Aug 30, 2008

Economics 101 - The Philip Klein Challenge

In Philip R. Klein's latest so-called "editorial" on the Southeast Texas Political Review, he again displays his simplistic understanding of economics while commenting on gas prices:

Seriously - you folks that are part of a Union are working your way out of a job. Yes - gas prices went up. And yes - when it went up we stopped using so much and guess what? The price went down because supplies (are) were high. Economics 101.

With this statement, it's obvious that Philip never actually took macroeconomics, microeconomics, or even basic business finance.  Actually, current supply is lower right now. By the end of the second quarter, 2008, commercial inventories dropped to about 2.58 billion barrels, 17 million barrels below the 5-year average and equal to only about 53 days of forward consumption.

Yet, the prices went down. This is because supply and demand is only one of several determinants in the price of gasoline at your local convenience store:

  • Strength of the US dollar
  • Refinery capacity
  • Speculation in oil futures
  • Supply and demand

Americans should have seen declining gas prices throughout the year if Philip's thesis is correct, since US consumption has been in a steady decline since 2007. In 2008, consumption in the US has dropped by about 800,000 bbl/day.  Unfortunately for Philip, this is not the case.

Rather, readers who are paying attention will realize that the price of a barrel of oil began to moderate at about the same time the US dollar began to rally. The strength of the US dollar affects the price of gas in two ways for Americans: not only does a strong dollar buy more oil for the same amount, but oil is traded in US dollars.  Putting this into terms that even a simpleton like Philip R. Klein can understand, the value of the US dollar fell to historical lows, while the price of oil reached historical highs. 

Likewise, refineries over the past few years have been running at 96 percent capacity. This capacity is critical, especially since a substantial portion of US refineries are located along the hurricane-prone Gulf Coast. This is the reason that the oil cartel, OPEC, who actually controls supply and demand of oil on the world market, did nothing to increase production of crude while prices were spiking: oil refineries around the world were operating at capacity.

Finally, oil prices spiked as speculators began moving from the depressed housing market into the oil futures market. Many analysts more knowledgeable than Philip R. Klein attribute the entire current spike in oil prices to this one determinant.

Philip's notion of "DRILL DRILL DRILL" is yet another example of his bumpersticker mentality and inability to comprehend even the most basic of issues.  Considering that it takes roughly 10 years from the time an exploratory drill is initiated until a well is brought online, more drilling will have little effect in the near future on actual prices. Yet, we can dramatically increase capacity in less than two years by expanding or even building new refineries, which will have a more dramatic effect on prices.

The strategy of using oil from other countries before tapping into the remaining US reserves makes a lot of sense to me as well. Since most US reserves were used during World War II and the years immediately after, then perhaps it makes sense to level the playing field.

Oil is not a renewable energy source and one day the spigot will run dry. Only idiots like Philip R. Klein would argue that we should ignore Hubbert and continue to place all of our eggs in one basket.  T. Boone Pickens has the right idea in my opinion.

Consider Philip's predictions on the price of oil over the last four months:

$200 By The End of Summer - Washington Whispers. That means gas at 7$ per gallon.

Oil - Will go to $200 Per Barrel and Gas Will Be At $5.00 per by July. That is what they are saying. Go figure.

Note to Philip: Consider this a proverbial slap in the face with my gloves. I'd love to discuss your idiot opinions about this, but it's obvious you don't have the mental capacity. You're simply parroting those wingnut statements from your real sources, like "The Guy from Boston," without any real comprehension of the underlying issues, so you can't defend your own statements.  Your repeated refusal to engage in a meaningful debate over your asinine statements simply underscores your lack of credibility, as evidenced by the declining readership. 

It's sad when someone has to assuage their own feelings of inferiority by inventing mail from purported readers.


Any comment, buddy? 

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