I'm not sure that the full information thing is so loopy. But anyway:

1. Almost all Americans buy gas regularly.
2. Gas prices are posted in huge numbers all over the place, so even if you're not buying gas, you observe how they're changing.
3. Gas prices fluctuate quite a bit; this is true of other commodities, but with many other commodities this price change is not so obvious to the consumer. Prices don't wildly swing if the price of copper changes. Sometimes prices swing on the prices of food commodities, but then there are obvious substitutes.

Gotta agree with John. Why is this is a puzzle? For many Americans, who do not live in urban environments with effective public transportation, driving is a fixed expense. They can't substitute other commodities or goods for pretol. When their gas prices increase by 50% to 100%, they lose a significant amount of disposable income. And there's plenty of information about it.

Let me add that Postrel's essay isn't likely to convince non-economic libertarians. "Its just a price increase."

And yes, there's plenty of hypocrisy here. Except insofar as increased gasoline taxes would, in theory, not simply be used to dampen consumption but to improve public transportation and resarch alterntives (see my above comment about the lack of viable options for many people).

John's surely right about price visibility. (I'm not sure there's any other item I regularly buy that I know the price of so well-- and even if I don't have to buy it for weeks on end, I *still* notice the price, because it's in big numbers I see every day) And Dan N. is right about non-substitutability. Notice how unique that makes petroleum among consumer goods. If the price of any one food product skyrockets, it can be substituted around almost unthinkingly (people throwing produce into the cart do so on the basis of at least quick half-conscious calculations about what seems expensive that week). Otherwise, non-substitutable commoditities tend to be purchased by industry, not [directly] by consumers. Substitution for petroleum involves major disruptions-- a new car, switching to other forms of transportation.

Homeowners who heat their houses with oil or gas aslo pay directly for a not-easily-substitutable commodity-- and there's regular political outcries about heating oil, too.

Our energy intensity has declined, but that is simply because we import more energy intensive goods. I am sure China's energy intensity has blossomed in turn. The real question is whether the world's energy intensity has declined. Doubtful.

Are wild swings in energy prices signs of market efficiency or inefficiency? I would argue it implies short term efficiency and long term inefficiency.

What about the cost of goods (food, etc) that depends upon energy for production? Has this been left out of these considerations?

While there is some cartelization of oil, it surely matters that not only are there non-OPEC producers, and that (for the purposes of the US oil market) the US gets much of its imported oil from non-OPEC producers (the two largest import sources, Canada and Mexico, are not in OPEC, though the next three (Saudi, Nigeria, Venezuela) are and deliver more than Canada and Mexico.

The US imports nearly 10mbbl/day of oil; but the US also produces 7.6mbbl/day (exporting about 1mbbl, for a net of around 6.5mbbl/day domestic production).

(I suspect that crude oil vs. petroleum products reporting differences make the numbers not add up perfectly, but they're roughly apt.)

In other words, imports account for only 2/3 of US oil consumption, and it looks like at most half of US oil consumption comes from OPEC sources.

A cartel with such limited coverage and with such immense incentives to cheat (and such immense cheating; I recall reading that none of the OPEC countries actually obey the production caps) isn't nearly as scary as it could be. (Or as pervasive as your benchmark cartel, DeBeers.)

It would be interesting if we could calculate what the worldwide cost of crude would be without OPEC. Can such a thing be done?

So, here's my question to readers... why is a spike in gas prices considered such a political crisis?

IMO, it's largely because politicians are operating out of a playbook written 30 years ago.

When something comes up, the first thing they think is 'how can we take advantage of this to make us look good and the other side look bad?' The second thing they think is 'what happened the last time conditions were like this?'

American forms of suburban developement are very auto intensive....Most people cant just substitute a bicycle or train. Some places auto = life. When the price of that goes up by 3fold ordinary people ...not UofC urban intellectuals have their life grind to a halt.

For better or worse, a whole lot of Americans use gas prices as a barometer on inflation and the economy as a whole. Prices up: times are bad. Prices down: times are good. It may seem silly if you're used to poring over statistical minutae to gauge the overall health of the economy, but it is a clear and obvious "indicator" of something - and in the past, particularly in the late 1970s and early 1990s, it actually did correlate with bad times and inflation...

