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Monday, August 11, 2008

Healing the Emotionally Damaged Oil Market

It's amazing how economics works these days. It used to be a matter of supply and demand. Too many consumers, not enough product -- prices go up. Too much product, not enough consumers -- prices go down. That's the short-course on how retail pricing used to work. Simplified, but true enough.

But we live in a much more complex world now. A world where pretending to do something about prices effects those prices. You don't need to actually do anything that will have any results. In fact, the efforts don't even have to have any hope of a result. You just shake the medicine rattle, say the magic words, perform the appropriate theatrics and ritual, and prices drop.

So it was that Republicans staging a pointless pretend session of Congress dropped oil prices. Armed with nothing but access to the floor, unable to actually introduce or pass legislation, unable to vote or negotiate compromises, completely without any real power at all, House Republicans managed to bring down oil prices through pure force of positive energy. In the new economics, wishing makes it so.

At least, that what they expect you to believe. And, if you're a freakin' idiot, you probably will. Right wing talk show hosts will pretend to believe it -- because that's their job, to be gullible for a living -- and the rest of the media will probably at least discuss the possibility that it's true.

See, what's happened is that House Republicans staged a "protest" session to embarrass Nancy Pelosi into allowing an emergency session on offshore drilling. Since any product of offshore drilling won't hit the market for years, Pelosi decided that maybe the word "emergency" would be misapplied. The House of Representatives went on scheduled break and House GOP stayed behind to "work" -- although said "work" would amount to zero accomplishment. They can't do anything.

So on Friday, after three weeks of giving speeches to a half-empty chamber, they started to get the idea that maybe this wasn't going to accomplish anything. And then, magically, it did:

The Hill:

House Republicans on Tuesday said their protest of Speaker Nancy Pelosi’s (D-Calif.) decision not to allow a vote on expanded offshore oil drilling has helped lower gas prices.

Heading into a third day of speeches in the near-empty chamber, Republicans acknowledged that the average price of gas and oil has declined in recent weeks. But they claimed credit for part of that reduction.

“I think the market is responding to the fact that we are here talking,” said Rep. John Shadegg (R-Ariz.) at a joint press conference with other GOP lawmakers. “I think the market realizes this kind of pressure from Congress may, in fact, lead to a change in policy.”

Woohoo! It worked. Just talking about lowering gas prices lowered gas prices. This pointless political theater was a resounding success! And the beauty of the way this magic operates is that it only works in one direction; "The Republican members did not answer questions about whether they would take the blame if gas prices go up again," The Hill reported.

I think we all know the answer to that.

But if House Republicans can't be blamed for rising prices, only praised for falling ones, neither can they take all the credit. John McCain had already made sure we all included Bush's own pointless effort to begin offshore drilling.

Associated Press (July 23):

Republican John McCain today credited the recent $10-a-barrel drop in the price of oil to President Bush's lifting of a presidential ban on offshore drilling, an action he has been advocating in his presidential campaign.

The cost of oil and gasoline is "on everybody's mind in this room," McCain told a town-hall meeting.

He criticized Democratic rival Barack Obama for opposing drilling on the Outer Continental Shelf.

Ten days ago, Bush lifted a 1990 presidential ban on offshore drilling and urged Congress to do likewise. "The price of oil dropped $10 a barrel," said McCain, who argued that the psychology of lifting the ban has affected world markets.

That's the word that explains everything -- "psychology." See, manufacturers and suppliers and retailers, contrary to popular belief, aren't in business to make money. They don't charge as much as the market will bear because they want to make as big a profit as possible. No, they charge as much as the market will bear because there's something wrong with their heads. What they need is a therapeutic session of "let's pretend," where market forces that would bring down prices are talked about, but in reality nothing happens. See, they're sick.

And they don't want to charge what they do. They can't wait to lower prices -- even if it means losing money. But someone else has got to get the ball rolling. If you start talking about actions that may lower prices years down the road, markets get all excited about lowering prices, jump the gun, and prices fall immediately.

Why? Because manufacturers and suppliers and retailers hate money. Like I said, there's something wrong with their heads. That's the way economics work these days. It's all touchy-feely psychological stuff where therapy sessions in the Oval Office and House of Representatives bring healing to emotionally damaged gazillionaires and, with it, lower prices.

Of course, there's also another possibility -- that economics hasn't changed at all, that all this stuff about "psychology" is BS, and that supply and demand still sets prices.

Some poo-pooers are poo-pooing this whole psychological healing of a psychically wounded market. In fact, people who follow markets for a living shoot the idea all to hell.

A new Trilby Lundberg survey finds that "U.S. average retail gasoline prices fell over the past two weeks and could ease further in coming weeks if the price of crude oil keeps dropping."

The national average price for self-serve regular unleaded gasoline was $3.8472 a gallon on August 8, a decline of almost 15 cents in the past two weeks, according to a survey of about 5,000 gas stations.

The decline is entirely due to lower crude oil prices, which have fallen $10 in the last week alone and are down about $30 from an all-time high of above $147 a barrel a month ago.

But the political equivalent of psychoanalyzing the market isn't credited with the fall in price. Old fashioned supply and demand is. "Lundberg noted that recent fuel price increases in China, India and other developing economies have impacted overseas crude oil demand, which in turn has led to the fall in global crude oil prices."

In other words, prices got too high, people stopped buying as much gas, and prices fell again in response. Gas is too expensive to waste, so people are taking steps to make sure they aren't wasting it. They're taking measures to increase their mileage, changing the way they do things to use less gas, and using more public transportation. There's a word for all of this gas-saving -- conservation.

And this conservation is having an impact on oil prices -- as the laws of supply and demand would dictate, The Oil Price Information Service's Tom Kloza predicts that prices could continue to fall another 10 to 20 cents for regular and as much as 80 to 90 cents per gallon for diesel. The word "psychology" doesn't come up.

All of which makes John McCain's position on gas price bass-ackward. McCain, in giving Bush's symbolic effort credit, shows he either doesn't understand how markets work or doesn't care. My money's on option B.

And it makes his attack on Barack Obama's energy plan ill-informed, to put it mildly. In attacking Barack Obama for suggesting that we keep our tires properly inflated, McCain attacks the sort of actions that are bringing prices down. You see, use less gas=buy less gas=lower demand=lower price. What do you know? The economy still works exactly the way it always has. Turns out that oil producers and retailers aren't mentally unstable and in need of healing through talk about possibly, maybe lowering prices five or ten years down the road. No, they're perfectly rational and lower prices when they aren't selling as much of their product as they'd like.

Use less gas, lower gas price. That whole tire inflation/conservation thing? Totally works. We're watching it work before our very eyes.


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