The Profit Motive Rocks

This post from TJIC, which is really about something entirely different, mentions that the price of cocaine has been dropping sharply over the last 10 years.  This is something I have heard police officials lament as well.

Does the profit motive rock or what?  The largest and most powerful government in the world stations armed men and ships around the country.  It has a legal system in place with huge penalties that has of late been nearly entirely dedicated to drug enforcement.  The US has even subverted 200 year old Constitutional restrictions on searches and property seizures (the Patriot Act is mostly used for drug, not terrorism, actions).  All to stop the importation of certain valuable substances.  And even so, the human mind is powerful enough to subvert all of these restrictions and bring in so much supply that the price continues to drop.

Al Gore believes that alternative energy efforts in the US are being subverted by the oil companies:

Apparently, according to Gore, the oil companies drive up prices
reducing supply and then depress them in a telling pattern. As soon as
the political will swells to a light boil, the companies reduce
prices/increase supply.

Really?  Independent drug traders are able to subvert a million government officials with guns to keep cocaine prices low, but Exxon, with a 5% market share (at most) in oil, is able to hold the line on oil supply?

Sure.  In 1972 and 1978 there were a series of oil price shocks (to real levels about where they are today) that convinced everyone that oil prices would keep going up and up and that oil would run out within a few decades.  Of course, in about 1984 oil prices crashed, and stayed down for almost 20 years.  Depending on how you date it, it took oil supply development between 6 and 12 years after the price signal to flood the world with oil, and that was in an environment with price controls and windfall profit taxes that reduced development incentives. 

Right now, we are about 5 years in to the current oil price spike.  Go long at your own risk.

More on supply and demand vs. price manipulation in oil here.  More on Al Gore, including a fisking of his solar plan, here.

Update: Of course, the Democrats in Congress are doing everything possible to keep oil prices up.  If I wanted to ensure high oil prices, I would 1.  Kill incentives to increase supply, perhaps with a "windfall" profits tax and 2.  Put the most promising potential new exploration areas off-limits to new development.  Congressional scorecard:  #2 is in place, and both Obama and Hillary and Pelosi are proposing #1.

Update #2:   Another thought on Gore's statement:  The boom-bust
patterns in oil are characteristic of nearly every other commodity out
there, which therefore presupposes that if oil prices are the result of
manipulation, then every other commodity must be as well since their
prices demonstrate the same patterns.  We see these patterns in
commodities that politicians have never even heard of and in which they
have never thought to exercise their "political will."  (political will
in this context defined as use of government force against a segment of
the populace).

A reasonable person might
suppose that the surge in prices followed by a drop a number of years
later is better explained by the time delay in increasing oil
production after oil prices spike. In many ways, Al's theory is simply
delusional.  If your friend started trying to tell you, in all
seriousness, that every action Microsoft takes is actually aimed at
thwarting him personally, you would think him insane.  But this is
effectively Gore's argument, showing the immensity of the politician's
ego.  Oil prices move not because of supply and demand, but because of
us politicians.  Every tick up and down is carefully managed to thwart
us brave Congressmen!

When a politician describes price signals as mainly influencing political actions, rather than the actions of free producers and consumers, they are probably a socialist.


  1. John Moore:

    It is typical misdirection to blame the oil companies, and typical leftist behavior to take advantage of this to inflate government earnings at the expense of the shareholders (in this case, largely retirement funds).

    However, OPEC, especially Saudi Arabia, does manipulate the supply. They operate with different incentives than Exxon.

    The question everyone has today is whether they are still able to do so, or if they are tapped out. A larger question is whether we have hit "peak oil", or even whether the rate of rise in global demand exceeds the ability of even dramatic price incentives to increase the rate of supply.

    See here for a very interesting DOE report which takes into account alternatives and incentives.

  2. Luis Dias:

    Yes, the question is if the wolf really ate the sheep this time or not. Peak Oil is the question and we will only know it in the rear mirror.

