The wealth of nations
Posted by Ron Coleman on May 25, 2007
I’VE NOTED REPEATEDLY that gas prices don’t seem to be high enough to affect people’s behavior. Apparently they’d have to increase a lot more to do that:
In 1962 — a year writ large in the popular imagination as the quintessential year of muscle cars and cheap gasoline thanks to the movie American Graffiti — gasoline prices averaged 31 cents per gallon. When we factor changes in disposable income, today’s gas would have to cost $4.48 to be a comparable burden.
The public likewise thinks of 1972 as the last year of energy innocence prior to the rise of OPEC and the onset of shortage. Fuel prices in 1972 averaged 36 cents per gallon, a hefty $2.77 per gallon in today’s terms. While still high, this price is not all that different than the prices we were paying earlier in the year.
No wonder people are still driving fast and often.
Nnyess. And a lot depends on how you figure the “today’s terms” number. You can do a simple inflation-factor multiplication — how many of today’s dollars buy a widget today compared to how many did in 1962 or 1972. But that ignores the wealth effect, namely that even if today’s gas is more expensive that it was then, almost every one of us has (even in real terms) a lot more money to spend on gas than we did then. Will people who spend $20 for a music CD, $50 for ticket to the ballgame or $25 for a haircut really drive less just because a tank of gas costs $45 instead of $35 or $30?
I don’t know about you, but the thought never occurs to me.
UPDATE: My point, Glenn! (He really needs me to connect the dots…)
May 25, 2007 at 4:57 pm
This is good news, as the free market is already working to help alternative energy technologies get us out of this cost, even though the expense is not high enough to cause economic damage.
Here is a future timeline of energy technology advances.
Here is a prediction way back from April 25, 2006, about exactly why high oil is good, longer term, rather than bad.
May 25, 2007 at 4:59 pm
Consider further changes in fuel efficiency: the most relevant comparison would be cost per mile, not cost per gallon.
May 25, 2007 at 4:59 pm
Also, wouldn’t one say that today’s cars at twice as fuel efficient than those of yesteryear? So, for the sake of the argument, my $3.50 gallon of premium in a sports car gets me 25mpg, while my dad’s bitching camaro got 10mpg.
So, how about a calculation along the lines of dollar per mile driven for consumers?
May 25, 2007 at 5:00 pm
jinx, you’re it, buzz
May 25, 2007 at 5:01 pm
By a matter of seconds!
You guys need to get out more. — RDC
May 25, 2007 at 5:15 pm
Phenomena like this show why economics isn’t a predictive science. A simplistic model would suggest that as the price of gasoline goes up, driving should go down, yet people don’t behave as expected because real people integrate a vast number of variables into even their simplest decisions.
Trying to predict behavior with crude statistical tools such as fuel prices is pointless. Yet everyday members of the political class standup and claim to be able to do just that.
May 25, 2007 at 5:16 pm
Like hell they don’t consider the price. I did it years ago. Look at this for one thing:
http://tracytoday.blogspot.com/2005/09/gas-price-math.html
If morons can’t figure how much driving costs to them, well, there’s no helping that.
May 25, 2007 at 5:39 pm
Pete, not everyone who makes choices different from yours is a moron!
Everyone who makes choices different from mine is a moron.
May 25, 2007 at 5:45 pm
So Pete, when ya selling your car?
I wonder what the tax (state and federal) was on a gallon of gas back in 1962 or 1972? Today it’s more than that 31 cents per gallon charged in 1962.
No, I think people know what it’s costing them to drive. They’re just choosing differently than you would Pete. Just as I pay more for some items in a local store rather than the big box a mile further down the road. I like to keep the little guy around because he often knows more than the hired help at the BB.
BTW, if you want to convince someone to change their habits, don’t start by calling them morons.
May 25, 2007 at 6:06 pm
As someone with a longterm love of economics, I think the statement “economics isn’t a predictive science” is unfair and - possibly - erroneous. Certainly you can’t predict real world economic behavior based on one or a few factors. And despite all the money sunk into econometric models over the last 60 or 70 years, many economic events - like turning points in the business cycle - are unpredictable. But with modern techniques, you can certainly describe many types of behavior like gasoline consumption - what changes are associated with what other changes (casuality is a different issue). The difficulty for the curious is that much of the data and the models are in the hands of “oil companies” - actually a very diverse group I expect, given the various roles of producing or importing oil/refining it/ transporting it/retailing it.
