Among the issues most commonly discussed are individuality, the rights of the individual, the limits of legitimate government, morality, history, economics, government policy, science, business, education, health care, energy, and man-made global warming evaluations. My posts are aimed at thinking, intelligent individuals, whose comments are very welcome.

"No matter how vast your knowledge or how modest, it is your own mind that has to acquire it." Ayn Rand

10 June 2008

Alan Reynolds: Get Ready for the Oil-Price Drop

Alan Reynolds, senior fellow of the Cato Institute, wrote an article called "Get Ready for the Oil-Price Drop" which is very interesting reading. It was published in the New York Post on 6 June 2008. He points out that the United States is using no more oil now than it did in 2004, which one would hardly guess given all the accusations that Americans addiction to oil is causing the high oil prices or is causing the imminent death of the planet. In addition, he points out that passenger cars are not the primary user of oil, so politicians and socialists trying to make us feel guilty about driving to work are giving evidence that they do not understand how oil is used.

Only 44% of oil becomes gasoline and much of that is used by industry, not just individuals who are being enjoined to walk a mile to a bus stop and wait 15 minutes for it to show up, if it does, then switch to a second bus, then get on a Metro train, and then walk the remaining several blocks to their place of work. Two-thirds of US petroleum use is for transportation, but half of it fuels commercial trucks, trains, airplanes, and ships. Most crude oil is used to produce diesel fuel, heavy oil for industry, aviation fuel, asphalt, home heating oil, propane, wax, plastics, detergents, drugs, and fabrics.

Since such a large fraction of oil is used for industrial production and the delivery of goods and services, the price of oil is very cyclical. That is, its price increases with economic activity and falls when economic activity slackens. Historically, the price of oil fell 44% in the Nov 2000 to Nov 2001 recession, 48% from Oct 1990 to Jan 1992, and 71% from July 1980 to July 1986. Because fuel costs have a huge impact on business profit and loss, when the price of fuel goes up greatly, then production will decrease shortly afterward. In nine out of 10 postwar recessions, the recession began shortly after the price of oil rose greatly. This time around, US manufacturing was proven very resistant to production decreases due to the high price of oil and has been one of the reasons for the sustained oil price increases.

In the US and Britain, industrial production is nearly flat, being only 0.2% higher than it was a year ago. But, in many other countries, production dropped over that period. Japan is down 0.7%, Austria 1.1%, Italy and Denmark 2.5%, Canada 2.9%, Greece 5.4%, Singapore 5.7%, and Spain 13.3%. In April, industrial production in India and China fell. This worldwide production decrease is going to bring down the cost of oil substantially.

Well, maybe it was a good thing it has recently been high. It made it impossible for the Democrats and some very foolish Republican allies to pass the incredibly wrongheaded Warner-Lieberman Energy Security Act which was to tax our use of fuels heavily and grab control of much of our lives. Of course, I also like seeing the US proving to be one of the countries most resistant to industrial output decreases in the world. Those of us who work hard to make the US so productive have much to be proud of. We also give the socialists and the earth goddess worshipers so much to complain about with our use of resources! Let us continue to give them much to be unhappy and bitter about! Heck, they would not know what to do with themselves if they could not complain about those of us who create and produce. They need us, as do all the human parasites. But why should we allow these angry leaches to suck our blood? Why don't we use this high gasoline price episode to keep up a drumbeat campaign for increased oil production in the US and in Iraq?

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