I grew up in the 70s, and my early memories are full of gas lines and oil shortages. The shortages were temporary, but for a brief, shining moment, we realized how vital oil was to our way of life. The green movement was born. We invented words like “sustainability” and “renewable energy.” Then supplies were restored, Reagan came to power, and many, many economists who knew nothing about resources, geology, or science, proclaimed that oil was essentially infinite.
We had a chance
You’d think the 70s oil shock would have taught us something. Nope. Culturally, for whatever reason, we stubbornly refuse to plan for the future. Then we act suprised when we get exactly what we planned for. By the mid-80s, we stopped trying to conserve or find substitutes even as we spent (and continue to spend) billions of dollars of government funds acquiring, defending, supporting, and encouraging the oil industry. So now we’re dependent almost solely on oil, and the science to fund a substitute is 30 years behind.
(Cheerful thought: even if there are scientific substitutes for all our current uses of oil, there’s nothing that says we’ll develop them in time to deploy them. It took ten years for 3M to build the initial factory to produce Post-It pads. Replacing a national infrastructure might take 50. And if we wait until we only have 30 years of oil left … Well, that’s a problem, isn’t it?)
Most people realize that if we use oil faster than we replace it, we’ll eventually run out. Maybe in a week, maybe in a century, and maybe in ten centuries. But we will, eventually, run out. The theory goes that “the market” will save us by raising prices. Those higher prices will make development of substitutes viable.
Ok… Well, that’s exactly what’s going on! Even if some price spikes are caused by one-time events, wars, and ethanol distribution snafus, demand has fundamentally grown. Oil isn’t dropping back to $30/barrel any time in the forseeable future. So guess what: prices are high, they’re going to get higher over time, and this is the market saying “Wake up, people, and start changing your behavior.”
So now, high prices may make it viable to start searching for substitutes. How comforting. The substitutes, mind you, will be more expensive than oil is today. Otherwise, we wouldn’t need the high oil prices to make the substitutes seem economical by comparison. So the squeeze is permanent.
Yet we’re crying for politicians to do something. Give us a little refund! Repeal the gasoline taxes! LOWER THE PRICE OF GAS! Because we believe in markets as long as they make us rich. But when markets give us signals we don’t like, we much prefer to ignore them. We’ll try to subsidize oil, we’ll go to war, we’ll do everything except save, conserve, and have a national effort aimed at creating a coherent energy policy and getting everyone to sacrifice now so we can have a secure future.
Expensive Oil is Exactly What We Asked For
So stop bitching about expensive oil. You love the capitalistic profit-maximizing free markets that gave you Beanie Babies? Then wallow in $3.50/gallon oil. Because all the oil companies are doing is maximizing their profits. You believe markets will save us? Well, that $3.50/gallon oil is the market telling you that one way or another, you’re going to start saving oil. Hello, Market.
Actually, let’s get real. Pundits use the word “market” in discussing oil, but the oil industry is not a competitive market. The major suppliers, OPEC nations, are a price-fixing cartel. Markets don’t set their prices, the suppliers set the prices. And since their only asset is their oil, they have tremendous incentive to send price signals that oil is plentiful because keeping us believing they’ll give us a supply of future oil is the key to their power.
On the distribution end, there are a small number of companies who use price signalling to move their prices largely as a block. They’re enjoying record profits, and they’re very well paid for it. And we care about capitalism (”must give profits to oil company shareholders”) more than national infrastructure (”must accept lower profits in interest of national good”), so don’t expect “market forces” to fix oil prices any time soon.
I’m not even sure it makes sense to keep oil as traditional profit-making private companies. We depend too heavily on oil and energy for our survival to trust it to a small group’s self-interest to manage. Yet I don’t know what the alternative is. Make them public utilities? Not exactly a recipe for excellence. Seize their profits (by eminent domain perhaps) and funnel them directly into other companies developing alternative energy? (If we can seize private property to give it to a developer in the interests of a community, why not seize corporate profits to give to other businesses in the interest of the nation?)
We Pay Oil Executives as If They Were Competitive Players
Oddly, we pay oil executives as if they were actual players in a competitive market, instead of beneficiaries of huge tax breaks, near-monopolistic pricing, and tremendous government involvement in protecting this critical national resource. My oil profit blog post shows that an oil company can generate record profits just through normal supplier price increases. Aren’t the oil company execs happy that their stock options reward them hugely for such non-actions?
We Give Oil Companies Public Funds through Tax Breaks That They Report as Profit
They’re certainly acting in their own short-term financial interest, despite us giving them national support. I was watching an interview with a Republican congressman last night. The interviewer asked why the oil companies continue to receive tax breaks while smowing record profits. He replied that the tax breaks were designed to encourage development of alternative energy, “but instead they just took them as profit.”
Er, excuse me? Last time I checked, if you give a tax break to encourage a behavior, you actually link it to the behavior. No alternative research, no tax break. This congressman is implying that they gave the oil companies general tax breaks, hoping that they’d use the money wisely. What a crock! Let’s just tell the truth, shall we? Oil companies are huge power players in a political system that has grown to serve the special interests more than the populace. They give politicians money and the politicians give them tax breaks. Let’s not indulge in “alternative energy” fantasies if the legislation isn’t written in a way that actually encourages alternative energy development.
Oil Companies Are the Wrong Players to be Thinking About Alternative Energy
And why, by the way, are we trying to give oil companies incentive to develop alternatives? They’re exactly the players with the vested interest in no alternatives. Furthermore, it’s not like the oil business–drilling, prospecting, and doing geology–is primed to develop energy that don’t involve digging and drilling. They have the wrong incentives and the wrong competencies. If we want our energy infrastructure to be privately developed, funnel the money to private enterprises that develop alternative energy and compete with oil.
Whew. Gotta go. Need to stop by the gas station while prices are still below $4/gallon.
(See my “Business Explained” blog for a discussion of why oil prices can rise and profits can rise at the same time.)
Posted by Stever in Oil