It isn't "loopy", unless you're an urban type who rides the train and wonders why everyone doesn't use bicycles to get to work. Also, I'd be willing to bet that at least half of Bush's job approval problems are due to high gas prices...

Last time this happened WalMart announced that their earnings would be down. It went something like "Our customers now have on average $8.50 less to spend each month." What WalMart customers have to spend on gasoline, they can't spend at WalMart.

For people with money, gas prices aren't that important. But people who don't have much disposable income find gas prices cut into it. Cut back on travel, and what happens? Buy at the nearest grocery store and the higher prices wipe out what you save by not driving to WalMart.

... as a percentage of income, the current price spike is less traumatic than what happened thirty years ago.

Yes, and iraq is far less traumatic than WWII. So what?

It isn't like gas prices have finished rising, either.

> IMO, it's largely because politicians
> are operating out of a playbook written
> 30 years ago.

Um, no. The suburbs and Wal-Marts not only require gas to get to, they require diesel to deliver things. As does industry. Outsourcing makes this worse; you take 5 factories around the US and move them to China, your transportation bill from Long Beach/Norfolk to your warehouse goes way way up.

Our transportation expense is up 40% in the last 6 months and it is killing us. We raised prices once (as our product is also made with oil we take a double whammy) but may not be able to do it again. If so - cutbacks and layoffs.

Besides the fact that many are trapped in suburbs from which they MUST drive, they also sense what the overall oil price jump means.

Lots of stuff is done with oil besides gasoline.

Cranky

I vote for price visibility. There are several products we buy very regularly, but gasoline is unique in that (1) those enormous price billboards at every station constantly visible, alwasy offering the exact product in the same unit size (gallon) with no change in quality, style etc, (2) no one can "stock up" beyond the capacity of the tank, so a price increase becomes quite noticeable immediately; (3) there's no way to save anything significnt by switching to a discount brand or using less for a period of time; and (4) in almost every purchase, it's the only thing on the bill, so a sudden fluctuation punches you in the wallet unlike any singel item at a grocery or department store.

When I see a comment like Brad DeLong's at the top of Dan's post I always think of the "veil of ignorance" thing from John Rawls. Democrats' and Republicans' basic positions regarding gas prices are their behind-the-veil positions. In the real world, when the shit hits the fan, politicians are all populists.

Anyway. I basically agree with what Dan Nexon writes above, but what's a non-economic libertarian? Does (can?) such a beast exist?

Cranky, if your transport costs are up 40% since october, it seems unlikely to be purely, or even chiefly, on the basis of gas prices. In October they were ~$2.60, now a little under $3. Regional statistics may differ, but it seems unlikely that anywhere will have seen something even approaching 40% over that time. Even if there were gas price hikes of 40%, gas is only a portion of your transport costs.

Seriously, think about the statistics you put out, and read the statistics that you're debating. No one is saying that Americans don't use gas any more, so the "Oh, yeah? Well how do they get to the Wal-Mart?" line of argument is a straw man. What is being said is that they don't use gas as intensively any more and that it is a smaller portion of their costs (from about 10% to about 6.25%). If you have something plausible to refute that, go ahead, but please don't make an argument from obviously flawed authority.

Dan Nexon, just to add that the increased research and investment in alternative fuels and public transport is a virtue of both the Democrat and Republican arguments for higher fuel prices.

James: true. There's an old argument that OPEC would increase output when petrol became so expensive that alternative sources of energy became viable. Increased prices also, of course, drive exploration and production into regions with higher extraction costs. Since I'm neither an economist or a political economist, I can't even begin to sort these effects out.

Non-economic libertarian? Bad construction on my part. But I was trying to be careful. Can't one be a civil libertarian or a political libertarian? I suppose that's Jacob Levy's department.

James, you appear to be averaging over the whole population.

But mostly, rich people don't use that much more gasoline than poor people. Lots of other things are more expensive when you're well-off -- mortgage, cars, entertainment, food, etc but gasoline mostly not. (You might use hi-test instead of regular, but not that much more of it.)

