Thursday, September 1, 2005

Oil Shortage After Katrina

(T)he only reason that traders are willing to pay those prices for crude oil is because they believe that individuals are willing to purchase fuels refined from crude at prices that will enable those original purchases to be profitable. In fact, the price of crude oil cannot rise independently of the value of the final products into which it is refined. Even though we are seeing a pattern in which the price of crude oil increases, which is followed by increases in retail gasoline prices, one must be reminded of the economic processes that are occurring.

I've been doing a bit of thinking about this and I think I may have over-reacted, at least economically, at what appears to be blatant price gouging. At some stations here in Rock Hill, SC, gas prices went up about 70 cents in one day. I began to consider this a little more and I'm not so certain that now we should be asking our government to intervene in putting price caps on gas. The solution that we do need is for America's dependence on foreign oil to be reduced or nearly eliminated. If you are complaining right now about gas prices, you should also be in favor of America drilling at home and building more refineries. Independence is a first step to lower prices!

Remember the oil crisis of the 70s (I don't....lol). This was partly due to our government imposing restrictions! Secondly, why is there a sudden shortage of gasoline from Katrina? It's simple - two major pipelines have been taken offline due to the hurricane. After thinking some more, I had to drop my perspective as a consumer and had to put on my Economics thinking cap. I remembered back in college the principle of J.B. Say, that "supply creates demand." This can be true in a shortage in a paradoxical format. We are seeing that we have less oil coming in (about 20% of imported oil comes up through the gulf) and this is somehow making it more valuable for the short-term (hopefully). I then decided to go to Mises.org (an "Austrian" economics website) to see if their writers had said anything about the oil crisis. I found the following excellent article by William Anderson that deals with the shortage issue and related price increases (the quote at the beginning of this blog was from this article). Dr. Anderson was my economics professor in college. I will not quote the entire article, you can read it for yourself if you have about 5 minutes.

"How to Create A Shortage" by William Anderson.

People are not happy about this latest round of gas price increases; and, not surprisingly, they are demanding answers — and "solutions" — from the wrong people: the political classes. At the cutting edge is Hawaii, where gas prices will soon be controlled by law, not markets.

Hawaiians are about to find out in the near future that the "solutions" they have supported are going to have the opposite effect of what supposedly was intended.

People in the Aloha State pay more for gasoline than anyone else in the United States, and anyone with even a basic understanding of economics understands why this is so. Hawaii is a group of islands located thousands of miles from the continental US, and Hawaiians who purchase gasoline must be willing also to pay for the high transportation costs of bringing fuel to that state. (At more than 57 cents a gallon, Hawaiians also pay the highest gasoline taxes in the USA, a penny more than their California counterparts and about 13 cents more than the national average, according to the American Petroleum Institute.)

Hawaiians believe this to be a most unfair set of circumstances and have turned to their legislature for what they believe to be relief. Yes, even though the high prices that people in Hawaii pay for gasoline are due to that pesky thing called the Law of Scarcity, citizens of that state are convinced that the politicians there can do away with scarcity by fiat. They are about to discover just how wrong they really are.

3 comments:

Greg Simmons said...

Agreed on the article.

Price controls are NOT the answer. They never deliver the expected results.

Although gas prices are high, they still have not reached the levels of the early 80s when crude oil spiked to over $90 per barrel (inflation adjusted). BUT, no new refineries have come online in the US in roughly 30 years. We, as a country, even with increased MPG performance still consume more gas than we did 30 years ago. Therefore, with no increases in refining capacity, supply will become constrained. The environmentalist wackos have prevented the construction of any new refineries. The Bush administration has proposed using closed military bases as sites for new refineries. This is a perfect solution since these sites are already contaminated with fuel spills, chemicals and ordinance (weapons) fuels and explosives.

Another problem that needs to be addressed are the number of required fuel blends. There are currently 11 different blends required by different states for various environmental reasons. This causes problems since refiners must use the same facilities (the ones that are 30 years old or older) to produce 11 "batches" of fuel. Bringing the refinery down to make changes to the blend subtracts from the total capacity to produce. Legislation needs to be passed narrowing this field to 1 or 2 blends used nationwide so that refineries will not waste time taking units offline to make changes for the next blend. This will more efficiently use the available capacity until additional capacity can be constructed and brought online. More efficiency means greater capacity which increases supply.

Lastly, yes...drill here and reduce our dependence on the middle east and Venezuela. Reducing our dependence will reduce our necessary involvement in these regions. If you object on environmental reasons, please do some investigation into current methods and techniques BEFORE you speak. K? Good!

Eric Parsons said...

Wow. Did you expect today's discussion over at Vowe? Seems you already did the research. :-)

Chris Whisonant said...

Eric, I was actually on the computer when your post came through...lol

It's like I told someone offline who was watching the discussion - we have to figure out some answers and offer solutions good or bad...