A Few Truths About Oil

It's been awhile since I've posted anything on the energy market, and I happen to have some interesting charts on the subject to share. This first chart is the real (in constant 2009 dollars, per the PCE deflator) price of crude oil going back to 1960. Oil has been trading around $70 for the past 3 months, and there is lots of talk about how inventories have risen and demand is on the verge of weakening, and thus we could see a big decline in oil prices soon. I'm not an expert on oil, so I don't have any strong views one way or another.

Click to enlarge:

But I would note that oil today is almost as expensive as it was in the early 1980s. It stayed up at these levels for a few years, then it came crashing down and remained relatively cheap from the late 1980s to the late 1990s. The reasons for the big drop in oil prices were simple: the economy became more energy efficient, and world oil production increased. High prices do indeed work to bring prices down over time, though sometimes it takes many years for this to play out.

Click to enlarge:

This next chart shows the percentage of personal consumption expenditures that is devoted to energy goods and services. Note that spending on energy was exceptionally high in the early 1980s, when oil was about as expensive then (in real terms) as it is now. Yet today, consumers are spending about half as much of their budget on energy as they were in the early 1980s. This is truly remarkable, and one reason that we are able to spend so much more of our budgets on healthcare.

This next chart shows why it is that energy consumes so little of households' budget. Simply put, it takes about half as much energy to produce a unit of output today as it did in 1980. Our economy has become far more energy efficient, thanks to technological improvements in fuel efficiency changes in consumers' buying habits (e.g., smaller and more fuel efficient cars, etc.).

Click to enlarge:

The last chart shows how remarkable all of this is. Despite the fact that the U.S. economy has more than doubled in size since 1980 and the population has increased by some 35%, we consume about the same amount of oil today as we did back then. That's a truly remarkable fact: U.S. oil consumption has not changed on balance for the past two decades.

Click to enlarge:

This collection of facts tells me a few things.

For one, it will likely be very difficult for the U.S. to increase its energy efficiency as much in the next 20 years as it did in the past 20 years, regardless of whether we impose some form of carbon tax on ourselves. That's because there is likely a limit to the efficiencies that can be wrung out of oil-based energy technology—surely we have picked much of the low-hanging fruit already.

Two, while energy is still quite expensive in real terms today, it represents a relatively small part of households' budgets; thus households don't have as much incentive to become more energy efficient today as they had two decades ago. Thus, a carbon tax might have to be punitive in order to produce the desired effect, and that in turn would have very negative (and politically undesirable) consequences for the economy. Finally, all of this illustrates that the free market is able to respond rather dramatically—given time—when rising prices signal a relative shortage of some key commodity like energy.

Comments

[koolsool:]

It is not about USA consumption anymore. The growing middle class population in China, India & other emerging economies are just now starting to use the world's oil supply. In a few years we will see major supply depletion & oil will become more expensive. New supply in the pipeline is deep water & oil tar sands that are very expensive to produce.

Sep 22 11:09 AM

[31October:]

If you feel like subsidizing other people's purchases, I would love an electric car - red, with lots of rear leg room and a 200-mile range. Thanks for supporting my purchase.

Oh, wait, a Cayenne qualified for the clunkers program. Maybe you already bought me a new car. Well, thanks for that, plus the electric that you'd like to subsidize next.

The government has already spent your money on subsidies, tax credits, loopholes for legislators, and banker bailouts. If there were anything left, [there isn't] what would make it okay for you to be forced to buy me a car?

The opposite is the answer: Elimination of all subsidies, with a variable base tax under crude to create a stable pump price, reduce our desire to invade anybody, and prop up a hybrid/electric market. Slash all other taxes, and -bam- gas is still cheap relative to output & income.


On Sep 22 09:32 AM a. palmer jr. wrote:
> snip>
The solution, as I see it, is to go to electric vehicles. I don't mean hybrids because they still burn gas although for now it's stop-gap, I suppose. I think that as long as electric cars are so expensive that they should be government subsidized, at least for now. It would pay off in the long run.

Sep 22 11:22 AM

[chap08:]

"it will likely be very difficult for the U.S. to increase its energy efficiency as much in the next 20 years as it did in the past 20 years"

I disagree with that and you'd better hope you're wrong. There seem to be ample and simple ways still open to us of increasing energy efficiency. I hope it doesn't take further high prices to make us realize this.