(Actually, I think “It” should also be in quotes - because often the question of what economists call substitues comes in, and there is frequently the question of where to draw lines. On the other hand - and Harry Truman always wanted a one-handed economist so he didn’t have to listen to “on the one hand/on the other”. Maybe we should just discard quotes as a rhetorical device.)
Certainly oil refineries were one of the leaders in applying linear programming - in their case, the most profitable way to distill products. So I would think that they have developed some interesting models over the years to predict demand which they consider proprietary - justifiably in my opinion. After all, one never hears that the West Coast is suffering from gasoline shortage while there is so much in the Middle West that arson has become a popular recreation ;while a price differential has developed in the North East so that “Gas Runners’ are smuggling tanker-trucks of gas from New York to Vermont.
May 25, 2007 at 6:26 pm
joated, when you got no argument, all that’s left is to call those who disagree with you “morons.”
May 25, 2007 at 6:26 pm
As usual I forgot, Ms. Love. Your statement “everyday members of the political class standup and claim to be able to do just that” is also something I disagree with. They do not try to make a forecast - they (to paraphrase H.L. Mencken - attempt to scare up and subsequently destroy hobgoblins. I fervently hope that in 2008 we are going to see massive numbers of incumbents tossed out of office on their asses because of their corruption and deceptive practices. (I started to embroider on that thought but it is definitely offthread.)
I doubt if that will happen because it will require basic political reforms that we have not been able to achieve since the popular election of senators at the beginning of the 20th century.
May 25, 2007 at 6:36 pm
Wow, you pay $25 for a haircut, $20 for a CD, and $50 to go see a ballgame? Pretty rich stuff for many people out there. I take your word for it though… if you are part of the new rich then all of these prices are nothing to you. Certainly $5 gasoline will be nothing to you too, also for $6 gasoline. Many of us though will feel the pain.
May 25, 2007 at 6:41 pm
Gasoline is like real estate: It’s worth as much as someone is willing to pay. In places like Hawaii, they pay a whole lot more, and are glad to have it. People complain, and that tends to beat down the price, but it’s not as if a boycott is likely. If there was less gasoline (meaning higher prices), people would tend to drive less, and tempers would flare (remember gas lines?), but it’s not as if there’s a substitute – for energy OR housing.
Which is why Warren Buffet loaded up on energy stocks when they got cheap enough for his tastes. Smart feller, he’ll make some money some day.
May 25, 2007 at 7:00 pm
Orman writes:
I doubt if that will happen because it will require basic political reforms that we have not been able to achieve since the popular election of senators at the beginning of the 20th century.
Nah. The Seventeenth Amendment was a bad idea, and the Sixteenth was even worse, but I won’t argue that here. Suffice it to say that what’s needed is not additional reforms but better education for the average man and woman, the better to avoid the lack of imagination or information displayed by comments such as Greentoe’s. Yes, haircuts can cost $25, CDs can (or at least used to) cost $20, and $50 might get you a decent seat in some major-league ballparks. (That $50 sure as Hell ain’t gonna get you much more than that, what with the prices charged by concessionaires!)
May 25, 2007 at 7:07 pm
Gah. I forgot to close a italicization tag.
……Yes, haircuts can cost $25, CDs can (or at least used to) cost $20, and $50 might get you a decent seat in some major-league ballparks. (That $50 sure as Hell ain’t gonna get you much more than that, what with the prices charged by concessionaires!)….
Also, instead of complaining about the high price of gasoline, stop and think why the price is so high. World demand for oil is up, which means economic activity is up, which means more business for American exporters, which means fatter paychecks and more employment in the export industry, which means better times here in the ol’ US of A, which means we can better afford the higher price for the gas.
Besides, remember the last time gas prices spiked, back in the early ’80s? Within five years, the price of crude oil fell by about 75%, and gas was back to well under a buck a gallon. Hang loose– 1986-87 will come again.
