Tuesday, May 13, 2008

Melodrama and Villains vs. Supply and Demand

With all the commotion in the media and in politics about the high price of gasoline, is there really some terribly complex explanation?

Is there anything complex about the fact that with two countries-- India and China-- having rapid economic growth, and with combined populations 8 times that of the United States, they are creating an increased demand for the world's oil supply?

The problem is not that supply and demand is such a complex explanation. The problem is that supply and demand is not an emotionally satisfying explanation. For that, you need melodrama, heroes and villains.


Thomas Sowell

22 Comments:

At 5/13/2008 10:19 PM, Blogger WesB said...

Why does it seem that lately people have been ignoring the rule for commas in a series, where when you have three or more items, you place commas after all but the last?

http://www.towson.edu/ows/ModuleCOMMA.htm

 
At 5/13/2008 11:01 PM, Blogger K T Cat said...

I know that bringing up the Nazis dooms you to scorn, but all of this hollering about the oil companies smacks of the pre-war economic populism of, well, the Nazis.

 
At 5/13/2008 11:44 PM, Blogger bobble said...

"Is there anything complex about the fact that with two countries-- India and China-- having rapid economic growth, and with combined populations 8 times that of the United States, they are creating an increased demand for the world's oil supply?"

no, not really that complex at all.

so why didn't the economists and politicians warn us 20 years ago? i don't believe they ever mentioned there was going to be a downside to globalization.

 
At 5/14/2008 12:37 AM, Blogger Romeo Bravo said...

Bobble:

Downside, there is now a global market for everything. As people in other countries earn more money/become richer, they consume more things.

The issue is that putting a new oil well on-line doesn't happen as fast as opening up a new factory to product plastic widgets.

However, I have no doubt that in the long run whether its oil, natural gas, coal, solar, etc. whatever we need to power our world will come on line in huge enough quantity to satisfy all of us at a reasonable cost.

 
At 5/14/2008 12:59 AM, OpenID sethstorm said...

India and China-- having rapid economic growth, and with combined populations 8 times that of the United States, they are creating an increased demand for the world's oil supply?

That should be a justification to cut them off somehow, not a justification to grin and bear it. If that means by force, fine. Yes, that means not being subservient in any manner to the wishes of another country. If that means punishing Big Oil in some means and making sure it's absolutely unavoidable, so be it.

Sowell, it is a shame you have to be an apologist for other countries. It is the only thing that fits you correctly.

 
At 5/14/2008 3:26 AM, Blogger juandos said...

"so why didn't the economists and politicians warn us 20 years ago?"...

You weren't paying attention or you weren't old enough at the time bobble...

There was quite the Casandra Choir when Ford Automotive moved their ceramics plant to Nuevo Laredo, Ta back in '78...

"i don't believe they ever mentioned there was going to be a downside to globalization."...

Again, have you been paying attention?

Any of the major unions in this country have dozens of economists they can trot out and give you the, "globalization is bad" argument anytime you want...

I get enough of it via their junk snail mail...

 
At 5/14/2008 8:12 AM, Blogger K T Cat said...

bobble, how does globalization play into this? What, were China and India supposed to stay squalid for all time? Wouldn't you expect them to do everything they could to become industrial powers and therefore consume more oil?

I don't get it.

 
At 5/14/2008 10:27 AM, Blogger bobble said...

"bobble, how does globalization play into this? What, were China and India supposed to stay squalid for all time? Wouldn't you expect them to do everything they could to become industrial powers and therefore consume more oil?"

LOL. of course it was going to happen, eventually.

all i'm getting at is that the 'experts' and 'leaders' that fasttracked this promised we were all going to win. there would be no downside. that is not the case.

the US middle and lower class is taking a hit. and, now we are watching the price commodities soar out of sight.

 
At 5/14/2008 10:29 AM, Blogger bobble said...

"bobble, how does globalization play into this? What, were China and India supposed to stay squalid for all time? Wouldn't you expect them to do everything they could to become industrial powers and therefore consume more oil?"

LOL. of course it was going to happen, eventually.

all i'm getting at is that the 'experts' and 'leaders' that fasttracked this promised we were all going to win. there would be no downside. that is not the case.

the US middle and lower class is taking a hit. and, now we are watching the price commodities soar out of sight.

 
At 5/14/2008 10:30 AM, Blogger Biebs said...

Sethstorm...

Your comment is a perfect illustration of Sowell's point. You are emoting rather than looking at the facts unbiasedly.

