Unraveling the Gas 'Conspiracy'
People will believe anything if it means preserving our entitlement to cheap gasoline.
By Trevor Shaw
They are to blame. They are profiteering. They are gouging us. We need some price control. They have technology to allow us to stop using oil but they won't let us have it.
Who are they? You have probably guessed it - oil companies. That's right, the only industry in a free-market capitalist system not allowed to make a profit - at least from a consumers' point of view.
I don't hear anyone complain when Stelco posts a profit - Hamiltonians practically want to make it a national holiday.
The truth is there is no conspiracy, price-fixing, or gouging. Although there were a few gas retailers that made news headlines after Katrina and before Rita for charging what was perceived as excessive prices - welcome to capitalism.
The very word implies capitalizing on an opportunity and the system requires that people do. The same people that claimed "greed is good" in the yuppie late 1980s are now crying for regulation and making conspiracy accusations. The reason is that cheap gasoline is a sacred cow. You cannot mess with the people's cheap gas.
Cheap gas and automobiles has been the great equalizer of North America. The road and highway networks are the result of the largest socialist program ever undertaken in North America: roads planned and built by the government with taxpayer's money and shared by wealthy and poor alike.
The poor, the middle-class, and millionaires drive on the very same roads. I think I saw Michael Lee Chin beside me on highway, although he was driving a Ferrari and I was in a Honda, we still shared the same roadway. Isn't that wonderful.
However, rising gas prices threaten to destabilize the middle class. In the long term it threatens to do a lot more damage than that. The results will eventually lead to inflation that will cause higher interest rates and ultimately a 20-year economic depression.
And that's probably the best-case scenario. But I digress; this is about the "conspiracy".
In order for a conspiracy to be successful, it needs to be secretive. If this were a planned conspiracy, do you think the oil companies would increase the price of gas by 30 percent in nine months? That would be obvious, but a ten percent increase for five years would be much less noticeable.
Adam Smith, an eighteenth-century economist, used the analogy of the baker. A baker doesn't provide bread out of charity but out of self-interest. In other words, if there is a lack of profit, the product isn't provided.
Regulating gas to an arbitrary price to keep it affordable for everyone will only put gas retailers out of business. Paying $2.50 per litre will be better than not having any gas at any price. Price capping will also have the same effect, temporarily closing gas stations for the duration of the price-cap.
Adam Smith's analogy isn't really applicable to oil extraction. Bread is a manufactured product, produced from raw grain and ovens that are made possible from energy. Bread is produced, but oil is extracted. The so-called 'invisible hand' of the free-market can't slide in and produce more oil in the ground.
Bread is produced - oil is extracted. Adam Smith's 'invisible hand' doesn't apply to the oil industry - it won't produce more oil in the ground.
The current price of gas reflects the world's capacity to produce crude oil, which cannot keep growing with demand. The phenomenon is called Peak Oil and refers to Hubbert's peak.
M. King Hubbert was an oil geologist who predicted that the United States' oil production would peak between 1965 and 1970. His colleagues and economists thought he was insane, but American oil production peaked in 1970-1 and has been declining ever since.
Hubbert later predicted the world's apex of oil production would be around 1995. He didn't count on the OPEC shocks of 1973 and 1979 reducing demand and delaying the global peak.
Oil extraction peaks then declines in a ypical "bell curve" fashion. No amount of drilling and exploration is able to stop the downward slide of extraction. Although the downward slide sometimes has hiccups and it appears that we are increasing extraction, the illusion is due to the fact that the price increase, decreases demand temporarily, crude reserves build up, and the price drops for a short time.
There will always be people who believe in a permanent oil industry conspiracy, no matter how much explaining you do. This is unavoidable, much the same way oil peak production is unavoidable. I think most people want to believe there is a conspiracy. That way, they could find and prosecute these conspirators and return their cheap gas privilege.
It's not going to be that simple. Dr. Colin Campbell, author of The Coming Oil Crisis, convener and editor of the Association for the Study of Peak Oil and trustee for the Petroleum Institute of London, said, "When the peak of oil production first occurs, people will suspect a conspiracy and be looking to blame someone".
When the peak of oil production first occurs, people will naturally suspect a conspiracy and be looking to blame someone (Dr. Colin Campbell, The End of Suburbia)
So are the oil companies conspiring to increase prices? No. They are simply operating the same way as banks, car manufacturers, and department stores; that is, like a business to produce a profit.
We can hope they use their profits for the research and development of alternative sources of energy, so they too can remain in business. Until then we'll have to accept a new life without cheap oil. Maybe that means driving cross-country and flying to the Caribbean will be out of reach for the middle class.
When we eventually come to the realization that oil isn't produced and the 'invisible hand' won't make more for us, we may actually be content to enjoy a simpler, slower life. Until then, happy capitalism.