You can argue that an oil crisis today like the last big one would only be 5/8 as bad. But that's pretty bad. The issue isn't how it affects the mean, the issue is what fraction of voters are hurting enough to vote about it.

I regard this as yet more Bush administration incompetence. The US government traditionally arranges that the economy look pretty good in election years, and at least middling good in mid-term years, and the bad stuff happens in the off years. Running the biggest deficits ever they couldn't manage that this time.

I wish there weren't "departments" (or, perhaps more accurately, departments within departments).

"Can't one be a civil libertarian or a political libertarian?" I don't know; in fact, I'm not sure what's the difference between those. And the difference amongst civil, political, and economic libertarians? No clue. Isn't the economic aspect of libertarianism a crucial aspect of it?

Alas, someone else's "department." (Apparently, someone named Jacob Levy. I'll take his class, or read his book, if I can.)

Oh well. I like high-fallutin' intellectual commentary on blogs. Just make sure you explain things to us BA's. I'd hate to see a blog like Drezner's polarize, with the Piled-Higher-and-Deeper on one end and the Bull-Shitters on the other.

I think gas prices are more visible to those of us residing in larger states—mostly in the west—because of the greater driving distances. And then the other shoe falls here in coastal California. In the SF Bay Area, where I am fortunate enough to have purchased a home 16 years ago, home prices have jumped so much that closer-in homes in the more desirable areas are getting out of reach for those with lower incomes. It's not unusual to see folks commuting 80 miles or so one-way to work. Then, of course, we Californians love our SUVs. Gulp!

We're already seeing stories about how Californians are cutting back on things like day trips on nice days—where of course a good lunch along the way is indicated—and on other discretionary spending such as fine dining. Or maybe you postpone a trip to the barber or beauty parlor. Rent a DVD instead of going to the movies. This will lead to failing businesses or at least to flatter business, with a concomitant impact on employment. The nasty "R" word looms.

Comparisons with other retail commodities are inapt. If I go to my local Albertsons and see that produce prices are higher, I can usually find something else I use that's on sale. For example, our store often has deep discounts on coffee, beer and paper products. Solution: I still get the higher priced produce, but I stock up on the nonperishable sale items. Result: monthly costs stay fairly constant.

Gas is different. There are no substitutes. Everywhere one can cut back has a probable impact on somebody else.

Running the biggest deficits ever they couldn't manage that this time.

Oh, come on. I'm not one to defend deficits, but "biggest deficits ever" is really just insane to make with dollar amounts instead of GDP. 2003's 3.5% and 2004's 3.6% of GDP were certainly bad, but also smaller than each of 1990-1993, 1982-1986, and 1976. 2005's 2.6% deficit isn't that historically high, though of course it should be lower. Historical data.

I don't see the complexity of this issue.... US politicians approach this issue with this theme in mind: "World Oil prices and US GDP: An Inverse Realtionship," which is the title of a graph published by the US government's Energy Information Agency found at
http://www.eia.doe.gov/emeu/security/gdpwop.gif

LMCinHK

I think the thread so far pretty much answers Dan's question, so I'll throw out a couple of my own.

First, re: Brad DeLong's comment about Democrats generally favoring higher gasoline prices -- this may technically be true, if by "Democrats" Brad means a couple of economics professors of his personal acquaintance. If instead he means elected officials, would he care to name one? Would anyone else?

Not only do Democrats not favor higher gas prices in deference to the environmentalist wing of the party, but most of the environmentalist wing doesn't either. That's why we hear the Sierra Club go on about changing CAFE standards (which affect new cars only) instead of calling for raising federal taxes on gasoline (which affects all drivers).

The other question involves political volatility. American elections, especially the ones in the middle of a President's term, are low-turnout affairs, one reason mobilization of party activists and interest groups is so important in American election campaigns. Rapid changes in the price of gasoline strike at the wallets of many people who don't ordinarily vote. These people may be turned off to the point of apathy by political corruption, partisan stalemate, even war in Iraq, but sudden high gas prices -- according to this theory -- could make them mad. Mad enough to vote, and throw some predetermined election results into uncertainty? The prospect has got to unnerve some elected officials in Washington, as well as their campaign consultant handlers.

