Who Sets The Price of Fuel?

Who Sets The Price of Fuel?

© Dennis York 2008

Jaisukh takes a ride with his first son on their newly acquired motor bike. Six months ago Jaisukh walked everywhere he went. His family frequently fasted to make ends meet. He worked two jobs and went to school in order to qualify for a white collar support job with a Western company. Now he answers phones twelve hours each day, six days each week and makes $113 US per week. This is 25% more than the national average of his country.

With his new wealth, Jaisukh can buy one gallon of gasoline each week to power the motorbike while still feeding his family.

Jaisukh is not alone. He lives in a country with an economy that grew by 9% in 2007. This is three times what would be considered a healthy growth rate in the United States. The people of Eastern Europe, Russia, India, China, Vietnam, Malaysia, Thailand, and many other countries are experiencing an economic revolution.

Now that he can feed his family, he wants a newer bigger, faster motorcycle. He wants a car. In fact he wants a BIG car! Jaisukh wants a bigger house. More than anything Jaisukh dreams of air-conditioning. With the exception of a few glorious hours in a movie theater he has lived his life sweating and hot. Air-conditioning is something only the very richest of his countrymen can afford. Air-conditioning is heaven on earth. Someday, Jaisukh prays he will be able to afford air-conditioning. The luxury of fretting about global warming is far too expensive for Jaisukh to consider.

In economics the margins make the difference. The very rich and the very poor set the trends. The people in the middle are along for the ride. The fact the Jaisukh is poor makes him powerful. If he and the other billionish people like him can afford to buy a gallon of gasoline at $4.00 then the world will pay $4.00 for a gallon of gasoline. If Jaisukh will only pay $3.50, then everyone will only have to pay $3.50. It is Jaisukh’s “marginal gallon” of gasoline that sets the price for the world. That “marginal gallon” is the last gallon the oil company can sell. It is sold to their toughest, most demanding customer. If that customer won’t buy, they have to reduce the price to get rid of that gallon. If that customer will buy, they can raise the price until the marginal gallon does not sell.

Who is responsible for Jaisukh’s recent success?

We are. We are the very rich of the world. On average Americans make five times what Jaisukh makes. We make so much money that we can afford to buy and benefit from his services. Further, we showed the masses of the world how to be successful. We went from Jimmy Carter’s malaise of high taxes, recession, 20% inflation, and gas lines to Ronald Regan’s “Shining City” is less than eight years. We did it by cutting taxes, cutting regulation, and believing in the abilities of ordinary people to make rational choices for themselves.

People around the world noticed. The pebble of liberty and free markets that Regan dropped into the pool that is America has rippled around the world. From Budapest to Beijing the Regan tide has lifted boats.

So what do we do now? Can we put Jaisukh and his billion or so brethren back in a box of poverty? Can Al Gore convince him that he really does not need or want air-conditioning? Can Al Gore even convince himself to forgo air-conditioning? The answer is not and cannot be more Carterist malaise and restriction of freedom. Only the rich can afford or abide this solution and they can only do it until they become poor as a consequence.

The answer is to trust people and the invisible hand of the free market to do the right thing. High energy prices will self-correct if governments get out of the way. One of the reasons that so many people are suddenly able to afford a gallon of gasoline is government subsidy. The governments of the developing world realize how crucial abundant energy is to quality of life. They know what we once knew. OIL IS WONDERFUL STUFF! So they subsidize energy which fosters rampant growth in demand. Now these governments have a problem. Because energy prices have risen these governments cannot continue meaningful subsidies and stay solvent. Subsidies are being dropped or reduced across the globe. This will cause consumption and prices to drop in the near future.

One of the reasons that prices have risen in the United States is the weak dollar. If a dollar is of less value it takes more of them to buy a barrel of oil. What is a dollar worth? According to the Congress of the United States as of July 24, 2008:

$1.00 = 9 minutes and 16 seconds of unskilled US labor

On July 23, 2007 that same dollar would buy 12 minutes of unskilled labor. In one year and one day the US Congress has devalued the dollar by 31% simply by redefining the marginal value of labor in the United States. Not only did the value of the dollar decrease, the US Congress increased the value of Jaisukh’s labor because his services became even more attractive in the world market. As Jaisukh makes more money he buys more gasoline (that bigger motorcycle) and the global oil supply shrinks. Therefore US government minimum wage policy has a strong primary and a lesser secondary impact on the price of energy for US citizens.

