FT110: “You can’t blame our dependence on foreign oil for high gas prices AND say that producing more domestic oil won’t lower gas prices.” -Old Pithy

Posted by PITHOCRATES - March 23rd, 2012

Fundamental Truth

The Combination of Low Demand and High Supply caused Oil Prices to Fall over 70% by 1986

The Organization of the Petroleum Exporting Countries (OPEC) is a cartel.  Made up currently of Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.  Their purpose is to set oil quotas for their oil-producing members.  To limit the amount of oil they bring to market.  To reduce supply.  And increase oil prices.  At least that’s the idea.  It’s been hard to keep the individual OPEC members from cheating, though.  And a lot do.  Often selling more than their quota.  Because when oil prices are high selling a few percentages above their quota can be very profitable.  Unless everyone else does so as well.  Which they usually do.  For their choice is either not to cheat and not share in any of those ‘excess’ profits (beyond their agreed to quota).  Or cheat, too.  Thereby increasing supply.  And lowering oil prices.  Not something any oil producer wants to do.  But it’s the only way to share in any of those ‘excess’ profits.

But that’s not the only problem OPEC has.  There are a lot of oil producers who aren’t members of OPEC.  Who can bring oil to market in any quantity they choose.  Especially when they see the high price OPEC is charging.  OPEC’s high price allows non-OPEC suppliers to sell a lot of oil at a slightly lower price and reap huge profits.  Which puts pressure on the OPEC target price.  Forcing them to lower their target price.  For if they don’t lower their price they will lose oil sales to those non-OPEC producers.  Which is exactly what happened in the late Seventies.  While OPEC was cutting back on production (to raise prices) the non-OPEC nations were increasing production.  And taking over market share with their lower prices.  Causing OPEC to reverse policy and increase production during the mid-Eighties.  Giving us the 1980s oil glut.

Of course, this rise in non-OPEC production was a direct result of the 1973 Oil Crisis.  Many of the OPEC members are Muslim nations.  Who don’t like the state of Israel.  In response to the West’s support of Israel in the Yom Kippur War (1973) OPEC announced an oil embargo on those nations who helped Israel.  Giving us the 1973 oil crisis.  Where this sudden reduction in supply caused the price of oil to soar.  Making the oil business a very profitable business.  Causing those non-OPEC producers to enter the market.  Then the Iranian Revolution (1979) disrupted Iranian crude production.  Keeping Iranian oil off the market.  This reduction in demand caused oil prices to rise.  Then Jimmy Carter broke off diplomatic relations with the Iranian state.  And boycotted their oil when it returned to the market.  Further encouraging the non-OPEC producers to bring more oil to market.  Meanwhile U.S. demand fell because of those high prices.  And our switch to smaller, 4-cyclinder, front wheel drive cars.  Saying goodbye to our beloved muscle cars of the Sixties and Seventies.  And the V-8 engine.  The combination of low demand and high supply caused oil prices to fall over 70% by 1986.  Giving us the oil glut of the 1980s.  When gasoline was cheap.  Enticing the V-8 engine back into the market.

Improved Fuel Economy AND Increased Oil Supplies can Reduce the Price at the Pump

So, yes, Virginia.  The amount of oil entering the market matters.  The more of it there is the cheaper it will be.  As history has shown.  When less oil entered the market prices rose.  When more oil entered the market prices fell.  And anything that can affect the supply of oil making it to market will affect the price of oil.  (And everything downstream of oil.  Jet fuel.  Diesel.  And gasoline.)  Wars.  Regional instability.  And governmental regulation. 