Sep 22 11:26 AM

[bigbear4511:]

Increasing taxes has lead to prosperity. I live in Canada and when the Prime Minister introduced a Goods and Services Tax 7% (1990) to all Canadians. I was so angry. I hated him so much and so did others; his political carrier was destroyed in the next election. When the opposition got in they were able to balance the budget within a few years because of the GST. Surplus after surplus for years. Canada's national debt hit 576 billion at its apex and was reduced to less than 450 in around 10 years. Only a handful of countries could say they had done this. The amount of interest paid was reduced drastically which allowed for more money to be put into health care. I have had mutliple surgeries one costing over $20,000 on my knee for which I paid nothing. Higher taxes is way better than sky rocketing debts that you will not be able to pay off. With China and Japan owning almost 2 trillion of your treasuries, what happens when they decide that an investment in the States is a bad one and stop buying. The answer bankrupt nation with your dollar being worthless. Not good for an importing nation.

On Sep 22 08:55 AM yank wrote:

> Jerry:
> Reality check for you. It was the Congress (controlled by Repubs
> from 1994-2000) that passed all these wonderful programs that you
> seem intent on giving Clinton credit for. Increasing taxes has NEVER
> led to prosperity anywhere. And once again let's shed some accuracy
> into the lies and distortions of the mass media. Tax revenues INCREASED
> from 2002-2006 after Bush's tax cuts. It was the out of control spending
> on the two wars and domestic programs that led to our ballooning
> deficit.
>
> Yank

Sep 22 12:36 PM

[langla4:]

I have to suggest that perhaps you have discounted the ability of consumers to alter their purchasing behavior. "Green" is becoming the new mantra. Green rationalizes the incentive to become more energy efficient: previously, that paradigm failed. How free is the market when purchasing decisions are so influenced? I've concluded that the interest of business and the environment have merged to change the rationale for consumer consumption.

Sep 22 12:45 PM

[Tony Petroski:]

Calafia Beach: Good article as always. But...

"The reasons for the big drop in oil prices were simple: the economy became more energy efficient, and world oil production increased. High prices do indeed work to bring prices down over time, though sometimes it takes many years for this to play out."

High prices lead to low prices given enough time. That has a statist feel as it implies that the government could tack on taxes, make the prices even higher than the market would set (come to think, governments do that constantly) and then lead the economy to low prices more quickly. We have those among us who want permanently high prices in order to smite the human for infesting the planet. Some of those folks work out of the White House and one works behind the big desk in the Oval Office.

Don't forget the part that Reagan played in scratching Jimmy Carter's regulation of the price of gasoline along with the elimination of Ted Kennedy's "windfall profits" tax (another of the many legacies that the lion of the senate left us). The timing of those efforts do seem to match the downward movement of prices shown on your first chart. It's called the supply side. Suppliers like high prices and those prices serve to increase supply if they are allowed to work.

Your article implies that energy conservation is an end in itself. Conservation is a normal reaction that free men make to reduce their energy costs in the amount they find congenial. If conservation was the best energy policy, the Jimmy Carter era should have been the millenium. He established the Energy Department, told us we had to turn down our thermostats and suggested we wear sweaters just like he did. We also had our highways stopped up with the infamous "double nickels," the nationwide speed limit.

Free men can handle conservation without the constant nagging of the Nursing State (I'm the first one to use that term, "Nursing State." I thought I would use it now that we're a nation obsessed with health issues). Market prices do a great job of signaling choices so free men can pursue happiness. We don't need the government to rig the game, enshrining conservation as a psuedo religion while creating rules that make all new production unprofitable. Current wisdom has us curling up in the fetal position lest our presence on this earth destroy the planet.

Sep 22 01:04 PM

[Benny Boom ...:]

We increased our energy efficiency radically in an era of cheap oil. And in the (possibly) coming era of more-expensive oil? Expect even larger increases in energy efficiency.
Actually, the question in 10 years may be: Who can OPEC sell their oil to?
CNG cars, PHEVs, and ordinary ICE's that get 60 mpg.
The Oil Era is ending, and with a whimper, not a bang.

