it's just common sense

The musings of an over qualified white male on matters of media, music, science, politics, etc, that are patently obvious.

Sunday, September 19, 2004

Lessons From Grammar School: The Law of Supply and Demand and US Energy Policy

As I learned the law of supply and demand sometime before exiting the 8th grade, it seemed so utterly simple and self evident. It was intuitive to me in the most obvious of ways. For those who remember the term, but may be in need of a review, let me engage in a short summary. The words alone will illustrate its completeness and utility. As the supply of goods decreases, the prices of those of goods will rise. The inverse of course is also true. When the supply of goods rises, exceeding demand, the prices for those goods will fall. Stated another way, when supplies are finite, prices will eventually rise unless demand is suppressed. Again the inverse obtains. Goods in infinite supply will not command higher prices.

The law has been used in countless ways over the course of time and study, explaining everything from inflation, and government price controls to many a Madison Avenue advertising campaign. How is it then that something so useful and unassailable in its logic remains ignored with respect to US energy policy?

Petroleum is a finite resource, and therefore as most any 7th grader can tell us, unless methods of curbing our thirst for this resource can be found, then prices for petroleum products will rise as time goes on. The 1973-74 Arab Oil Embargo was a very large illustration of the law of supply and demand for most Americans. These events caused an unusual introspection where the words reduce, reuse, and recycle actually became part of our national lexicon. They were accepted terms for a time that even carried patriotic overtones. The can do attitude associated with our national character included these ideas, and our political and legislative climate reflected this.

These trends culminated during the presidencies of Gerald Ford and Jimmy Carter. By the late 1970's there were even regulations that guarded against the excessive heating and cooling of public buildings as a way to save precious, finite petroleum. (Those regulations are long gone, thanks to the Reagan Revolution's notions of an invasive government, but to this day, I personally cannot walk into a cold movie theater in July, donning my sweater, and long for more sensible days when such waste of resources was recognized).

Those years were also a time, when our national introspection led us to believe that perhaps it was not really prudent to be driving such large fuel drinking automobiles. With equal importance our national will told us that we could actually do somehting about it. The outcome of this thinking was embodied in the Corporate Average Fuel Economy Requirements, or CAFE regulations. ( http://www.nhtsa.dot.gov/cars/rules/cafe/). In brief, each manufacturer of automobiles sold in the US, including foreign makers, would be required to achieve increasing miles per gallon targets in each new model year. This was based on the average mpg of all new cars sold. Failure to reach the legislative targets of mpg triggered a system of monetary fines against individual manufacturers. What a blessed idea, a government which actually utilizes foresight and planning for the future instead of short term political gain! A government with the fortitude to reach out and save a population from its own bad habits in the process. Those were noble and heady times indeed to see a government willing to apply what it had learned by the 7th grade for our national and global well being. It was a time of profound common sense.

It is interesting to note however, the ways in which progressive and seemingly sensible ideas are reversed during times of Republican or conservative control of the White House or congress. One can notice the correlation of record federal deficits, relaxed environmental laws, the doubling of commercial minutes allowed on children's television, and any number of similar trends during times of Republican ascendancy. (http://www.infoplease.com/ipa/A0774721.html). Our society becomes polluted in many ways that are below the public radar, and buried under the rhetoric of free markets, and smaller government. But that is a discussion beyond our scope here.

In 1980 the tone of our country changed in this manner as the Reaganomicists and their ideological colleagues in congress implemented their own notions of a smaller less "invasive" government. Who can forget such lines as, "It's time to get government off the backs of business!", (meaning General Motors et. al.), "We must preserve the entrepreneurial spirit in America", (meaning IBM or GE).

The translation of this rhetoric into the world of CAFE meant that by 1985, the efficiency standard for passenger vehicles was frozen at at 27.5 mpg, and from 1986 through 1989 it actually was lowered. Astonishingly, this meant that American cars were actually getting larger, and less fuel efficient despite the law of supply and demand, despite the continuing decline in world wide reserves of petroleum. As a nation, we somehow called it a greater wisdom to use even more oil. ( http://www.nhtsa.dot.gov/cars/rules/cafe/overview.htm). It was not until 1990, (a renewed Democratic majority in both houses of congress), that the CAFE requirements were amended back to the 27.5 mpg figure, but were frozen at that level where they remain until this day.

Yet, the subsequent manipulation of the CAFE requirements classifies SUV's as trucks, instead of the passenger vehicles that they really are. This is a tip of the hat to the benefit of domestic automakers. As a result, our rates of consumption have continued to grow. US consumption is higher today than in the late 1970's. Even more shocking, after the national anxiety of 1973-74, our dependence on foreign oil is a full 25% greater than in those years. In the 21st century, this fact carries with it a double whammy, because it is not simply the raw materials that we are importing. Today, we are importing a larger percentage of our foreign requirements as finished products. This means that not only are we beholden to other nations for the raw materials, but dependent on them for the latest in refining technology as well. The most modern refineries, with their ability to squeeze more and better products from every last barrel of crude oil are located overseas. This is a true double bind in both materials and know how. ( http://www.eia.doe.gov/).

The American appetite for fossil fuels therefore remains unchecked, either through our own volition, or through regulatory manipulation. The US comprises 4.6% of the world's population, yet acts unabated as the consumer of 25% of the the planet's fossil fuels, and and amazing 30% of the world's total resources. (http://www.eia.doe.gov/kids/infocardnew.html). Yet, through government inaction to make the hard choices, US gasoline prices are lower than 101 other nations on earth. (http://www.nationmaster.com/graph-T/ene_gas_pri&int=-1).

Perhaps the true genius of our government and our society has been that we are able to maintain such reckless numbers and wanton disregard for the law of supply and demand, while doing so at prices for energy that remain far below world scale. But it is an artificial world of rampant consumerism and disregard for our 7th grade grasp of the law of supply and demand. It is a world encumbered by a short sightedness and self interest in the government's business of business that crosses the border into irrespopnsibility.

The job of government is the job of long range planning. It is a job that may sometimes include difficult decisions in the short term, in order to provide for long term security. It is not the job of government to ignore such trends, as an ostrich, while singing the praises of smaller government, and hearkening to some vague and self serving notions of free markets. It is certainly not, in the words of of both Presidents Bush, a case where "The American way of life is not up for negotiation." Bush 41 uttered these famous words when trashing the Kyoto accords on global warming and fossil fuels, while the son used them in the aftermath of 09/11/01.

The answer my friends lies, as do many answers, back in our elementary schools. The answer is as simple now as it was then. It is an insult to our schools, and to ourselves as thinking adults that we can ignore the basics, and allow our government to do the same. O Pray that we find the wisdom to behave as 7th graders once more, and find the good sense to lessen our demands for that demon black gold.

Further Thought:
http://www.worldwatch.org/
http://www.thelutheran.org/0301/page18.html

Timely Common Sense Developments Since This Post:
http://query.nytimes.com/gst/abstract.html?res=F40A13FE345D0C768EDDA00894DC404482 California backs a plan to reduce emissions. The implementation of this by automakers will require increases in mpg.

http://www.ctnow.com/news/opinion/editorials/ My hometown newspaper, The Hartford Courant endorses California proposal.

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