Oil’s well that endzoil
Every once in a while (actually, it’s quite frequently), someone comes along and says they’re going to run the government like a business. What a utopian idea!
Now, when one gets into the details, running the government of a capitalist society like our own doesn’t often lend itself to the business model. Profit and loss lose some of their meaning–after all, many of the functions of government don’t lend themselves easily to generating revenue and that’s certainly true when it comes to setting policy. Nonetheless, I think there may be some valuable insight to be gained from looking at certain policy conundrums from a business standpoint. In particular, this whole four-dollar-a-gallon gasoline thing has both major parties spewing nonsense. It’s time to reset and take a fresh look.
Even if government can’t be modeled with business solutions, perhaps societies can. One business practice I’d be interested in applying is root cause analysis. In my mind, this could be a good way to look at a number of problems. But let’s look at how I’d envision the results when applied to the oil/gasoline price problem.
First, do we even agree that oil prices are a problem? To this, I’d say “absolutely.” It’s clearly affecting Joe Schmo, especially when he lives in the heartland. In places like Kentucky, the effects of high gas prices are embellished because of the distances between towns and the relatively lower incomes of its inhabitants. A New York Times article provides a nice look at this. But the effects of gas prices on truckers (and thus to a significant degree to almost all of the goods we can purchase) are also often mentioned in the dialogue of the times, as is the effect on airlines. Less mentioned (though still touched on) is the effect gas prices have on all sorts of petroleum-based products–important when we have become very reliant on plastics, for example. So oil prices are a problem, and the problem is very relevant.
But what is really causing gas prices to be so high? Here is where things can get tricky. Let’s look at several scenarios. First, let’s take on the factor of rapidly rising demand. This doesn’t sound too unreasonable. Basic economic theory suggests that increased demand with static supply will lead to higher prices and we are led to believe that cars are becoming more in more mainstream in the large developing economies of India, China and Brazil. So demand is certainly a possible factor–let’s hang onto that thought.
Supply could also be a factor. Again, basic economics says that decreasing supply under static demand will create rising prices. And there has been media coverage on this issue as well. While oil companies still claim to have plenty of reserves available, they are increasing difficult to reach. By every indication, methods such as oil shale extraction will be viable once prices are high enough; this would, for example, open up reserves in places such as the Green River Basin (provided political restrictions are removed). The concept of limited supply is more frightening in the sense that if supply problems alone are driving the price increases we’re feeling, it would appear at first glance that oil supplies are dwindling even faster than some of the doomsday predictions. But the market also doesn’t react immediately. Increased prices will make supplies that weren’t previously viable into potentially profitable sources but it takes several years to get the machinery and infrastructure in place. In other words, supply problems could be caused either by diminishing supply or, simply, slow reaction to increased demand.
There is another reason for high oil prices that has been proposed by Democrats recently, which is that out- of-control oil speculation has driven prices up. Several Democrats have countered the President’s requests to cancel legislation banning offshore drilling with several proposals to limit speculative practices. Finally, a fourth cause of high gas prices is the weak dollar.
So, there are four quickly identifiable pressures on oil prices–what’s a policymaker to do? Well, let’s wait a second…have we really found the root causes for each pressure? Let’s look again. Demand is up. Why is demand up? Because large industrializing countries are adopting them, on top of increased demand from mature economies where oil-thirsty behaviors (large engines, large cars or long commutes) can be a symbol of affluence. Why is supply down? Well, the energy source in question is limited and we’ve used some portion of it up. There may be more, perhaps even more than what we’ve used over the course of history. But there is going to be less tomorrow than there was today. Why is speculation (and specifically manipulation) occurring? Because it can be done, and done profitably, largely because oil is price inelastic. We need a set amount of energy to live our lives the way we’re used to, and we don’t change our behavior quickly (much as Bush’s oil rigs won’t be set up off of coastal Florida tomorrow). As for the falling dollar, while it shouldn’t be ruled out as a cause, the root causes aren’t specific to energy and as such are outside of this discussion. Looking at things this way, I find that three of the four identified pressures seem to have very similar causes: we use a lot of energy. Solving the supply issues or solving the market manipulation problem doesn’t get to the heart of the problem.
Rather than pushing policy that seeks to solve higher-order causes, our politicians need to look at the demand problem and in my mind, that means going beyond fuel efficiency limits and cap-and-trade emissions programs. We need increased incubation funds for energy-efficient technologies, but even more than that, we need to look more closely at the very structure of our societies. When I go to the local “natural” food store and see California strawberries for $6.00 a quart when I can get a quart of strawberries for $5.00 at the local farmer’s market, there is a problem. When I feel I have to own a car to have suitable access to a job in a major metropolitan area, there is a problem. When we design a metro area like Phoenix, Arizona, with it’s sprawl (to say nothing of cooling requirements) we have a problem.
This problem will not be solved by oil at any price, nor will it be solved with nuclear energy or even solar and wind energy. It can only be solved by understanding and then reducing the energy we need to live our daily lives, and while our politicians probably shouldn’t have too much influence on that process, they also should avoid intervening too much by solving the wrong problem and in doing so obscuring the right problem.
