It’s the Economics, Stupid!

Recent news reports have noted that as gasoline prices have risen, the President’s popularity has declined commensurately. From a practical point of view this makes no sense, because the President has absolutely no control over energy prices.  He can’t even reduce or increase taxes on gasoline unless the Congress passes legislation, and he certainly can’t set gasoline prices.

In economic terms, crude oil and gasoline are what are known as fungible commodities, that is, there’s no price distinction between light crude from the United States, Saudi Arabia, or elsewhere.  The only price differential in the marketplace is the transport cost from the point of production, and since Middle East oil has a lower cost of production, in most cases, transportation costs don’t affect the price of crude, only the price of refined gasoline. What that means, among other things, is that “Drill, Baby, drill!” isn’t going to make a measurable difference in gasoline prices. In fact, as U.S. production of oil has increased over the last few years, it’s made no appreciable impact on gasoline prices because world-wide demand has increased and will continue to increase as countries such as India and China build and use more cars and trucks.

The only time in the last 60 years when a President attempted to control gasoline prices was during the Nixon administration when Nixon imposed price controls [through legislation he requested and Congress passed].  The result was a disaster.  Because oil companies could not pass on the costs of higher-priced crude oil, they stopped buying and producing it because to do so meant losing money on every barrel of higher-priced oil.  The result was gasoline lines blocks long all over the nation and fuel shortages.

On the other hand, North America is literally awash in natural gas at present.  Interestingly enough, even though natural gas prices are close to all-time lows, which means that most homes heated by natural gas have seen real heating costs decline, this doesn’t seem to translate into greater political approval for the President or anyone else.

What continues to be overlooked in the debate over Romneycare/Obamacare [The Affordable Health Care Act] is the issue of “transferred costs.”  Because hospitals are essentially required to provide health care for those who need it, the costs involved in providing such care to those unable to pay have to be “transferred” to someone else – or the hospitals would go broke. Because doctors can refuse to provide services to those who cannot pay, the uninsured overuse hospital health care, especially at hospital emergency rooms, and that drives up health care costs. Because they cannot pay, the hospitals transfer costs to other paying patients, or their insurance companies, or governments. There are two classes of uninsured – those who could afford insurance and choose not to pay for it and those who either cannot get it or cannot afford it.  The thought behind the Affordable Health Care Act was to provide insurance to those who could not afford it and require those who could to purchase insurance or pay penalties, thus addressing the cost issue and theoretically redistributing health care away from overuse of expensive hospital facilities.  Regardless of whether one agrees with the Act or not, the driving force was the accelerating cost of health care and the economics behind it – and, so far as I can see, none of the opponents of the Act have come up with a viable and workable way of addressing those economics.  They don’t want to require universal insurance; they don’t want a single payer system; they oppose any cost-cutting measures that will make a real difference; and they don’t want to deny health care to anyone. Under those parameters, health care costs in the U.S. will continue to rise, even though they’re the highest of any developed nation… and our health is below average.  The issue is economics, and no one wants to confront that reality.

Whether it’s gasoline or health care prices…it’s so much easier to cast stones… especially at politicians, and especially when they deserve blame for other things.  But right now, on too many economic issues, people are blaming politicians, and politicians are trying to blame anyone else… and none of them want to look at the economics.

 

 

 

18 Responses to “It’s the Economics, Stupid!”

  1. Jack says:

    Its just like everything else in politics, no one has the spine to do the things that need to be done. Just shuffle along and hope things get better. A recipe for disaster. Wars always begin because of economics, and we are headed for one.

  2. Chad says:

    The argument that more crude produced in the USA does not affect prices one bit completely ignores the volitability aspect of our currect sources. A substantial find in a secure country will lower prices compared to a find or a source in risky Nigeria or one of the Stans simply because the speculators will not be as nervous about the source going to war or nationalizing the production.

    Also, more local production would not alter the price but the petrodollars would go to locals rather then shieks or dictators.

    • Daze says:

      @Chad, the problem is that World Oil Demand http://omrpublic.iea.org/world/wb_wodem.pdf is currently exceeding World Oil Supply http://omrpublic.iea.org/world/wb_wosup.pdf. This means prices will rise until growth in WOD is choked off by the higher price – i.e. it gets expensive enough to travel/run your factory that some of us actually stop doing it instead of grumbling. On the basis of the last time these graphs crossed (just before the GFC), that equates to WTLI trading at around $150pb, which you can expect around September on current trends.