I wouldn't call the reaction to increasing energy prices a crisis. Crisis is just a word the entertainment-oriented news media throw around to juice up the copy they read on the air. It's more accurately called a serious problem, one we had every reason to know we would face sooner or later and chose not to. A few politicians more or less losing their seats -- which is what the media in New York and Washington is mostly interested in -- is hardly the most important consequence of it.

The government interventions that distorted energy markets in the 1970s, and put drivers through hell, have disappeared.

Is this to be taken seriously? Does Postrel imagine that oil somehow conforms to elementary textbook models of competitive markets? And as for government intervention, it may be true that the US government intervenes slightly less, but what of the Saudis, Iranians, Venezuelans, etc.?

W/regards to the original question, I think the first commenter hit it on the head with #2. It's almost all about Price Visibility, with the lack of substitutes playing a small part. Regardless of whether you even drive a car you are hit over the head with its price multiple times each day. If something essential like bread or milk doubled in price, you would only be hit directly with this once a week when you went to the grocery store. Then you add in what people bitch about - I can't recall the last time I heard someone mention the shocking price of milk these days - and its constantly in peoples minds.

PS - Screw DeBeers. Get some Alexandrite if you want to get something valuable ;)

This article was written by an idiot and doesn't deserve to be scrutinized. This can be determined by Dan's lionizing of Brad DeLong.

Take this quote for example:

: What's more, so-called energy intensity is declining rapidly. That means we produce more with less energy. According to Economy.com, "The U.S. economy has undergone major structural changes over the last two decades, becoming more energy efficient, thus reducing its overall dependence on energy. … The energy intensity of the U.S. economy has declined by roughly 40% since the first oil crisis (as of 2001)."

Yes, the US economy's energy intensity has declined. That's because it's lost its entire manufacturing base, to China, and it's now in the toilet. Neither of these are exactly unambiguously good things, are they? More like unambiguously bad things!

Or take this quote:

: According to the Bureau of Economic Affairs (see chart here), American consumer spending on energy as a fraction of total personal consumption has declined considerably since 1980. Whereas 25 years ago, one in every ten consumer dollars was spent on energy, today it's one in every 16. In other words, what it takes to heat and cool our homes and drive to and from our jobs and vacation destinations is relatively less costly than it was then.

REALLY??? And why is it that nobody believes this? Oh right, because wages haven't risen in the last 20 years and so consumption sure as hell hasn't increased. Oops, I forgot about credit cards and debt-fueled consumption. But then, when talking about debt-fueled consumption we aren't talking about a good thing. I mean, we're not talking about an increase in the standard of living over the past 20 years. Rather, there's been a decline. And if the cost of most goods (such as housing in the course of the recent real estate bubble) has outpaced the cost of gasoline, well that's not anything complimentary to gasoline, now is it?

DeLong's "most concise and correct analysis" is a bunch of crap, and anyone who thinks so highly of it ....

Richard, I think you're overstating the case.

Sure, we have a postindustrial economy now, focused on services. That isn't unambiguously bad. Like, we have a whole lot of health insurance professionals who're better than anybody else in the world at what they do. If china outsources their health insurance to us we'll be sitting pretty. And health insurance doesn't use nearly as much energy as, say, steelmaking. All we need is to get other countries to outsource services like health insurance and income tax assistance to us and we'll do fine.

And some people *do* believe that spending on energy as a fraction of total personal consumption has declined. If the price of most things has increased *more* than the price of gasoline, then that means an increase in the cost of gasoline won't matter as much as it used to. If you're already paying more for everything else, gas can rise 40% or 50% and it won't have as big an effect as it did then.

I vaguely remember the old crisis. My uncle laughed about it and said that gasoline wouldn't go over $1/gallon because they'd have to change all the pumps. He was right, I never heard of gas costing more than 99.9. I saw a newspaper article about oil priced at $15/barrel and I freaked out. My uncle said to read it carefully, and it turned out the price wasn't that high, it was just the saudis had decided they would charge their tax as if saudi oil had that price.

