Sat, 24 Apr 2004

The Price of Gasoline 2

Continued from a previous posting on The Price of Gasoline.

Went to David Isenberg's WTF!?! retreat last weekend. The retreat was held at Edith Macy conference center, owned by the Girl Scouts. It showed, too. Isabel Walcott pointed out, with far too much glee, that the women's room had 7 stalls while the men's room had only 2 stalls. Since WTF was male-heavy we got a taste of the common problem women face in buildings designed by idiotsmen.

Heard from many interesting people. One of them was Kenneth S. Defeyes, geologist and author of Hubbard's Peak. He is fervently pointing out to everyone who will listen that we're really, really not discovering any more oil this time. He's using the same method which predicted the peak of oil production in the USA, a prediction which history has supported. He's even going so far as to put forth the specific date of November 29, 2005, plus or minus a few weeks.

So, are we going to run out of oil? The answer is that no, we're never going to run out of oil. Oil is used for many things: it's cracked into various densities, and each one has its own use. As long as there are uses for any one of those densities, oil will sell for the price of the substitute for that use. If there is no substitute at all, then the oil will sell at the price of doing without it. If the price of extracting oil exceeds the price it can be sold at, then the oil will be left in the ground, hence the statement that we are never going to run out of oil.

Kenneth is saying that we have a problem, because the demand (which has always increased and may be expected to increase in the future) and the supply (which has always increased) are soon to be headed in opposite directions. What he wants is for people to realize that oil is going to becomes several times more expensive (he estimates $7/gallon), and unless people start doing something about it now, people are going to suffer.

I told him, in the Q/A session after his talk, that I couldn't dispute his geology, not being a geologist, and that while I agree that there are a bunch of quack economists out there, I had to disagree with his economics. (BTW, Isen gave me grief for not being angry enough, particularly given the way I savaged Eli Noam, who also spoke at WTF. If you want to change people's minds, you can't get them into their lizard mind.)

The way that the world changes is that people go along, doing stuff. The level of stuff-doing may go up and down a little, or there may be a trend towards expansion or contraction. If there is some predicted problem with stuff-doing, people do not immediately change, no matter how reliable the prediction. That is simply because the future is uncertain, and people are inherently conservative. This conservativism comes from the first year of life, where babies learn object conservation, and learn that when they put one foot out, the floor is there when they put their foot back down. The world doesn't change that quickly, and neither do people. It takes a crisis for people to change. Kenneth is being a poor economist but a good geologist when he says "Hey! If you don't prepare for a lack of oil, you're going to suffer!" I had to tell him "There's going to be a crisis no matter what you say." After I returned to my seat, Sara Wedeman said "you're right!" She's a behavioral psychologist with an MBA.

The price of gasoline will rise long before we actually "run out of oil." What is happening, and what should be happening is that the shortage will be brought from the future into the present by people creating stockpiles of oil against its future scarcity. Some will no doubt be accused of hoarding. But what's the difference between a hoarder and a salesman? Simply that the hoarder refuses to sell at the current price whereas the salesman is willing.

The technical term for this is speculation. You see it on the commodity exchanges all the time. People buy a commodity because they think it will be worth more later, or sell a commodity they have now because they think it will be cheaper later. It's even possible to sell things which don't exist yet--that's called a "future". Someone agrees to provide a commodity for a given price on a certain date, and they'll sell that future to someone else. They no longer care how much the future is worth, because they know how much they're getting paid. That lack of uncertainty is worth a lot to them, so they sell the future at a discount relative to the price an omniscient being would sell it for.

The trouble with speculation is that people see it as an offense against society. The speculator is holding onto something that is desperately needed by people, "just cuz". The "just cuz" shows a profound ignorance of economics. The speculator is actually helping society by preserving something from being used prematurely. For example, a speculator might purchase land from a logging operation because they anticipate that in twenty years the land will be in demand for recreational uses. In the meantime they keep people out because people will harm the growing trees. Once the trees have regrown, and the land is worth more, the speculator will want to sell it for a much higher price. This will cover any effort they put into improving the land, the taxes they spent to hold the land, and the foregone value of the money spent to purchase the land. However, from a non-economist's point of view, the speculator didn't "do anything" worth paying for.

An ethicist on 4/4's Sunday All Things Considered make a similar mistake. I would never presume to judge an ethicist's ethics, but I feel competent to comment on his economics. He said, in relation to the ticket prices "you haven't contributed anything to the production of the value of the ticket." That's wrong. First, he paid for the ticket in the past and plans to sell it in the future. In the meantime he's giving up the value of anything else he could have bought with the same money. Second, the ticket is worth more later, as more tickets are sold to people who value them higher.

Long before gasoline actually becomes scarce, it will become expensive. The price of gasoline has risen lately, but it's still cheaper in real (inflation-adjusted) dollars, than it was twenty years ago. You'll still be able to drive to the store when gas costs $3/gallon, you'll just think about it before you go. As a recent political cartoon put it, gasoline is cheaper at $2/gallon than most other fluids that people buy.

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