High prices certainly spell doom for 12mpg SUV's.

I should check VW's stock price - the demand for 50mpg VW diesels should soar.

BINGO! We have a winner...

VW stock price soaring

Note, I don't agree with the overall leaning of the piece. I don't think we're heading for an oil crisis in the near future and I think the author spends insufficient time on emergent technologies that could lead to a better resolution than is suggested.

But it is a good, levelheaded article with solid investigative work that highlights problems which do need to be addressed in one way or another. Like Ace says, worth a read even if you don't agree with it.

NYT article: Simmons replied, ''I wasn't talking about low triple digits.''

RIGHT HERE is where the dude lost me - I didn't read any further dismissing the whole thing as scare mongering. Meh.

There is a "crossover point" where the cost of Arab oil exceeds the cost of making oilish products from scratch out of other hydrocarbon sources - like coal - which the USA and europe, Russia, etc are lousy with.

In reality, "oil/gas" are what I'll term a "convenience" energy products, because the raw form is closer to what you want than coal is. But, to a chemist constructing relatively simple hydrocarbon molecules, its just a matter of production cost between using oil as a starting point rather than coal, or discarded furniture, or scrap plastics, dead bodies, etc...

As the chicken people say - parts is parts.

There may be a few years lag where oild prices are stratospheric, but when local cracking plants are built and come online, then arab oil won't be worth any more than the synth equivalent product and prices would stabilize for the next several hundred years.

I am neither an economist nor an engineer; but it seems to me that cheap oil was one of the principal obstacles to developing newer sources of energy - especially renewable ones. After all, why spend money to develop sources of energy when you can pump energy right out of the ground? Alternative energy sources had an almost impossibly high threshold to cross when oil was $10/barrel. At $60+/barrel, other energy sources, as Tony notes, become more attractive.

One thing is clear to me, though, and should be the cornerstone of our energy policy: The sooner we stop burning fossil carbon as our princpal energy source, the better off we'll be.

Yep. My degree's in economics, our professors always rolled their eyes at the idea we're going to run out of oil for exactly the reasons Steven Levitt said. High prices will create incentives causing people to change their consumption (demand) and make hitherto unprofitable substitutes or oil resources worthwhile to develop (supply)..........all things remaining equal and an absence of government interference.

There will always be doom mongers saying we're going to run out of something, the globe's overheating (when it's not on the verge of a new ice age), the economy is about to collapse, or overpopulation will cause mass famines. They're almost always wrong.

U.S. demand has skyrocketed over the last several years. Many reasons, but the switch to big trucks and SUV's are a big part of it. It is not just China.

The Saudi's used to regulate the price somewhat, but they no longer can.

The days of $10.00 oil are just as nuts as the $100.00 some are forecasting. This argues for some sort of rate stabilization method. Without something, it is impossible to run an airline,a trucking company, etc.

The market will adjust, but it take a long time - I would argue that since we (sort of) regulate the money supply, interest rates and crop prices, we should find some way to keep prices within a range the way the Saudi's used to. Too low is just as bad as too high.

Without some stability, we will soon enough change all our cars over to hybrids which may be just as nuts as the switch to big trucks. We are sheep.

Robert,

Its not that the public are "sheep" per-se, they/we do really drive the market and development at the most fundamental level..

What has happened, is that the "threshold of pain" simply isn't large enough yet for us to demand something else -- IOW, the public likes comfy inertia until such time that doing nothing simply hurts too much.

We're really not even close to that point yet - ex. "town planners" in FL and many other places are STILL creating zoning schemes that virtually guarantee that EVERYONE in the town will need a vehicle of some sort if they intend to live there. Some of the reason we drive a lot is because of idiots who are creating infrastructure designs that virtually dictate it. A return to the traditional semi-chaotic small town layout with business interspersed with residential allows a lot of people to travel a lot less to accomplish daily tasks.

In the US we bitch and moan about $2.60/gal gas, but the euro public is willing to tolerate 2X that and they STILL haven't met their pain threshold that would demand local synfuel projects and other alternatives...

This isn't new stuff - all the basic organic chemistry research was done by the Germans during WWII. The earliest O-chem references I had in college were even printed in German.

