Bread and Circuses

The nation is outraged, outraged I say, by the cost of gasoline. And, with typical pre-pubescent petulance, they are demanding that ‘something’ be done about it. Naturally, this being a congressional election year, the pols are eager to do ‘something’. They clearly hope that providing bread and circuses for the unwashed masses will garner them a lot of votes this fall. Through it all, they assume that the public is incredibly ignorant of basic economics. Surprisingly, the evidence seems to indicate that they are correct in this assumption.

What is magical about a particular number? Why does three dollars become an issue more than $2.50? Three bucks is apparently the trigger number this year for that consumer outrage. Having lived through the days of two-bit a gallon gas when I was growing up, I admit to being stunned by the cost. But, then I was buying my first house shortly after those years and paying $18,750 for three bedrooms, brick, air-conditioned with fireplace, carpeting and all appliances. Recently, I completed my new home and consider it a bargain when it came in under $300K. So why the brouhaha over the cost of gas? If we take a look at the cost of a gallon of gas in constant year dollars, we find that we’ve been pretty fortunate in terms of that portion of our household budget spent on automotive fuel.

Then there is the political screaming about “excess” profits. What exactly is an excess profit? My economic education taught me that the price of something is what a willing buyer and a willing seller agree upon. If the price is too high, the buyer won’t buy. If the price is too low, the seller won’t sell. Probably the worst situation is one in which the price is set by a third party in a totally arbitrary manner without regard to profit, investment, labor, infrastructure, transportation, etc. It shouldn’t be too difficult to remind anyone over the age of thirty about the Communist experiment in such pricing. While bread was cheap in Moscow, it also wasn’t available. Despite the Politburo’s effort to price it, the producers couldn’t quite produce it for that amount. Hence, no bread. So, let’s agree that government determining what a proper profit should be is a ridiculous concept. If the price is too high, buyers won’t buy—that’s sufficient control

Which brings us to “windfall” profits and the presumption that when such occur, the proper role of government is to confiscate that windfall and somehow thereby assuage the insult to the market. What a load of crap! Anyone who believes that a government which takes any profit away from an industry is somehow going to benefit the individual is ready to make a down payment on a bridge in Brooklyn. Taking money from the oil industry in America is going to do several things, but none of them will be particularly beneficial to Joe Six-Pack.

It will penalize shareholders of the oil companies. And, don’t say that isn’t you unless you don’t have any investments of any kind including a pension or retirement plan where you work. It will penalize the oil companies which will create a reluctance to invest in exactly what is needed to help control rising fuel costs—exploration, refining, capacity, production, etc. It will inevitably raise the cost at the pump as the cost of the penalty gets piled atop the basic costs of the product. No good comes of the windfall profits tax beyond the creation of a pool of money for the political panderers to spend on bread and circuses.

If Americans were a little bit more worldly, they might be aware of the price others pay for gas. While we’ve had decades of low priced fuel, Europe has been a showplace of what market interference can cause. Twenty-five years ago when I was stationed in Spain, the cost of gas was somewhat obscured by pricing per liter. Yet, if you did the simple math equating a liter to about a quart and then multiplying by four to get cost per gallon, you found that gas was between three and four bucks a gallon. It didn’t change no matter where you went in Europe—France, Germany, Italy, England, or wherever. Always about three or four bucks. Now, the price is closer to five or six dollars a gallon. What are we griping about?

Reality ought to set in rather than pandering. Let’s start by admitting that the cost of gas isn’t generated in the USA. It’s a global commodity in a changing global market. Supply and demand can’t be ignored. The issue is that demand is increasing faster than supply with the rapid technological and economic advances of Asia, most notably China and India. More vehicles for more millions of people means more competition for that available supply of oil.

Simultaneously supply is jeopardized. We don’t control the producers of crude oil. The Middle East is not even remotely stable and therefore supply is not assured. Venezuela is in the political grasp of a US-phobic Marxist who may or may not hinder that supply source. Other areas face problems of transporting through terrorist filled regions. That drives prices up.

Top the whole steaming pie with a load of environmental do-gooders protecting us from theorized harm to the planet. When the US has untapped reserves of oil which cannot be exploited because of restrictions imposed when oil was cheap, we can accept a chunk of the pricing blame ourselves. Technology has improved drilling and production techniques considerably from the dirty old days of the 1940s. It is possible to co-exist with nature while still recovering the petroleum resources.

Building refineries in the US should be a priority. When we note that no new refinery has been built since the 1970s, it seems obvious that we could simultaneously reduce risk, increase production and lower costs by getting busy investing in our infrastructure.

Shifting of major oil users to other energy sources has got to take place. Firing electric generating plants with oil or even natural gas puts pressure on the petroleum markets. Nuclear power generation is safe, clean and relatively low cost today. We’ve got to face that fact. Home heating, particularly in older communities needs to shift from oil to other fuels as well. Wind and sun aren’t particularly efficient nor are they small footprint, so let’s get serious about nukes.

Finally, let us please get away from thinking that we can tax our way to lower prices. Only one person ever pays a tax regardless of where it is levied. That’s the consumer, the citizen, the man-in-the-street.

My advice is let the market work. If gas costs too much, people will drive less, buy smaller cars or shift their transportation mode. If some company makes too much money, another company will sell the product for less and eat away at the pig’s market share. And, if politicians want to get elected, let them show me that they understand capitalism and free markets better than taxocracy and throwing bread and circuses for the masses.