The Market is much smarter than the government. The Market always finds the right solution if allowed to. In his 2003 State of the Union Address, President Bush announced a $1.2 billion dollar initiative touting hydrogen as an energy solution. hydrogen is neat stuff. If you burn it you get heat, water, and no pollution (well maybe some oxides of nitrogen but they hardly count). If you were driving a hydrogen powered car and you crashed and ruptured the fuel tank the hydrogen would disperse into the atmosphere so fast that lingering fire would likely be avoided (unlike gasoline). If you were really clever and had NASA’s funding, you might be able to convert the hydrogen to electricity in a fuel cell without burning it. This can be very efficient.

But hydrogen is not an energy source and President Bush is ill-informed to tout it as one. You can’t drill for or mine hydrogen unless you live on Jupiter. Hydrogen is more like a bucket that holds energy. You have to fill your hydrogen bucket at the expense of some other form of energy. You can make very expensive hydrogen by breaking water apart with electricity. The current commercially viable way to make hydrogen is to take apart hydrocarbon fuels. To put it another way, you take a perfectly wonderful fuel like natural gas, add money and energy and end up with an inferior fuel called hydrogen. There are more hydrogen atoms in a gallon of gasoline than one can fit into a gallon-sized liquid hydrogen tank. So if you want to use hydrogen as a fuel, burn gasoline. If you simply must use hydrogen, liquefying it and cramming it into a tank and maintaining it at −423.17 °F/−252.87°C is a trick for NASA not the minimum wage guy at COSTCO. OK, so just put it in a pressurized tank. To get the cruising range of a gasoline powered car, the high pressure hydrogen tank will need to be seven times bigger than the gasoline tank and must be either cylindrical or spherical in shape to withstand the high pressure. The entire trunk and some of the back seat become the fuel tank.

President Bush’s limousine uses gasoline because it is a great fuel. It has incredibly high energy content on both a volumetric and weight basis, it burns clean and it is easy to handle and distribute. The Market made an excellent choice and we are blessed to have such a wonderful fuel. If hydrogen were a good fuel The Market would have selected it. Limos would use it. And government money (read: your money) would not be wasted on hydrogen promotion.

Hydrogen is just one of many alternatives touted by politicians and con men. All these are “alternatives” only because The Market is smart enough not to embrace them. Only fools and governments buy “alternative” technologies.

Electrical energy is versatile and easy to distribute. The Market chose well when it ushered in the age of electricity. But electricity has one big flaw. It can’t be stored effectively. You must use it as you produce it. This is one of the many reasons that The Market has marginalized both wind and solar electrical energy. They only happen when and where the sun shines or the wind blows – not necessarily when and where the power is needed.

But suppose for a moment that the USA had an infinite amount of environmentally clean, cheap, and dependable electrical energy. We could all air-condition our homes without guilt. We could all simultaneously plug in our electric cars to charge them. We could bring heavy industries like aluminum and steel back to the heartland. We could export more manufactured goods, import less petroleum, and improve the value of the dollar. We could export power to Canada, Mexico, and Cuba. We could afford to make hydrogen from water in high temperature reactors. Entrepreneurs, spurred by The Market, would work to find ways to store the energy of electricity effectively and economically. This could usher in a new era as good for the world as was the adoption of petroleum 100 years ago.

What stands between us and infinite clean, cheap, dependable electrical energy? It is not technology. France has it today (70% of their capacity). Nuclear energy is the only source of energy that The Market has approved and blessed. Nuclear works. It is cost effective and virtually pollution free.

Standing in the way of Nuclear energy are politicians and environmentalists. They also say no to coal, they want to tear down hydroelectric dams, they fight against wind generation in many locations, they make it difficult to find, extract, or import natural gas, and they do all they can to prevent oil exploration and extraction.

Their argument is that nuclear power is dangerous. Not one life has ever been lost in the US Commercial Nuclear Power industry. And today’s nuclear technology is far safer than that of the past. New designs are inherently failsafe. New fuel reprocessing technologies - outlawed in the US - eliminate virtually all nuclear waste, and what remains can easily and safely be stored at Yucca Mountain. The reprocessing and storage of nuclear waste could and should be a growth industry in the United States. If we don’t do it the Iranians will be happy to. Jaisukh will have air-conditioning powered by nuclear energy soon. Will you?