The bipartisan answer to oil prices
Posted by The Red Pill on June 21, 2008
Republicans and Democrats have very different views on how to solve the problem of ever-increasing oil prices. Many Democrats favor an approach that addresses America’s huge demand for oil, while most Republicans favor an approach that increases the supply of oil available for America’s consumption. Partisan politics being what they are, both sides feel their approach is the only answer and that the other side is just plain wrong. But being lost in the political manuevering are the basic economics that show the simple truth—both answers are correct.
Economics has two main factors known that are known as supply and demand. Each can be measured on a graph using price and quantity as variables. When supply and demand are measured together on the graph, an equilibrium point is found that sets the fair market value for the item.
Democratic presidential candidate Barack Obama advocates a plan to reduce America’s demand on oil. Senator Obama’s plan includes the support of “next generation biofuels,” by investing federal resources and expanding biofuel refineries, as well as setting the nation on the “path to oil independence” by reducing America’s oil consumption by at least 35% by forcing new standards on auto makers.
The plan to reduce America’s demand on oil shifts the demand curve to the left, resulting in a potential reduction in price, as shown in the graph below.
Republican presidential candidate John McCain has begun advocating a plan to increase America’s supply of oil by lifting the ban on offshore drilling and maintaining oil company tax cuts that could be used for technology and other supply-side factors (AP article, so no quotes or links).
The plan to increase America’s supply of oil shifts the supply curve to the right, which also results in a potential reduction in price.
The graphs above show that both the Democratic and Republican plans to address the problem of rising oil prices can result in potential price reductions. What they do not show, however, are the potential results of using both plans together.
U.S. Energy Secretary Samuel Bodman recognizes the need for oil conservation, as well as increased production, inventory, and capacity.
All nations must be better at conservation, and the U.S. is at the top of that list,” said Bodman, who is attending a international meeting of oil producing and consuming nations focusing on high oil prices in Saudi Arabia on Sunday.
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Although some have blamed speculators for driving up oil prices, Bodman said he did not believe that they are the cause.
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Since 2003, he said, global demand for oil has increased because of industry in China, India and the Middle East. But from 2005 to 2007, there was very little increase in supply.
Shifting the demand curve left while at the same time shifting the supply curve right results in a greater potential for a reduction in oil prices, as opposed to using just one of the above policies alone.
The answer to the question of oil prices does not include “either, or” but “and.” By using a policy that addresses both the ever-increasing demand for and an ever-increasing supply of oil, America can begin to wean itself from its oil dependency while it maximizes the potential of its natural resources. It’s a winning combination that serves everyone’s agenda—lowering the price of oil.
Alfie said
I know people hate the guy but really the Gingrich plan (not really his per se) is along these lines. Perhaps more people need to speak uo about the combo plan since Newt and American Solutions are persona non grata from the center to left spectrum.
Tex Taylor said
It’s a shame Red that an explanation of Economics 101 needs to be demonstrated for the political left and right, even if the graphs don’t fully explain the problem being demand for oil mostly inelastic. But in the world of politicians, politics trumps common sense. This is possibly the only issue where I have been in some agreement with the greenies because I have been calling for conservation for many years after working in the petroleum industry for 20.
A couple of points. First, my criticism of the right. Just because you can afford to fill the Hummer doesn’t make it right. For people not conserving, understand you are in your own way aiding and abetting the enemy. Since we import 65% of our petroleum, we’ll never reduce our dependence without every American citizen’s help. Do you really think it is a great idea to be beholden to OPEC? Second, supply is not the problem; demand is. Oil executives said as much at the last Congressional Zoo hearing. Yes, building new refineries needs to be done, and yes the needless environmental restrictions are a joke but building more refineries is not some magic bullet; don’t pretend that it is. Get on the team or continue to be a part of the problem. Third, there are ’some’ alternative energies worth pursuing and petroleum companies don’t need to be paid to pursue them – as a shareholder, I say do it out of your own pocket. You don’t need to be subsidized to be a good corporate citizen.
Now my criticisms of the left. Thirty years ago, you assisted in killing further nuclear energy development and were applauded for you heroism – even though it helped put us in the predicament we find ourselves in now. If you’re really concerned with the environment, it doesn’t get any cleaner than nuclear this side of hydrogen. Dumb. Second, biofuels are not a substitute for hydrocarbons because the thermodynamic properties are not as efficient as hydrocarbons. In addition, the production costs are much more energy expensive to produce on a per barrel basis. Petroleum based products are a feedstock for many more uses than filling your vehicles and you’ve made a bad situation worse because in the pursuit of alternatives, the feedstock in this case is many times what you eat. That in turn has helped drive up the price of food. Third, you quote ANWR will only provide a temporary solution. How do you know because you won’t let us explore when you make that statement? You don’t have a clue to what you’re talking about. Nobody knows what reserves would be found in Alaska. And don’t give me the garbage it would take seven to ten years anyway – the Gemini and Apollo programs didn’t take that long. With the right incentives, realistically 12-24 months; maybe less. So quit parroting the lies. Fourth, offshore drilling does not damage the environment like you would like us to believe and it is 50 miles to sea. A 50 year track record says otherwise and we are one of the few countries in the world with such stringent restrictions – more restrictive than Europe, in fact. Fifth, shale reserves have the potential to completely wean us from imports in the coming years but because much of it is located on federal land, you won’t let us have a small portion of access to it to determine viability. Oil companies are not the boogeyman and you need to quit treating them as such.
The bottom line is Red that although few Americans want to hear this, I can actually see some good from this latest energy fiasco if it makes us finally address the situation.
ChenZhen said
Well, I guess I can say that I’m doing my part for the demand curve.
The Red Pill said
I just discovered the world of economics after taking a couple of required university courses. Once I realized it isn’t about numbers and formulas, I found it fascinating.
I definately forsee more pieces in that catagory for the future here. Maybe I can make it as interesting for someone else as I find it to be.
msfriendly said
The graphs are GREAT! In my line of work, we call them Graphic Organizers!!!! The price of gas is a thorn for us ALL. I say we do whatever works regardless of who calls it first; R or D…this issue supersedes political affiliation. I call for a revolution…but, then again, don’t I always????
The Red Pill said
Thanks, Ms Friendly.
I am a very visual learner, so the graphs are the only way this stuff makes any sense to me.
Sedate Me said
In fairness, I think while both candidates stressed their primary methods, they were also willing to accept a certain level of the other’s method.
But what about the effects of reducing price? Doesn’t that eventually lead to increased usage of the resource, thus forcing prices back upwards and ultimately negating whatever benefit gained? Or is there some marginal decrease effect curve out there? It’s something neither side of the issue really talks about much (if only because it’s “too complicated” for Joe Sixpack) and they should. Especially if we are to rely on a Free Market approach. If the Free Market negates the price impact, is there any point?