Friday, April 29, 2011

Sigh

Congress returns next week to a flaring brawl over oil industry profits and tax breaks, with both parties hoping to capitalize on growing public ire at high gasoline prices.

President Obama touched off the latest flurry with a letter to Congressional leaders last week calling for the repeal of $4 billion a year in tax incentives for domestic oil and gas production, saying the industry was doing very well, thank you, and needed no help from the government. Republicans responded that the president’s proposal would only raise the cost of production and the price of gasoline, which now tops $4 a gallon in many parts of the country.

Both parties are planning legislative maneuvers this week to try to caricature their opponents as either in the pockets of the oil companies or hostile to domestic energy production.
An entire article in the paper of record on the politics of high gas prices.   And no mention of "Libya", "Saudi Arabia", "Iraq", "fuel economy", "China", or any other factor that actually matters to the price of oil.  The disconnect between our political elite and reality couldn't be much wider, could it?  I mean, I suppose we could be launching rockets to drill for oil on the moon...  That would be worse, right?

20 comments:

bordoe said...

Stuart: Why blame Congress?

WE are the problem.

Any of the actual solutions (involving reduction in use) are basically 'off the table'.

Why?

Not only because of the oil and gas interests, but because most Americans dont want to hear it.

They want someone ELSE to give up use, not themselves. They want someone ELSE to pay the environmental costs of spills and global warming.

And that's what we get.

Until the system doesnt work any longer to bring the goods.

Which will happen sooner or later.

Emil said...

It's funny, you know, because I was just reading this article and when I finished I thought 'I bet Stuart has some dry remarks', I went here and there you go.

As for your comment, I can only sardonically note that politics in the U.S. is increasingly becomming like the politics of Rome when it was under the cusp of falling. The sheer amount of ignorance and corruption is astounding.

yt said...

The ONLY sensible energy strategy for the US would be to raise its totally ridiculous gas tax.
Or let's say any sensible energy strategy for the US should include raising the gas tax.

But of course that will not happen

Stuart Staniford said...

Double Sigh! An entire article in the paper of record discussing why we are intervening militarily in Libya, but not in the otherwise very similar situation in Syria. But no mention of the fact that Libya is a significant oil producer, whereas Syria is not...

Stuart Staniford said...

yt: Yeah, but you have to realize the implications of the fact that the price elasticity of oil is barely different from zero. What that means is that when the price of oil goes up, people don't use less. Instead, if they possibly can, they keep using the same amount and just pay more. But they aren't happy about it. it makes them mad, and they report themselves less happy about the economy to consumer confidence surveys, and less happy about the President to approval polls. And if the price goes up too much, they go on strike, sometimes crippling the entire country.

As a politician, you rouse these passions at your peril...

The difference I think between Europe and the US is historical. The US was a major oil exporter in the formative years of the oil era, whereas for Europe, oil was always something that had to be obtained from somewhere else at some cost and considerable military and strategic risk. So I think European elites were a lot warier early on about letting their populations get too addicted to the stuff.

yt said...

Stuart,

I think the price elasticity of oil being close to zero is a complete myth, on different levels :

1) the coming crash with the second oil price spike will result in major oil consumption decrease in the US (you can say this is through recession or demand destruction, but in the end it shows major elasticity)

2) Raising the gas tax does have major effects on consumer spending, products choice, and products design: Doubling the mpg for a car result in half consumption for the same miles driven, that is some major elasticity.

But anyway, I understand that "tax" is such a repulsive word in the US these days, that any kind of rationality went out of the window for quite some time already.

Stuart Staniford said...

yt - you're technically wrong, but I agree with the spirit of what you're trying to say. If price increases cause a recession, and then GDP falls and that causes a drop in oil usage/production, that will tend to show up as income elasticity not price elasticity.

However, I completely agree that is how the causation works, which is why I foresee a recession.

yt said...

Stuart, not sure what you mean by "technically wrong", or why oil would have a mysterious "price inelasticity", fact is that it doesn't, and this elasticity can manifest itself in two different ways : consuming less with the same consuming machines (like staying at home when you would have driven away on a week end), or choosing more efficient consuming machines when buying them, really the elasticity is there .

bordoe said...