So anyway, maybe the question to ask is how high would the price of oil have to go before our spending went from 1/16 to 1/10 like 1980....

There isn't any price for milk. In northern virginia I can walk to my local gas station and get a gallon of 2% milk for $4.35. I can go to the closest grocery store and buy it for $3.50. At CostCo it's $2.52 and at WalMart it's $2.28. (But sometimes the WalMart milk tastes kind of like reconstituted dried milk. I have a suspicion that the laws might allow dried milk with no labeling now, but I haven't checked.)

$2.52 is less than I paid at HCM in texas 4 years ago. Before inflation. It doesn't make sense to talk about the price of milk. But gasoline prices don't vary nearly that much.

I am not an economist but I do play one on TV.
What I'd do if I were a real one would be to model the results of Presidential Candidate John Anderson's 50-50 plan. Anyone remember that?
A fifty cent per gallon gas tax with the proceeds going into the social security fund.

What would the effect of that have been since 1980 in terms of fuel efficiency of vehicles and living patterns? How many dollars would have been pumped into the social security trust fund? (the last one's easy except that you would have to fact or in the decreased consumption due to the higher price?

The Road Not Taken.

I forgot to mention re: the 50-50 plan that the second "fifty" referred to a fifty percent cut in social security payroll taxes so that would have provide a certain amount of economic stimulus.

If you play with that Bureau of Economic Affairs table and look at prior years (it goes back to 1929), you'll see that 1980 was unusually high when it comes to energy as a share of all personal consumption expenditure. 1980 is a bad baseline.

And, sure enough, an incumbent president got defeated in 1980.

I read somewhere that, of all the variables, presidential popularity correlates most closely with the price of gasoline.

And I once read, somewhere else, that during World War II, gas rationing was the only rationing that the public never accepted.

(Sorry, I don't have citations, or the time to look for them today.)

And, as others have said, the fluctuations in gas prices are the one market that almost everyone follows, no matter how apolitical they are.

I just wish somebody could be the anti-demagogue on this, and argue that higher gas prices will be good for society in the long run.

I'm not sure that high prices are a good thing, although Drezner's Democrat reasons in the post for advocating higher prices are pretty uncontroversial. I'd be surprised if anyone here would be sad if more money was rationally and efficiently pushed into alternative fuels research by the private sector.

With the arguments for letting markets work, it is less a matter of the high prices being good, even though they may encourage more exploration, research, and so on. It is more a matter of them being better than any of the solutions.

Please visit www.dieoff.com. If oil/gas prices go up, there is an immediate and negative impact on peoples' lives. If the price increase is truly related to peak oil, then the pain at the pump we're currenlty experiencing will very rapidly become "the good old days".

What some in our government don't think about are the working poor in this conutry.Were sruffing the most with $3.00 a gallon gas.Were having to make the chocie between buying food or buying gas to go to work on.And it's hard when your kid's ask for thing's that you can't give anymore.Here in north carolina with over half the job's gone it is almost impossible to make a living.and that $100. dollar rebate check that there talking about isn't a drop in a bucket that seem's to have hole's in it.you know it's got pretty bad here when you go to bed hungry so kid's have enough to eat.And I'm waiting for the county to try to forclose on us Because the money that I pay on My land taxes though the year is now having to go to gas.So you tell me who is the loser in the end ,my kid's.Because it make's it impossible to provide for them.it's not bad enough that we can't afford health care or that we make just a few dollar's to much to get government help with food or health care.but who know's maybe we'll make and then again we won't

I'm not an economist, but i'm just having trouble understanding what exactly we want the oil companies to do. Oil is a commodity, ok fine, so are we expecting American oil companies like Chevron to dump oil well below market price? If i'm not mistaken, they will quickly sell all their available oil (not just to the U.S.) and the price for the remaining oil on the market that we import will spike even higher. At the end of the day will that save us anything? It will certainly cripple American oil companies. What happens in the long term if US oil companies flounder? When people say 'stop gouging' isnt that the same as saying 'start selling below market value'?

