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Monday, June 21, 2010

The Effects of the Offshore Drilling Moratorium on Gas Prices

Replacement axe handleIn Adam Smith's seminal economics work, The Wealth of Nations, he made a simple observation. If you find a stick on the ground, it doesn't have a lot of value. Let's face it, there are a lot of sticks lying around and if someone wanted one bad enough, they wouldn't have a lot of trouble finding one. For the sake of argument, we can set the value of a stick at "free."

However, if you take that stick back to your workshop and fashion an axe handle out of it, that stick suddenly has value. If you were to sell it, the value wouldn't be determined by the resource it came from -- after all, it's that same free stick -- but from the labor and skill you put into making it an axe handle. Maybe someone else doesn't have that skill, maybe they do and just don't want to take the time to do it themselves, but someone will now pay good money for your formerly free stick. In this example, 100% of the value is conferred by the woodworker's labor. When someone buys it, they aren't really buying the axe handle, what they're doing is paying you to make an axe handle after the fact.

The stick was a resource and, to tell the truth, in most cases resources aren't free. But a resource isn't a product. Even resources that have a lot of intrinsic value need to have labor applied to them -- i.e., diamonds must be cut and gold must be refined. And the value of the resource increases after it has been worked -- by labor -- into a product. In short, even when the stick isn't free, labor still increases its value. Call that Economics of Manufacturing 101, the super-simplified fast course.

I bring this up because this very simple economic truth is being lost on Republicans all over the damn place. After the Deepwater Horizon disaster, President Obama imposed a moratorium on offshore drilling. This is the worst thing ever. In fact, in a fit of cartoonish buffoonery, Mississippi governor and former head of the Republican National Committee Haley Barbour argued that the moratorium is worse than the spill itself. See, the ban puts people out of work and will drive up the cost of gas, argues Barbour -- which is half-true, it'll put people out of work. Of course, in addition to the $20 billion Obama secured from BP for damages, he got $100 million to help pay out-of-work rig workers. So no actual hit there.

And the rest of the argument is just as dumb. As Digby points out at Hullaballoo, "I'm surprised these conservatives haven't used this argument [for] the food and drug companies when their products are killing people: sure, the e coli may be deadly but we can't stop selling that tainted meat because it costs jobs and drives up prices."

But will it drive up prices? Not really, no. Crude oil is a resource, not a product. Unlike the stick, it's far from free, but the increase in value still comes mostly from labor. You have to refine crude oil or it's just useless and poisonous crap no consumer in their right mind would want. Oil is a commodity sold on a global market. Unless you want to argue that all the oil in the world is extracted from offshore drilling in the United States, any effect of the moratorium will be limited. The price at the pump isn't dictated by the availability of the resource -- like the stick, oil isn't rare -- but in the production. Despite the fact that a fortune in oil was being spewed out into the Gulf of Mexico, gas prices were falling. Keep in mind, the moratorium's been in place this whole time too.

What's actually driving the price of oil up and down right now are supply and demand. You can make all the axe handles you want but, if no one needs any, good luck selling them. As the global recession went on, it reduced demand for refined petroleum. People were cutting back, people weren't going to the mall, people weren't going on vacation -- in short, people weren't burning as much gas. Production's been outpacing demand. Too many axe handles, not enough lumberjacks, so the price falls.

Never let it be said that good news ever comes without accompanying bad news. Just as the recession (bad news) kept gas prices low (good news), so a recovery will have the opposite effect.

Gainesville Sun:

Crude oil prices have begun to rise and some analysts see that as a good sign that the economy is rebounding.

According to the New York Mercantile Exchange, prices for crude oil rose last week to their highest level since mid-May. A primary factor driving prices higher is increased demand, which is viewed as an indicator that the economy is improving. The demand has been the result of consumers being willing to buy more gas, according to Jessica Brady, manager of AAA Public Relations.

So an economic recovery will bring gas prices (and the price of everything else) back up to normal. I guess you could see rising gas prices as the bad news here, but you could also argue that the real bad news is that it'll seem to back up the Republican lie. Don't fall for it.


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