I'm surprised this submission was published, because it is national in scope without any Oregon specific angle, like Russell Sadler's "Glenn Jackson, $3 gasoline, and mass transit, from May 21, 2006 (use of capital letters in title as original published by author). However, gas prices are a hot topic here in Oregon and Mr. Harris does make a good point about how prices at the pump impact lower wage earners most.

The insistence of the Bush Admin and oil industry that oil prices really aren't as bad as they seem is even more outrageous when you consider that the Federal Reserve Bank of Dallas actually reports a statistic that is used to track the impact of energy costs (particularly oil) on the average American worker. The statistic is called the Price of a Barrel of Oil in Hours Worked. After stumbling across the statistic about a year ago and testing it as a variable in a multivariate regression analysis, I wrote a short and informal research paper on the PBOHW statistic and its strong correlation with business cycles in the U.S. economy. The article was published on Portland Indymedia and is available at the following link for all interested readers in pdf format: http://portland.indymedia.org/en/2005/06/319969.shtml

I find this sort of commentary really tedious and uninformative. Folks, in the long term, prices are only going to go one way, and that's up, because the world is running out of oil. That's a geological fact. We won't know when peak production has been reached except in hindsight, of course. Pointing fingers at Bush, or at oil oligarchs, may make you feel self-righteous, and might even give you a "populist" campaign plank--bogus, but populist--but a few decades from now, it will all just look like noise.

Ted:

You tested PBOHW as a variable in a Multivariate Regression Analysis yesterday?

What a coinky-dinky: I did too. Must be the rainy weather!

We should get together sometime and compare notes, or the size of our intellectual tools, or something.

Robert Harris:

Does the fact we haven't built a new U.S. refinery in the last 25 years impact the price of gasoline? Something about supply and demand, if my economics memory is correct.

Would the construction of a new refinery be something that Liberals would be in favor, or against? How hard would it be to site one in, say, Astoria?

Posted by: wjs | May 29, 2006 6:09:59 PM

wjs: I find this sort of commentary really tedious and uninformative. Folks, in the long term, prices are only going to go one way, and that's up, because the world is running out of oil. JK: I too find this sort of commentary tedious - running out of oil? The question is in which century: the 21st,22nd or 23rd. In any case as the price rises, consumption will go down and supply increase. We are seeing more tar sands oil now and the price is probably to the point where we can use a gas from coal process like Germany used in the later war years.

wjs: That's a geological fact. JK: But not for substitutes. Oil from coal. We could even do carbon from CO2 and H2 from water + energy = oil. No problem, just a question of what is cheapest at any given time.

wjs: ...--but a few decades from now, it will all just look like noise. JK: Agreed, today’s high prices will be just a blip like in 1981.

Thanks JK

I think the question was why have gasoline prices risen so quickly between the 2002-2006 year period.

I have two reasons for you: China and India.

Those two countries citizens have bought more cars in the last few years than they both have combined in the years prior to 2002. It's an effect of globalization....

"Big Oil" doesn't set the price of a barrell of oil. Nor does President Bush or VP Dick Cheney.

For the past few decades we've had something called a "commodities futures market". These markets are made up of both producers hedgers, and speculators. These markets set the price of major commodities such as oil, gold, grains, meat, orange juice, etc.

Price is set by the activity of buyers and sellers. If there is more buying interest, the price goes up. If there is more selling interest, the price goes down. All players in the futures markets are interested in one thing; making money. Every buyer always tries to buy at the lowest price. Sellers always try to sell at the highest price.

If any of you actually stay current on financial headlines, you would see that this morning, OPEC signalled that $60.00 should be the "floor" price for a barrel of crude. If crude starts trading below $60/barrel, OPEC begins cutting back on production to create a shortage (that means forcasted demand exceeds longer term forcasted supply). The US, nor any of its corporations or Gov't officials are part of OPEC.

With the prospect of a shortage, buyers bid up crude oil futures contracts.

If Exxon Mobile (XOM) decides to sell their crude on the open market for less than the market price (let's say they sell it for the socialist pleasing price of $30.00/barrell), speculators will simply buy it and re-sell it into the futures market at the true market clearing price of $60.00 barrell. Thus, XOM's attempt to "help" the market (through gov't mandate) does not pass through to the public. The only person who receives the gift is the speculator who re-sells it.

If the government regulates prices as it did in the 70's, you end up with gas lines as demand exceeds supply. Gas line means that the economy slows down and even more people lose thier jobs. The minimum wage doesn't matter when employers are firing, not hiring.