Fuck the elk! Let's drill ANWAR.

the switch to big trucks and SUV's are a big part of it

The federal government's regulations were entirely responsible for that switch. Arbitrary distinctions between trucks and cars, combined with the requirement that manufacturers' fleets of CARS maintain a certain mileage rating, made cars less desireable and trucks more desireable.

since we (sort of) regulate the money supply, interest rates and crop prices, we should find some way to keep prices within a range the way the Saudi's used to.

This is 100% wrong. It is absolutely the worst possible course of action.

As another poster said, people adapt to changing circumstances. Prices fluctuate. This is normal, appropriate, and even useful.

Prices act as signals to production. Prices contain information -- they reflect (in part) manufacturing costs, the available alternatives for that product, and the areas of the economy where there is more (or less) demand for a given product or service. Prices should NEVER be manipulated. It interferes with all these critical signals, and the result is production in all the wrong places and in the wrong amounts.

When you artificially depress prices, you get less production and more consumption of that good or service. That's why it always leads to shortages. Artificial price increases cause the reverse effect.

"town planners" in FL and many other places are STILL creating zoning schemes that virtually guarantee that EVERYONE in the town will need a vehicle of some sort if they intend to live there.

This is exactly right. The federal interstate system is also behind this phenomenon. In effect, a small group of government officials (and their hired "experts") decided for everyone where and how we would all live.

The federal government's regulations were entirely responsible for that switch [to SUVs and trucks].

I remember reading something about that a long time ago. Didn't the regulation have something to do with helping family farms? The explosion in SUV manufacturing and popularity seemed to happen a few years after Farm-Aid, if I remember correctly.

I haven't read the pieces yet this morning, so stop me if I'm repeating a point made in either of them, but the *real* crossover point isn't when we run out of oil, but when we think we're running out of oil.

I don't know if we're at that point now-- this whole current bubble feels totally artificial-- but we may be close.

George Will had a brief but sharp piece on this concept last year, worth a visit.

Cheers,
Dave at Garfield Ridge

Incidentally, Ace, Dubner (whom you quoted) seems to be confused about what "the whole peak oil argument" actually is. "Peak," as it's used in the article, refers to a given field, region, or planet's production capacity rather than price.

The rest is still debatable, of course.

I'm not sure, Sue. It was my understanding that the fleet-wide mileage restrictions were sold to the public as a fuel-independence measure.

They may have exempted "trucks" from the artificial restrictions because trucks are (were) more of a commercial vehicle, and farm and ranch interests complained about the lack of power that high-mileage vehicles get, or something along those lines. Thus, the two-tiered regulations were born.

The problem, of course, is that people adapt. Things change. That's what economics is all about. If everyone wanted the same thing all the time, the same number of people died as were born, and everything was predictable, we would never need prices or entrepreneurs or innovation, since we would already know exactly what to manufacture, how to make it, and how many to make. That's not reality, of course.

Vehicle consumers looked at the various alternatives and decided that a large, low-mileage vehicle was worth the added price. In other words, the federal government forced car makers to make a product that people did not want (or at least did not want to the same extent as was being made). The government effectively mandated that manufacturers make the wrong kinds of cars.

If fuel prices go up, then, as Moonbat One said, conditions have changed again, and people will adapt.

The market can (and will) always adapt as fast as the situation requires. If nothing else changes, we can always supply our fuel needs for the time being through domestic production, which will raise the price of gas, which will make fuel-efficient cars that much more attractive.

The government, on the other hand, is an impediment to adaptation. It is slow, inefficient, and never meets consumer demand.

As soon as the price goes above $80 a barrel, we can start using thermal depolymerization.

http://en.wikipedia.org/wiki/Thermal_depolymerization

While I subscribe to the capitalist argument here, there are two problems with it.

One, and new technology will require a new infrastructure to support it. Investment in such an infrastructure demands that not only is the consumer end profitable (i.e., gas is too expensive, forcing consumers to switch), but that the production end is *no longer* profitable. Meaning, as long as energy companies can make money off of oil, why bother changing, and spending huge sums of money on a new exploration /refinement/ distribution architecture. And, as long as the price of oil has the potential to fluctuate, i.e. the current price point isn't permanent (or believed to be permanent), I doubt such investment will occur.