Sowell is not apologizing for anyone's behaviour he is simply explaining the reasons behind the increase in oil prices. Politicians (and you apparently) look to make judgement calls on whether the behvaiour is good or bad; economists look to understand why the behaviour occurs.

 
At 5/14/2008 11:04 AM, Blogger Deepali Chandra said...

I was thinking on the same lines what are the drivers behind the soaring oil price? I had consolidated the list for the same http://deepalichandra.blogspot.com/2008/05/oil-price-rise-is-opec-really-opaque.html

 
At 5/14/2008 11:28 AM, Blogger K T Cat said...

"the US middle and lower class is taking a hit. and, now we are watching the price commodities soar out of sight."

I don't get your point. More competition for the same jobs lowers wages. More competition for the same goods raises prices. Those are just facts. What's your point in all of this? Reality sucks?

 
At 5/14/2008 12:23 PM, Blogger Marko said...

The reason why there is a downside to global trade is that the market is not allowed to clear because of government interference. Of course the markets will always shifts and people in outdated or dying jobs will suffer, but that cannot be helped. The buggy whip and candle manufactures were the victums, but the whole world was better off.

If it weren't for government enforced labor monopolies (unions), government restrictions on property rights (regulations, federal wage and hour laws, etc.) and massive manipulation of market forces (tax laws), this globalisation of trade would be much more obviously an overall good. People would have gotten out of dead end manufacturing jobs long ago when the market signalled the industries were dying with lower wages. But that didn't happen because of unions and other market harmful legislation.

There are villains and melodrama - government over regulation and interference. The middle class in the U.S. is much better off than in any time in history, and the poor are better off here too.

Plus, without the high level of taxation and regulation of american industry (have you ever dealt with OSHA?), our own industry would be more competative and this would probably happen more slowly, giving people time to adjust.

I just wanted to show that you can emote in the other direction. Maybe we need more of that. We are getting our rhetorical butts kicked out there!!

 
At 5/14/2008 12:23 PM, Blogger bobble said...

"I don't get your point. More competition for the same jobs lowers wages. More competition for the same goods raises prices. Those are just facts. What's your point in all of this? Reality sucks?"

yeah, pretty much. i mean it wasn't the reality we were promised is all. LOL. i just think all the lying economists and
politicians should do the right thing and fall on their swords!

but also, it could have been handled differantly. it seemed like there was a rush to trade with anybody and everybody without any regard to the consequences.

there could have been more barriers to countries that keep their currency artificially high against the dollar. or that were protecting their industries against our exports. that's not 'free trade', that's mercantilism. [yes, i "get it" that we got the goods cheaper that way, but it caused the transition from manufacturing to service in the US to happen faster than the labor market could adjust]

there could have been some kind of enforcement against exports from countries using slave/child labor.

there could have been some kind of enforement against countries that overly pollute. why should we be outsourcing our pollution?

H1B work visas. i get it that the high pay tech jobs are going to move overseas. labor arbitrage and all that. but do we have to import cheap labor to fill the few high tech jobs that are left? what's that all about?

 
At 5/14/2008 1:26 PM, Blogger OBloodyHell said...

> so why didn't the economists and politicians warn us 20 years ago? i don't believe they ever mentioned there was going to be a downside to globalization.

LOL, just because your media sources didn't listen doesn't mean that it wasn't being said.

I'm sure there are (and have been all along) lots of scientists saying about Global Warming, "Now hold on, now..." -- this does not mean it will make it into the news reports.

====
> **Seth

I'm not even going to bother to quote any of your lunatic diatribe. "Cut them off" has got to be one of the more idiotic notions I've heard recently... and that includes things from blithering idiot leftists.

You figure a "blockade" will do it, geeeenyus?

> What, were China and India supposed to stay squalid for all time?

Why, yes, as a matter of fact. :o)

Ask any lefty enviroweenie (not necessarily including bobbie, there) -- the whole world is supposed to devolve into a welter of squalor and suffering, donchaknow?
"It's just not sustainable, man!! We're all like... dooomed. Hey!! Don't bogart that joint, man!!"

