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Countdown to $200 oil (3) – no gas tax needed
Jerome a Paris, Daily Kos
As in previous years, I got my ass whupped in my latest diary on gas taxes. Some commenters kindly called me a “rich elitist f*” (guilty on all counts, of course) for wanting to bankrupt poor Americans who cannot do without gas, preferably cheap, and are already struggling mightily.
Well, here’s the news:
Oil moves above $120 mark
Oil prices hit a record of more than $120 a barrel on Monday, driven by fresh supply disruptions in Nigeria and a growing sense of optimism that the US economy might escape recession. (…)
Traders are unsure what level oil prices could reach once US oil demand starts to recover. Last month, Chakib Khelil, president of Opec, the oil cartel, warned that prices could reach $200 a barrel and said there would be little the cartel could do about it.
The entire WTI futures curve is trading well above the $100-a-barrel level with the longest dated contract for December 2016 up $1.57 to $110.55 a barrel on Monday, signalling the market’s consensus that $100 oil is here to stay.
… prices have to go high enough to destroy demand. Given that we really don’t want to do without our cars, the pain has to be bad enough to actually cause (undesired at lower prices) changes in behavior. Thus, VERY high prices.
One would expect such high prices to also bring online a lot of new supply, including from unexpected sources. It is happening a bit (biofuels being one exemple, coal-to-liquids another), but nowhere near the scale it’s needed. It appears that demand destruction in the West is still, at current prices, the easiest way to actually balance the oil market, however unlikely that may seem, and however painful it is for us.
But given that Chinese demand is growing by 5-10% per year, and that Saudi, Iranian or Russian exports are dropping (as their production stagnates and their domestic demand continues to jump), we need to destroy yet more demand each year.
Thus, higher prices will happen. It’s inevitable.
Well, there is an alternative, actually: shortages and rationing. Maybe that will create the urgency that the current situation seems unable to yet.
And maybe we’ll start having an energy policy that works, rather than one that does nothing and lets the poor gets slowly squeezed with no hope of any solution in sight.
(5 May 2008)
Capacity
Atrios (Duncan Black), Eschaton
Just to make clear earlier what I meant about the gas tax and being at capacity, here’s our friend the supply/demand curve.
The markets for oil and gas aren’t the same, but this graph can provide a representation of both.
Basically over the flat horizontal part of the supply curve (S), increases in demand (represented by rightward shifts of the demand curve, reflecting a greater quantity demanded at any given price) lead to an increase in quantity supplied by oil firms or gas refineries without much increase in the price. This is because they’re operating at levels such that they can pull a bit more oil out of the ground, or refine a bit more oil into gas, without any significant increase in cost.
But these are both capital intensive industries, and oil requires exploration and discovery as well, so the capacity to keep cranking out product at the same or similar cost is limited. At some point, as the demand curve continues shifting to the right (remember this is the world market, so with more and more Chinese consuming…), we reach the a point where the curve tilts upwards. Over some range, more oil/gas capacity can be provided without costs going too much: perhaps increased 3rd shifts or shifting focus of refineries, or tapping known but more costly oil wells, but at some point you hit capacity. There is no more oil to be pumped out of the ground at any price, at least over the short run, and US oil refineries can’t crank out an extra gallon at any cost. At that point, continued increases in demand simply raise the price without resulting in any additional quantity supplied. Prices go up to equate supply and demand, while output and consumption remain the same.
I won’t do the full lecture on tax incidence (who actually pays a tax, buyer or seller, when it’s levied on a transaction), but it depends on the shape of the supply/demand curves. And when we’re in the verticalish region of the supply curve, any sales tax levied is almost entirely paid by the seller. Increasing the gas tax cuts into profits without increasing the price consumers pay (though causing them to consume less). Decreasing the gas tax increases profits without decreasing the price consumers pay (though leading them to consume more).
And this has been your Econ 101 lecture of the day!
(6 May 2008)
Oil prices and leadership deficits
Carl Etnier, Vermont Commons
Distractions from political leaders make it more difficult to focus on relocalizing the economy. When politicians who know better propose solutions to high oil prices that ignore the fundamental causes of the high prices, then the time it takes to debunk them eats away from the limited time during which we have abundant energy to use in relocalizing the economy.
… I spent some time today reviewing my basic economics, to understand a point the economists make: “First, research shows that waiving the gas tax would generate major profits for oil companies rather than significantly lowering prices for consumers.” For those interested in the details, here are some pictures that explain it.
It all comes back to the supply and demand curves, and how steep they are. Reducing the price moves the supply curve down and to the right (orange curve in Fig. 1). Demand follows the demand curve, supply increases, and the price decreases. However, the new equilibrium point is $3.39 for the first demand curve drawn; use has increased and the price has not come down the entire 18.5 cents of the gas tax. So the consumer receives some of the benefits and the oil companies receive some.
(4 May 2008)