The elasticity the IMF is referring to is economy wide, not individual, so Jevon's Paradox comes into play it would seem to me.

So while higher prices may cause more efficient individual use, the entire economy will continue to consume very nearly the same amount as before despite price increases.

That's the take away from their stats for me; although I have some questions as to how they're measuring things (as always when it comes to stats, What and How you measure can hide a lot of bias).

Draft said...

Stuart - when do you see the recession as officially starting? (That is, when do you think they'll deem, in retrospect, the recession having started?)

It seems it has a lot to do with how sensitive we are to current oil prices. Might we be in a recession by the end of Q2 this year? Or will it take another quarter or two?

Greg said...

yt -

you're talking about two different things, short run elasticity and long run elasticity.

It's been found* that after a price shock, in the short run people tend to buy about the same amount of fuel, but defer purchases of consumer durables (cars) for a while, until they know whether or not the high price is just a blip. That deferral causes a drop in GDP: a recession.

The slow replacement of old guzzlers by new high-mileage cars is part of the cause of long-run elasticity. (Remember that the average age of cars is over 10 years, so only a small fraction of the fleet gets replaced every year. That's why it's long-run.)

------------------------------

* James Hamilton's 2009 paper Causes and Consequences of the Oil Shock of 2007-08 (pdf)

Thanks to the Brookings Institution for making their old "Working Papers on Economic Activity" freely available.

yt said...

@bordoe
Not sure how Jevon's "paradox" would play out there, one thing for sure, Europe OECD countries with much higer fuel taxes than the US for a long time currently have an oil use per capita about half of the US one:

http://www.eia.doe.gov/pub/oil_gas/petroleum/analysis_publications/oil_market_basics/images/conspcap.gif

And also much lower oil usage per unit of GDP. For sure you could point to differences in countries geography etc, nonetheless this clearly points towards some elasticity on oil use with respect to price (and don't forget that a tax doesn't change a country GDP, all things being equal).
Moreover reality will clearly show this elasticity in the future ... The only point is whether countries are willing to accelerate the necessary changes, or just wait for the next slap just being harder.
And really don't know how the IMF get their "elasticity" figures, as this is typically something you can't really measure.(and why 2008/09 recession consumption decrease wouldn't also point towards some clear elasticity)

bordoe said...

yt>For sure you could point to differences in countries geography etc, nonetheless this clearly points towards some elasticity on oil use with respect to price (and don't forget that a tax doesn't change a country GDP, all things being equal).
Moreover reality will clearly show this elasticity in the future ... The only point is whether countries are willing to accelerate the necessary changes, or just wait for the next slap just being harder.
And really don't know how the IMF get their "elasticity" figures, as this is typically something you can't really measure.

-+-

Not sure it does, point to elasticity that is (from higher tax rates).

Elasticity is about how societies respond to, or CAN respond to, price increases, not how societies respond to high, but stable, prices. And it can be measured with 'econometrics' although I wont bore you with the details of multi-variable regression analysis.

Europe (and Japan) took a consciously different development policy from the very start. Both first went to war for oil (WWI saw the first invasion of Iraq by the Brits, Japan tried to take over Indonesia for the same reasons Germany tried to take Baku). Then when that proved impossible, they went along with the US dominated oil world as long as they could get their meager share and use it wisely.

It is in that context that Europe and Japan decided to tax consumption of oil heavily (compared to the US) and nationally back rail transit and the like.

The US, as Stuart pointed out, developed policies and infrastructure during a period it was a major EXPORTER of oil and was the largest oil producer on the planet. When Pennsylvania ran dry Texas and California came to the rescue with huge gushers.

So we did the short term logical thing and exploited this hydro-carbon to the Nth degree building out an infrastructure (suburbia/exurbia) that relied totally on burning as much as this stuff to get around as possible.

In such a society, the ability to respond is quite different; basically, it's not there. At least in the short run.

The shock to Stuart was that non-OECD countries are even less able/willing/for whatever reasons just not consuming less when prices increase.