> all i'm getting at is that the 'experts' and 'leaders' that fasttracked this promised we were all going to win. there would be no downside. that is not the case.

bobbie, the "experts" were quiet because otherwise the "leaders" (read: "politicos") would not have selected them to support their points. This does not mean that the OVERALL is not still an upside. In any changing situation, there will be ups and downs as things change -- people wind up out of work, and have to find new jobs. In the end, the new jobs may well be a lot better than the ones that they had, but that's not obvious at the time of unemployment. Tripling the size of the market, as well as the industrial capacity, of the planet will have far more long-term beneficial effects than downsides. Economies of scale kick in that weren't there before. And, if anything is going to temper China's male-female ratio problem, it will be making it into a richer nation with more to lose by getting jingoistic. Instead of attempting to improve their position by military action, their males can compete in the financial and industrial markets. As far as resources, well, there are a lot of resources available out in space for a people who don't treat every single death while pioneering as a major tragedy, like the USA does these days.

> The buggy whip and candle manufactures were the victums, but the whole world was better off.

Precisely.

> We are getting our rhetorical butts kicked out there!!

We always will. The product you sell, "Hey, there is sometimes pain" does not sell anywhere near as well as "GET THOSE BASTARDS!!!".
:o)

> i just think all the lying economists and politicians should do the right thing and fall on their swords!

a) The economists did not lie. They didn't mention everything -- some of which should be obvious: "There is always a downside to change" is an example.
b) "lying politicians" is a repetition of terms. The politicians who will stand by something regardless of what it does to their career are few and far between -- and almost always, in every place and time -- are. The statesmen -- the Liebermans and GWBushes of the world, the Reagans and Thatchers and Blairs, are few and far between. For every one on that list, there are literally thousands who have all the stolidity and reliability of a ton of Jell-o. We've been lucky to have the ones we've had. Don't ever presume that a politician will take a stand for anything -- at all -- They generally don't.

> that were protecting their industries against our exports. that's not 'free trade', that's mercantilism. [yes, i "get it" that we got the goods cheaper that way, but...

Mercantilism is one of the chief causes of The Great Depression, along with some other factors. You look at this wrong -- the governments of those nations took *paper* in return for wealth (goods). They have, somehow, to do something with that paper. If they don't buy our goods, then they have to buy something else and, other than goods, they can't port it back home with them. So it's not a win-game for them to practice mercantilism only on their side. We can ignore their actions. Their actions, in this form, amount to their people subsidizing our way of life. If their people are that stupid, then I have no problem with that. If they stockpile this money, then come over here to buy property (companies, etc.) then they wind up losing their shirts because they drive the prices of those things up rapidly. Japan did this in the late 80s and early 90s, and wound up selling a huge chunk of what they bought, back to US investors, at a loss.

> it caused the transition from manufacturing to service in the US to happen faster than the labor market could adjust.

This was ALWAYS going to be "painful". It was necessary, but it was never going to be painless.

People simply won't leave an existing job they know for another job they don't know. You have to throw them out of work to get them to follow the changing conditions.

As a matter of fact, this was another cause of the Great Depression -- farm price supports kept people on border-line farms far longer than they should have been (and again in the 80s, leading to "Farm Aid"), as we transited from an ag economy to a full-blown industrial economy.

Right now, we should have an industrial workforce on the order of 2-5% of the populace. We need to get people out of that so we can roboticize our industries much the same way we've mechanized agriculture.

It's 1910 -- If we resist changes NOW then we will PAY LATER. And in very hard human coin, since it very likely would put us into the slow death mode of post-WWII U.K. rather than fast-tracking to the next economy.

The US is singularly suited for the service and IP economy. We have a history of rapid adaptation, of accepting external ideas without issue, a polyglot culture.

US Entertainment sells well EVERYWHERE because if it has widespread appeal here then it has appeal everywhere... because it's already shown that it appeals to our microcosm of the world populace.

When change comes, we accept it faster than most cultures. We invent new terms and wrap our collective social head around it, and immediately look for the downsides and upsides.
There is a reason S.F. developed *here* first:
Mainstream literature is about Being. For character studies, it's probably the best genre around; but nothing happens, nothing changes. [Speculative] literature is about Doing. About making the future, not just bemoaning it. We'll all be living in the future by and by. Some of us like to scout ahead.
- Niven/Pournelle/Flynn, 'Fallen Angels' -

Futurity invades our here-and-now, erecting beachheads in our language, in our architecture, until, at last, we're under occupation.
- Alan Moore, "Miracleman" -

With our relative lack of class structure, we have no problem with financial mobility. This means that everyone here is always looking for a way to Get Ahead. Sooner or later, enough people find a way so that everyone benefits.

bobbie, what you think of as "bad" isn't. It's just an unfortunate aspect of the universe that nothing changes without pain and discomfort. Humans will always strive to reduce that, but it is inherent in the universe, and the day we manage to eliminate it, we will have indeed become God.

