Bush Unpopular, Chavez Super Popular, Gas Prices Hit $0.14 in Caracas

The top story on the New York Times today says that President Bush is extremely unpopular, especially among adults aged 18-72 (who else is there?). I guess I'm not surprised to see the news, in light of the war with a country that didn't have weapons of mass destruction, the prospect of another country with which we are not yet at war obtaining such weapons for real, high gas prices and a weak dollar. I hear he's also bad at other things like maintaing a staff. While the news that less than one in three Americans approve of the job that he is doing is shocking, I don't buy the conclusion that he is doing any worse than usual. As a president, I would think he has done a lot better than about nine months ago when he ignored a great big hurricane that wiped out a major American city. But I don't think approval ratings by the public are a good indication of how good a president he is.

Don't get me wrong, I didn't vote for him, don't like him, and wouldn't eat barbacue with him even if it were free. I think he's dumb. But approcal ratings are not a good indicator of anything. If you click the link below you can see the approval ratings of previous American presidents, including the most recent polls concerning Pres. Bush. They don't correspond with much other than the purchasing power of the dollar (A guess based on the data). 41% of Americans in the poll approve of his handling of the war on terror and only 13% approve of his 'handling' of the issue of gas prices.

Americans take the issue of gas seriously, but blaming the president for a high gas price doesn't make sense. He's messed up a lot of things, and deserves a lot of blame, but the price of gas is not one of them. Gas is not more expensive becuase he is the president and would not be cheaper if he were not the president. Arab and Latin American nations are not restricting oil output becuase of him, they are pumping oil as fast as they can to take advantage of the price. Gas is expensive becuase places like China and India finally have money to buy some. The way to know that a change in demand and not supply explains the high price of gas is to observe that since four years ago, when gas was much cheaper, the quantity produced glboally is almost 15% greater.

President Bush was the second president in American history to finsh his first term with a higher price of oil than the price at the beginning of the term and still win reelection. Americans are in a place to be hit hard when oil prices rise because it's the most variable cost that takes up any sizeable portion of the average family's spending (coffee and produce are also variable, but account for a much smaller portion of our spending). Not only do we spend a lot of money on Gas, but it is not easily substituted away from so we pay for it when the price rises, especially in the short run. Right now oil prices are somewhere around $75 a barell, and adusted for inflation that makes them higher than any time since 1981, the end of the oil crisis. That sounds bad, because in 1981 people were very seriously affected, the government rationed gas with lines and tickets, Presidents (Carter) were removed from office, and federal laws changed the speed limmit to conserve fuel. Today, Americans are much better off even if the price is comprable. That's because the figure doesn't take into account how much wealthier most people are today. In 1981 the average American family spent almost 10% of their income on fuel. That isn't even almost the case for most americans today. As a share of their income, an American family of four spends an average of 3% of their income on fuel--and there is a huge standard deviation because the number varies grately depending on whether you live in a city or a suburb. Some people-commuters and suburban families with big SUVs that they bought when gas was cheap-are more hard hit, but on average Americans are in a much better place to deal with a high gas price. At the end of the day, especially in the short run, people will pay A LOT of money for a liquid with which they may drive several miles on only a few ounces. Europeans have been doing it for a long time.

Nonetheless, people are upset and blame the president. But I don't think the President can or should do anything in response to the price because I believe fuel should be rationed by the market. Let me explain: if the President would do something, most people would probably hope he would subsidize gas prices, open the reserves (which is the same), reduce the tax on gassoline, or allow drilling in the ANWAR. These are all terrible ideas.

Subsidies and gas prices are the most popular ideas, and in my mind almost as dangerous as drilling in Anwar. The market for gassoline works well becuase price allows people to allocate gas between time periods. By making gas expensive when gas is scarce sends people the correct signal that gas is valuable and should be used responsibly. It should not be wasted driving a military vehicle through the suburbs unless you REALLY like to be seen driving said vehicle. And if you really like it, and it really makes you happy, it should cost you a lot. Making the price articificually low allows people to continue to waste gas, not change their lifestyles, and continue to driver irresponsibly large trucks.

Part of me likes it when gas costs a lot becuase it makes me optimistic that it will someday be worth someone's time to invent something that can move a person from one place to another with much less gassoline. Because the investment in the research for such a product would have to be so great for the project to have a reasonable probability of producing a new vehicle, it will only be made if the production of such a vehicle is profitable after the investment. Even now that gas prices have risen almost 35% in the last three years, an individual who used to spend $100 each month putting gas in his car spends a total of 1200 each year, and with the new gas prices, he is spending $420 more each year (assuming he does not drive any less). at an interest rate of ten percent, he would be willing to pay $4200 (420/ 0.1)dollars to secure the old gas prices forever, assuming he would use his car the same amout for the rest of time.

