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Archive for May, 2008

Simple Economics, part 1 (Fuel prices)

Tuesday, May 6th, 2008

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I’ve got a series of blog entries that I intend to write to address the various kinds of alarmist propaganda that the media is heavily engaged in making us believe so that we’ll stay tuned in to their media outlets and pay attention to their advertising. The first topic I’d like to discuss is rising fuel prices.

Fuel prices are simple: most of the worlds’ oil comes from a conglomerate of oil producing and exporting countries (OPEC). This organization decides how much oil is going to be produced and exported. Since demand is generally a known quantity (we know how much oil we all use and we can safely forecast demand for oil in the future) and OPEC controls supply, then in a sense OPEC controls price since price is a function of supply and demand. Everyone knows this. If demand grows at a much faster rate than supply, then prices will increase and continue increasing until the growth rate of supply and the growth rate of demand are equal. This, coupled with the decline in the value of the dollar against other currencies, has led to steadily increasing prices.

This leads us to a very small set of solutions if we do not want the price of oil to continue to grow: (A) we need to find a way to increase the supply of oil, (B) we need to decrease the demand for oil and/or (C) we need to steadily increase the buying power of the dollar versus other currencies. Of these three solutions, option A is the only one that is entirely within our capability.

Option B is unrealistic: we have no control over the oil consumption of the rest of the world, and if our objective is to decrease the price of oil the only options are rationing it or investing in research which has no guaranteed outcome. It would be illogical and foolish to assume that oil supply would stay the same even if demand decreases since we would still be subject to OPEC’s psuedo-price control.

Option C would require a pretty substantial overhaul of federal monetary policy, and I believe that the applicability of this solution vector to our problem is limited: we could not go on increasing the value of the dollar forever because the money markets logically move towards a state of equilibrium.

So we are left with option A: increasing the supply of oil. We must make the assumption that the potential supply of oil is unbounded, so our capability to extract oil must scale linearly with the desire to increase supply. This is a reasonable assumption if we also assume the ability to remove domestic governmental restrictions. The idea that the world’s natural oil reserves are near depletion is still under heavy debate and is regarded by many as unfounded alarmist propaganda, so I have excluded this possibility from consideration.

Oil Rig

We’ve now reduced the problem of rising oil prices into a tangible solution that looks like eliminating government regulation that prohibits drilling and eliminating regulation that discourages the construction of oil refineries. By doing this, we’ve also shielded ourselves from international instability because we have increased our national self-dependence and we have dramatically reduced the amount of money that is flowing from our country into militant Islamic states and Marxist dictatorships.

Unfortunately, I don’t see this happening for quite a while due to a controlling political party that is full of people who pander to environmentalists. Therefore, dogmatic obsession with the unsupported theory of global warming and wildlife overprotectionism is going to dramatically slow our economy and it’s all going to get blamed on our “lack of public education funding” and socialized healthcare (because goodness knows those both have a measurable effect on productivity).

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Archive for May, 2008

Simple Economics, part 1 (Fuel prices)

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