Secondly, and far more importantly-- we all talk about technological solutions to our problems as if they exist, or given a permanent shortage of oil, can be made to appear out of thin air. However, the technological solutions may not exist, or be developed in time we need it. Or, conversely, we may have the technology, but nobody may want to put up with the inconvenience of using it (meaning our tolerance for high oil prices may be much higher than people think-- as the current situation seems to be proving).

Remember, the bus is more fuel-efficient than a car. A bike is even more fuel-efficient. Walking is totally fuel-efficient. Guess what? Most people (myself included) would rather drive than do any of those things. How high does gas have to get to force those habits to change?

Cheers,
Dave at Garfield Ridge

I'm with Megan - I don't necessarily agree with the story's leaning - I think the Saudis understand they need us as much as we need them, and will adjust prices when it looks as though we're going to change our consumption habits.

In terms of pure journalism, though, this is the best story I've read in the NYT in a long, long time.

I have invented a perpetual motion machine and I am looking for investors. Please contact me at
NigerianGeneral@hotmail.com for details.

"There may be a few years lag where oild prices are stratospheric, but when local cracking plants are built and come online, then arab oil won't be worth any more than the synth equivalent product and prices would stabilize for the next several hundred years."

There's just one problem. Where are these local cracking plants going to be built? We haven't built any refineries in 25 years because of various regulations; they'd also prevent us from building "coal refineries". We need to change those regulations in any event; I wouldn't be surprised to find gasoline get cheaper once that happens, at least for a while.

Of course we also need to deregulate the crap out of the nuclear industry, and to Hell with the radiation level of the middle of the *#&# desert 10,000 years from now. Either humanity will be spacefaring and advanced in technology, or everyone will be savages whose ancestors foolishly ran out of fuel without building any means to get more from space; savages tend not to live in the desert, and advanced spacefaring civilizations will have much better means of either using or neutralizing any nuclear waste we leave behind.

While I subscribe to the capitalist argument here, there are two problems with it.

I don't object to the use of the term 'capitalism,' since we all generally know what we are talking about. But the term 'capitalism' was coined by Marx as a form of criticism. It is a propaganda term, not a scientific one.

"Free markets" is better, and more accurately describes what I am taling about.

When people have (sound) objections to capitalism, it is usually only relevant to the aspects of capitalism that are not part of a free market.

When people criticize the free market, it is because they are wrong.

One, and new technology will require a new infrastructure to support it.

Why is this a problem? It sounds like a boon to those who are ready, willing and able to create it.

Investment in such an infrastructure demands that not only is the consumer end profitable (i.e., gas is too expensive, forcing consumers to switch), but that the production end is *no longer* profitable.

Such changes are never made monolithically. To quote Depeche Mode, different people have different needs. Consumers want different things. People still buy cars, just fewer than they do SUVs. Multiple energy (and transportation) systems can co-exist alongside one another, as long as they are meeting different sets of consumer demands.

And, as long as the price of oil has the potential to fluctuate, i.e. the current price point isn't permanent (or believed to be permanent), I doubt such investment will occur.

The companies that predict the future price of oil correctly will succeed. The ones that predict prices incorrectly will fail.

The best solution is to allow the various competitors in a given business to make these predictions on their own, and see who comes out ahead. The solution is not to force the price to remain rigid. That is a measure that exists solely for the producers' benefit and always comes at the consumers' expense.

the technological solutions may not exist, or be developed in time we need it. Or, conversely, we may have the technology, but nobody may want to put up with the inconvenience of using it

Wherever there is an unmet need, someone will find a way to meet it. Maybe the solution will come, in part, in the form of freeing up urban development restrictions, as Tony mentioned, thus reducing the need for cars. Maybe in alternative energy sources. Maybe in making (private) rail systems more attractive. Maybe in something else entirely.

Economic calculation is when people weigh the costs and benefits of a course of action. If it is preferable, on balance, to pay increasing gas prices, then that's what people will do. It's a basic axiom of economics that people act to improve their situation (even though the manner in which that improvement is measured is subjective), by choosing from among the various alternatives as they exist at that time. From among the various alternatives, the ones that, on balance, are preferable will win out.