Sep 22 01:06 PM

[HardwoodFlo...:]

Well first of all there are some great points and some real pontificating going on here:

When it comes to reducing energy consumption one must consider that there has been great innovation on that front over the lat 20 years (save for SUVs). As a manufacturer our motors are more efficient. We have gone away from Hydraulics (constant running motors and pumping of fuel) to energy efficient VFD (variable frequency drives) direct drives. We have large motors that used to pull 100 KWs per hour now pulling 6 KWs (same principle as a hybrid car).

We have gone away from burring Nat Gas to using bio-fuel.

Our OTR trucks that used to get 2-4 miles per gallon (20+ years ago) now get near 8.

For those that claim India and China and the rest are using so much more fuel that demand is way up I have to question this. The US, Europe and Japan account for some 75% of total global Oil demand. Our usage is way down. In Europe, now available in the States, diesel cars get over 30MPG.

So you have cascading demand in the largest demand US/euro zone/Japan new demand that is coming on line is 1)going to be more efficient 2) it takes a lot for an emerging market to move the needle (think 10% on 10 trillion vs 10% on 100 billion). The emerging market demand story just isn't there.

Now on Health Care. In the conversation b/c the author put it there. I can tell you that as an employer with over 200 employees it's a disaster. Hospitals, Doctors and Insurance companies (yeah toss in the mal practice lawyers too) are completely jobbing employers. We spent over $500,000 last year on "diagnostic testing". These are MRIs. When I told our banker about it he said "well that makes sense the Doctors own 1/4 of the machine and get a spiff off of everyone they put in there. We finance them". The insurance guy come sin every year and says "great news your insurance was going to go up 20% but we negotiated down to just a 12% increase." Reality, our products are not going up 12% a year. They are going down in price.

I say- give health care to the government. It's a disaster as a small business owner we can't afford it (even now when we have HSAs it's a joke).

It's not the aging population that is cranking health care it is the corrupt system of Doctors, Hospitals (that build edifices to themselves), insurance companies and lawyers who are all gaming the system. I say screw them.

Back to energy. The truth is it doesn't take much in terms of alternatives to have a major impact on the price of "old" energy. Just a little hydro here, a little bio-fuel there a little wind/solar over there and chip away 10% at a crack over the next 10 years and we will have lower cost energy and better (sustainable) energy.

I can tell you this America better get it’s act together. Just back from Europe and they are kicking our ass when it comes to both of these subjects. It is time to stop navel gazing. To stop acting like losers (akin to people in the streets of New Orleans after Katrina expecting the Gevernment to save us) and get lending going again and start kicking some ass.

Sep 22 01:29 PM

[Road Runner:]

You conservatives miss a very big point about the economy and taxes today verses the economy and taxes when Reagan came into office. You believe that cutting taxes is always the solution to improve the economy, when in fact, it is only 1 tool to be used in the correct circumstances.

When Reagan came into office, taxes were very high (80% plus for top earners) and the economy was stalling because of it (along with a sudden jump in oil prices that led to stagflation). Government was still taxing high but they had no "high multiplier" projects left. High multiplier projects are ones they pay back to the economy very much more than the cost of the project. Hydroelectric dams are a good example. They provide cheap electricity for many decades. Thus, Reagan did a very good thing economically by cutting taxes, thus pushing more money into the private sector, and away from bloated government that was adding little value to the economy.

However, today we have the exact opposite problem. Taxes are too low on the wealthy at below 35%. Note that the Bush tax cuts will be rolled back at the end of 2010 leading to a top tax rate around 40%. This is too little tax on the wealthy. It leads the wealthy to build large houses and drive expensive cars that get poor gas mileage. Sure, this behavior puts people to work temporarily, but it has no long term benefit to the economy. In other words it has a 0 or negative multiplier effect. This behavior of the wealthy takes value away from the economy.

Also, today we have a great need to make big chances in the world economy. This makes government more important than it was in the 80s and 90s. The move to alternative energy needs a strong government plan and support. For example, it is hard to build high voltage power lines now because of “not in my back yard”.