...Don't hold your breath.

.

 
At 5/14/2008 3:12 PM, Blogger bobble said...

"bobbie, the "experts" were quiet because otherwise the "leaders" (read: "politicos") would not have selected them to support their points. "

thanks OBH. actually i knew that. i just wanted to hear someone else say it.

good post.

 
At 5/14/2008 3:18 PM, Blogger megnichols said...

I still disagree with the premise of argument that increased consumption in the developing countries is driving up oil prices. Following are the increases in oil consumption in China, India and Brazil. As you will observe, this change does not justify a 400% increase in oil price between 2002 and 2007.
Also, rising profits of oil companies contradict with this assumption:

In Thousands of Barrels/day
2002 2007
China 5000 7000
India 2250 2750
Brazil 2200 2400

Source: http://www.eia.doe.gov/emeu/cabs/China/Oil.html

On the other hand the oil companies have made tremendous profits, showing high correlation between price increase and profit making, which smells of price carteling and price rigging:

Net Profit
2007 2002
Chevron $18.69 $7.60 Billion
Exxon
-Mobil $40.61 $20.96 Billion
BP $20.85 $10.26 Billion

Source: http://finance.aol.com/financials/bp-p-l-c/bp/nys/income-statement

 
At 5/14/2008 3:20 PM, Blogger megnichols said...

I still disagree with the premise of argument that increased consumption in the developing countries is driving up oil prices. Following are the increases in oil consumption in China, India and Brazil. As you will observe, this change does not justify a 400% increase in oil price between 2002 and 2007.
Also, rising profits of oil companies contradict with this assumption:

In Thousands of Barrels/day
2002 2007
China 5000 7000
India 2250 2750
Brazil 2200 2400

Source: http://www.eia.doe.gov/emeu/cabs/China/Oil.html

On the other hand the oil companies have made tremendous profits, showing high correlation between price increase and profit making, which smells of price carteling and price rigging:

Net Profit
2007 2002
Chevron $18.69 $7.60 Billion
Exxon
-Mobil $40.61 $20.96 Billion
BP $20.85 $10.26 Billion

Source: http://finance.aol.com/financials/bp-p-l-c/bp/nys/income-statement

 
At 5/14/2008 7:43 PM, Blogger juandos said...

"the US middle and lower class is taking a hit. and, now we are watching the price commodities soar out of sight"...

Hmmm, Democrat party/Socialist selling point sounds like...

BTW I wonder how many of those jobs that went off shore was due to Government Regulatory Compliance Costs?

 
At 5/14/2008 8:56 PM, Blogger juandos said...

"On the other hand the oil companies have made tremendous profits, showing high correlation between price increase and profit making, which smells of price carteling and price rigging"...

By who? The governement?

In contrast, the taxes paid or remitted by domestic oil companies have been consistently far greater than their profits and now total more than $2.2 trillion (adjusted for inflation) over the past quarter century. The largest share of those taxes is federal and state gasoline excise taxes. In 2004, governments collected $58 billion in gasoline excise taxes. Overall, governments have collected $1.34 trillion in gasoline excise taxes since 1977.

Today, U.S. consumers pay an average of 45.9 cents per gallon in gasoline taxes. The federal gasoline excise tax is 18.4 cents per gallon while the average state and local tax is 27.5 cents. The vast majority of these taxes are levied at a flat rate per gallon—regardless of whether a gallon of gas costs $1.49, $2.49, or $3.49. Thus, the effective rate of these taxes can vary wildly, from roughly 31 percent in the former case to 13 percent in the later.

 
At 5/19/2008 10:48 AM, Anonymous Is said...

Meg,

Exxon made ~4 cents / gallon during 1Q 2008. They made ~8 cents / gallon during the same quarter 2007, even though oil prices were higher during 1Q 2008 than 1Q 2007. In addition, increasing profits can be found during times of decreasing oil prices, also, so the high correlation that smells of price fixing is pretty much non-existent.

 
At 5/28/2008 10:18 PM, Anonymous Anonymous said...

I read that as much as 60% of the price of oil is based not on supply and demand but upon speculation on oil futures - that profits were being created for new investors dissappointed with stock performance in other industries.

 

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