May 25, 2007 at 7:38 pm
Well,
I used to drive a 1971 Mustang Grande. Tricked it out myself. Added a high-rise manifold, a new high-performance 4-barrel, headers to dual exhausts, a dual-point distributer, racing ppoints, and a huge-@ssed coil. Got top of the line equipment all through the motor/drive train.
Back end had air shocks so I could lift it up and I used GR60 radials on 15″ rims, and thin 14″ rims on the front.
Bottom line is this: despite it being a damned fine street machine, she also got 28 mpg on the highway, and around 16 intown. That was a rather large improvement in performance AND mileage over the stock purchase from Ford.
What I’m getting at is that folks can do a LOT to help out with efficiency, without compromising performance or even breaking the bank.
Currently, I don’t own a car. I live intown, and everything’s either in walking distance, or I can grab a cab. If I need a car, I just rent one for the event. Nice thing about that is that if something breaks, the car company comes and fixes it, or gives me a new car.
It’s an interesting economic problem. I save the cost of a vehicle which has to iclude payments, fuel, wear and tear, insurance, registration, taxes, etc. That all adds up to a big chunk of change. That, then, is offset by the costs of taxis, rental cars, bus fares, etc. Currently, I come out way ahead, but I lose the convenience of spontaneous travel.
That, however, allows me to save some money because I can plan my travels. I lose the spontanaity, but I gain finacially.
Respects,
May 25, 2007 at 8:34 pm
The price rises until people do in fact cut back. That’s how we manage not to burn any gasoline in advance of its being produced. A lucky thing, too.
The demand being inelastic just means that it has to rise a whole lot, which is what it does. It also means people scream about it, screaming being cheap.
In the limited supply case, taxes on gasoline have no effect on the price the consumer pays. The price is whatever limits the demand to meet the supply.
May 25, 2007 at 9:44 pm
Ron Hardin wrote:
The price rises until people do in fact cut back.
Mr. Hardin, I believe price could also rise until oil companies worldwide find it profitable to bring on line oil wells that were unprofitable at lower prices.
If an oil company anywhere on the globe drills a new well and finds it doesn’t produce enough to break even at $2.25 a gallon, they cap the well. The same goes for an old well that is no longer productive at $2.25 a gallon. When the price of gas / diesel goes up to $3.00 a gallon, it becomes profitable to bring those wells on line. They then pump the fuel through the pipelines to the refinery. The supply of fuel goes up.
Say refinery A sells a million gallons a year at $3.00 a gallon. If they can sell two million gallons profitably at $2.95, they make a profit, and take business away from refinery B. Then that oil company can increase their market share by selling more.
May 26, 2007 at 3:16 am
Part of the problem is that these rises are only temporary. We saw last year that they went away as summer wore on. Then there is the inevitable complaint in the media that oil companies are making record profits, with no reference to their accounting methods or the years of low profits in the past. As long as we hope for relief, either through time or politics, we won’t respond to prices. We have to perceive them as permanent before we’ll change our habits.
Another problem is that we have huge reservoirs of oil that could be produced domestically at these prices, but who will invest in the technology to mine oil shale and extract the petroleum, for example, when OPEC could undercut it so easily? We’d have to have a tariff on imported oil sufficient to protect domestic producers, and can you imagine any politician supporting that?
May 26, 2007 at 6:52 am
Fifty dollars for a tank of gas, up from $25 just a few years ago. Multiply that times 3-4 times a month = $75 - $100 of post-tax disposable income
That hurts.
It erases any wage gains that a middle class family might have enjoyed. [ ditto for rising health care costs, but that's another story. ]
Now pick up the paper and read that ExxonMobil et. al. enjoyed record profits of $35 billion, and the stock market is in record territory.
The economy is booming!
Not.
May 26, 2007 at 9:18 am
Ara et. al.,
One of the positive effects of the BusHitler tax code changes was the adjustment of the Dividend tax. It used to be taxed as ordinary income - that is, simply added to your income even if you did not see a penny of it (it was reinvested). Dividends are paid in corporate after tax income - so they are taxed at the corporation and taxed to the individual that received them. Under President Clinton’s tax code there the demand for dividends was weak because investors did not want their companies to pay tax and then they pay a very high tax. That is why Enron got away with gaming the system. They played up phony profits to push the stock price up - thus increasing capital gains which were tax advantaged. Had investors demanded dividends they would have had to show cold hard (and taxable) cash.