Basically, if these numbers are correct, relying on the price signal to curtail consumption is not going to be viable strategy unless the price causes a fall in economic activity (which would be income or GDP variable, not price).

Stuart Staniford said...

Greg:

Yt is also referring to the fact that sharp increases in the price of oil will trigger a recession, which will reduce oil demand, and he wants to call that price elasticity. I sympathize, but the usual econometric framework for estimating elasticities wasn't set up with the possibility in mind of a commodity that was so critical that a shortage of it would trigger a loss of income, and so I believe what it will tend to do is call this income elasticity, not price elasticity.

yt said...

"It's been found* that after a price shock, in the short run people tend to buy about the same amount of fuel, but defer purchases of consumer durables (cars) for a while, until they know whether or not the high price is just a blip."

Yeah maybe the fact that for most Americans, opening ANWR and a few other restricted places would put them out of "foreign oil", or that they don't even realize that the US went through its production peak in 1970 can also have something to do with the above (and the fact that SUVs sales are, or were not so long ago, back to pre 2008 levels). Economics isn't a science, and far from it, there is no scientific rules to these reactions, or let's say the culture and constant commercial propaganda has as much to do with it.

bordoe said...

yt

Economics IS a science, the study of how societies allocate scarce resources.

But it's a descriptive science at the very core. It is NOT predictive, and it is NOT about setting policies; those are totally separate activities. It is also not a moralizing science, although the most public faces are often highly morals and rules based.

If you hear an "economist" giving you a description of an economy (if oil prices did this, quantity of consumption did that) then they're being a "real" economist.

If they then say "So the best course of action is _____" then they're being policy makers or actors.

Economics is a very misunderstood science, and the profession itself doesnt do itself any favors in this regard.

yt said...

bordoe

Ok, if you consider that "the study of how societies allocate scarce resources." you can indeed call it a science as much as history is called a science (and I have a lot of respect for history), or even "journalism with a high degree of deontology in reporting facts", and if "If they then say "So the best course of action is _____" then they're being policy makers or actors." clearly reflects the pure descriptive aspect desire, it also reflects some kind of current "disgust" towards true politics", at a time when passing the message that gas is way too cheap compared to the energy it represents and its scarcity evolution would be highly necessary, and tax on it being probably the only available media to pass this message ..

Even though somehow it breaks the "how to destroy the world as quickly as possible" objective, which is more or less the main judgement criteria of what is called "economics" today.

dr2chase said...

"Elasticity is about how societies respond to, or CAN respond to, price increases, not how societies respond to high, but stable, prices."

Thixotropic, then, not elastic.

My gut model for how non-OECD elasticity could be so low, is "four guys carpooling in a Tata Nano". Energy's relatively expensive for them, the investments required to use it are relatively expensive, they have surely first targeted the most-profitable (locally) uses of that energy. As such, those uses remain profitable even when energy is somewhat expensive, given the sunk cost of the investment (the Tata Nano) required to use it.

That said, I am not sure that carpooling in Nanos is actually a significant use of that energy -- that's just the mental model.

bordoe said...

>you can indeed call it a science as much as history is called a science (and I have a lot of respect for history), or even "journalism with a high degree of deontology in reporting facts",

--

I actually think this is correct.

It's closer to anthropology than anything.

--

>Even though somehow it breaks the "how to destroy the world as quickly as possible" objective, which is more or less the main judgement criteria of what is called "economics" today.

--

Yes. Industrial civilization is all about growth and turning (limited) nature into human valued goods and services at an ever faster rate.

So it's not a shock that 'economics' (as with nearly all fields of study) in this society gravitate towards those goals.

It's not a good thing, it's just the reality of the situation.

yt said...

About "It's not a good thing, it's just the reality of the situation. "

Yes, and somehow not sure that something else can be set up (in the sense getting out of maximising profit, maximising production, etc ..), so that only "constraints", can be added to the systems, and these constraints should probably primarily be put on creating artificial price differenceq (or added price pressure) on newly extracted raw materials or fuels (through taxes), thereby favorizing recylcing, and more efficient and longer lasting products.