Friday, August 12, 2005

solution for $60/barrel oil?

let me start by stating I don't believe this proposal is valid (nevermind that it's also infeasible). the only reason I'm repeating it is because it was put forth by a respected economist who presumably knows more about economics (utility, elasticity, supply and demand and all that rot) than you or me. so it's good for an argument either way:

"the solution to high gasoline prices is for everybody to change their buying habits at the gas station. instead of filling up, if everybody always only put in $20 of fuel -- regardless of the price per gallon; the result would be that the reserve of gas now being stored in auto gas tanks would be shifted back. nobody would have to drive any less or have more efficient engines. merely shifting the reserve backwards -- from car to gas station, to delivery tanker truck, to refinery, to oil tanker, to oil well -- would cause a surplus of oil which would force each middleman and eventually the oil producing countries to cut back their price. this price cut would then be permanent and repeated because the end users would continue to only purchase $20 of gasoline every visit to the filling station. that's the theory."

now for my rebuttal: the authors argument leaves out the fact that oil producers can simply cut back on production - they don't have to store any surplus, because they can just leave the oil in the ground. sure they have fixed costs which must be met, but really isn't the majority of oil sales pure profit to the OPEC countries? secondly, if the surplus caused a reduction in price, that $20 will then pay for more gallons of gas, which then will wipe out the surplus. an equilibrium will be reached and continued $20 purchasing behavior will not cause further decreases in price.

ok, does anyone else care to argue one way or another?