If it is true that the US net production (what we produce minus what we sell) is approximately 9 mbl/day, and we import approximately 10 mbl/ day then our daily consumption is around 19 mbl/day.

If US companies, depending on the year the lease was written, are paying $10 to $20 per barrel to get the oil out of the ground, and they are charging us the spot market rate of $70 per barrel for that $20 per barrel oil, then there is a profit of $50 per barrel on that oil.

If slightly more than 50% of our oil cost $70 per barrel (imported oil) and slightly less cost from $10 to $20 per barrel, then it seems relatively clear where the enormous recent profits for our oil companies are coming from.

Clearly, there IS price gouging on the part of the oil companies. And they have all but told us they are going to take gas prices to nearly $5.00 per gallon by the end of this summer.

My questions, therefore, are:

Is this right?
Whether you are existing pay check to pay check or wealthy and well to do, these prices effect everyone and in a myriad of ways.
Is this gouging right?
Is it effecting what is left of they very fabric of our society?
What is the gain if oil executives and some institutions reap horrendous profits on their stock holdings if the nation as a whole suffers?
FAIR and REASONABLE profits I can understand. But this current run is obscene.
Is it right to allow this to continue?

What do you think?

Glenn Reynolds said ....
"According to the Bureau of Economic Affairs (see chart here), American consumer spending on energy as a fraction of total personal consumption has declined considerably since 1980. Whereas 25 years ago, one in every ten consumer dollars was spent on energy, today it's one in every 16. In other words, what it takes to heat and cool our homes and drive to and from our jobs and vacation destinations is relatively less costly than it was then."

Using this quote is misleading. 25 years ago was the height of the 1981 Jimmy Carter gasoline crisis when oil was $40 a barrel.

In no way does this comparison represent a true picture of energy costs of our parents vs. energy costs now.

Why are you lying?

What I don't really understand is why the retail price of gasoline is based on a FUTURE'S CONTRACT FOR SPOT CRUDE ... does it even make any sense in a day and time where if you minus the country owned comapnies - 6/7 companies control the rest (some in partnership with countries) - they aren't buying crude oil futures, are they? Or rather they don't need to - they have a set price - and basically speculators are driving the prices up (or down in some bizarro world) - why is this system even in place?

People have said it's the replacement cost - frankly, what do we as consumers care?

J Belkin, it would be very good for the people who believe in simple unrestricted free enterprise to look closely at your example.

Perhaps the people who determine the floor price are the guys who buy on the spot market and sell at discount prices. When they have trouble the price goes down. When they can buy cheap they set their prices to be x cents below the new consensus.

Even after allowing for the movement of manufacturing abroad over the past several years, I don't think our energy intensity is doing as well as DeLong thinks it is. We made our biggest gains in terms of reducing energy intensity in the 1970s and 1980s when we still had a very strong manufacturing base. Besides improvements in manufacturing efficiency, that was also when consumers moved to smaller cars, Thermopane windows and started to install the first high-efficiency furnaces. Most of that change is already in the can, so to speak, and we've seen very little further improvement in the last few years--and indeed backsliding in the automotive area. So of course people are going to start to notice a very big change. The only way DeLong will be proved right is with a further massive improvement in energy intensity -- smaller cars, more use (and government support) of mass transit, solar power and so on. Otherwise the American public is going to squeal very loudly indeed as we slide back from one-energy-dollar-in-every-16 to one-in-every-ten again.

Another way to look at the BEA data that makes it better to understand is that from the bottom in 1971 to the peak in 1980 the share of nominal spending allocated to energy rose from 6% to 9%.

From 1980 to 2000 it fell from 9% to 4% --due both to lower prices and conservation.

So far this cycle it has risen from 4% to 6% --
that was in the fourth quarter as I have not looked at the first quarter data yet.

Remember, real prices are still below the 1980 peak.

There is always some sort of controversy relating to the prices of gas. Its undoubtedly the essential commodity in our daily life. Its prices r always in news. The reason could be political or economical.High prices r not a good thing for anyone of us. Check the rates before its too late.

Government regulates the price of milk. Why wouldn't government regulate the price of gasoline?