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On my drive into work this morning I heard several soundbites from folks in the current Obama Administration, including from the Central Planner himself, to the effect that, “Drill Baby Drill is stupid. Increasing the supply of oil will not have an impact on gas prices.”

Now, I won’t yet paint this as the stupidest economic observation ever coming from an Administration without asking a question. It might be the case that the Administration has a model of energy supply and demand in their head that looks like this: the reason supply changes do not change gas and oil prices is that the demand for gas and oil is … any takers?

That’s right, they have to have a  model in their head that shows the demand for gas and oil will be very, very, very elastic. In other words, for supply shifts to have NO impact on prices, it must be the case that consumers are extraordinarily sensitive to changes in the price of gas and oil, and that any small change in price on the downside encourages them to massively increase their consumption of it and any small change in price on the upside encourages them to massively decrease their consumption of it.

That sounds great, except it’s 100% the opposite of what’s been going on and 100% the opposite of the economics that the Administration believes exists in other areas. Aren’t we told that “consumer thirst for oil is insatiable?” Now it could be the case that what is going on is that as supply increases there has been a regular increase in demand (continued shift out in the demand curve) such that the short run demand curves may be inelastic but the effective long run demand is elastic. That makes sense, but I hardly think that’s the model they have in mind. Even if this WAS the case, then it is still patently absurd to say that new oil has not had an impact on the price of oil – oil prices would be massively higher without the current Drill Baby Drill boom.

Which brings me to my real point. This sort of denial that oil supply has an impact on prices is really hard to stomach from a group of people who play these sort of counterfactual games like a pyro in a fireworks factory when it comes to stimulus. How many times has some representative of the administration defended stimulus and the current recovery on grounds that, “sure, unemployment is the same today as it was 4 years ago, but it would have been worse without the stimulus.” You don’t get to pick and choose the type of logic you wish to employ, so if you want us to believe that observation about stimulus (which I tend to agree with as a matter of logic, since we can never observe the counterfactual) then sing another song about high gas prices.

And another observation: drilling on federal lands has actually fallen (as I am told, need to look it up at EIA when I get to work) since the Central Planner took office. The gas and oil boom has taken place on private lands.

And another observation: if adding to the supply of conventional resources can do nothing to impact the price of gas/oil/energy, then please explain to me why you continue to promote massive subsidies of favored energies like wind, solar and biofuels? Seriously. If it is the case that increasing the supply of solar cannot possibly bring down its price, then the subsidies are doing to be doing what, exactly? Are you admitting that you just like shoveling money into your favorite pet projects?

And just think about what these historic observations about supply not mattering means. We can flood the country with purchasing media and the purchasing power of money will not change! Oh the things we can imagine we can do!

4 Responses to “Drill Baby Drill … for Some Economic Sense That Is”

  1. sherlock says:

    I believe their next cop out is usually oil is such a “world good” that increasing the supply here has no effect on the price. But to be consistent that way, wouldn’t anything China does be irrelevant to world market prices?

  2. chuck martel says:

    Two other issues are related to the actual prices of oil and the current administration’s response. First of all, federal policies that discourage natural resource development send a signal to investors that there really won’t be much of any effort to increase fuel supplies and that prices will continue to rise, encouraging further investment in current petro-related assets. A federal announcement that drilling permits would be issued on federal lands would lower oil prices IMMEDIATELY, even though no increase in supplies occurred. Secondly, the administration is betting that if oil prices stabilize at their current level or even increase, the consumer will come to accept that as the “new normal”, just as 36 cents a gallon was an increase over 27 cents in 1970. Certainly society will and can adjust to higher energy prices, as we have already done in the past. The issue is that government actions or lack thereof are diverting our expenditures from one asset class (maybe beer or lingerie) to another (motor fuel) in a way that makes us all poorer, since the cost of fuel resonates throughout the economy.

  3. chuck martel says:

    It’s mystifying that it’s taken so long for energy resource development and oil prices to get some attention from the media and government when they have been such a huge factor in the current economic situation for the last five or six years. Gasoline demand is actually pretty inelastic, since so many people commute by auto to work. The spike in gas prices has literally taken $100-$300 a month out of people’s income that used to be spent on discretionary items like movie tickets (or beer and lingerie) and on the mortgage payments they made before they moved back in with their parents.

  4. blink says:

    With this schizophrenic demand curve — perfectly elastic today, perfectly inelastic yesterday — it is amazing we observe anything like an equilibrium in reality! As you say about employing counter-factuals, this is one-way reasoning. Hearing that “Increasing the supply of oil will not have an impact on gas prices,” I would like to ask, “So *decreasing* the supply of oil will not have an impact on gas prices either, right?”

    Charitable interpretation: Maybe the point is that increasing the supply of *oil* is unlikely to affect the short-run price of *gas* because the production process is slow and inter-temporal substitution is difficult for consumers.

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