by Jim Davies, 2/26/2011
One of the banners waving in a Libyan crowd this week said just "Oil For The West" and I'm unsure about its purpose. It might have been an anti-Qaddafi crowd (help us get rid of him quickly so your oil supplies will stabilize) or a pro-Qaddafi crowd (support our leader so that the turmoil stops.) Either way, message clear: oil price sensitivity is high. A small change in supply can have a big effect on price. Brits got the message yesterday in the Telegraph: at the pump there, gas prices are hitting £6 a gallon already. To explain: that "gallon" is 1.2 US gallons and £1 is $1.60, so it equates to $8 a gallon here, about 2.6 times our present price. So the question du jour is, how do we rate a little extra freedom in the Middle East, against that added cost of fuel? - and how will all that change, after government here evaporates?
Freedom is the primary value of this Blog, so my answer to the first is, let it rip - even if one result is a fuel price hike, which will cascade through the prices of everything else, and so reduce our standard of living a little. All government is savage, but those living under the rule of morons like Qaddafi are long overdue for a taste of liberty, if they can get it. Furthermore, the price hike will most likely be modest and short-lived, while their increase in liberty may well be permanent.
Libyans produce just over 2% of the world's oil, and with the high sensitivity, should that cease it might trigger a 10% rise in price. Nasty, but tolerable; $3.00 becomes $3.30 a gallon. But whatever the outcome of the Libyan struggle, the winner will suffer much more from the loss of revenue so will do everything possible to turn the faucet on again; the shortfall will be temporary. Now notice what else goes into oil prices.
European pump-prices have long been more than double ours (that UK 2.6 times is not unusual) yet the true price of gasoline must be almost identical here and there. On average in the USA governments add 48¢ a gallon to the sale price so the "true" price of gas in the "West" is now around $2.60 a gallon. Thus, the UK tax is (8 - 2.6 =) $5.40 a US gallon, or (5.4/2.6 =) 208%. So in Europe, one pays the government $2 for every $1 of actual product. Such is obscenity. Those parasites do nothing to extract, transport, refine or distribute the fuel yet charge users twice its market price, for their permission to buy.
Lurking over there in the background is the question of Saudi Arabia. If the people of that country do what is being done in Tunisia, Egypt, Bahrein, Libya et al then there could be disruption to Saudi oil supplies and that would amplify the problem: that country produces six times what Libya does and so an interruption could cause very serious chaos everywhere. Yet a régime that cuts off hands for petty theft has no place in a civilized world. Let freedom ring!
The good (short term) news is that when the protesting is over, whoever comes out on top will rush to restore supplies, because oil makes a lousy beverage; they will have to sell it, and that will restore prices to (say) a 2010 level. What of the long term? What will be the effect when, in or around 2027, government evaporates in the US altogether, and other governments too begin to fall like dominoes?
First, tax will be zero so fuel will be quite a lot cheaper, and that will stimulate all manner of production. Increased demand for it will stimulate fresh exploration, until an equilibrium is reached - that's how supply, demand and prices do their dancing, in a free market. Then, the distributors' "oil cartel" will largely dissolve, since it is sustained by the FedGov. That will bring increased competition with all its benefits of stimulated exploration, smarter refinement and innovation. The cartel of producing countries won't vanish that soon, for that is sustained by foreign governments - but when Exxon, Shell, BP, Chevron and the others get a little long needed competition the results can only be beneficial.
I wish that happy day could come sooner, but the method of bringing it to pass is infinitely faster than any other yet discovered, so we'll have to work patiently.