Price fluctuations are simply a shorthand way of judging which alternatives are preferable. By interfering with the price fluctuations, you interfere with the adaptation and innovation mechanism.

Who effing cares?

The sooner we run out of oil, the sooner we can get back to burning trees for fuel.

Effing trees.

Two words: nuclear cars.

Let me put it this way: governmental controls on oil prices is what's keeping us from having cars that fly.

It doesn't get any plainer than that.

Say no to nuclear cars. Say yes to wind powered cars.

Is this what you have in mind, Ralph?

Somehow, I don't see myself sailing down I-95 in one of those.

Two words (or three, depending on how you look at things):

monkey-powered rickshaws.

There is still tons of oil out there. The entire province of Alberta is basically oil-soaked dirt. When oil comes out of Saudi Arabia at $15 a barrel, it is not worth putting into place the substantial infrastructure required by Tar Sands extraction. If the price of oil stays around $50 a barrel, there will be a LOT more use made of it - which is why, in the past, the Saudis tried to keep the price low enough that it wasn't particularly profitable, with occasional super-dips to really smack the producers of exepensive oil in the nose. Of course, what's good about the expensive oil is that a lot of th expense goes to good blue collar salaries and equipment acuisition instead of into OBL's family's pocket.

What someone really needs to do is invent a gadget like the one at the end of "Back to the Future" that powers vehicles with trash.

The exhaust fumes would probably stink pretty bad, though.

Phinn,

I share your anti-regulation mindset. However, I think you are overlooking the OPEC cartel. You seem to put way too much blame on the Federal gov't for oil pricing. You think if our Gov't suddenly stepped out of the way that oil prices would lower?

OPEC is going to keep prices at the highest possible level. You know, that level determined to milk the consumer without pissing them off so much that they demand real alternatives.

But what do you do with the monkey when he's not pulling you around?

Gotta do something with that monkey.

Monkeys don't take care of themselves, you know.

Cigars and a unicycle. Fit nicely in a unicycle trunk. C'mon Phinn, that's what they were made for - keepin' monkeys occupied and keepin' us entertained.

you are overlooking the OPEC cartel. You seem to put way too much blame on the Federal gov't for oil pricing. You think if our Gov't suddenly stepped out of the way that oil prices would lower?

The prices should be whatever the market decides. That price is based on about a zillion factors that no one, especially not a government, can possibly account for or even know.

OPEC is going to keep prices at the highest possible level. You know, that level determined to milk the consumer without pissing them off so much that they demand real alternatives.

How is that different from any other good or service ever bought and sold in the history of mankind?

Every producer tries to get the best possible price. Every consumer tries to get the best possible price. That's what determines the market price in the first place.

Everyone makes economic decisions based on three factors. This is true for everything, everywhere:

(a) your income (which is the price that you get for the things that you produce);

(b) your needs (which exist in a range of importance, from food, clothing and shelter at the top, to less critical necessities such as transportation and communication, on down to various levels of luxuries), and

(c) the alternatives among producers that are available to you at the time.

Whenever there is a need that someone is willing to pay for that is not being met by others, someone will enter that market and produce whatever is needed. There is a veritable army of businessmen and entreprenuers who spend all their time desperately searching for opportunities presented by unmet (or undermet) needs and wants.

If there is someone out there who can beat the OPEC price, let them do it. They will have to find a way to be sure their costs of production are lower than the revenue generated at that price.

If no one can do that, then by definition, the OPEC price is the best price, and the consumer is getting the best deal available.

Peak oil is an old argument with a new name.

The really interesting numbers in this debate are that back in the 70’s I believe people were saying we had about 400 billion barrels of oil in the world wide reserve. We have currently pumped out about 390 billion barrels since then. People are now arguing whether we have 1 trillion or 3 trillion barrels of oil in the world wide reserve. Nobody ever notes the huge discrepancy or how wrong the projections have been. As the Saudi go offline Africa and South America will become more important sources of oil for us. Like so many issues it is very hard to find out exactly what the truth of the matter is since most oil producing countries refuse to tell us what they have left. I've seen that the Saudis have anywhere from 150 bb to 500 bb left.