Thus, a need today is to raise taxes in a smart, Moderate way. Raise taxes only where it makes economic sense. I don’t think the wealthy should be overly taxed. It destroys the incentive to work hard and start businesses, and creates incentives to move money overseas. Around 45% should be the maximum income tax.

I think gasoline taxes should be raised. Let’s do $0.10 a year for 10 years. Doing it this way is a good balance. It creates incentive to conserve fuel, but it gives people time to smoothly adjust – they don’t have to hurry their next vehicle purchase.

And please don’t think I am a Democrat. I am not. I am a long time Republican that feels betrayed by the ultra-right wing of the Republican party that hijacked the party. To paraphrase Ronald Reagan when he explained why he left the Democratic party and became a Republican, “I didn’t leave the party, the party left me.” I am a right leaning Moderate that finds both the far left and far right out of touch with economics.


On Sep 22 01:04 PM Tony Petroski wrote:

> Calafia Beach: Good article as always. But...
>
> "The reasons for the big drop in oil prices were simple: the economy
> became more energy efficient, and world oil production increased.
> High prices do indeed work to bring prices down over time, though
> sometimes it takes many years for this to play out."
>
> High prices lead to low prices given enough time. That has a statist
> feel as it implies that the government could tack on taxes, make
> the prices even higher than the market would set (come to think,
> governments do that constantly) and then lead the economy to low
> prices more quickly. We have those among us who want permanently
> high prices in order to smite the human for infesting the planet.
> Some of those folks work out of the White House and one works behind
> the big desk in the Oval Office.
>
> Don't forget the part that Reagan played in scratching Jimmy Carter's
> regulation of the price of gasoline along with the elimination of
> Ted Kennedy's "windfall profits" tax (another of the many legacies
> that the lion of the senate left us). The timing of those efforts
> do seem to match the downward movement of prices shown on your first
> chart. It's called the supply side. Suppliers like high prices and
> those prices serve to increase supply if they are allowed to work.
>
>
> Your article implies that energy conservation is an end in itself.
> Conservation is a normal reaction that free men make to reduce their
> energy costs in the amount they find congenial. If conservation was
> the best energy policy, the Jimmy Carter era should have been the
> millenium. He established the Energy Department, told us we had to
> turn down our thermostats and suggested we wear sweaters just like
> he did. We also had our highways stopped up with the infamous "double
> nickels," the nationwide speed limit.
>
> Free men can handle conservation without the constant nagging of
> the Nursing State (I'm the first one to use that term, "Nursing State."
> I thought I would use it now that we're a nation obsessed with health
> issues). Market prices do a great job of signaling choices so free
> men can pursue happiness. We don't need the government to rig the
> game, enshrining conservation as a psuedo religion while creating
> rules that make all new production unprofitable. Current wisdom has
> us curling up in the fetal position lest our presence on this earth
> destroy the planet.

Sep 22 02:32 PM

[Road Runner:]

I agree with chap08 and disagree with the author. There are ample ways left to increase energy efficiency in the next 20 years.

We Americans use gasoline very inefficiently. Let gasoline go to $4 or more. $4 seems to be the point that causes Americans to significantly change driving habits and vehicle purchases. Plus, you have plug-in electric-drive vehicles coming in the next few years that are much more energy efficient.

Incandescent lighting is very efficient. Replacing them with fluorescence or LEDs is a dramatic improvement in efficiency. Plus fluorescence and LEDs last much longer than Incandescent reducing manufacturing needs.

Homes are poorly insulated, even new ones. Developers build homes to minimum government code in order to reduce the cost. There are people here in Dallas that have newer 3000 square foot homes and pay more than $500 a month in electricity bills in the summer for air conditioning. And, electricity rates are average here at around $0.14 per kWh in the summer. Building codes must be improved, even if the special interests of developers make a big fuss about it.


On Sep 22 11:26 AM chap08 wrote:

> "it will likely be very difficult for the U.S. to increase its energy
> efficiency as much in the next 20 years as it did in the past 20
> years"
>
> I disagree with that and you'd better hope you're wrong. There seem
> to be ample and simple ways still open to us of increasing energy
> efficiency. I hope it doesn't take further high prices to make us
> realize this.

Sep 22 02:54 PM

[Old Trader:]

The author makes some valid points, but as at least one commentor has pointed out, misses the 800# gorilla in the room, and that's global demand.