Now dividends are taxed at 5% for those in the bottom two brackets and 15% for the rest. Investors are demanding dividends. Corporations cannot simply game the system and lie through their teeth like Enron and Global Crossing. And, they cannot play gimmick accounting games to reduce profits on paper since dividends can only be paid through profits. Investors want cold hard cash dividends rather than the promise of capital gains.
Thus, EXXON and the rest must show much more profit to satisfy the customers’ demand for dividends.
Hence, much higher profits!!!
May 26, 2007 at 9:35 am
By the way, the dividend tax treatment is a very significant factor in the 209% (inflation adjusted) growth in Federal Corporate Income Tax revenue from FY2001 (President Clinton’s last budget) to FY2006 (our last FY final numbers). $169,298 Billion in FY2001 to #353,915 Billion in FY2006.
Companies and investors have no incentive to hide profits from the tax man. It is better to pay the tax and have the flexible cash flow.
I made the same decision with regards to my home loan. I decided to refinance my home from a 30 year mortgage to a 15 year mortgage when the interest rates were low. Everyone screamed that that was stupid. Everyone yelled that I was wiping out my only real tax shelter. But, why should I play tax code games when I only get a 20% tax code benefit on the interest paid. And, I get no ownership in the house even though I am paying a bank gobs of money each month. And, I leave myself very open to financial failure and/or housing inflexibility if the price falls. I chose to pay a higher tax rate.
Now, what do you think happens if we increase corporate tax rates, increase dividend tax rates, and increase personal income tax rates? Yup, corporations will shelter profits, investor demand for dividends will shrink, and I will use my cash flow to shelter my income. What do you think will happen to the tax revenue stream!!!
May 26, 2007 at 12:32 pm
What everyone has implied, except Ara who ignored it completely, is that these things are cyclical.
Ara, if you have any healthcare or energy sector experience, the economy is not only booming, it’s skyrocketing, exploding, <insert your superlative here>. Of course, 10 years ago the energy sector was dead. These things happen.
Just because the economy isn’t good for you doesn’t mean it’s not good. Trust me, I’m in the tech sector, which is finally rebounding (hoping for my first raise in five years).
Economics is all about feedback loops. It’s not “predictive” because we don’t know all the variables, how long the delays in the loops are, and they are chaotic.
However, just as one can usually ignore Einstein, all that can usually be ignored and this works: Higher prices leads to lower consumption but also to increased production (to get those evil profits), which leads to lower prices and higher consumption, until the lower prices erase profits and production is cut back. Then it all starts over.
Is there really anyone who doesn’t know that? You don’t need an economics degree, just eyes.
May 26, 2007 at 5:32 pm
Fellows,
Speaking of cyclical, the Oil Business is exactly that, production-wise. Right now, the refuneries have shifted the bulk of production to gasoline to take account of increased driving during the better weather. As it comes on line, you’ll see some prices drop a bit, because production is well along. However, as the fall approaches, you’ll see another gasoline spike. That’s because refineries will slow gasoline production in order to ramp up refining of heating oil and kerosene for the winter months.
The biggest threat we currently face, energy-wise, is the loss of refining capability. As it stands, no new refinery has been uilt for 30 years. That’s a direct result of eco-terrorists like Green Peace using the courts to stop new construction. Oil companies have refused to invest in new refineries unless and until they can be certain of being able to build one without years of costly legal challenges from every dirt-eating lunatic piling on.
Oil is not the problem. The oil is there, and in far greater quantity than the leftists would like you to belive. It’s the refining capacity that’s the problem.
Respects,
May 26, 2007 at 6:58 pm
[...] The wealth of nations Instapundit writes: I’VE NOTED REPEATEDLY that gas prices don’t seem to be high enough to affect […] [...]
May 26, 2007 at 9:44 pm
Ara, you fill up four times a month?! No wonder you’re such a miserable cur. Get a bus pass.
May 27, 2007 at 10:20 am
Hahahaha! Why didn’t I think of that?!
New Yorkers are so provincial.
Seriously, most people (in that Steinbergian territory out beyond the Hudson River) drive cars every day and will continue to do so because mass transit simply isn’t available.