It's about economics, not politics.

You don't try to impose Gov't restrictions on real estate prices. The more you try to regulate the economy, the more your look like the very countries that you said were part of the problem: Venezuala, Bolivia, etc.

Market forces work if you let them. You will never, ever, create a system that creates an ideal life for all member of society. Perfection is not attainable. The system of free market prices is still the best system known. It is tough to argure this point unless you are a socialist or communist. If you are one of these two, you must be scratching your head as first Russia, and now China have moved towards market based economies.

I wish you all a good day. Thank you for your time.

Please excuse the typos.

I would agree that Dan J has described the market accurately. However, rather than ending the discussion it is really the beginning. Although some government action would certainly be unwise, his explanation implies that there is nothing that can be done to mitigate problems stemming from gas prices. The tricky part for progressives is, of course, although expensive gas is tough on low income families, cheap gas is tough on the environment because people have very little incentive to stop burning the carbon and polluting the countryside.

So what do we do? We know a gas tax would decrease the environmental problems over time (either by reducing overall consumption from more expensive gas, or by actually raising the money to cover the expenses of cleanup and the creation of carbon offseting vegetation). But, we also know a gas tax will hit the poor harder than the rich.

As progressives, it is a catch 22.

One plausible answer is to redistribute the excess gas tax revenues (ie. that beyond the amount necessary to pay for the externalities of cleanup, etc.) through the income tax system. Although both rich and poor would get a tax rate decrease, poorer income brackets would get a slightly larger decrease to maintain the progressivity of total tax burden.

Over time, both rich and poor will have proper economic incentives to decrease their usage, and progressivity is maintained.

Dan J and Robert Harris, does this idea disentangle the economic problems from the political ones?

Dan J,

Do you believe the government should repeal the tax breaks it gives to "Big Oil," or is this part of your free-market system.

I agree that Big Oil's profits are not solely from greed, with the open market oil prices so high, and their costs for drilling the same, of course they should make more.

However, I think it's reprehensible that most people who talk about the free market being the solution conveniently forget to mention the tax breaks being given to big oil.

PG,

It is very possible that a gas tax and redistribution may help in the short term, but hurt in the long term. It is still Gov't trying to force markets to adjust in ways that they might not naturally.

The truth is that gas consumption is fairly inflexible in the short and intermediate term. How can you drive less if your employer is 20 miles away.

What happens in the real world is this:

The Jones family has $500 of discretionary income each month. If they must now pay an extra $60.00 at the pump, they are forced to cut back from other areas. Most people will adjust their shopping habits. Skip the 6-pack of microbrews(now that's sacrifice in my book), or shop at a lower priced grocery chain. Thus Safeway loses a customer to WinCo.

Instead of shopping at Fred Meyers, they go to Walmart. The big loser might actually be middle america. The family business that can't compete with the lower prices of Walmart or Costco.

Increasing the taxes just decreases revenue to middle income owned family businesses.

Over the longer term (3-6 years), people buy more fuel efficient cars or move closer to work locations when they pay off their car loans or look to buy a new home.

Theberle,

You are correct. It is ridiculous to provide big oil with a tax credit for exploration. They deserve both the cost, and the profit, for their own business ventures.

A couple responses for Dan J:

1) You say a gas tax may hurt in the long run, but you also mention that people's behavior will adapt over the long run. I would suggest that is the primary benefit of the gas tax/offsetting income tax reduction: rich and poor folks take steps to decrease their monthly allocation to gasoline (eg. people living closer to work, taking fewer trips, etc.). 2) Increasing the taxes just decreases revenue to middle income owned family businesses. It might not be fair to say that it is the tax's fault that some businesses are more competitive than others. Also, it might not be fair to say less competitive businesses are owned by middle income families.
3) Good call for agreeing about tax credits, Theberle is definitely right about that. I am curious how much oil companies save out of their total costs from the tax credits.

I'm with Dan J on this topic. Let the free market work. The best cure for high gas prices are high gas prices. (Quote stolen from the Cato Inst.) High gas prices incentivize suppliers to produce more, and consumers to comsume less, until the spike is over. A plus to higher gas prices is as we consume less, that's less emissions to deal with.

Remember something about taxes; sooner or later any tax imposed will be relected at the pump. If you take away the tax breaks, oil companies will have to make back those revenues somehow to maintain a competative return on sales which in the long run will mean higher gas prices.