      The reason supply from volatile states is a problem, even though few of them produce as much as a million barrels a day, is exactly because we’re so close to the edge of supply constraints. Nowhere that anyone is considering drilling, US or elsewhere, is going to produce a million barrels a day to make this problem any easier – indeed no field big enough to do that has been discovered since the 1970s, and believe me they’re trying. So, “A substantial find in a secure country” is becoming increasingly unlikely.

      PS: post euro crisis, GFC, Republican primaries, not sure there are any truly secure countries any more, either.

  3. Joe says:

    Personally I have a problem with a mandate requiring me to pay for-profit so-called insurers who do everything they can to wriggle out of paying when I’m sick. I would not have a problem paying contributions to a non-profit service where all the money goes into providing the health care others need today and that I will need when I’m old. So I’m all for a national health care system, just not private for-profit entities which escape customer choice — the discipline of capitalism.

    The US doesn’t have enough gasoline reserves to make a meaningful dent in world demand, so LEM is correct. The people who’ll get the money are the oil company executives, not the “locals” who’ll end up living in a more polluted environment than they did previously. People in Wyoming and rural Colorado don’t appreciate the brain damage they’re getting from volatile hydrocarbons resulting from fracking.

    We sent our manufacturing to China. Chinese electricity supplies are notoriously unreliable. Whenever the electricity goes out, thousands of diesel generators are started up. So we’ve lost jobs, and gained tighter oil supplies, to make the same widgets. Who won? A few executives.

    The reason people think the president can change the price of oil is because all the presidential candidates claim they can. If people actually understood how things work, making such daft claims would prove a candidates’ incompetence. Democracies only elect people slightly more competent than the average voters’ competence. The only solution is to raise the competence of the average voter.

  4. Chad says:

    Joe, Show the proof about higher brain damage from fracking. As far as the money I live in the area of the Bakkan formation and the money in this economy has kept me from having to lay off a half dozen workers because of the need for oil field housing. Everyone is busy, land owner are getting huge royalty checks and businesses are on the go. It is amazing. Every year the oil produced is higher then expected and forcast to increase the next. Thank goodness the oil leases are on private land so the governement can’t restrict it like the federal leases.

  5. Joe says:

    @Chad:

    The EPA states chemicals in fracking fluid cause brain cancer.

    http://www.epa.gov/ogwdw/uic/pdfs/cbmstudy_attach_uic_ch04_hyd_frac_fluids.pdf

    People in rural Colorado and Wyoming have wells. When the groundwater is polluted by fracking fluid they drink it. In Wyoming, the town of Pavilion the ground water is undrinkable due to fracking fluids:

    http://www.epa.gov/region8/superfund/wy/pavillion/EPA_ReportOnPavillion_Dec-8-2011.pdf

    Finally volatile organic compounds cause nerve damage, and cancer.

    http://www.nrdc.org/land/use/down/down.pdf

    I hope you don’t suffer any ill effects from your local oil fields.

  6. Chad says:

    Joe, The Pavillion study was found flawed and the EPA is redoing it. Also, your contention that if a well is contaminated people will continue to drink from it is simplistic. The EPA has had three huge setbacks in in claiming that fracking pollutes groundwater. The jury is still out but oil production has always been a risky and messy venture. It is much cleaner today though… like most other production activities in the US today.

    the Bakkan formation is producing over 500,000 barrels per day. This is increasing every year by almost 100,000 barrels per day. Total estimated reserves have gone from 4 billion barrels to upwards of 20 billion barrels. This means a hundred year supply at current rates. Extend these types of production wells to the rocky mnt. shale areas and we could be closer to energy independance then anyone could predict a decade ago. Especially with truck fleets starting to pursue switching over to natural gas from diesel due to the NG glut.

    The main reason this increased domestic supply has not altered the price of crude is because of the massive printing of dollars. Crude is sold in dollars and because of QE and QE2 the dollar is devalued and the price of crude inflated. Without the increases in domestic production it would be much worse.

  7. Alan says:

    There are a myriad of reasons that people believe that the president, or any political figure can influence the prices of gasoline or other services provided. And there are many things, from pre-existing contracts (Such as those which keep gasoline prices on military bases higher then the price out in town despite not paying taxes on the gasoline sold on base) to speculation on the market which keeps the prices high.

    Of course, many would lay it all at the feet of greedy capitalism in the Middle-East, and elsewhere.

    How many people, on a daily basis, drive some place they could easily walk? I know my wife is horribly guilt of this. Driving to the kids school, because it is easier then walking .6 miles. Or to the grocery store 1 mile away because it is faster and easier. This is an easy example of ways to reduce spending on oil.

