Friday, December 07, 2007

He Slept Thru Economics Class

I have to admit that my car radio pre-sets only have to have NPR and Air America (or whatever it is), since that's all I listen to while driving.

Today on one of these stations I heard Iowans (?) questioning presidential candidate John Edwards at some kind of open forum. A male questioner made a little speech about gas prices, and then stated the conspiracy theory that many share with him: "the automakers have technology that would deliver 50 miles per gallon in an SUV but they have conspired with oil companies to suppress it."

John Edwards didn't react directly to the questioner's speech, probably because he didn't want to call the guy a nutcase in public. But, since this is my blog, I can say directly to this guy, "You slept thru economics class, bonehead!"

So, you ask, do I have inside information about auto companies and oil companies? No, I don't. I can't prove they haven't conspired to bury some magical technology. Why, then, am I so sure this guy is a bonehead?

The answer is simple. A technology that would enable a 50 mpg SUV is worth more bilions of dollars than I can imagine. It's the holy grail of technology. It's the invention that would enshrine the inventor aside Thomas Edison and Albert Einstein. It's the dream of every chemical and mechanical engineer in the world, and it's the dream of every smaller car company. Can you imagine what the patent on such a device would be worth? It's incalculable! And that's why this guy is a bonehead.

The simple answer of economics is that things of great value are sought by many very smart people and many powerful organizations, and, once discoved, cannot be hidden for long. It's extremely likely that if such a techology existed it would have been "discovered" multiple times already, and if it was, then everyone associated with each "discovery" would have to be dead. Have you heard about any mass killings or disappearances of chemical or mechanical engineers?

It's convenient to blame the gas prices on a conspiracy, but it would be smarter to learn the law of supply and demand as it applies to both oil and the American dollar. This poor Iowan must have slept thru economics class.


ThomasLB said...

I agree.

But I do think oil companies are deliberately keeping prices high by refusing to build new refineries. With the profits they've been reaping they could easily afford to spring for one or two.

Bishop said...

Here's the part I can't figure out. Why do oil companies make more money when crude prices rise? Don't they (A.) they simply pass higher costs on to consumers? And (B.) doesn't an increase in price correlate to a decline in amount sold?


Ron Davison said...

I have to take issue with you. I know a guy who has invented a perpetual motion machine. Each month, Exxon sends him a check for $10,000! Just to keep it off the market. Of course he's not going to release it when he can get big money like that.
Okay, seriously, one of the scarier things about these town hall forums is the extent to which it reveals exactly such thinking. Ouch.

Frank said...

Thomas, I'm not sure whether it's harder to get a refinery or a nuclear power plant in your back yard...everyone one wants more gasoline and more power, but nobody wants to put the source anywhere near their city. If refineries are to be built, they will most likely not be in the U.S.

Bishop, oil companies do make a lot more money when the price of oil rises, since they immediately raise the pump price to reflect the replacement cost of the oil that you get in your next fill-up. Think about it this way: yesterday you bought a bar of gold for $1,000 and today the market price is $1,500. Would you sell that bar of gold for $1,100 just to get a "fair" profit, or would you sell it for $1,500? The oil companies like the $1,500 option.

Regarding demand, the higher price does reduce demand, but much more in the long run if prices stay high than in the short run. I just heard that demand has fallen about 1% due the $3.00+ per gallon price. If the price stays high, people will make more choices to conserve and demand will continue to go down.