What Would John Galt Do?

A whole different way of looking at "WWJD"

Sunday, May 06, 2007

Fuel-ish

Yesterday I received the following email from a nice lady I know:

There is an email going around about not buying gas on May 15. That is all well and good, but the gas companies know that we will buy gas the day before and the day after and use their fuel like we do everyday.

To really hit them in their pockets, like they are hitting us in our pockets, we need to not use their fuel period! That means, do not drive your rig to the beach, to the movie, out to dinner, in to town for that thing you think you just have to have right now. Stay home and do not drive. If you have to go to work, try mass transit, ride your bike, walk, car pool. Of course if there is an emergency you will have to drive. But, if we really want to send them a message that we do not like the cost of fuel right now and the fact that the oil companies are having record profits, not gross but profits, then let's hit them where it hurts. Do not use their fuel. Do not drive May 19 & 20.

Is this worth forwarding on to everyone in your address book? I hope so.
We seem to go through this every year at this time. Indeed, I blogged on the subject precisely one year ago today (see "Anger! Obscenities!" in the sidebar) when the media was whipping up their usual feeding frenzy over rising gasoline prices, which happens every year at about this time. Of course, last fall when prices dropped -- as they always do at that time of year -- it was all George Bush's doing; he was manipulating prices so the Republicans would get re-elected in November.

Last year I had a co-worker who would complain ad infinitum over fuel prices, the oil companies, and their "record" profits (which, as I recall, were a lower ROI than the average shoe store). This man owned one of those huge motor homes that cost half a million dollars that gets, what, about five gallons to the mile or something? And he couldn't understand that it was all of these people driving those huge things around the country every summer that's tweaking the demand side of the Law of Supply and Demand. Hell, no, he wasn't causing any scarcity by sucking the resource pool dry! It was all those damn Big Evil Oil Companies, by God!

Sometimes the human capacity for stupidity is just breathtaking.

At least our Nice Lady had the right idea: when prices rise, consume less. Now, THAT is a rational response as far as it goes -- and, of course, it's what rational people do anyway. Her mistake was in thinking that this would send the oil companies a "message" and "hit them in their pockets".

So, I composed a reply to her and 200 of her closest friends (yes, she put everyone's email address in the "To:" field, where the whole world could read them!):

> Is this worth forwarding on to everyone in your address book?

No, it isn't worth forwarding to anyone.

And here's why: Gasoline prices aren't set by the oil companies.

It is common for people who don't understand economics to look for a scapegoat when prices for a scarce commodity start rising. And they also invariably try pointing the finger of blame at "record profits", as if profits are some kind of evil thing.

Briefly, the price of a commodity is set by the Law Of Supply And Demand. In a market in which there is competition and no collusion, the price of that commodity is always the lowest, and fairest, price possible. It may or may not be a price you like, but it is the lowest price that is possible at that point in time.

If you want to affect gasoline prices, you'll need to look to the factors that are limiting the supply and/or increasing the demand for it. But the bottom line is that prices ALWAYS rise at this time of the year as the summer vacation season approaches and members of the supply chain begin buying more stocks to meet the increased demand.

At this point in time, probably the biggest obstacle to low gasoline prices is the United States' critical lack of refinery capacity. When supply cannot keep pace with increased demand, prices rise... a lot more than they otherwise would.

Your proposal will make the same difference that two days of dieting will make: none, and for the same reason.
A little bit later, a reply to this hit my inbox. It was from a man with the same first name as my former co-worker, and just as ignorant:

Gas companies do not DIRECTLY set the prices, but they do control the refineries. When I hear the statement "There is an unexpected shortage of refined gasoline in the supply chain and noone [sic] knows why" I just want to barf. How can someone running a multi-billion dollar operation not know why the supply is suddenly short. [sic] They manage the supply to keep it artificially short in order to jack up prices. If you don't believe this, ask why this situation exists - When crude goes up, gasoline at the pump almost immediately goes up due to the new raw material cost. But, when the price of crude drops, the pump price takes a long time to drop, due to 'the length of time it takes to get the new lower-cost crude through the system'" [sic]. If it takes a long time for the lower priced stuff, it should take the same time to process the higher priced stuff.

Why are refineries in the southwest still producing winter heating oil? Why did California send a large percentage of their gasoline to Arizona and New Mexico to cover their pipeline break, and penalize all of the west coast, rather than just let those two states have higher costs? Could it be that they make more money by having a big state like California short of gas rather than a small state like Arizona?

