Dark Star

Tom Friedman has a fantasy about a mythical presidential candidate, who would regulate gas prices with a price floor:

This candidate would note that $4-a-gallon gasoline is really starting to impact driving behavior and buying behavior in way that $3-a-gallon gas did not. The first time we got such a strong price signal, after the 1973 oil shock, we responded as a country by demanding and producing more fuel-efficient cars. But as soon as oil prices started falling in the late 1980s and early 1990s, we let Detroit get us readdicted to gas guzzlers, and the price steadily crept back up to where it is today.

We must not make that mistake again. Therefore, what our mythical candidate would be proposing, argues the energy economist Philip Verleger Jr., is a “price floor” for gasoline: $4 a gallon for regular unleaded, which is still half the going rate in Europe today. Washington would declare that it would never let the price fall below that level. If it does, it would increase the federal gasoline tax on a monthly basis to make up the difference between the pump price and the market price.

To ease the burden on the less well-off, “anyone earning under $80,000 a year would be compensated with a reduction in the payroll taxes,” said Verleger. Or, he suggested, the government could use the gasoline tax to buy back gas guzzlers from the public and “crush them.”

But the message going forward to every car buyer and carmaker would be this: The price of gasoline is never going back down. Therefore, if you buy a big gas guzzler today, you are locking yourself into perpetually high gasoline bills. You are buying a pig that will eat you out of house and home. At the same time, if you, a manufacturer, continue building fleets of nonhybrid gas guzzlers, you are condemning yourself, your employees and shareholders to oblivion.

What a cruel thing for a candidate to say? I disagree. Every decade we look back and say: “If only we had done the right thing then, we would be in a different position today.”

But no politician dared to do so. When gasoline was $2 a gallon, the government never would have imposed a $2 tax. Now that it is $4 a gallon, the government should at least keep it there, since it is really having the right effect.

Yes, that evil free-market is to blame.

Price ceilings and price floors don't work. They never have. They make a screwed up situation even more screwed up. Price Floors always - ALWAYS - lead to surpluses. Price Ceilings to shortages.

First of all let's take a look at what Mr. Friedman is really wanting here. He is wanting to keep prices artificially high. Not just gas prices either. That's just where the action is. When gas prices go up, everything goes up. You not only pay more to drive to the store, you pay more when you get there, because whoever brought it to the store drove to get there, too. That's a simple illustration, but transportation is the backbone of the economy and transportation takes oil.

So Mr. Friedman would have it that ALL of our prices for everything stay artificially high, even if oil prices tumble to $50/barrel. So we would all be paying the same we're paying right now, from now until new technology arrived to supplant oil. His reasoning? Because the higher prices seem to be having the desired effect of curbing consumption. (And, therefore, he says, reducing our dependence on foreign oil).

Well, hang on now, if it's that simple, why didn't we do that a long time ago? Because we had responsible people take over the White House after Jimmy Carter is the correct answer.

So what happens when our price floor prevents the market from reflecting $50/barrel oil? Surplus. And if Americans won't buy it (at the artificially high price), then guess where it goes? The answer is not here. So while emerging economies like India and China (the causes for higher demand at present) can buy more gas for their vehicles on the cheap, Americans pay through the nose. And if Americans pay through the nose for gas, as we've noted, they pay through the nose for everything else. Imagine Communist China paying real prices for gas, which are lower than America's artificial prices. Think about it.

So what happens to China and India's imports to the U.S.? They increase. Why because they can make and transport things cheaper than we can. So what happens to our manufacturing jobs then?

So what makes me so sure oil prices will come down naturally anyway? Because they are being kept high right now, due to futures investors buying oil futures to protect themselves against a weakened U.S. dollar. And the U.S. dollar will not stay weak. It will rebound, causing more investments in the dollar, oil futures hedging will fall, and so will oil prices.

Have you been hearing all these advertisements for investing in Gold? It's based on the same principle. The dollar is currency. Gold is money. There's a difference. That's why you don't hear a bunch of advertisements that want you to invest in oil. Oil doesn't have to advertise.

Oil is more "money," than money.
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