehicle and gas prices are $2 per gallon, you will save ~$4300 in gas with the Prius.

How does this compare with the premium? I am not sure as I didn’t really price equivalent cars. I’ve heard many estimates that the Prius is $2000-4000 more and a high-end estimate that it was like $10,000 more. The high-end estimate was clearly ludicrous in that it compared the Prius to an Echo, which is much smaller and has considerably less features. I think the $3000 figure is probably roughly correct for a list price comparison although one would have to add to that the fact that, at the moment, demand for the Prius is such that you have to pay full list (actually, in some cases, people are paying more than list!) whereas you can probably get some discounting on a comparable car. So, my best guess is that it ends up pretty close to a “wash”.

[I did not include the additional federal income tax deduction, which is $1500 this year, or any state income tax deductions or tax credits. Up til the end of last year, N.Y. State had a $2000 tax credit…i.e., you saved a full $2000 on your taxes…but alas that expired and as I understand it the new budget did not renew that.)

By the way, I should note that I have previously figured out that in my case the Prius did not pay off financially but that is because if I hadn’t bought a Prius, I would have bought a car more similar to my old Plymouth Colt…i.e., a car that was smaller, more fuel efficient, and had fewer features than a Prius-equivalent. So, in some sense, the Prius was an upgrade in size, power, and luxuriousness for me, in addition to being a hybrid.]

43

Sam and John, I have to give props to your cogent and informed arguments. Your posts are long on substance and short on rhetoric, in contrast with certain posts by your opposition. In my eyes, you are definitely winning the debate.

The terms “market” and “free market” seem to be the source of some confusion. Sam and John, you appear to be using the terms correctly. Your opposition seems to use the terms as a synonym for “Big Business”. :rolleyes:

Incidentally, I am a fan of high oil prices because I have concern for the environment. I understand that the most effective way to encourage alternate energy technology, conservation, et. al. is to have market conditions which encourage their development and use. Conditions like high oil prices.

The thing about self interest, or “corporate greed” if you are more rhetorically inclined, it is predictable. If there is a way in which “Big Business” can make money using environmentally friendly energy, guess what… THEY WILL. No other method will ensure their, or anything else’s adoption more quickly and surely, not government, not activism.

And I definitely don’t buy the argument that Big Corporations won’t be able to bring the technologies to market “in time” to save us from the “impending oil shortage”. First, it’s not like the world’s oil supply comes from one big faucet which is either on or off. If we run out soon, it will be a pretty gradual process, as rising prices will encourage less consumption and better efficiency, not to mention the exploiting of alternate oil sources and the developing of alternate energy production methods.

Second, and more relevant, big companies are already developing these technologies. I wish I had a link for this (PBS.org is broken for me today), but a recent edition of Scientific American Frontiers on PBS showed some great “clean” technology under development by everyone from auto industry giants to lone innovators. The program did a great job showcasing all sorts of technology from fuel cells to hydrogen. The argument that “the market” won’t have an attractive alternative once oil runs out just doesn’t wash.

Some links to other promising developments:

fuel cell breakthrough

cheap, efficient hydrogen source

“The market” is most definitely working on solutions.

44

The free market only works if we presume rational people. The problem is that a person in real life in demonstratably not rational in this scenario. He/She does not consider the potential cost of oil prices increasing over the next 5 year, in fact, he/she barely even considers current oil prices when buying a new car. What this means is that there exists situations where a rational consumer would have been “happier” buying a Prius whereas the real consumer ends up with an SUV because the immediate tally favours the SUV. While it’s true that measures like carpooling and driving less can reduce fuel costs, the sunk cost of the SUV means that it’s impossible to implement other, much more practical measures than carpooling that both use less fuel and impose less of a burden than carpooling, namely, buying a Prius. Presumably, the government IS aware of the potential for an increase in oil prices and they are in a position to evaluate the economic impact of it which means that it’s important NOW for the government to step in and correct the distort the market. Of course, the government might be wrong or it might be right. But I think it’s a fair assumption to make than an organisation with educated expert and lots of data is in a better place to make a decision than the consumer and theres more chance of something disaterous happening if the government doesn’t do anything than if it does.

