Tag Archives: oil

Saudi Oil and the US dollar

Last week the dollar began to recover in value as the Bush administration finally started making serious noise about a strong dollar policy. Now, right on the heels of that display, the Saudis finally agree to up production.

Both events were a bit long in coming, at least relative to the reasons stated by each party. The Bush administration claimed it was (finally) worried that imports would become too expensive if the dollar were allowed to continue its slide. They didn’t seem concerned the past several years as the dollar slowly dropped a third in value. After all, it was their policies that caused it. Similarly, the Saudis have been fighting production increases all the way as oil has quadrupled in value. But now $140 is the magic number where they start to care?

It leads one to think maybe the two capitulations are connected. After all, high oil prices hurt America. A devalued dollar hurts the Saudis, as oil is priced in dollars. Priced in Euros, for example, the Saudis aren’t raking it in as much as it would seem. Given how much they trade with Europe, the dollar’s fall has offset a lot of the increase in the price of oil, especially given that they probably have a lot of production costs that are priced in other currencies, squeezing them from both directions. So, we prop up the dollar to help them, they increase production to help us. Given the connection between the Bushes and the Saudis, maybe the two governments finally addressing these longstanding problems at the same time is not a coincidence. Nor, perhaps, is it a coincidence that this coincidence happens during a presidential campaign.

Bowling for demagogues

The three remaining candidates for president, even the “Republican” one, have all recently come out with pandering proposals to placate the masses over oil prices. McCain and Clinton have banded together over a gas tax holiday, an idea so hopelessly without merit that you can’t find a working economist who thinks otherwise. According to Greg Mankiw, when Leonard Burman was interviewed on PBS’s NewsHour on the subject, he asked the producers why there weren’t another guest taking the opposing position (that a gas tax cut was good). The answer was that they couldn’t find anyone who agreed with the tax cut. As pointed out by Mankiw, cutting the tax on something supply-limited like oil will only result in increased demand, and therefore prices, but without much change in production. Thus, most of the tax rebate will be kept by the oil companies, not passed along to consumers. The macroeconomic principle in this particular case can be summed up as “you can’t squeeze blood from a stone,” or more generally and boringly, the effects of a tax are divided across parties in proportion to their relative price elasticities.

Credit should go to Obama for being the only candidate not to endorse this sham of an idea. Unfortunate that he should then lose it by turning around and proposing a “windfall” tax on oil corporations, who make profits of around 8%, in line with every other industry in America. (Before the boom, they actually had below average profits.) If they had a 30% profit margin and the gas occasionally spontaneously exploded in your tank they might resemble the software industry, and yet I have never heard of a politician proposing a wind fall tax on Microsoft. Furthermore, taxing our oil companies is counterproductive, and will only bring advantage to foreign oil companies.

The problem in both of these cases is that our politicians only have power over us, so when it comes down to the zero-sum game that is the oil industry (in the short term), all they have at their disposal is sleight of hand. They lower gas taxes and hurt our highway funding, and then have to make it back up by taxing the corporations, who pass that tax on to the consumer, yielding no real change except a lot of wasted energy and added inefficiency. This situation exactly sums up the full Hillary proposal, which is to lower fuel taxes and raise corporate taxes on the oil industry, a proposal that should (and according to exit polls does) cause anybody who has ever taken an economics class to dismiss her as a complete fool. But while Hillary is the worst offender, all three candidates are variations on the same theme when it comes to pandering to voters on the subject of oil prices. But we have only ourselves to blame if we believe politicians when they tell us they can solve fundamental problems of supply and demand by heavy-handed legislative fiat. The Wall Street Journal summed it up nicely last weekend:

This tiff over gas and oil taxes only highlights the intellectual policy confusion – or perhaps we should say cynicism – of our politicians. They want lower prices but don’t want more production to increase supply. They want oil “independence” but they’ve declared off limits most of the big sources of domestic oil that could replace foreign imports. They want Americans to use less oil to reduce greenhouse gases but they protest higher oil prices that reduce demand. They want more oil company investment but they want to confiscate the profits from that investment. And these folks want to be President?

If you want to help the poor deal with high energy prices, just give them money! Pretty simple, huh? Why aren’t Hillobamcain suggesting this? I imagine the candidates aren’t suggesting it because none of this hot air is really about helping the poor (who aren’t a particularly lucrative voting bloc). It’s about welfare for the middle class, politely phrased in terms of taxes to avoid the stigma. But the problem is it won’t even work. If the candidates were economically literate*, they would just propose something akin to what New York City is proposing: forcing a few hundred millionaires to pay for a public transit system none of them will ever use. The honesty in that kind of transparent shakedown is refreshing, and what’s more, it would actually produce real results. See, it’s not demagogy if it will actually work, it’s just populism.

*They can be forgiven for not being so, as none of them have never been in an executive position in their lives, and as legislators are under the conditioned impression that there is no wrong can’t be solved by the right bill.

Supply and demand in the Middle East

In the continuing interest of figuring out what in God’s name is going on with the price increases in oil, I did a little research on the US Government’s Energy Information Administration website, which apparently exists. (I suppose it may be an inexorable fact that governments continue expanding until beaurocracies are created to represent all possible three letter combinations, at which point they move on to four letter ones like USSR.)

birge-oil-prices-big.png

To put the world oil supply in historical perspective, I took the past data for proven reserves and divided it by the yearly world oil consumption. The result (shown above in red) is a plot of the number of years worth of reserves in the ground expressed in the years of consumption at that time. If you can trust the reserve data, this number is basically a lower bound on the amount of time before the oil hits the fan. For reference, I’ve also shown the total worldwide consumption.

There are two interesting things, I think, about this plot. First, it’s kind of hard to worry too much about “peak oil” when the amount of time our reserves will last keeps going up, not down. Second, there doesn’t appear to have been any change in the consumption or suppy (at least in terms of reserves) that would justify the sustained rise in prices that occured around 2001.

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