The IEA recently came out with a report that for the first time ever, emerging economies used more energy that the developed countries. That fact won't change anytime soon. Today's Must Know Breakfast news mentions the sharp spike in growth in Asia.

Sep 22 02:57 PM

[john s. gordon:]

runner -
you mean incandescent is inefficient.
also adds to your air conditioning load in summer.
> jack

Sep 22 03:42 PM

[john s. gordon:]

hardwood -
you forgot to cuss at the pharmaceutical corporations, they are always pushing pills on TV & they make you go to your doctor & get him to prescribe to you some of those latest & greatest (& expensivest).
> jack

Sep 22 03:48 PM

[VirtualDebt:]

In all Honestly we arnt solving either.


On Sep 22 09:32 AM a. palmer jr. wrote:

> I hope that by year 2015 this conversation we're having will be moot...that
> we've solved our oil problems along with some of our trade imbalances
> by finally doing what we need to do. The solution, as I see it,
> is to go to electric vehicles. I don't mean hybrids because they
> still burn gas although for now it's stop-gap, I suppose. I think
> that as long as electric cars are so expensive that they should be
> government subsidized, at least for now. It would pay off in the
> long run.

So transferring our energy expenditure from directly petro based fuels to a energy grid, which nationally, uses mostly petro isnt really shifting the burden that oil resolves, we need more nuclear power and alternative energy that is feasible.

Also our imbalances havent been fixed either, its not entirly our fault considering China manuplates its currency to rig the table, sure its a nice arrangement US gets massive debt purchases from the chinese, and they get to devalue their currency so they can increase employment by such acts, but sooner or later Chiamerca will break down as the force feeding of dollars on the chinese economy will grow less in value to the point it wont be worth producing chew toys for us, if a dollar cant fetch the cost of oil to produce the plastic for the toy to begin with lol

Sep 22 04:12 PM

[Road Runner:]

That's correct John. Thanks for the catch.

Also, good point about the double energy hit from incandescent.


On Sep 22 03:42 PM john s. gordon wrote:

> runner -
> you mean incandescent is inefficient.
> also adds to your air conditioning load in summer.

Sep 22 07:59 PM

[Vervegent:]

The author fails to acknowledge the biggest reason the US's consumption of oil per GDP has declined so drastically since the 1970's: To wit, we went from having a significant manufacturing sector to one that is largely service-oriented. It requires considerable less energy input to provide lights and HVAC to an office building where workers are building credit swaps than it does to fire a manufacturing plant where workers are building steel girders.

That's not to suggest that the switch is necessarily a bad thing. It is, however, to suggest that not factoring that in as a major contributor for the reason the consumption v GDP chart shows the decline it does is a major oversight.

Sep 22 09:37 PM

[johngonole:]

I am one of the ultra-right conservatives but not a NeoConservative. I'm libertarian. I agree however that tax rates are too low. At some point on the laffer curve tax rates can be too low for optimum tax revenue raising for the government. Also when we allow the politicans to wage war, provide huge grants to non-profits serving as politcal machines, pork barrel spending, bail out banks and the like, etc etc.......without raising the necessary taxes it allows politicians to direct resources that IF TAXED we would never let them do it. People who don't pay taxes will always ask for more (supposedly) FREE government services. Bushes tax cuts for the middle class were appalling. When Obama is done more than half won't even pay Federal Taxes. Clinton perhaps the worst offender started allowing people to receive checks who don't even pay taxes (tax credits)

Spending without taxaction is the new "taxaction without representation". Our grandchildren (who have no representation) will have to pay for all of this.

Fascism for the rich, socialism for the poor, and capitolism for the dwindeling middle class. Soon there will be only the poor and the politically connected.

The reality is that the US is producing all kinds of crap that the free market would never support. This is a big reason why we've lost our competitve edge and are seeing real production moving over seas.

The calculus says we have no hope of unwinding this problem unless the masses can be persuaded to force the government to balance the budget. We must place shackles on our politicians before we leave our grandchildren in ruin. This is the time to push back it it probably our last chance. VOTE THEM ALL OUT....except Ron Paul and the campaign for liberty.