What we have is a massive increase in demand and an industry reluctant to expand supply. This problem has been widely known for years thus Bush and the Republicans have always been pushing for a new energy policy. Remember when Cheney got in trouble for having the gall to meet with energy industry leaders and not the tree humping hippies from Sierra and Greenpeace? Like Sierra or Greenpeace have ever had anything constructive to add.

Then you have the nimby problem. Nobody wants refineries or LNG terminals near them but they want cheaper gas. You can’t fight expanded domestic capacity and then wonder at why the prices of energy commodities go up.

Beyond that while refinery capacity has been the same for 30 years the number of different gas formulations demanded by state and federal governments has become legion. For example where I live my car gets 37 mpg in summer and only 34 mpg in winter. Most people don't understand that what they think of as gas is actually a very variable product depending on location and time of year.

The oil the Saudis are currently pumping is high sulfur which we don’t want.

China is consuming oil at rates nobody could have dreamed and many wonder at how long it can continue. (China’s banks look way to similar to what went on in Japan and South America before their decade long recessions.)

As to artic drilling I’m mostly an agnostic on the issue since I view it as an attempt to forestall the inevitable. But I will say that people that are against it for environmental reasons need to explain exactly what they think the environmental impact of oil drilling up there would be. Their knowledge begins and ends with the Valdez disaster. When you debate someone on this issue they have zero clue what they are talking about. For example does anyone know how much oil has leaked from the Alaskan pipeline so far? Certainly there is an impact but people are mostly talking out of their ass on this issue. Given proper safe guards the caribou so often depicted when the word Anwr is mentioned on TV will not be affected. Hell the MSM never actually show where the drilling would take place because open barren land is awfully hard to defend.

http://www.amazon.com/exec/obidos/tg/detail/-/047173876X/103-0131439-2292647?%5Fencoding=UTF8&v=glance

Last comment with link to Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy is mine. It's serious analysis of Saudi Arabia's oil fields and explains why they may well peak sooner than we think.

Ah yes,

Thermal Depolymerization. I remember that Discovery article quite well. It heralded a brave new world. One where car parts and turkey parts = texas crude.

Quaint notion. In an idiotic, quixotic kinda way.

Original Discovery article:
Anything into Oil

Fisking:
What choo talkin bout Willis?

Well, then, add cigars for the monkeys to the list of costs. Cigars ain't free.

And unicycle repair. Although you may be able to get the monkey to do the repair work himself, thus saving on labor costs, at least.

Clever little monkey bastards.

OOOH OOHH!!! AHH AHH AHH AHHH!!

EEEEEEEEEEEEEEEEEE!!!

EEEEEEEEEEEEEEEEEE!!!

I don't understand why W doesn't lean hard on Fox to start drilling lots more oil and building a bunch of refineries. It would create more Mexican jobs and more American energy.

After Reagan decontrolled the price of oil, it fell so far that the Saudis lost 60% of their income in one year. They have suffered from recessonary drops in demand before and are fully aware of what that can mean. I believe we are headed for a world-wide recession, the likes of which we haven't seen for quite awhile, and largely because of oil prices. We cannot endlessly "adjust" to spending more and more of our money on energy costs. It is a drain that, over time, will drain us of so much of our incomes that little by little, we can no longer buy all the things we did before. This cannot go on forever. Perhaps the Saudis new leader will reign in OPEC and bring some discipline to prices. But nothing has been done yet, and I get a strong sense that the Saudis, like us and much of the world, are living in a fools' paradise and until the sky comes falling down upon them, they won't lift a finger to lower prices or raise output.

I refuse to devote much thought to the Peak Oil hullabaloo mostly because the people I know who are most excited about it are 'Capital L' Libertarians (of the unshaven WEED! WEEEEEED! variety) and their equally unshaven counterparts on the wacko-left. Like all apocolyptic tales, it has the musty funk of adolescent wish-fulfillment about it, in that those most excited about it would no doubt secretly love to see it happen, whether it's to get back at suburbanites for laughing at their Priuses, or because they think it will result in a world-wide wasteland where the unkempt tax-protesting recumbent-bike-rider will be treated as nobility and the pinnacle of sex-appeal to the hordes of man-hungry apocolyptic hunnies.

