Gasoline prices are currently above $6 per gallon in LA County. So this must be a good time to take some advice from my younger self on the price elasticity of oil.
The first quarter of my freshman year in college, I didn’t do well academically. Apparently, fraternity parties and not going to class wasn’t a recipe for straight A’s. Shocking.
That quarter, like every freshman, I took introduction to Macro Economics and even though I was probably drunk, I actually learned something called supply and demand.
I also learned (in a different class) that the human memory should really last 23 months, which is where our supply and demand story begins.
April 20, 2020, Something truly magical happened on that day. The price of a barrel of oil went negative. Was this due to some secret plot that retired Vice President Biden hatched to destroy America? No. Was this only happening in America? No. Then why was the price crashing? Intro to Macro Economics would tell us that the price crashed because demand crashed.
June 21, 2020, Geologist Art Berman came on one of my favorite podcasts, “Macrovoices”. If you pop on this podcast or Youtube clip that is literally entitled “Expect oil prices to move down, then up, then WAY up“, in a very clear way, Art will walk everyone through how long it takes to close an oil well, but more importantly, how long it takes to reopen an oil and gas well once demand returns. (hint: it takes a looooong time)
On June 21, 2020, this expert in oil production told everyone who would listen EXACTLY what was going to happen to oil/gas supply/demand and price over the next year to 18 months. And it happened exactly as predicted. (He was not alone in this prediction, BTW)
Lastly, as a reminder, in America, we don’t have state-run oil companies, we have “capitalism”. Well, technically “capitalism with massive tax breaks and subsidies”. So given all of that, it’s now pop-quiz time.
Which people in Spring/summer of 2020 closed the oil/gas wells all over the world? Thus massively reducing supply for the foreseeable future.
Was it…
Private citizen Joe Biden?
The current President of America at the time, Donald Trump?
Or was it the CEOS and COOs of Exxon, Chevron, BP, Total, R.D Shell, Oxy, Phillips 66, etc, etc?
Hint: you can actually go back and listen to conference calls of these companies and listen to their CEOs/COOs tell you how many wells they were going to shutter due to falling demand.
Take all of the time you need to figure out this “mystery”. But the answer to the above question will tell you exactly who is responsible for higher oil prices and shockingly, it happens to be the exact same people who benefit the most financially from higher oil prices.
As a shareholder of these companies, I commend their CEOs and COOs for doing exactly what they were supposed to do, respond appropriately to supply and demand. Now that demand and prices are way up, these same people will respond, but, again, unfortunately, wells take a looooong time (6 months ish, often longer) to get back to capacity.
But eventually, market forces will correct and probably over-correct, as markets usually do.
One of the things I miss most about Pre-Trump American conservatives was that for almost all arguments, y’all could be counted on proclaiming that market forces would solve the problem. No problem was too big for the “free market” to solve or too small for the government to screw up.
Where are my free market advocates these days? Where did y’all go? I miss y’all. Can you come back now please? We need y’all in the public discourse.
Because, after watching almost every person in America, from both sides of the aisle, scream for a government solution to this problem, I couldn’t disagree more. Can we have “smart” government incentives that propel innovation? Sure. But, I don’t want this President, or ANY POTUS/Govt Official making supply decisions about oil/gas wells. These decisions are best handled by geologists, engineers, production managers, and data scientists who spend all day thinking about nothing but oil.
Sometimes capitalism is gonna capitalism.
Stop calling for a government solution to a free-market supply/demand issue. If you are constantly screaming about how capitalism is the greatest thing since sliced bread (a product of capitalism) you can’t keep running back to Sugar Daddy-Socialism every time capitalism goes capitalism all over you and your money. (yes, I’m looking at you Banking Crisis of 2008- I haven’t forgotten what you did)