    Some fundamental differences since 1973 though. Alternative energy sources are becoming competitive with increasing costs in oil production. Even if oil pops and busts, it will never go back to 1998 levels, oil is much harder and costly to produce nowadays. New oil wells in brazil and etc, are located in extremely deep reservoirs which are very expensive to reach. Meanwhile, solar, wind, and later geothermal and waves, etc. are descending production costs, not climbing. How long until they crossover and industry makes massive investment in alternatives is beyond me. This has to do with how great advances are in alternatives and how fast Fossil Fuels deplete and boost its own price. I have no crystal balls like Al Gore, so I can only guesstimate. And other than guesstimate, I hope this moment comes sooner than later, as I am sick and tired of watching scumbags making luxury buildings in the desert with air conditioning and pools... to home their horses. We are wasting money, folks.

  3. diz:

    Meanwhile, solar, wind, and later geothermal and waves, etc. are descending production costs, not climbing.

    I can say with complete certainty that Solar and Wind costs energy have been rising the last couple years. You can't always double and triple the size of an industry without radically driving up the price of certain key raw materials and/or components. Solar has been beset by enormous increases in the prices for high grade silicon and tellurium. (Yes, tellurium - if you think oil prices have grown quickly, check out tellurium prices).

    Wind tower manufacture is beset by shortages in just about everything, but particularly precision components.

    Most importantly, however,is the fact that all of this enormous strain on these industries is occuring at a level that is trivial in terms of what it would take to out a serious dent in our energy demand.

    As for geothermal and tidal power, I have no idea what the trends are. Partly because they scarcely exist.

  4. Philip Fortuna:

    Nice coincidence. I was watching Scarface last night when the exact same thought came to me. Irrespective of punishment or threat people undertake all sorts of activities if there's money in them.

    I'm writing a thesis on the role of the corporation and debating the idea of Corporate Social Responsibility as out of place. Profit is the most powerful motivator.

  5. Dan:

    The fellow who writes this site is by my estimate very bright and well-read. So are most of the people who comment on the site. But he and most of the others are way too sanguine on the subject of energy. They seem to think the market can work everything out. Not this time. You can't compare now to 1973 when you talk energy, because the world population is twice as big, China and India's economies have boomed and we've run through 35 more years of dwindling oil supplies. The transition from our current oil-based economy to some other kind of economy is going to happen, and it will happen very soon (already is) and it won't be pretty at all. We have run out of "easy" oil, and there is no more Saudi Arabia/North Sea/Prudhoe Bay to save us this time.

  6. skh.pcola:

    Pshaw. We haven't "run out of 'easy' oil." Not nearly. I know this to be true because there are hundreds of billions of barrels in the Gulf of Mexico and in ANWR, among other places that self-righteous political hacks have placed off limits. Any particular argument that relies on hysteria and omission of key realities such as that is not a rational argument.

  7. Dan:

    Hundreds of billions of barrels? Hmm - I'd love to see where you get those statistics. I've heard maybe 5 or 6 billion in ANWR and maybe a total of 30 billion to 60 billion in the Gulf and off the Atlantic and Pacific coasts (and oil under the ocean isn't "easy" oil, by the way).

  8. MJ:

    "Oil prices move not because of supply and demand, but because of us politicians.".

    In Gore's defense, a large segment of the population believes in this myth.

    Not in Gore's defense, he is now a Nobel Prize recipient and really ought to know better.

    As to world demand conditions being different now than in the 1970s, China and India do affect the demand for oil, but they also face the same, if not stronger, incentives to reduce their consumption when prices rise (due to lower average income levels).

    They also will be encouraged to develop new sources of energy in which they have a comparative advantage (supply curves slope upward). Thus, globally we should expect to see a great deal of innovation in the coming years on the supply side. In the US, we have high enough incomes that we unfortunately can afford to make expensive mistakes (see the many posts on this blog related to the ethanol trap). We should be letting a thousand flowers bloom...but not planting them in Washington, D.C.