Imagine a techonology that allowed a driver to drive twice as many miles with each gallon of gas--something like a new car or a magical potion you put in your gassoline. Assume that the model driver does not drive more or less with the pill (or that his demand is perfectly inelastic, a completely unrealistic assumption in the long run). How much would the driver be willing to pay for the pill? if he spends 1650 dollars on gas now, he can driver the same amount for $825 each year, saving the other $825 a year. At an interest rate of ten percent, this technology is worth about $8250 dollars to someone who plans to live forever. Say there are 100 million such drivers in the U.S., then the techonology is worth aroud 800 billion dollars. It looks like a lot, but it's less than the U.S. military's budget for two years. Morever, that is the reward IF you can invent the technology and I'm guessing that it is extremely difficult and extremely risky to to produce this technology. Say it cost 400 billion to have a fifty-fifty chance of producing the magical pill that doubles gas mileage. You would be crazy to take what seems like a fair bet with that sum of money. No one would ever do it.

But this technology would probably be worth more if we assume everyone buys the magical potion, and everyone drives the exact same distance, because in that situation the US uses half as much gassoline. It seems fair to assume that it costs less than half as much money to produce half as much gassoline, or that the cost of producing a gallon of gas increases the more gas you produce. The millionth gallon of gas is probably more expensive than the first and, thus, if you reduce by half the amout of gas the U.S. consumes, you would probably also lower the price of a gallon of gassoline (this is the same as saying that the supply curve is upward sloping). So aside from making people need less gas, the cost of gas would be lower, so they would be willing to pay more for it (and more for the technology the more widely used it was, since the more widely used it is the cheaper gas gets).

But this all assumes that people don't drive any more when it costs half as much to drive a mile. Since people don't seem to drive much less when it costs more to drive a mile, this is maybe a reasonable assumption in the short run, but in the long run it is certainly not.

Many environmentalists believe that inventing something that that can double gas mileage is the solution to our problems with air polution. This is incorrect. If we consider that in the long run, people will adjust their driving habits to the reality that they can drive twice as far for the same cost it could well be the case that people use MORE gas in the future than they do at present, making the price of gas increase and not decrease. That would be a net increase in pollution if we assume that burning a gallong of gas always creates the same amout of pollution.

This seems impossible to imagine in the short term, but in the long run I don't have trouble imagining the ways people would change their behavior if driving a mile cost half as much. We would fly in airplaines much less, we shipt things by car more, ship more things, we would have less of a reason to take the subway, and would take a lot more road trips and vacations. This is not to mention the new investments that would be made in making cars faster: if people drive more, then a technology that makes a car drive the same distance with the same amout of gas at a faster speed is a more valuable techonology. This way cars could really compete with air travel and trains even over long distances. I do not have trouble believing that the long-run demand for driving is elastic, which is to say that reducing the cost of driving one mile by one-half would cause people to drive, in the long run, to drive more than twice as much. It would be necessary to test the conclusion, but I would not be surprised if that has happened in the past.

So I believe that oil should be expensive to reflect the fact that a lot of people want it. Hugo Chavez and I disagree on this point and Venezuela heavily subsidizes oil within its own country and also to some extent to the rest of the world. A gallon of gassoline costs U.S. $0.14. (I'm not kidding, less than fifteen cents for a gallon of gassoline. see here; http://money.cnn.com/pf/features/lists/global_gasprices/price.html). This is a problem, and I think it is representative of the sort of problems that arise when politicians abuse power over the market. In Caracas, the streets smell of gassoline (I am told), because oil is so cheap it is wasted. The vehicles get terrible gas mileage and pollute at levels you can't imagine. The rivers are unsafe because of the amount of petroleum drained into them. At the colombian boarder there is a military station and a mountain of gas canisters used to illegally traffic fuel from Venezuela, where it is artifically cheap, to Colombia and the rest of the world where politicians do not interfere with the market so grotesquely. When gas is artificially cheap people use it badly becuase they live in an artificial reality where gassoline is cheaper than bottled water (true! they actually do.). On the margin they use gas very badly: it is not worth the cost to make even very cheap repairs to their cars and busses that would double their gas-mileage. The value of gas, on the margin, at thirty cents a gallon. There are plenty of people in venezuela who would like to trade a gallong of gassoline for thirtry-one cents of food or medicine and plenty of people in the rest of the world would be willing to pay them far more than that. This is a mutually beneficial transaction that is illegal becuase of Venezuelan law, and the world is a worse place because of it. (The law that sets the price at $.14 a gallon must be accompanied by a law that bans its export at that price or people would expore gas until it cost the market price in Venezuela).