    A company in Canada has developed a process for recycling plastics. They currently generate 1000 barrels per day. Not a great deal, but it’s a start up. The process is 90% efficient at reclaiming the oils from used plastics. And the oil produced is sufficient grade and cleanliness for immediate use in further plastic production or refining for fuels.

    Many people believe that when they drop their things off at the recycle bins, the plastics, glass, etc get re-used some how. For metals and glass, this is true. But for plastics, not so much. It goes into fiber glass, road materials and insulation(To name a few). The plastics aren’t really recycled, but simply pulped and used as filler material where possible. Leaving the vast amount of plastics to go to landfills.

    These are just examples of societies wastes and miss use of materials. Until people are willing to accept a more efficient, and yes less convenience in daily life, method of living, the economy will be oil driven. Eventually the price of crude will climb enough that it drives up gasoline prices to the point where people will stop using their cars as much. At some point people are willing to trade convenience for cash. Eventually the gas companies will reach that point.

    Yup, my wife will have to walk the kids to school instead of driving .6 miles.

    But I’ve gotten distracted by the oil discussion from LEM’s remarks about healthcare. I do not subscribe to big government, I never have and never will. The notion that the government should have it’s nose in my daily life at any level is highly irritating to me. But that is a personal opinion. Just like any other, I’ve a right to it.

    But the idea that an individual can be forced to pay for something, health care in this instance, when they do not wish it (Though I do pay for private healthcare insurance through my company) is ridiculous. Can you reasonably force some one to purchase any service? At what point is the notion of the greater good, and the pursuit of happiness being replaced by the drive to put the almighty dollar in some-one’s hand?

    With the current trends in United States society, more and more socialism springing up, I believe that they can expect the steady incursion into their lives by the government, such as the medical bill. The push of big government all through the aspects of their lives while things such as education, infrastructure and the other basics which will ensure a safe future go by the wayside.

    For my money, I support the notion that people get what they work for. Not hand outs. Not free medical care. If you are unemployed, it is not my job to support you. If you cannot afford health insurance, I should not foot the bill for your care. I sympathize with those who cannot take care of themselves medically because they have a condition which costs a fortune. Or an accident happens and they need expensive treatments. But why should others who have no knowledge or care for and of others pay for it?

    I am sure some would question my basic humanity for such a selfish point of view. But the idea that society should support it’s weakest members at the expense of all is a defeatist path. Every time we tell the child who fails in math that it’s alright to be in the 20th percentile, or that it’s O. K. to be second place. Each time we ‘main stream’ those with learning disabilities or physical disabilities for the good of the handful we support a growing number of weights on society.

  8. Max says:

    Alan, problem with your approach, is that it requires a true “dog eats dog” scenario at the hospitals or emergency rooms, turning away people who (for whatever reason) made decision not to buy insurance.

    Lets do some thorough experiments (things are intentionally taken too far, as its easier to make a point that way)

    Thought experiment 1:

    Pretend you are a doctor, and an pregnant women is brought in with a broken leg. She is bleeding and a piece of bone in sticking out of her leg. Will you provide health care to her for free, or turn her away? What if that women is your next door neighbor’s pregnant wife?

    Thought experiment 2:

    Lets say you had decided not to have insurance.. While vacationing somewhere, your came into contact with some poisonous marine animal, with venom so strong, it lives you completely paralyzed and dying in excruciating pain (which is a realistic scenario I just seen on Discovery channel).

    When taken to the hospital, people discover that you do not have insurance, and your financial resources are insufficient to pay for expansive anti-venom.

    Will it be ethical for a hospital to just put you out on the street, dying?

    What if instead of you, it was your child, who had no input into your decision of not purchasing health insurance for him/her.

    • Wine Guy says:

      Thought Experiment #1 and 2 occur all the time: I don’t have to pretend – I am that doctor. Every day, I see indigent patients who cannot pay for their health care who come in with life-threatening illnesses and injuries. Some of them (I’d say… 20% or so of the top of my head) are because of direct lifestyle choices the person has made: a 20-something who has been skiing/biking/etc. without insurance and is involved in a crash. There is usually alcohol or some other mind-altering substance involved. The bill can vary from $300 (which they can’t afford) up to a couple hundred thousand dollars (i.e.: the kid we med-evac’d from my little rural town to the University hospital 70 miles away with bleeding inside his head). Who pays? We all do: it’s called Medicaid. Your tax dollars at work.

