Friday, July 25, 2008


Rational and Irrational Reaction to High Energy Prices

Bryan Caplan links to a snippet from Richard Posner on people's resonses to high gas prices.

I wonder, too, whether the recent decline in U.S. gasoline consumption doesn't represent to some degree an irrational panic reaction. To take a huge loss on the sale of your SUV in a market that is depressed because so many other people are doing the same thing at the same time is unlikely to be justified by the gains from the improved gas mileage of the car you buy with the modest proceeds of the sale. Likewise, driving a substantial distance to save a few cents a gallon on the gas you buy is unlikely to be worthwhile. A recent article suggests that people fixate on the price of gasoline because unlike most regularly purchased items, such as food, gasoline is purchased separately from other items so that its price is not buried in a bill for multiple items.

Pile on top of that, entirely rational reasons fuel efficiency may decline with higher gas prices.

And, it gets worse. From CNN, communities are cutting back on public transit, police, and road maitenance.

Food prices are greatly affected by oil. It accounts for most of the production cost.

Fuel consumption is declining much less than driving is.

Not to worry, people are discovering ways to reclaim their lost efficiency.

The last time there was a significant reduction in gasoline consumption was 17 years ago.

17 and a half years ago, there was an upward spike in oil prices in August 1990. It was followed by a recession from Sept 1990 to Sept 1991.

Arran: Tom T from the reference frame here. Good post. It really doesn't make sense to trade in your SUV for a hybrid, because hybrids cost a lot more than other cars. People need to take a longer view of things.
Thanks Tom.
I disagree with your comment "(a) holiday, rather than permanent, will likely make the admin cost pretty high"

The software that cuts a check to the Government gets one variable changed for a Holiday. The quantity of gas sold is multiplied by "0" instead of "$0.18" (or what ever the fed tax is ).
at the end of the holiday it gets changed back.

If the tax was eliminated completely, the software would have to be rewritten to not calculate, and not issue the check. Cutting code out of a program creates thousands of man-hours of testing, to make sure that one has not introduced an error. Changing a single variable is 10's of man-hours or less.

Justin Wolfers is confused when he says "Does shame really determine oil prices?"

A tax holiday on Gas has nothing to do with oil prices. It effects the refined product, which the corporation has some control over. The price of Oil is set on the spot market, and is out of the hands of the Oil company. The Oil company can increase the ammount of Oil pumped from the ground in a well that they own, but if there is a war in Nigeria, the price of oil will increase. It would be bad for your engine to run at 4000 to 5000 rpm all day long (when it usually runs at 2000 rpm to keep you at 65 mph), but not a big problem for short burst. For similar reasons, it is inefficient to pull oil out of a single well at the Maximum rate.

The cost to refine oil into gas should be the same in June as it is in October, minus the change in raw material cost (oil).

As far as shame, these corporation spends millions of dollars to make their company brand name something that inspires trust and a feeling of strength.
It is easy to publicize the gas price, of various stations, the week before the tax holiday, and the gas price the week after the holiday.

Since the float can be calculated to compare the price change of the raw material (oil) 3 months after the gas tax is rescinded, there is a strong incentive for the company that does the refining to not(!) take advantage of the $0.18 change from the start of the tax holiday, until the end 3-4 months later.
Regarding buying a Hybrid; the economic model is not all that goes into the decision.

For my part, I was willing to pay 25,000 for my Honda Civic Hybrid, instead of 2,1000 for a similar Honda Civic.

As an early adopter, I was voting with my wallet to get the company to make more Hybrid cars. With increased volume comes lower prices, and more research into better battery technology. A positive feedback loop (virtuous cycle) that will encourage more electrically based vehicles.

More electrically based vehicles will provide a base for products that allow the consumer to charge their car at night, reducing dependance on oil.
You're right. But I was thinking of reworking the budget.
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