Saturday, June 11, 2005
Once again - Chavez was right
When Chavez came to power he vowed to change Venezuelan oil policy. He would respect OPEC production quotas, cut back on oil ouput, and help bolster oil prices. This was a 180 degree turnaround from Venezuelan oil policy up to that point where production was maximized and everything possible was done to accamodate foreign oil interests. Chavez’s assertive oil policies produced immediate dividends for Venezuela as oil went from $8 per barrel to over $20 per barrel.
One aspect of this policy was for OPEC to implement a price band. The band was from $22 to $28 per barrel. The way it was to work was for production to be cut if prices fell below $22 and for it to be increased if it went above $28. While this was a very sensible and succesfull policy it was viruntly attacked by Chavez’s oppenents. The arguement was that by increasing prices OPEC was making oil so expensive that consumers of oil would cut back on consumption or switch to alternative energy sources.
However, that arguement never held much water. It ignored the fact that even at $28 per barrel oil was very cheap by historical standards – aproximately a third of what it was in the early 70s and early 80s. In fact for most of the past year oil has been priced at about twice the upper end of the band and it still turns out that oil, and the gasoline it is refinted into to, is inexpensive . An excellent analysis of this was published in the USA Today:
Of course, as interesting as this analysis is and as many different calculations that he did to show how in monetary terms and in time worked gasoline is inexpensive the real proof of the pudding is in the eating. So are people in the U.S. cutting back on gas consumtion due to the higher prices? Not at all. Witness this article:
So there you have it. Even at oil prices of over $50 per barrel, way over what Chavez’s opponents said was too high, consumption is unaffected. This shows just how cautious and prudent the $22 - $28 price band was. Recently Venezuela has been pushing within OPEC for the price band to be increased to over $40 per barrel. The empirical evidence to date shows that is very reasonable and workable. If OPEC is smart it will listen to the Venezuelans.
And as for Chavez’s opponents – do you think they’ll admit they were wrong on this and apologize? After all, Chavez being right and being so assertive on this has created a windfall for Venezuela. But to date they haven’t and I’m not holding my breath.
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One aspect of this policy was for OPEC to implement a price band. The band was from $22 to $28 per barrel. The way it was to work was for production to be cut if prices fell below $22 and for it to be increased if it went above $28. While this was a very sensible and succesfull policy it was viruntly attacked by Chavez’s oppenents. The arguement was that by increasing prices OPEC was making oil so expensive that consumers of oil would cut back on consumption or switch to alternative energy sources.
However, that arguement never held much water. It ignored the fact that even at $28 per barrel oil was very cheap by historical standards – aproximately a third of what it was in the early 70s and early 80s. In fact for most of the past year oil has been priced at about twice the upper end of the band and it still turns out that oil, and the gasoline it is refinted into to, is inexpensive . An excellent analysis of this was published in the USA Today:
Gas prices too high? Not by historical standards
By Mark J. Perry
By Mark J. Perry
If you're like most Americans, you have probably found yourself complaining lately about the high price of gasoline — especially if you just spent a day or two in the car over Memorial Day weekend.
A USA TODAY/CNN/Gallup Poll in May found that 59% of those surveyed said high gas prices had caused a hardship on them.
You might even find yourself longing for the good old days of cheap gas. If so, think again. Gas prices today, by any measure that adjusts for inflation and rising real income, are a bargain.
Gas prices appear to be at a historical high, and prices of the past appear to be cheap (17 cents per gallon in the 1930s, a quarter in the 1950s and 50 cents in the 1970s). But this is a classic example of "money illusion." In real inflation-adjusted dollars, gas prices are the same or lower today than in most previous decades.
Measured in real dollars, gas prices peaked in March 1981 at more than $3 per gallon. We have not even come close to paying the highest real gas price in history — today's prices are still 30% below the all-time high.
We can compare gas prices over time by calculating the cost of 1,000 gallons of gas purchased at the average price in a given year, as a percentage of per-capita disposable income in that year. For example, in 1935, when gas prices were 17 cents per gallon and annual disposable income was $466, the cost of 1,000 gallons of gas was 36% of average disposable income. Today, it takes less than 7% of our disposable income to buy 1,000 gallons of gas at the current $2.10 a gallon. The "cheap" gas of the '60s and '70s cost about 12% as a share of income.
Prices stable
Gas prices since the mid-1980s have not only been more affordable as a share of income than at any time, they also have been remarkably stable. The recent small increase in gas prices relative to income is fairly insignificant.
Further, we can avoid money illusion by pricing gas in "minutes of work at the average wage per gallon of gas," instead of dollars per gallon. Priced in minutes per gallon, you certainly wouldn't be longing for yesteryear's gas prices.
A typical American working today at the average hourly wage of $17.50 works about seven minutes to buy a gallon of gas for $2.10. In contrast, the average worker in the 1930s worked more than 20 minutes to buy a gallon of gas. During the 1940s, it took 12 minutes of work. During the 1950s, it took about 10 minutes per gallon.
Cost in minutes
Americans are paying about the same for gas in minutes per gallon today (7.2 minutes) as during the 1970s, when the retail price was only 40 cents per gallon, and much less than during the early 1980s (more than 10 minutes per gallon) when real gas prices peaked.
Finally, consider the consumers in most other countries. With the exception of members of the Organization of Petroleum Exporting Countries, such as Iran, U.S. gas prices are lower than almost anywhere in the world.
Go to Europe and you'll pay from $5 to $7 per gallon — even in Finland and the United Kingdom, which are major oil producers and exporters. In Mexico, the world's fourth-largest oil producer, they pay $3.20 per gallon, about the same as in India, Brazil and Singapore.
Consumers might have a lot of gripes to justifiably complain about, but the illusory high price of gas is not one of them.
The good old days of cheap U.S. gas are here now.
Mark J. Perry is a professor of finance and economics at the University of Michigan-Flint and an adjunct scholar at the Mackinac Center for Public Policy in Midland, Mich.
Of course, as interesting as this analysis is and as many different calculations that he did to show how in monetary terms and in time worked gasoline is inexpensive the real proof of the pudding is in the eating. So are people in the U.S. cutting back on gas consumtion due to the higher prices? Not at all. Witness this article:
Drivers use more gas despite prices
By Barbara Hagenbaugh, USA TODAY
WASHINGTON — U.S. drivers are using more gasoline despite near-record prices, a trend that could lead to even higher prices at the pump in coming weeks.
The four-week average for U.S. gasoline demand was up 2.9% from a year ago last week, which included Memorial Day, the unofficial start to the summer driving season, the Energy Department said Wednesday. That's the strongest year-over-year increase in four months and the sixth-consecutive weekly gain. Gasoline supplies could grow tight and prices rise if the trend continues, Alaron Trading oil analyst Phil Flynn says.
So there you have it. Even at oil prices of over $50 per barrel, way over what Chavez’s opponents said was too high, consumption is unaffected. This shows just how cautious and prudent the $22 - $28 price band was. Recently Venezuela has been pushing within OPEC for the price band to be increased to over $40 per barrel. The empirical evidence to date shows that is very reasonable and workable. If OPEC is smart it will listen to the Venezuelans.
And as for Chavez’s opponents – do you think they’ll admit they were wrong on this and apologize? After all, Chavez being right and being so assertive on this has created a windfall for Venezuela. But to date they haven’t and I’m not holding my breath.
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