45

[/QUOTE]

Well for Christsake isn’t it? The retail market is increasingly WAL*MART, Home Depot, Target et al. The oil market is Royal Dutch Shell et al. The commodities market is Cargill, Archer-Daniels-Midland et al. The automobile market is a few huge corporations. The information market is FOX, the networks, corporate newspapers like The Tribune Company (Chicago Tribune, LA Times et al), the Time Co. (NY Times) et al.

Free marketeers pretend the above named entities really want the market to operate freely. What they really want is an exclusive franchise in an essential product.

What planet are you on?

46

As I said earlier, I think you are “starting the clock” late on measuring government action. The war in Iraq, for instance, didn’t spring out of the ground in March of '03 without quite a bit of planning. Aren’t you one of the supporters of the idea that the planning began before Bush was even elected? But aside from that, it is the government’s job to have contingency plans for these types of things. It’s the job of government to be ready to act in times of crisis to defend the county (even if the action, as in Iraq, didn’t have much to do with defending the country).

Further, we are not talking about enaction one piece of legislation here. We’re talking an ongoing, almost day-to-day activity of jiggling with the market. Market conditions change all the time, and the only way to even remotely keep up with market forces would be to have an stand alone agency specifically set up for that purpose. Since we already have a cabinet level Dept of Energy, why don’t you outline specifically what you want them to do?

You are grossily oversimplifying the situtation be focusing on the time it might take for even a piece of legislation to pass. That’s not the real issue. The real issue is micromanaging a market on an ongoing basis without introducing more perturbations than would otherwise be there.

No market is perfect, in the academic sense of that term. That is correct. But government solutions are at least as erroneous in making idealized assumptions-- ie, that markets ***can ** * be manipulated, that politicians aren’t corruptible, that pork barrel priojects don’t bloat the legislation, that business lobbying doesn’t direct money into corporations instead of into actual solutions, etc, etc, etc.

47

Free marketeers pretend the above named entities really want the market to operate freely. What they really want is an exclusive franchise in an essential product.
[/QUOTE]

Nope Here’s one free marketeer that will gladly admit that WalMart’s goal is market domination. That they want to crush every competitor and drive them out of business. Of course, their competitors want to do that to them, too. That’s what is so great about it. It’s nearly impossible for any company to create a real monopoly (without help for the government). The closest situation we have right now is Microsoft, and even that is not a monopoly-- go buy an Apple if you don’t like Windows. The boogey-man of “monopoly” seems to get thrown out there a lot, but where do we ever actually see one in the real world?

Besides, we have anti-monopoly laws in place. Is there something else you need besides those laws to deal with what you perceive is a flaw in the market?

48

Jshore said:

Don’t forget the battery replacement cost. I understand it’s gotten better, but the early hybrids had batteries that were only supposed to last for five years, and cost $3000-$5000 to replace. That alone makes them financially non-competitive. However, I think the newer generation of vehicles have improved on that. I think the Prius battery is supposed to last 10 years, but I don’t know how much it costs to replace.

The bottom line is really that we won’t know how much more or less expensive it is to operate a hybrid until they’ve been in service for a while and rack up a good maintenance record. There are a lot of electronics and motors in a hybrid - they are pretty complex.

But hybrids are a good example of how the market works and government can be counter-productive. Remember when people were clamoring for government to mandate all-electric cars? California wanted to force people into electric cars because they were convinced they were the wave of the future. Well, they turned out not to be. But if the government had forced them on us back when hybrids were not on the drawing board, we’d be stuck with a crappy second-rate technology.

The same thing happened with Minitel in France. Remember the ‘chicken and egg’ problem with the internet? People weren’t getting connected because there was no content, and there was no content because people weren’t logging on. So France decided the market was ‘too slow’, and built it’s own large government-backed information network. For a couple of years, Minitel was the talk of the computer world. Those French, so advanced! They had phone books online and everything. Everyone had a minitel terminal. All kinds of activists in the U.S. and Canada were pushing the ‘minitel revolution’.

