Tuesday, October 21, 2008

Saudis Succeed in Keeping Us Hooked on Oil

So, the price of oil has now plunged to nearly $70/per barrel, and in most of the US the pump price is below $3 per gallon and falling. In an article in yesterday's Washington Post, one of the designers of the Toyota Prius, Bill Reinert, warned that at $2.50 per gallon, few people are interested in buying hybrid cars, much less the more expensive plug-in electrics that reportedly will cost $8,000 more to purchase than standard cars. Also, it takes five years to "ramp up production" of a totally new automobile. While several automakers are working on plug-in electrics, which looked good at $140 per barrel of oil, it is some years before they will come on line, and one producer, Tesla Motors, has already canceled a project for a mid-cost sedan due to financing problems.

So, clearly there was a speculative bubble in oil this past summer, but the turnaround has also had fundamental components. Part of it is the oncoming global recession reducing demand, but part of it was due to production increases that were little noted at the time earlier this year. Those came in Iraq, where production has now gotten back up to where it was prior to the fall of Saddam, and in Saudi Arabia. The total between them amounted to about 1 million barrels per day. Needless to say, the Saudis have nothing to offer the world other than their oil, and will do what is needed to make sure that we remain dependent on them. That means killing any serious alternatives to the internal combustion engine before too many of them get on the road by getting production up enough to keep the price of gasoline down enough to do so, even if some other OPEC members are unhappy about it, wanting their oil revenues now.

4 comments:

Don said...

"The total between them amounted to about 1 million barrels per day. Needless to say, the Saudis have nothing to offer the world other than their oil, and will do what is needed to make sure that we remain dependent on them. That means killing any serious alternatives to the internal combustion engine before too many of them get on the road by getting production up enough to keep the price of gasoline down enough to do so, even if some other OPEC members are unhappy about it, wanting their oil revenues now."

Assuming you're right, wouldn't the best solution be getting the price of oil as low as possible, and then taxing it in the U.S., and investing the money from the tax in alternative energy. In other words, the ratio of tax proceeds in the price of gas would increase significantly.

Don the libertarian Democrat

rosserjb@jmu.edu said...

Don, t.l.D.,

I do think we are going to have to have more active intervention to encourage alternative energy. In many ways this is garden variety standard microeconomics. There are all these negative externalities associated with fossil fuels, and especially petroleum, from global warming to national security issues (not sure that counts as an externality) to dispersed development patterns and on and on. I am all for having higher taxes on gasoline or carbon more generally, although raising taxes on anything in the US context is always difficult politically.

The irony, of course, is that people are more likely to see that there is a problem when gasoline prices are high, but then they resist higher gas taxes because they do not like the high prices they see. It would certainly be easier politically when gasoline prices are lower, but then people are less likely to see "a problem" that needs solving. Everything is OK, and I can drive my SUV all I want.

Don said...

Thanks for the reply. In the same way that Saudi Arabia is trying to find a price that makes them a pot of money but keeps us addicted, I was trying to find a way to make oil cheap ( say by breaking OPEC ), so these countries would get reduced revenue, while we raised the taxes on gas to high levels, thereby generating revenue for alternative sources of energy and causing conservation at the same time.

The reason I'm willing to do this is precisely because OPEC is a cartel, and what you identify as externalities. In other words, political and environmental objectives that transcend the mere economics of energy use.

I was hoping that we could keep gas high, but not high enough to dislocate the economy so that people would object and nix the program.

It might not be possible, but I wanted to offer a proposal that allowed us to:
1) encourage conservation
2) get higher revenue for alternative energy
3) give less money to countries like Saudi Arabia

It was just a thought, and the breaking of the cartel would have also given us a free market side to offset our taxing side.

Don the libertarian Democrat

rosserjb@jmu.edu said...

Don,

Well, OPEC survived $9 per barrel oil in 1986 and upper teens in the late 1990s. The Saudis in particular can handle much lower prices, even if some of the others will get hit hard with a drop, especially some that have raised their spending based on the more recent higher prices.