On Sep 22 02:32 PM Road Runner wrote:

> You conservatives miss a very big point about the economy and taxes
> today verses the economy and taxes when Reagan came into office.
> You believe that cutting taxes is always the solution to improve
> the economy, when in fact, it is only 1 tool to be used in the correct
> circumstances.
>
> When Reagan came into office, taxes were very high (80% plus for
> top earners) and the economy was stalling because of it (along with
> a sudden jump in oil prices that led to stagflation). Government
> was still taxing high but they had no "high multiplier" projects
> left. High multiplier projects are ones they pay back to the economy
> very much more than the cost of the project. Hydroelectric dams are
> a good example. They provide cheap electricity for many decades.
> Thus, Reagan did a very good thing economically by cutting taxes,
> thus pushing more money into the private sector, and away from bloated
> government that was adding little value to the economy.
>
> However, today we have the exact opposite problem. Taxes are too
> low on the wealthy at below 35%. Note that the Bush tax cuts will
> be rolled back at the end of 2010 leading to a top tax rate around
> 40%. This is too little tax on the wealthy. It leads the wealthy
> to build large houses and drive expensive cars that get poor gas
> mileage. Sure, this behavior puts people to work temporarily, but
> it has no long term benefit to the economy. In other words it has
> a 0 or negative multiplier effect. This behavior of the wealthy takes
> value away from the economy.
>
> Also, today we have a great need to make big chances in the world
> economy. This makes government more important than it was in the
> 80s and 90s. The move to alternative energy needs a strong government
> plan and support. For example, it is hard to build high voltage power
> lines now because of “not in my back yard”.
>
> Thus, a need today is to raise taxes in a smart, Moderate way. Raise
> taxes only where it makes economic sense. I don’t think the wealthy
> should be overly taxed. It destroys the incentive to work hard and
> start businesses, and creates incentives to move money overseas.
> Around 45% should be the maximum income tax.
>
> I think gasoline taxes should be raised. Let’s do $0.10 a year for
> 10 years. Doing it this way is a good balance. It creates incentive
> to conserve fuel, but it gives people time to smoothly adjust – they
> don’t have to hurry their next vehicle purchase.
>
> And please don’t think I am a Democrat. I am not. I am a long time
> Republican that feels betrayed by the ultra-right wing of the Republican
> party that hijacked the party. To paraphrase Ronald Reagan when he
> explained why he left the Democratic party and became a Republican,
> “I didn’t leave the party, the party left me.” I am a right leaning
> Moderate that finds both the far left and far right out of touch
> with economics.

Sep 23 01:15 AM

[A Barrel Full:]

......For one, it will likely be very difficult for the U.S. to increase its energy efficiency as much in the next 20 years as it did in the past 20 years, .....

Like some of the others I disagree. If you look at Europe as an example, they use far less energy per unit of GDP, despite being almost as rich as the USA.

........Thus, a carbon tax might have to be punitive in order to produce the desired effect, and that in turn would have very negative (and politically undesirable) consequences for the economy..........

Not neccessarily. If a significant carbon tax were to be matched by higher personal allowances on income taxes, lower employer contributions, or lower income taxes (or some mix of the three), we would actually have a net positive effect on the economy. Sure there would be losers, but the winners would outnumber them.

The beauty of carbon taxes is that there is no loss to the economy, as government revenues increase. (I say that as an instinctive tax cutter).

Sep 23 04:01 AM

[Reactionary:]

While not likely to be 20%, there is probably some additional efficiency to be squeezed from oil burning tech. The diesel engines are a good example. There may be others. But the real goal is to get the cheapest and most abudant energy possible, whatever the form. Efficiency increases won't get us where we really want to be. We need new sources of generation that consist of more than wishful thinking. Solar is a nice residential supplement, but still can't supply industry. Wind is a joke. Fission and eventually Fusion are the best hope - but we'll have to overcome the irrational resistance of the Greens. Those neo-luddites stand in the way of progress, and until they are shoved aside we're going to have energy costs spiral upward continually, driving down the economy.