But then the internet came along. A vastly superior technology, and it rose out of the market (yes, I know DARPA helped the technology along, but I’m talking about the adoption of it by consumers and business, which was market driven and which rapidly outgrew anything DARPA had ever dreamed of). So the Internet came along, and suddenly France was stuck with a nationwide system of obsolete terminals. For years France had one of the lowest rates of internet adoption, and they lagged badly. French companies missed the boat. Minitel turned out to be yet another case where the government thought they were ‘jump-starting the market’, but in fact wound up building roadblocks. Very expensive roadblocks.

If it was a good idea for governments to prod the market into different directions, France should be a superstar among nations. Government interferes in the market all over the place, both to ‘help’ it along and to regulate it. But France isn’t doing so well. France is an economic basket case.

49

First, the market DOES factor in supply five years down the road. Or ten years down the road. Or twenty. That’s what the futures market is all about. Watch the oil market. When fields are discovered the price of oil drops, even if that field won’t produce for ten years. When the day comes that new discoveries of oil do not keep up with increases in demand, it is widely expected that oil prices will rise dramatically (that may be happening now). Investors buy long bonds. The market often factors in amazingly long-term plans.

But the reason why people don’t consider the price of oil *that much in their purchasing decisions is not because of a flaw in the market, but because fuel costs are still relatively inexpensive. Sure, buying a fuel-efficient car might save you $500 a year in gasoline costs, but people will spend more than that just to get a good stereo and leather seats. Compared to the $600/mo car payments people are paying, adding $50 extra in gas just isn’t a big deal to a lot of people.

That’s why today most hybrid purchasers are ‘early adopters’. They value fuel efficiency more than the pure economic value, because their personal value system places a value on being efficient for its own sake. Just like people who spend thousands on magnesium wheels, because their value system says it’s worth it even though they’ll never recover the cost.

But one day gasoline will be a significant percentage of the ownership cost of a vehicle. And when that happens, everyone will be an environmentalist. Eventually, gas will be so expensive that it doesn’t make sense to burn it in cars, and when that happens the market will move to something else. But it will do it efficiently, and gradually, and the give-and-take of competition will ensure that the solutions we find will be optimal.

And by the way, when that happens there will still be plenty of oil left for other uses. We’ll never run out of oil. We’ll simply continue to use it in exact proportion to its value. Its value will increase as supplies dwindle, then as we shift to other energy sources demand will drop and the price will stabilize. In the meantime, the higher price of oil will make deeper oil wells, tar sands, synthetic oils, and other alternatives more competitive. It’s a wonderful thing, as long as we resist the impulse to stick the sweaty palm of government into the mix to stir it up.

50

Let me add one more comment about the speed at which governments act. I do not mean to be critical when I say the government is “slow”. We should WANT it to be slow… and deliberative. The worst kind of government policy comes about due to knee-jerk reactions to trumped up crises. After all, I don’t think anyone would make the claim that we are suffering from a sever shortage of laws. Let the government mull things over and act only after careful thought. We, and the rest of the world will all be better off for it.

51

Sam Stone: But people CAN drive less, or choose alternate transportation.

Of course, most forms of “alternate transportation” other than foot or bicycle are public transportation, which is at least partly funded by—well, there it is again—government.

I really don’t think there’s a viable case to be made for a smooth decoupling from a heavily car-centered society without government easing the transition in some way or another.

That’s why today most hybrid purchasers are ‘early adopters’. They value fuel efficiency more than the pure economic value, because their personal value system places a value on being efficient for its own sake. […] Eventually, gas will be so expensive that it doesn’t make sense to burn it in cars, and when that happens the market will move to something else. But it will do it efficiently, and gradually, and the give-and-take of competition will ensure that the solutions we find will be optimal.