This is a good example of people in Latin America exploiting their country's wealth to win elections. Hugo Chavez does this better than anyone else. He is wasting that country's wealth and selling those peoples' oil to gain immediate popularity. He's a meglomaniac and that will cost his country grately in the long run. I believe the extremely high price of oil is what has allowed Chavez to come to such prominence in the international community. His nation's windfall profits have made government spending incredibly important in Venezuela and allowed him to buy votes in his own nation by subsidizing things like gasoline and funding other public programs for the poor. He has also bought respect abroad by buying two billion dollars in argentine treasury notes, which gives him ENORMOUS sway over the Argentine economy, for if he decided to sell all of them at once the Argentine interest rate would have to rise so quickly almost all foreign investment would flee and even that would probably not prevent governmental default. He also did a one billion dollar contract with Iran for defense technologies, built a one billion dollar oil refinary in Brazil, and finances campaigns in Bolivia, Peru, Panama, and Colombia.

Evo Morales in Bolivia, of whom Chavez is an outspoken ally, has recently followed in Chavez's footstepts and nationalized the oil industry there. This is the same sort of policy that is dangrous for the reason that they are scaring foriegn investors away by the bunches, as well as creating abusively powerful governments. They scare investors away becuase of the fear that your capital will be nationalized; there is clearly a much greater risk that your company will be nationalized and prifits seized now that Morales is in power, as such the country and people should expect much less foreign investment and much higher interest rates. This is bad if you are middle class and would like to build a store, shuch as a restaurant, which requires borrowing money. And if it is harder for one person to build a business it is twenty-million times harder for twenty-million people to build an economy.

There is also a long-evidenced trend for countries with great mineral and peroleum deposits to have hugely corrupt governments and as a result, terrible economies. There are a few reasons for this, but the most important is that, since these reserves tend to be owned by the state, the government is in a position to spend a huge amoung of money relative to average incomes and thus the role of president is endowed with an enormous amount of power not different from a dictator. Goverments have a tendency to distort incentives in favor of not working since this is what gets them elected (if they have elections, and interestingly this isn't the case in places like Saudi Arabia, where there are no elections). Moreover, when there is one source of revenue that has one owner and can be auctioned to a private company leaders become particularly corruptible. Becuase exonnmobile is willing to pay so much to access the oil reserves, the value of changing a politicians mind is high, and thus there are plenty of mutually agreeable transactions that constitute corruption (twenty million dollars in campaign contributions for a vote for the right to Nigerian oil reserves, say). Some people call this the curse of oil.

So I don't think oil is too expensive, and I don't think President Bush should do any more, but that doesn't mean that I think he is doing everything right with respect to oil. IF anything, oil is too cheap. Since the American opinion responds to readily to oil prices, the President has every reason to lower them today and no reason to care how much oil costs in the future. He would be happy to get Saudi Arabia to pump all the oil they will pump for the next twenty years during the duration of his presidency, and make the price as low as it is in Venezuela. Americans would be happy, for the next two years. But it's a bad idea, becuase after that the price of oil would get EXTREMELY expensive, far more than it is now (even with less extreme examples). Saudi Arabia doesn't have a reason to do it becuase they would do better to save that oil and sell it later than sell a lot of oil now at a low price. If the market were effeciet we would assume this is what they do, save oil in periods of plenty for the time that it is scarce. But there are good reasons to believe that this does not happen and that Saudi Arabia does not make profit-maxamizing decisions (like Venezuela), but makes political decisions. The US has enormous clout in Saudi politics and no doubt pressures Saudi Arabia and other oil producing nations to producing more, even more than is profit-maximizing, becuase George Bush has no interest in long term oil solvency.

There is an organization that claims to have good evidence that this happens, and is wide spread and oil is too cheap now (despite monopoly powers exercised by OPEC). I cannot find their website at present, but I ment the founder of the PAC at (of all places) a career fair (she used to be an investment banker). She was extremely interesting and has dedicated her time to solving this important problem, trying to get markets and not politics to ration oil over time. Apparently the movie Syriana concerns this (I bought a pirated version, but have not yet watched it).

http://www.nytimes.com/packages/pdf/politics/20060509_POLL_RESULTS.pdf