As for taxation, taxes are quite high enough already. The openly displayed taxes plus the vast hidden taxes we pay allow the government to suck up half of our wealth as it is. The government does not "invest" wealth. It spends. It's pure overhead. We don't get anything from government that produces a return. What do we get? Pork, graft, an ever expanding population of welfare scum who are paid to breed and avoid work, corporate and union welfare for big donors, and hand-outs of every variety to buy votes. We spend our treasure to police the world, rather simply fight our own fights and let the others carry their own weight (Japan, Korea, Europe). Of course, maybe that won't be an issue now that we have an administration intent on undermining the ability of the US to defend its interests or project power... Now the loving, caring State wants to take over health care - and the only schemes NOT on the table are the only ones that will work to cut waste - particularly tort reform. The government is also quite skilled at erecting barriers to change and innovation, and regulating us to death.

Let's say there's still room on the Laffer curve to get more revenue (which is doubtful, given that Bush's tax cuts resulted in greater tax revenue rather than less). So what? Why on earth do we want to maximize the money the government has to waste? The government should get the bare minimum it needs to function. Not one cent more. The pig is eating just fine as it is. More taxation on the lower classes won't make it change its ways. Europeans have proven that people will pay way higher taxes than we do and offer little resistance, and government will STILL have deficit spending. The only option is to starve it. Eventually people will stop lending it money, and then it will be forced to face the music.

Sep 23 09:15 AM

[lewisabroad:]

Reactionary,
Unquestionably the government wastes a lot of money, but look at what we use it for:
Social Security:20%
Defense:19%
Medicare 13%
Unemployment and welfare: 13%
Medicaid: 9%
and my favorite:
Interest: 8%
Medicaid and medicare only use 2% of the funding for the system - the other 98% goes to healthcare providers. Compare this to an average of 85% for private insurance providers. Talk about feeding pigs.
Transportation is one of my favorites, it doesn't even rank. You want fusion power? Only Sandia and Livermore do significant research on it in the US. Guess what? you will have to feed that pig if you want it to grow. (0.8% of the budget for the DOE, by the way). Noone in prvate equity is going to fund fusion.
I agree that government should be more transparent (especially the 19% going to the defense budget), but the idea is that it serves us, the people. When I'm healthy and wealthy I contribute. When I am sick and poor I receive help. Unfortunately a lot of us get caught on one side or the other and can't understand why the other side won't get up and go to work or, conversely, won't stop hiring us and firing us at their convenience. It's tragic to pay high taxes, but more tragic to see someone you know lose all their retirement savings due to illness - just because they won't qualify for medicare until that happens. We all breathe the same air, use the same roads, go to (mostly) the same schools, so we need to pay for that, right?

If you want to starve the pig then you have to give up projecting power, or social security, or medicaid. If you expect market forces to solve our energy issues then expect more volatility and that we will have to import all of our technology from Europe when the price of energy gets too high.

About the article, some points. Inelasticity of oil prices means high volatility and spiking when demand=supply (which we saw last summer). Derivatives, speculation, and subsidies in key economies played a part in the spike too, but in the end it was because we maxed out capacity at the wellhead.

Carbon tax makes sense if you buy into the global warming science and want to deal with the potential externalities of rising sea levels and desertification. Might cost a lot to put dikes around Manhattan and Brooklyn. Besides, it forces consumers to make choices they would only make during price spikes otherwise, and likely helps reduce the trade imbalance and deficit. Cap-and-trade doesn't do any of this, it only hurts big industry in the US and forces more production overseas. Just what we need. of course there is always the do nothing option, which would be similar to not getting any insurance before doing a potentially dangerous activity. Potentially unwise.

The only efficiencies we have "wrung out" are the ones that have 2-4 year ROIs with regards to building efficiency, or with gasoline prices in the $7-10 a gallon range. At that point lots of people start to switch (EVs or house remodeling re: geothermal heat pump/envelope sealing etc) and we see the price stablilize at a new equilibrium point - one where the alternative and it's payback are slightly cheaper than the commodity.

For the next few years the current pattern will remain, but as soon as demand equals supply again it will plateau and either hit our economy (damping demand) or force us to switch. The plateau effect will be delayed if big policy changes alter the math for consumers. As for the externalities of carbon emissions on our climate, well, if the scientific consensus is right then we are in for a rough ride no matter what.

Sep 24 12:24 PM