Plus, like the best doomsday scenarios, there's no deadline set. They can carp all day about the comeuppance that'll come "sometime soon" without ever having to worry about being proven wrong, something that greatly appeals to someone who knows they're full of monkey-rickshaw exhaust.

PS - I drive a 5-speed stickshift car that gets 36 mpg!

add cigars for the monkeys to the list of costs.

Cigars, maybe; but monkeys can can be source of cheap, renewable, clean (except all the shit-flinging) energy. It's a matter of treadmill science coming down in cost, feasible for mass prodution where growing monkey power demands will bring it down even further.

Monkey power: an elegant solution whose time may finally be upon us.

(would also be a boon in that it would immediately solve the growing monkey unemployment problem)

Using monkeys for slave labor? That can't end well.

Great, Sue. Sure, why not bring up that tired, discredited, hollywood leftist demonization of monkey power... The MP industry's 'China Syndrome.' Luddite scaremongering, nothing more.

Every pweres source has it's plusses and minuses. Global warming, nuclear meltdowns, toxic waste. Bad stuff. I'll risk a little monkey revolt, thank you.

Oh, Sue, don't be such a Cassandra. We'll just put all of the monkey rebel leaders on the moon, as a part fo Ace's Monkey Trip to the Moon Reality TV NASA Fundraiser&trade:.

I mean "Ace's Monkey Trip to the Moon Reality TV NASA Fundraiser™."

"Ace's Monkey Trip to the Moon Reality TV NASA Fundraiser™."

They'll find a way back.

And if you think Hillary's bad, just wait until Monkey Lincoln comes along.

Four score and seven years ago our fathers Brought forth upon this continent a new nation, conceived in li..ooh ooh ooh OOOOOOOOOHHHHHHHH!!!!! AH!!! AHHHHH!!

EEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEE

EEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEE

SEE? Damn it, I TOLD YOU!

However, I think you are overlooking the OPEC cartel.

You just can't trust them OPECkers.

"There's just one problem. Where are these local cracking plants going to be built? We haven't built any refineries in 25 years because of various regulations; they'd also prevent us from building "coal refineries". "

I know a guy - whos family owns a HUGE island across the harbor from the kennedys compound in Hyannis. Now - a few generations ago, the boss of the family had a clear cut cut from the front door of his mansion to the shore so the Kennedys would have to gaze at his families INSANE wealth and feel small.

I suggest to my good friend, and his family, that they buy up as much Exxon stock as they can (of that which they dont allready have in family posession) and sell the island to exxon to build a LARGE refinery in the north east.

Right across the harbor from the Kennedy compound - so they have to look at it for the rest of time.

Phinn,

Thanks for your comments, I do appreciate them.

First, I used capitalist as shorthand for free markets. Apologies for the imprecision, but. . . geez, back off, man.

Second, you lay out a lot of eloquent free market theory that is wonderfully correct-- on paper.

The problem is, as folks elsewhere on the board have pointed to, is that we're not dealing with a friction-free market when it comes to oil. OPEC, taxes, subsidies, environmental regulations, national policies, you name it-- everything interferes to render a true free market for energy a figment of our imagination, like Santa Claus, the Easter Bunny and man-friendly lesbians.

If we "cleared the table" and let pure market forces determine our energy policy, we'd never have another gas "shortage" again (Chinese might ;-).
Alas, the ideal is far from the reality.

Cheers,
Dave at Garfield Ridge

but. . . geez, back off, man

I'm not jumping all up in your shit. I was trying to be clear, not aggressive.

As far as the "on paper" thing goes, that's the one aspect of the free-market debate that I have never understood.

The line usually goes "the free market is all well and good, but unless X, Y and Z all happen first, then I'm against it."

Why does it have to be all or nothing? The economic points I discussed are universal truths -- like laws of physics, prices and production adhere to very strict rules. The problem is not the laws of economics. The problem is our refusal to acknowledge them.

Collectivist regulations (subsidies, price controls, production quotas, etc.) were implemented one at a time. They can be undone one at a time, too.

