It makes no sense?

Some weeks ago I was in a coffee shop when one of those who has to talk to the whole room was holding forth.  He repeatedly exclaimed “It makes no sense” with regard to gas prices rising after haven fallen so low.

Rather than going over to his table and joining the conversation, I just stayed where I was and kept quiet.

However, in the true free market sense, it does make perfect sense for more than one reason.

First, the number of producers of oil was way up.  When a commodity becomes plentiful the price goes down.  But when the price becomes too low for some to make money, they drop out.  The number of producers drops and the price starts to climb.

Two, traditionally the price of gasoline rises in spring and fall as refiners switch the blends to match the season.

Three, as the price dropped, more people drove more.  As they drove more, the demand for gasoline increased.  As demand increases so does price.  That’s the “free market”.

I don’t know whether this exclaimer was a “liberal” or a “conservative”, but this is the kind of view that some who call themselves “conservative" hold.  These “conservatives” are ready to blame anybody but themselves for almost any problem.

Ironically, these up and down gasoline price movements are one of the few really free markets we have in our “free market” economy.

There are many buyers and sellers.  Many sellers if we limit sellers to those extracting the oil.  It is not so with refiners where we have relative few; one refinery can be producing gasoline for an entire region.

Both buyers and sellers are free to enter and leave the market.  Many drivers can change their driving habits: make fewer trips or use other transportation.  Drillers do turn their rigs off and on and explore more or less.

Both buyers and sellers have all the information they need to make a decision.  For the most part, gasoline is a price-driven commodity.  Despite what the oil companies say, the product is the same from station to station.  For the station, it’s mostly is the credit card good.

All costs are covered by the transaction.  This is where gasoline fails miserably.  We don’t pay for the pollution and global warming caused by our “freedom” to drive when, where, and how much we drive.

I wish more of what happens made as much sense as the ups and downs of the price of gasoline.

No harm to humans: where have we heard this before?

I just watched “The Clean Room” in “Cosmos: A Space-Time Odyssey” with Neil DeGrasse Tyson.

Clair Patterson, a graduate student then a professor, spent years trying to determine the age of the earth by the amount of lead, a product of uranium decay.  He kept running into far more lead in the environment than should occur naturally.  He concluded that the lead was coming from tetra-ethyl lead added to gasoline to improve anti-knock qualities.

However, lead is a known neuro-toxin, known even in Roman times.  Chemical industry representatives kept trying to show that leaded gasoline was not a problem.

We still have many people having neuro-toxin problems from leaded paint in older buildings.  But we try to show that their problems are caused by lack of initiative rather than environment.

Now we have the same scenario all over again with vested interests working overtime to “prove” that carbon dioxide in the atmosphere is not a problem.

When will we ever learn?  Those who live by profit are not to be trusted: Adam Smith, Wealth of Nations.

The price of gas and other things, a perspective

Many are complaining about the cost of gasoline as the price approaches $4/gallon.  Consider that about fifty years ago gas was often 25 cents/gallon.  The price is now about 16 times as much.  But consider also the use of those gallons of gas.  Fifty years ago many cars got 10-15 miles per gallon; now many cars get 30 or more miles per gallon.  In other words we are getting an effective $2/gallon or better of travel compared to fifty years ago.  So, as far as our use of gasoline, the price could be considered only eight times as much.

Consider postage.  Fifty years ago the price of a first class stamp was three cents.  Now it is 47 cents (I don't know exactly because I buy forever stamps).  Hm!  That's about 16 times as much, about the same as the increase in the price of gasoline.  But postage is now a better deal.  Fifty years ago a first class letter would take five days or more to go across country.  Now it can go coast to coast in three days and even four or less to Hawaii.  To get that kind of service fifty years ago, you had to buy an airmail stamp at eight cents.  So, in one sense, postage has gone up about six times as much as fifty years ago.  Pretty low inflation considering it is a government service continuously hobbled by Congress.

Consider newspapers.  Fifty years ago the price of a daily paper was five cents.  Now it is one dollar, twenty times as much.  And they are a lot smaller.  And in most cities there is only one newspaper rather than two or three.  Worse, the last newsstand increase was from 75 cents to one dollar.  A 33-1/3 percent increase, and I never saw a single complaint in letters to the editor.  A newspaper is produced by a "free market" company.

The list of items whose prices have "skyrocketed" goes on and on.  I remember sixty years ago going to the movie (sometimes a double feature with a cartoon, a short, and the news) for ten cents for the ticket and ten cents for a box of popcorn.  I wouldn't buy a candy bar at the theater because they cost six cents compared to five cents at the drug store next door.  Ice cream cones were five cents a scoop.  Sundaes and milk shakes were 25 cents.  "Pepsi-Cola hits the spot / Twelve full ounces, that's a lot / Twice as much for a nickel, too / Pepsi-Cola is the drink for you!"

Oil - synchronicity strikes again

Yesterday I wrote an entry about drilling in the Gulf and that it would not lower the U.S. price of gasoline because the gasoline would be exported to the highest bidder. Today, the Star Tribune published an article entitled "U.S. exports a record amount of refined fuels". The article stated that two Department of Energy analysts predicted this last January. See http://www.latimes.com/business/la-fi-fuel-exports-20111231,0,7622832.story.

The synchronicity is that seemingly similar events happened without mutual causality.

This export market also illustrates a difficult goal - either you have free markets or you have low prices, but not both with "scarce" resources. As we fill our tanks, I'm sure we are not going to be contemplating with joy that this is "efficient" allocation of resources.

A perspective on prices

Many people complain about the cost of postage, claiming it has risen way out of proportion to anything else. Let's do some simple arithmetic to check this.

Postage: was 3 cents, now 44 cents - 14-2/3 times as much

Daily newspaper: was 5 cents, now 75 cents - 15 times as much (and in Duluth half as much stuff to read)

Bus fare (Cleveland OH): was 10 cents, now $2.25 - 22-1/2 times as much (but many routes are longer)

Gasoline: was 25 cents, now $2.70 - 10.8 times as much (of course, this hasn't been adjusted for a much needed gas tax for highways)

Doctor office visit: was $5, now $100++ - 20 times or more as much

Haircut, man: was 50 cents, now $10+ - 20 times or more as much

Ice cream cone, double scoop: was 10 cents, now $3.00+ - 30 times as much

It looks like three of the prices that many people complain the most about are the best bargains!

How to reduce the price of gas

The quickest way to reduce the price of gasoline is to stop driving. Unfortunately, too many people would rather drive than take the bus. The next quickest way is to price gas in liters. Just think, the current $3.459/gal. in Duluth could become $0.909/liter.

This has the added benefit of making comparison with other countries easier. One would only have to convert euros or yen or whatever to dollars instead of first converting liters to gallons and then currency to dollars.

A third benefit, probably short-lived, is that gas would once again be below $1.00 per unit.