So what are things that will bring more oil to market?  Well there’s the obvious.  You drill for more oil.  This is so obvious but a lot of people refuse to accept this economic principle.  As supply increases prices fall.  The 1980s oil glut proved this.  Even John Maynard Keynes has graphs showing this in his Keynesian economics.  The economics of choice for governments everywhere.   Yet there are Keynesian politicians who avert their eyes to this economic principle.  So there’s that.  More drilling.  You can also make the permitting process easier to drill for oil.  You can open up federal lands currently closed to drilling.  And once you find oil you bring it to market.  As quickly as you can.  And few things are quicker than pipelines.  From the oil fields.  To the oil refineries.  (And then jet fuel, diesel and gasoline pipelines from the refineries to dispensing centers).  So before oil fields are ready to produce you start building pipelines from those fields to the refineries.  Or you build new refineries.

Improving fuel economy did help reduce our demand for imported oil in the Eighties.  As well as lowered the price for that imported oil.  But it wasn’t fuel economy alone.  The non-OPEC nations were increasing production from the mid-Seventies through the mid-Eighties.  Without that oil flooding the market oil prices wouldn’t have fallen 70%.  And they won’t fall again if we ONLY try to reduce our demand for foreign oil.  For reducing demand is marginal at best in reducing oil prices. 

Only if we Drill and Build Pipelines can we Reduce the Price at the Pump

For there are no electric airplanes.  The cost to electrify all railroad tracks is too prohibitive to consider.  The capital costs to build that electrical infrastructure.  The maintenance costs to maintain it.  And the electricity costs from the increased demand for electrical power while supply remains the same.  Or falls.  Because excessive regulation inhibits the building of new power plants.  And speeds up the shutdown of older plants.  Especially coal-fired because they pollute too much.  And hydro power.  Because of the environmental impact of dams.  Severely straining our electric grids.  And moving into electric cars will stress our electric grids even further.  Leading to brown outs.  And rolling blackouts.   Or worse.  Causing wires to overheat and sag, coming into contact with trees.  Shorting out.  Causing cascading blackouts as power plants disconnect from the grid to prevent damage from the resulting current surges.  Like they did in the Northeast Blackout of 2003.

You can’t replace oil with electricity.  In some cases there is just no electric equivalent.  Such as the airplane.  Or the cost of moving from oil to electricity is just prohibitive.  Such as updating the nation’s electrical infrastructure to meet an exploding demand.  Which leaves oil.  We need it.  And will keep using it.  Because there is no better alternative.  Yet.  So we need to produce it.  And do everything we can to help bring that oil to market.  Not fight against it.  And it all starts with drilling. 

We must drill.  Bring that oil up from under the ground.  Put it into a pipeline.  And pump it to a refinery.  If we do this enough we will be less dependent on foreign oil.  And have more control over the price at the pump.

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FUNDAMENTAL TRUTH #29: “The problem with doing what is best for the common good is that few can agree on what the common good is.” -Old Pithy

Posted by PITHOCRATES - August 31st, 2010

CHOOSING IS EASY WHEN ONLY ONE IS CHOOSING

Lunch groups can be a pain in the you-know-what.  Ass.  I mean, if you’re hungry, you can go and eat whatever you want.  If you want pasta you can eat pasta.  But if you’re dragging 3 others with you, there’s a chance at least one of them doesn’t want pasta.  He or she may want Thai.  And be the only one who wants Thai.  Another may be trying to lose weight and wants a healthy vegetable sub.  Which may be the last thing someone wants if they have their heart set on a good, juicy piece of dead cow.

So you know what happens.  You don’t have pasta, Thai, the sub shop or the steakhouse.  You end up going to that greasy diner that smells like an old, unwashed ashtray.  The food’s not that bad and they have a huge menu.  Which never ceases to amaze you.  And worries you.  Just a little.  (You know they’re not selling broiled haddock every day and you wonder just how long it’s been in the freezer.)  There’s something for everyone.  It may not be the best.  No one is particularly happy with the choice.   But it was the best compromise everyone could agree to. 

Picking a movie can be just as fun.  “What do you want to see?”  “I don’t care.  What do you want to see?”  And this can go on and on.  And on.  An action thriller?  Too violent.  A romantic comedy?  Too sappy.  That r-rated comedy?  Too many boobs.  That 3-hour movie that’s like Steel Magnolias only sadder?  I can sleep at home for a hell of a lot less. 

