Promising to Slash Gas Prices is "Economic Nonsense"


Oddly enough, I found myself nodding vigorously while listening to George Will yesterday on This Week. He derided politicians who claim to be able to move globally determined oil prices enough to influence gas prices dramatically, saying they might as well promise we can grow lobsters on trees. He rightly called it “economic nonsense.”

As the head of Securing America’s Future Energy noted in a televised interview today, the renewed focus on simplistic solutions is “déjà vu all over again.” As such, it’s worth re-reading some of what I’ve written about this in past few years, including on the folly of ignoring the global nature of the oil marketplace and the increasingly important role that a frothy futures market plays in determining oil’s price. There are, of course, also multiple books about this as I wrote here, these include my friend Lisa Margonelli’s Oil on the Brain.

Speaking of the brain, I may finally understand why the media routinely gets the facts wrong when it comes to this issue, making statement’s like Will’s – a painful glimpse of the obvious – stick out as exceptional. Nobel-Prize-winning psychologist Daniel Kahneman lays bare the way we think in his brilliant new book, Thinking Fast and Slow. He says, among many other insights, that our brains have an always-on “System 1” that can “easily think associatively…metaphorically…causally…” but stumbles when faced with statistics which “requires thinking about many things at once…” Then System 2 must engage, and it can do a decent job but it requires effort and so the inclination is simply to endorse what seems intuitively obvious.

Now this can work brilliantly, allowing conceptual leaps that are quite useful. And it can also be way off the mark.

To get an idea of the type of “System 2” thinking required to really understand the oil marketplace, I recommend bookmarking Tom Kloza’s blog (which also has the benefit of being quite humorous). His latest about oil and gas prices in 2012 clarify just how many factors are at play, especially his entry looking ahead to a rocky 2012 which is also bookended with a reminder that these kinds of projections aren’t surefire given the complexity of oil price trends. Here’s a key paragraph, juxtaposing factors likely pushing oil prices each way this year (I italicize a couple of items driven in part by policy favored by NRDC):

What is reasonable?  Let’s look at the bouillabaisse of bearish/bullish ingredients. In the bearish column we have sovereign debt woes, a tapped-out U.S. consumer, stubborn unemployment, new car efficiency, migration to urban areas and working-from-home. In the bullish column we have incredibly brisk demand growth from emerging economies, robust export demand, a hornets’ nest in the MENA [Middle-East, North-Africa] countries, closures of refineries on both sides of the North Atlantic and the typical mess that comes with the transition from winter to summer gasoline, all against the backdrop of heavy maintenance.

Kloza thinks we won’t break $5-a-gallon this year, although I know others have grabbed attention by predicting otherwise.

Photo credit: istockphoto/skodonnell

When I first dug through the first layer of hype with this stuff, I thought that maybe it was true that all we needed to do was drive oil imports down and we’d be able to pay whatever we want at the pump. Wrong, as Canada and the United Kingdom know all too well. We’re part of a big – very big – global economy and take the price set in that huge marketplace. Even if we imported zero oil, that would be the case.

I also thought maybe we could boost production enough to drive down prices, at least. More supply, lower prices, right? Wrong again. Increasing production might well have an effect on prices, over time. But that assumes all else remains constant, in a world where 1/3 of humanity is industrializing (China and India) and where suppliers are organized in a cartel (OPEC) that influences prices. What’s to stop them from closing spigots as ours open, negating our actions?

Are we powerless? No. In the short run, we can exercise options that save us money and help insulate the economy – here are seven ideas for doing just that. And in the long-run, where this game will really be decided, we can drive down oil dependence and spur real competition in transportation so we have more options the next time the global oil rollercoaster clicks-clicks-clicks relentlessly upward.