Gas Prices - The Purple Answer
May 20, 2006

We PurpleThinkers have waited to comment on gas prices to see what’s fad and what’s fact. No matter how much we listen to the punditry out there, no one has made a significant case for anything at play other than basic market economics. We think this is quite easy and that politicians simply need the cahones to do what’s right. We are interested in whether or not you agree with this very simple and straight-forward argument.

1) Gas prices are market-driven. Seems obvious, but it’s worth stating. This fact is not accepted by everyone, and it is a pre-requisite to hold any further debate. If you don’t believe this, then nothing will persuade you to advocate solutions to the real problem.

How do you explain record oil company profits while the average driving public suffers? ExxonMobil and others invest in the infrastructure and distribution systems necessary to get gasoline to your car. The cost to ExxonMobil changes at roughly the rate of inflation – labor, materials, taxation and other sunk costs do not fluctuate wildly. What does fluctuate wildly is the cost of commodities. Price speculation on the commodities markets can drive-up the cost of gasoline quickly and dramatically. This speculation is just that – a guess as to what prices will do down the line in light of supply and demand, both affected by world events. The cost of oil jumps, but Exxon’s cost to prepare and distribute gasoline does not. Voila! Increased profit!

There’s no mystery or conspiracy here. Many pundits are predicting dramatic drops in oil prices this year – from $70 to around $40 per barrel. If this happens, ExxonMobil’s record profits will disappear as quickly as they appeared.

Not convinced yet? Think of it this way. A farmer planting corn assumes certain costs to cultivate, harvest, and transport their corn to market. The farmer’s profit or loss is a product of what that corn will sell for. That price is a product of simple supply and demand – as affected by weather and other events. Do you think there is a massive corn conspiracy when tornados wreak havoc across the Midwest and commodities drive-up the prices? Those who didn’t get hit with tornados are sitting pretty if they have full harvests. Are they gouging you??

2) If you accept #1, your choices are clear. You can affect supply, demand, or both. Instead of debating “windfall taxes,” or “anti-gouging legislation,” congress should be working diligently to increase supply and decrease demand.

We PurpleThinkers can hug trees like the best of them. We like alternative fuel research, conservation efforts, incentives for hybrid vehicles and other such programs. However, these aren’t taken nearly far enough. We aren’t advocating more government spending, but rather unleashing the power of the market to advance demand-cutting affects.

The U.S. remains the largest automobile market. If the government made it economically safe for manufacturers to produce alternative fuel vehicles, we would see them – quickly. But, right now, it’s too risky. If the U.S. mandated a phased approach whereby all new automobiles sold in the U.S. after 2030 must be hydrogen-powered – we would see dramatic reductions in oil consumption within 5-years. Knowing there would be a market for hydrogen power, filling stations would bear no financial risk in retrofitting their stations for hydrogen. Automobile manufacturers would be forced to plan their hydrogen-based models immediately and there would be incredible market pressure to get them out there fast. Big Oil would see that their financial future rests in mass-production of hydrogen and would begin that process in just months.

This is a political blog and not an economic one, so let’s throw-in a curveball. Because the U.S. is such a large consumer of automobiles, the hydrogen-based car models would proliferate quickly across the globe – compounding the affect of decreased oil demand. This dramatic reduction in oil consumption would bring oil prices to under $20 a barrel within 15 years. Oil producing nations like Saudi Arabia, Iran and Venezuela would see their tyrannical governments in chaos trying to support their massive social welfare systems. Cash-strapped and desperate, the threat of war would possibly be even greater than it is today.

Thus, any plan to shift from oil to hydrogen must include expanded oil-drilling. ANWAR, the gulf, and the pacific coast must be opened to oil exploration at the beginning of any hydrogen-based energy policy. There will always be a need for oil -- airplane fuel, asphault, cosmetics and other products will continue to require petroleum and the U.S. may need our own sources to stave-off any political crisis that could erupt in oil-rich nations.

This epinion piece is a perfect example of why we call ourselves PurpleThink. We believe in free-markets, but aren’t opposed to government spurring-on the marketplace. We understand that markets can’t do everything, but we don’t believe government programs and more taxation are the answer. We refuse to fit neatly in a liberal or conservative box – and that’s why this scenario will likely never happen.

Shame.

 

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