Boghie:
One of the positive effects of the BusHitler tax code changes was the adjustment of the Dividend tax.
Dude, my eyes glazed over by the time I got to the end that sentence. BusHitler? Dividend tax? Who talks like that? Get real.
Mrsizer:
[I]f you have any healthcare or energy sector experience, the economy is not only booming, it’s skyrocketing, exploding, .
Yeah. Well.
See, I guess that’s my problem: I’m just a regular guy who works for a living. I’m “lucky” that I have health insurance.
I have my 401k, I have a few investments. I also have a wife and four kids to support — one in college, one on the way to college. And I have two others that need to be driven back and forth to school each day — that’s four trips to a school that ain’t exactly next door or down the street.
THAT’S the kind of “healthcare or energy sector experience” that I have. IOW, I’m like most people in this country. And I have to tell you: the economy ain’t booming for us.
Wake up, people: Y’all can talk about BusHitler and Dividend taxes all you like, but you’re missing the point. Most of us (70%) think this country is definitely on the wrong track.
AW1 Tim:
Oil is not the problem. The oil is there, and in far greater quantity than the leftists would like you to belive. It’s the refining capacity that’s the problem.
Baloney. The problem is that we’re not energy independent. We still import half of our oil from sources that want us to kiss their asses before they fill our buckets.
{Excuse my French, Ron.}
THAT’S the problem. You got a solution to that, Mr. Oil Refinery?
May 27, 2007 at 2:16 pm
Interesting comment linking to this piece:
Some people would find this acceptable, even desirable, because (a) well, a 3% decrease actually would be of some significance, and (b) they like the government to have more wealth. True conservatives generally disagree with (b). But as the author notes:
In other words, if your only interest is reducing consumption of petroleum (or greenhouse gases), oh, we have policies that can take you there…
May 27, 2007 at 8:24 pm
You guys are re-arranging deck chairs on the Titanic.
I’m just saying.
May 28, 2007 at 10:59 am
The Europeans accept more pollution (the use of diesel) as a balance to better fuel economy. Their average fuel economy is 30+ mpg – largely because of diesel.
Additionally, they buy their oil from whatever source is expedient – for example, Iran. Oil is fungible, however, so even though we do not purchase Iranian oil the fact that Europe has no qualms about it means that is all balances out in the end!!!
We will make decisions like the above before we use solar powered cars. I don’t know if I like it or not, but that will not matter much in the end, eh…
Ara…
My point about the dividend tax code changes is simply this: Companies are now showing these huge profits because their investors are demanding that they show huge profits. Investors want dividends. Thus, both companies and investors are paying a dividend tax now where before 2003 they paid neither – but they are willing to pay that tax because they want unfettered cash flow. So, Ara, you will naturally see companies show more profit. That is a good thing, eh…
By the way, I too drive a lot and pay for health insurance. I invested in much better spark plugs, plug cables, better filters, and a good fuel additive and get about 5 mpg better gas mileage. And, my health insurance premium went up almost 2% over last year - which didn’t break my piggy bank. And, having kids in college kinda points to a good prioritization of life expenses. My parents and grandparents would not be crying about the lousy economy that allowed them to send their children to college, pay for CAT scans, and fly cross country for $400. You have done well and made the good decisions. Most other Americans have as well – I wouldn’t assume otherwise.
May 28, 2007 at 12:36 pm
The money be gone. Spent on gas then not on steak dinner. Walmart didn’t have a good quarter for a reason. $5 time 100 million is $5 billion. As they say “a billion here and a billion there you start talking real money.” When the fallout from non-spending becomes apparent pundits will blame it on whaterver is hot that day.
May 28, 2007 at 12:38 pm
Meant $50 times 100 million.
May 29, 2007 at 10:02 am
Boghie:
Companies are now showing these huge profits because their investors are demanding that they show huge profits.
Oil company execs: “The shareholders made me do it!”
Riiiiiight.
Dude, if we stay on this course, our grandchildren will be living in an America that is a third-rate power.
June 27, 2007 at 4:12 pm
[...] is that more efficient cars encourage more driving — it’s cheaper per mile. Now, I have argued that the cost of gasoline, at this point in history and given the overall increase in wealth, [...]