The “efficient and gradual” part depends partly on the existence of economically “irrational” actors, such as the government and “early adopters” like jshore, who are willing to invest in a technology before it becomes efficient, in purely market terms, to do so.

Without the boost given to the early stages of development by these extra-market motivations, technology changes would start occurring only when existing technologies became too expensive, so they would be more frantic and wasteful.

Market forces are indeed a very important—indeed, the most important—factor in adapting economies to involuntary changes in resources or capabilities. But arguing from that that only market forces have any role to play in such adaptations is unconvincing.

52

No they wouldn’t! Technology changes start occuring when businesses decide that the need for such technology in the future is obvious enough that widespread enough that it makes sense to begin developing it. In fact, hybrid cars disprove the statement above. They STILL aren’t economically efficient, and yet auto makers have been working on them for a decade. Or look at the Athabasca tar sands - That project has already been in development for decades, despite the fact that it’s barely cost effective now. And why? Because it was obvious decades ago that at some point the sands would be viable. So there were pilot projects. Then demonstration projects to work out the manufacturing details. Then there was more research into efficiency gains. That’s the way it goes. Very large businesses HAVE to take a long view. They know they’re going to be around in fifty years, and if a technology takes twenty years to develop and it’s obvious that there will be a need for it in twenty years, they begin to invest in it. That’s why Microsoft has a multi-billion dollar research division.

Here’s another example: home robots. Honda, Sony, Fujitsu, and many other companies have made significant investments into humanoid, walking robots. Because they believe that one day there will be demand for them, and they don’t want to be caught up short against the competition.

All the major auto makers have extensive research programs into alternative fuels, and they have for decades. Hydrogen, LNG, elecftric, hybrid, you name it. Ford even built a turbine car. Go to any auto show and you’ll see show cars that highlight technology that will be available next year, five years from now, or even twenty years from now.

53

SS: Technology changes start occuring when businesses decide that the need for such technology in the future is obvious enough that widespread enough [?] that it makes sense to begin developing it.

But my point is, part of what makes it “make sense” are those non-market-motivated “early adopters”, not to mention government subsidy. Yes, firms do start exploring new technologies before they’re fully economically viable, but they would be a lot slower about it if it weren’t for the “inefficient” inputs from governments and early adopters.

E.g., the founding of the Athabasca Tar Sands project that you mention depended partly on the research of scientists at government-funded universities, on government funding for railroads and pipelines, and on subsidies for exploration and development. Similarly, Japanese research into humanoid robots has also received lots of government funding.

I’m not arguing that there’d be absolutely no advance private research into transition technologies if everybody else refused to contribute anything to them before they became the most cost-effective option. (And I’m sorry if my phrasing “technology changes would start occurring only when…” gave that impression.) But I am saying that, absent that “economically irrational” advance support from governments and early adopters, transition technologies would emerge in a more late, frantic, and wasteful way than they now do. None of your examples suggests otherwise.

54

I’m not sure why you think early adopters are “non-market-motivated” or otherwise irrational. They are basing their decisions on utility, just as people who buy fancy cars or blue drapes instead of red ones do. They are as much a part of the market as the risk-averse whos personal utility leads them to wait until a technology is very well established before they enter the market.

The fact of the matter is, the market does indeed take the future into account. But it does so rationally. If a business knows that 100 years from now there will be a desire for alternate fueled vehicles, but the time/value of their money multiplied by the risk does not equal the projected profits from demand. This is just another way of saying that a market-society starts to invest in future at about the right time.

55

No, it most certainly is not, especially in the way that economics savvy posters like sam stone and john mace are using them.

Just a hunch, but understanding the differences in the way you are using the terms in contrast to the way they are using them would go a long way toward understanding the other side’s arguments.

From This Site

Market

  1. The interaction between supply and demand to determine the market price and corresponding quantity bought and sold.
  2. The determination of economic allocations by decentralized, voluntary interactions among those who wish to buy and sell, responding to freely determined market prices.