Sorry, gasoline prices are one of the few consumer items that are NOT driven by supply and demand. If it were, supply (refinery capacity) would increase to keep pace with demand. They are short on gasoline EVERY summer and are short on heating oil EVERY winter. That is not just coincidence, it is planned.
Hoo boy, here we go again. "They manage the supply to keep it artificially short in order to jack up prices." "Gasoline prices are not driven by supply and demand." Don't you just love it when some nutcase contradicts himself? At least he's right about the shortages not being a coincidence. They definitely are planned, which we'll get to below.

Still, I didn't want to start a flame war. Let's face it: None of us were taught economics in High School. You cannot expect people to automatically know this stuff. Hell, I didn't understand it until just a few years ago. The guy's just ignorant; he's not being an ass about it, he just reads the papers and believes whatever they tell him.

So I composed this nice non-flammable reply to him:

[Y]ou're free to believe whatever you want. However, problems only get solved when we deal with things the way they actually are, rather than according to what we want to believe.

I can prove to you that the idea you expressed -- that petroleum companies are artificially limiting refinery output to keep prices high -- is not only wrong, but ridiculous.

Each refinery owner will do what is in his own rational self-interest. If he cuts back production, he will make less money. Prices will rise by a tiny amount, but it's his competitors -- not he -- who will reap the benefit.

On the other hand, if he increases production he will make more money. Prices will drop a little bit, but not enough to offset the increased profit from increased production. However, his competitors will earn a little bit less because of the decreased prices.

When refinery capacity is scarce (as it is in the US), competition ensures that refineries will always be running at maximum capacity.

And they are. Check the petroleum industry reports. There are no artificial cutbacks in production anywhere in this country.
It didn't help. All I got back from him was more of the same, which isn't worth squandering the electrons to quote. Except for this one little gem:

Ask yourself one question. If, as you believe, increasing production increases profits, why aren't the oil companies builing new refineries?
Un-fucking-believable. The depth of human stupidity truly knows no bounds. The only reply I could muster, with mouth agape, was "Do you honestly mean that you don't know why the oil companies aren't building new refineries?" I am still incredulous over that one.

Back to the Nice Lady. Her next email to me was a heartbreaker:

Some very good points, thank you. One thing you do say is "supply and demand". Just about everyone I know, and I am sure you hear it too, complains about the cost of fuel but are not willing to do anything about it. The demand for the fuel can only be cut if we are willing to curb our driving. Is anyone really committed enough to do that? We can complain all we want, but unless we are willing to be a part of the solution, nothing will change and the price of fuel will keep increasing.

Yes, it does always go up this time of year because we all go on vacations. So, we are going to continue taking our vacations, pay $4 at the pumps and keep complaining? I am not willing to do that. Not only not willing, but not able. I am a 53 year old widow, raising her granddaughter. I work, but do not even come close to making enough to keep up with the rising cost of fuel.

We will not be able to go anywhere or do anything besides go back and forth to work and school. My $125 a month fuel budget has now jumped to $225 a month. That money has to come from somewhere, so part of it comes out of our meager $125 a month food budget and the rest comes out of our entertainment budget, leaving us with no entertainment budget now.

Sit back and accept this? No, I can't. Something has to be done. Any other ideas or suggestions?
I resisted the temptation to suggest shooting a certain man whose $500,000 motor home was, all by itself, going to erase all of her efforts to conserve.

The reality is, of course, that people will do all of the things she suggested in her original letter. It's how the market adjusts. Some will buy smaller cars, some will move closer to work, some will find alternative transportation, some will try to get a better-paying job. She will do some of these herself.

And Mister Half-Million-Dollar Motor Home will make adjustments too as he makes the hard decisions on how best to use the money he has available. Thus will motor fuel continue to be allocated in the fairest way possible.

And Left-wing politicians (and their lapdogs in the Press) will continue blaming the Big Evil Oil Companies for the high prices that they, the politicians themselves, created. Some things never change.

In the end, I never had the cojones to tell the Nice Lady the one thing that she can do: quit voting for politicians who pander to the environmental movement, and vote only for those who understand the nature of wealth, where wealth comes from, how it's created, and civilization's vital need for energy. I just didn't want to wade into the Alligator Pit of Politics with her.

Perhaps I should have told her that her predicament is the logical, natural outcome of politicians who refuse to allow drilling in the ANWR and in several other places right here in the United States where we have oil -- lots of oil -- and enough of it to make a real difference in domestic fuel prices.

The environmental movement has been working tirelessly for nearly a half-century to deny America that which is most vital to her freedom -- energy -- and their efforts are beginning to bear fruit. Among that fruit is a fifty-three-year-old widow who is being forced to choose between food and transportation.

Pretty rotten fruit, if you ask me.

Ken
What Would John [Galt] Do?

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