And round and round you go.  Finally, you settle on a compromise.  Great Moments in Opera History – a film of a live performance of Verdi’s Rigoletto that includes some nudity.  There’s singing, a sad story, some comedy, a tragic ending and, of course, boobs.  No one was bursting with anticipation to see this movie.   No one is particularly happy with the choice.   But it was the best compromise everyone could agree to. 

When you’re deciding for one, you only have to please yourself.  The more people involved with the decision-making process, the less you please yourself and the more you try to please others.  Key word being ‘try’.  Because the more people in the decision-making process, the less likely anyone is going to be pleased.

E PLURIBUS UNUM (OUT OF MANY, ONE)

They call America the melting pot.  Canada is a mosaic, but we’re a melting pot.  America became a mixture of the different immigrants that came to this country.  These people assimilated into being Americans.  People with different nationalities and religions melted together and made a singular national identity.  Out of many, one.  (In Canada, there’s no melting.  Hence the mosaic.  And no singular national identity.)

Many say our diversity is our strength.  We’re not conformists.  Just look at the explosion in television channels.  We’re so diverse that we can’t agree on what to watch on TV.  So there are hundreds of channels to choose from.  To satisfy our very different tastes and interests.

We like different things.  Television shows, restaurants, movies, books, newspapers and blogs.  To name just a few.  There is, in fact, little that we really agree about.  Other than agreeing we should be able to enjoy the things we wish to enjoy.  And not be forced to endure the things we don’t.  Mosaic or melting pot, however you want to look at it, individuals make up the whole.  Persons with individual tastes and interests.  With individual hopes and dreams.

WHO’S TO SAY WHAT’S BEST?

Now put the two together and what do you get?  A lot of people who don’t agree with each other trying to agree with each other.  It’s sort of like drawing a square circle.  You can’t do it.  Now take that group and ask them to make a decision for the common good.

Sounds easy, right?  Most are willing to sacrifice a little.  If it’s for the common good.  We just need to list the things that everyone would agree are important for the common good.  Like better fuel economy in our cars to reduce pollution and our dependence on foreign oil.  Or making cars safer so people get hurt less in accidents.  Both of these appear to be for the common good.  But they also conflict with each other.  More of one means less of the other.  Little boxes with sewing-machine engines will give great fuel economy.  But they can get blown off bridges (like that Yugo that blew off the Mackinac Bridge in 1989) and don’t fare well when struck by an 18-wheel truck. 

Which is the greater good?  It depends on your definition of the greater good.  Which is, must be, subjective.  Big, heavy cars are safe.  Light, little cars have good fuel economy.  Some people so hate the internal combustion engine that a rise in highway fatalities is acceptable to them.  Others would rather give up a few MPGs for a safer car for their family.  These people aren’t likely to agree.  They’re probably not all that willing to compromise either.  For, unlike the lunch group, there’s no real motivation to get along with each other.

Now multiply this by thousands of other issues.  More arts funding.  A stronger military.  Stem cell research.  Lower taxes.  The Decriminalization of drugs.  Better border security.  Abortion.  AIDS research.  High-speed rail.  Etc.  Each of these has strong proponents.  And hefty price tags.  Or provoke bitter social/moral/ethical debate.  Can we agree which of these is the greater good?  Ask 10 of your family, friends and coworkers and find out.

SHARED SACRIFICE

Getting people to agree that we should do what’s best for the common good is easy.  Getting those same people to agree on exactly what that common good is, well, is impossible.  We’re too many people with too many diverse interests.  I know what’s best for me.  But how does my neighbor know what’s best for me?  And how do I know what’s best for him?  We can’t.  And the more we try the more we must settle for something less. 

When we start deciding for others, some will have to sacrifice for the greater good.  But that’s okay.  Because everyone is for ‘shared’ sacrifice.  If it’s for the common good.  As long someone else’s share of sacrifice is bigger than yours, that is.

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