Economic freedom (a.k.a. “free markets”)
Freedom to engage in economic transactions, without government interference but with government support of the institutions necessary for that freedom, including rule of law, sound money, and open markets.

Market economy
A country in which most economic decisions are left up to individual consumers and firms interacting through markets. Contrasts with central planning and non-market economy.

“Market” does not equal “Big Business”

“Economic Freedom” equals “Free Market” does not equal “Big Business”

“Market Economy” does not equal “Big Business”
Having lived in Soviet Russia, you’ll excuse me if I say “thanks, no” to any more central planning.

Dude. Uncool.

56

On average, a consumer is expected to keep the same car for 5 - 10 years, therfore, a rational consumer would consider the total cost of keeping a car over a 5 - 10 year period and weight it against perceived benifit keeping in mind the fact that it’s quite probable oil prices will increase over that duration. The TYPICAL consumer does NOT do this, at best he extrapolates a 10 year time-frame assuming current day market costs of oil, at worst, he gives no regard whatsoever to petrol costs and looks merely at the sticker price. What we get is an instance of market failure because there will be a proportion of people who will end up regretting their purchase choice because petrol prices were more than they expected. Now, whether this instance of market failure is severe enough for the government to get involved or not is a matter for debate. The fact that there is a market failure is, IMHO, not.

57

No, it is not. You see, the problem is that governments do not make individual decisions for individuals. They make decisions for very large groups. Individuals, on the other hand, make decisions tailor made to their own individual situation.

Think of it like voting every time you purchase, or don’t purchase, anything. Millions of times per day billions of people make decisions which affect the allocation of resources. Certainly they don’t spend millions of dollars and hire hundreds of experts to make each decision. Part of the beauty is that they do not have to. If some of them make bad decisions, resources get allocated to other people.

Governments on the other hand do spend millions of dollars and hire hundreds of experts to make almost every decisions they make. Think about a best case scenario (time wise) where some sort of Oil Tsar determines the price of gas every day. How often would his experts be able to generate the data necessary for him to make an informed decision? Now, remember that he has to make that decision nor just for the whole country, but for each State, City, Neighborhood, and even each store. They all may have slight differences in what price they need to charge, or what price they need to pay for gas. Meanwhile, the Tsar has to also field objections, questions, and suggestions, from advocacy groups, industry lobbiests, and even unconcerned citizens.

I cannot imagine how you make the assumption you make.

But this has already been answered. This analysis is not done (in detail, it is done to some degree) because gas prices are so low compared to everything else. If I am contemplating the pruchase of a car which will cost me $400 a month in car payments and $50 a month in gas, I hardly think it is irrational to spend most of my time worring about the car payment vs worrying about the mileage.

I mean most people don’t factor in the cost of air freshener over the life of their cars either. Is that irrational?

Can someone from the left side of the debate confirm for me that they agree with this usage of the term market failure? I have been excoriated for accusing liberals of using the term to mean “bad things happen to people”. Can someone please help me to understand how this quote is not an example of just such a usage?

58

Market failure, put simply is when the behaviour of a population deviates significantly from a presumed “rational” population. ie: The free market has failed to efficiently allocate goods and services.

59

SS: I’m not sure why you think early adopters are “non-market-motivated” or otherwise irrational. They are basing their decisions on utility, just as people who buy fancy cars or blue drapes instead of red ones do.

My bad, I was trying to say that they are being “irrational” in terms of market forces based solely on price. I agree that in real life, market forces include other factors. (Of course, if we open up our definition of utility all the way, then people’s choices about, e.g., government also become part of the market and we can no longer argue for a clear separation between market and non-market activity of any kind.)

This is just another way of saying that a market-society starts to invest in future at about the right time.

And what it considers the “right time” is partly dependent on what kind of support their investment receives from government and from non-price-motivated consumers. And that will make a difference in the efficiency and timeliness of its response to changes in resources.

60

Now that you mention it, voters tend to act in the same way. We should set up a panel of experts to pick our legislators, governors, and presidents since the voters do not act rationally. I think you’re on to somthing!