Thursday, February 10, 2011

Here’s a good article on the price of gas.

It took me a long time to understand the Law of Supply and Demand. We covered it in high school and the most important point was missed. Even in college Economics, the point was glossed over. It wasn’t until many years later I heard Milton Friedman explain it with the proper emphasis.

First, let me give an example I run into on almost a daily basis. The taxis around here do have meters but almost all of the drivers claim they are busted. When I take a taxi from the bus station to home and the meter does work, the fare comes to about 35 pesos ($2.88.) With a broken meter, they usually ask for 30 pesos ($2.47.) Sometimes, one will ask for 45 pesos ($3.70.) That’s almost 30% over the going rate and although I can afford the 82 cent difference, does it make sense to get taken? So, I go, “¡A poco! íMe cobran 30! (WTF! They usually charge me 30!) Right away, we settle for 30 or 35.

The missing point is that price settles where the seller is WILLING to sell and the buyer is WILLING to buy.

Just for drill, a barrel of oil that’s used to make gasoline yields about 42 gallons of gasoline. I can’t find a good figure on what percentage of oil produced is used to make gasoline. Let’s say half.

The average price of a gallon of gas is around $3.15.

A monthly Metrocard for the NY Transit System costs $104.

The average tax on a gallon of gas is $.41 or 13%.

Any monopoly other than OPEC would be loudly condemned by progressives, liberals and Democrats. They split up Ma Bell, didn’t they? OPEC can and does fiddle with supply to get the best price it can for a barrel of oil.

Speculators bet on the change in the future price. Thanks to several factors in addition to holding their oil till the “right time”, they make large profits. Is that their fault? Are they any eviler than anyone who buys stock in a company expecting to rake in big profits for retirement? Judging what effect speculators have on the price of oil is clouded by OPEC, state and local taxes and other government actions.

Now, a quick look at oil company profits. The billions of profits look obscenely large. Put it in a perspective that maps to a simpler concept. Sell off all the oil companies’ assets and let them invest the proceeds in US Treasury Bonds. The income from those bonds would be very close to the profits they make by being oil companies. What! Yes, it’s true. Along the way, millions of people would lose their jobs. Businesses that depend on the oil companies would disappear. There would be negative effects throughout the world economy. So, these “evil greedy bastards” must be staying in business for some other reason than just being evil and greedy.

How about a look at the demand side? When I lived in Las Vegas, I used a gallon of gas a day on average. 250 workdays a year at $3.15 a gallon cost me a little over $65/mo. to go back and forth to work. That guy in Queens or Brooklyn who owns a car anyway and commutes by subway for $104/mo, how is he better off? Given that that $104 fare is already heavily subsidized by taxes, his real cost is a good bit higher. What does that do to all the hype about mass transit?

Looking further, how many people spend $1000 or more on a big screen TV, pay over $150/mo. for cable TV, over $100/mo. for cell phone service, $25 or more for two people to go to the movies once a week. Am I dreaming or can the vast majority cut back on something they can absolutely do without and not lower their quality of life?

You really want to lower the price of gas or its future equivalent (biodiesel, hydrogen, wind, etc.?) Can you find anything quicker and cheaper than allowing the development of all the energy resources in the US without government interference or prohibition or subsidies?

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