      And the $300 bill? The hospital won’t see much more than about $40. For the 300,000 bill? The system will reimburse no more than 30%. Neither will cover costs.

      Thus the price shifting to the insurance carrier who actually let hospitals make a little money to keep their heads above water.

      There is creditable research out there that suggests that 1 in 4 to 1 in 3 hospitals will be closing by 2020. Guess where? In poorer areas: rural and urban areas.

      There are hard choices to be made:

      Flat out: people need to be responsible for their own health. Stop smoking, eat right, lose weight, exercise, get screening tests on time and don’t put them off because you’re squeamish about them (or, if you do, accept full responsibility for your actions).

      Other thoughts:

      1. Great Grandma can’t have her 3rd cardiac bypass surgery.
      2. Smokers have to pay more for all aspects of care.
      3. People whose cancer treatments don’t work in the first two courses of therapy (surgery OR chemo OR radiation) should go straight to hospice.
      4. The US needs to stop subsidizing the rest of the world’s drug research through the ridiculous prices of medications.
      5. Tort reform: let me stop ordering ridiculous tests so I don’t have to defend every little thing in court.
      6. Equalize pay between specialists and the primary care: those of us who use our brains work as hard – and harder – than those who do procedures all day. That will get the ‘best and brightest’ into specialties that specialize in keeping people healthy (Fam Med, Peds, Int. Med) rather than trying to fix them when they’re already broken (every single surgery specialty and all medical subspecialties except Geriatrics).

      I can go on and on.

      • Mayhem says:

        One of the greatest unsung achievements in the medical system in NZ was they made suing for malpractice something that could only be done by the state. It immediately takes a large part of the burden of proof off the medical practitioner, and places it upon the regulatory structure, where it belongs. It also ameliorates one of the worst counter-intuitive issues with primary paramedic care – where the more qualified a passerby is to help, the less likely they are able to actually do so in case they make the problem worse and are held directly liable.

        With regards general medical practice, there are nominal fees to reduce frivolous visits, but justified care is generally freely available through the state medical system. Medical insurance is widely available, but used to provide additional benefits over the state system, such as faster appointment times for surgery or better rooms for recovery. It is not mandatory, because your normal taxes pay for a minimum level of care at quite a low cost.

        We also have a separate nationwide medical levy which means all citizens are automatically covered for all accident and emergency care including transportation and subsidised during their recovery. Tourists are also covered free at point of entry, but their costs are generally recouped from travel insurance later, or may be billed back to the country of origin if the user didn’t have travel insurance.

        Frankly the american system strikes me as being insane – the idea of being involved in a car crash through events out of your control, and then being completely ruined through being charged for all aspects of your care strikes me as both immoral and inhumane.

        Besides, nationwide medical cover means the government can enforce things like vaccination policies and herd immunity, greatly reducing the risks of the population as a whole.

  9. Chad says:

    @Joe,

    I was refering to 100 years of production from the Bakkan formation. Not that it was 100 years of world consumption.

    • Daze says:

      @Chad: or to put your and Joe’s numbers together another way, the Bakkan formation will increase oil supply by just over one half of one percent. Clearly a game changer.

  10. Chad says:

    @daze

    Which shows why we need a 100 new discoveries just like it.

    But, Bakkan currently offsets 5 percent of daily USA imports and could ramp up to 10 percent in the near future. That is indeed a game changer. If we would have developed ANWR 10-15 years ago when it was debated and when it would have taken 10 years to hit the markets that also would have been nice about now.

    • Nate says:

      Except that it still wouldn’t meaningfully affect world prices, and therefore wouldn’t affect US prices (unless the United States banned the exportation of oil, which would create many more problems than it would solve).

  11. Carl says:

    Actually, this is one area where magic thinking DOES work.

    The US president can do anything that he and other people believe he can do, regardless of what the constitution says his powers are. Because his power doesn’t come from a magic scroll of constitution, it comes from popular belief in him and willingness to go along with what he wants.

    If he wanted to set petrol prices, he could do so.

    What he can’t do is stop the greenhouse gas emissions caused by cheap petrol from destroying the climate. Unlike voters, physics doesn’t answer to belief.

  12. […] It’s the Economics, Stupid! – Interesting look an energy prices and politics, although I think that he doesn’t take into account the effect of staring at a pump for a minute or two as you pump your gas, rather than simply seeing one number one time each month when you get your natural gas bill. […]

Leave a Reply

You must enable javascript to see captcha here!