Just because all of these other anti-free-market restrictions are in place doesn't mean that we should add to the problem. The solution is to undo the mess we've been making by moving in a free market direction.

More price controls on oil (to supposedly counter-balance some other set of gov't regulations) will only need to more economic decline and, eventually, a call for bailout or total governmental control of the energy sector altogether. The attitude that government controls offer any kind of real solution is the heart of the problem, and the reason we got into this mess to begin with.

Free market economics isn't a theory or some pie-in-the-sky daydream. It is very practical and immediate and real. We need to make the market for oil more free, in any way we can.

Phinn--

I agree, 100%. But I think you would acknowledge that there are more practical challenges in play than merely forcing people to understand the mechanics of a free market.

Things like taxes, regulations, national policies, etc. are put into place for reasons that, while contrary to ideal free market function, are weighed against such function. The choice may not be an entirely rational choice, but it's still a choice that's going to be made. For instance, just look at OPEC-- how free market is *that*? It's not, in the least. Yet, if I were Saudi Arabia, I may decide that it's in my best interests as Saudis to micromanage supply and demand. It may not be in the best interest of America, or consumers, or even 95% of the oil producers in the world, but that's the stick.

I guess my fear is that by focusing too much on how things should be, it is easy to forget how things are. I'd like to be able to drill in ANWR, but that's not easy to do politically. I think hybrid technology should be completely market-driven-- but I recognize that without government intervention, we wouldn't even have the hybrid technology we have today. I'd like to think the OPEC nations will find a way to produce more oil to lower the prices before their customers flirt with recession, but I realize that the short-term economic interests of the United States may not mesh with their long-term positioning.

Cheers,
Dave at Garfield Ridge

But I think you would acknowledge that there are more practical challenges in play than merely forcing people to understand the mechanics of a free market.

Honestly, I can think of nothing more practical (and important) in the whole world. I am not being facetious or snarky. If our government were to return to Free market economic principles, it would unleash the greatest prosperity the world has ever seen.

without government intervention, we wouldn't even have the hybrid technology we have today

No, we'd have something better. You can't analyze the effects of governmental innovation without accounting for all the things that never came to exist because of it. What's here is only half the story. What never came to be (because of the waste of time and money brought about by government-induced inefficiency) is the rest.

If the price of oil-based vehicluar transportation were to skyrocket, it would prompt immediate innovation and change to other alternatives.

The long-term consequences of government intervention are always a decline in productivity and innovation.

... and don't forget oil may be a geological byproduct, vs a decomposed dinosaur.

The monkeys won't escape if we just CHROME THE MOON! (After paving the earth, that is)
/TJ

We still have oil out there we just got to quit allowing that green jackasses from getting in the way and lets drill in the ANWR

Mr. Phinn:

I am also a free market believer. As such, I believe, as you say, that market forces are the best way to convey information to consumers and producers, and thus “regulate” markets.

My point was somewhat different. It is that some market price points can reach extremes – through various causes (Government regulation, long lead times, taxes, etc.) – you pick it.

The benefits of stability are well known. Investors require political and fiscal stability to invest in third-world economies and the World Bank frequently proscribes great pain. Since 1980 or so, we are better able to control US stability in inflation and interest rates, by controlling the money supply. Some argue that the Fed should not have constricted the money supply in the face of the 2000 tech bubble. I disagree. Had the Fed not acted, the bubble would have been worse, the crash worse.

Stability is a best friend of the economy, and vice versa. Since 1980 or so, the better stability has produced the two longest expansions in our history and two of the mildest recessions.

The point is that we take some fairly powerful actions in the name of stability and we should consider not only the price of oil, but the price range as well.

An airline planning the purchase of a new plane goes through fairly exacting calculations in routes, passenger-miles and cost of fuel. It is much harder to manage with oil prices going from $ 10 to $100, or more. The same is true for the auto companies: how does one decide which mix of cars and trucks to produce 4-5 years from now?

It is not surprising that a number of these companies are now in trouble.

Note that I am NOT arguing for price controls. I am arguing for a stability system to replace the Saudi’s who can no longer control the price within a range.

The Saudi’s did it by regulating supply. Markets do it by influencing both supply and demand and this will always be. We could limit the extremes of the range by changing our tax policy.

One proposal to do this is to change the tax from a fixed to a variable system. If, say, half the price of gas is taxes, this could be a powerful force to stabilize prices.

I am saying that I think that a continuous rate of about $ 45 is better than an average price of about $ 45. (Substitute any number here; the price will go up over time). If the rates had not gone so low, the re-fleeting to big gas burners would not have been so complete. Today, demand and therefore prices, would not be so high. Rather than knee-jerking between Hummers and Civics every few years, is there a way to make these changes more predictable and gradual?

If one set a nominal price equal to the average world market price over a moving 5-year period, and then set a nominal tax equal to the existing tax, then the two together would be the nominal price. (Note that this would move, over time, with the rolling average of the changing world market price. World markets would in large measure react the same way they have always done.)

Then the tax could be higher when prices are down, and lower when prices are high. Over time, market forces would still set the nominal price.

robert:

In all sincerity, you are not a free market believer. You are advocating that the same agenda of central planning that exists in the monetary sector be applied to oil. You advocate a soft-edged version, with your rolling averages, but the theory is the same.

Stability is a best friend of the economy, and vice versa. Since 1980 or so, the better stability has produced the two longest expansions in our history and two of the mildest recessions.

Stability is not the cause of economic growth. In fact, price fluctuations are as much a benefit as a problem. Stability is neither inherently growth-promoting nor growth-hindering. It can be either, depending on the circumstances.

What we have now, with regard to monetary policy, is simply a new kind of volatility, not the elimination of volatility altogether. Now, we have an entire sector of the economy (interest rates, i.e., banking) that is not geared toward predicting market conditions (supply and demand) but is instead geared toward predicting government actions. These actions have become the cause of all kinds of wild swings, which are virtually 100% divorced from market reality.

(This policy is destroying the housing market right before our eyes, and will yield a reckoning the likes of which we have never seen, but that's another story.)

Trying to put a stop to market volatility is a fool's game. For one, you can never eliminate it. Things change. The world changes. This is what causes us to have prices in the first place. It is normal. It is natural. Price fluctuations reflect changing realities -- growth of economic development, changes in production technologies and capacities, and in the case of oil, (largely unpredictable) exploration successes and failures, just to name a few.

By trying to reduce volatility in one set of transactions, you do not eliminate it. You merely transfer it somewhere else. The underlying changes in the economy (i.e., risk) are still there, and will not go away. The Soviet Union tried to control every aspect of economic life, and yet they still had a thriving black market.

When you try to control volatility in oil prices, you end up transferring price volatility to every other area of the oil business. The artificially-enforced stability of the crude barrel price leads to increased volatility in exploraiton, production, etc., everything from labor to equipment. The risk doesn't go away -- someone has to bear it.

(This effect is similar to the volatility introduced by mandating fixed-benefit retirement plans, like social security or even private benefits plans. The guaranteed benefits that A gets comes at the expense of B's increased risk.)

And, as with all price-fixing schemes (or in your case, a soft-edged price-fixing scheme), there is no reason other than political favortism to say that Party A should be the beneficiary of artificial stability at B's expense.

how does one decide which mix of cars and trucks to produce 4-5 years from now?

That's the challenge of all business. The companies that predict correctly will succeed. The ones that do not will fail. The economic actors who accurately predict demand will sing the praises of price fluctuations, and the ones that predict incorrectly will, naturally, blame the market rather than themselves.

This is really not a society-wide problem. On the contrary, it is a socially beneficial phenomenon. The failure of the inefficient or poor-predictor companies will come as a short-term benefit to the good-predictor company. In the long run, society benefits. The successful company will have the opportunity to take over the market share of the failed company, and probably hire its employees, too. The end result is a sector of the economy that is populated with better-run companies. That increased productivity, which is making products that more closely fit consumer demand, is the essence of economic growth.

The Weekly World News newspaper has a similar headline on its front page - that the world will be out of oil in six months! When I first saw this entry here, I thought this was the newspaper being quoted. Maybe there's not much difference anyway. Except maybe for the page 5 bikini model.