Wednesday, July 26, 2006

Apples, Oranges, DVD's and Oil

As expected, I received static from comments I made here earlier this week that I am happy paying $3/gal for gasoline when the alternatives are considered. Griping about the cost of fuel to me is a lot like griping about dealing with the cure for my cancer last year. Beats the alternative.

John C. posted to my blog:

“That is a whole bunch of excuses wrapped up on one blog. It is like a "Dirt sandwiches are GOOD for your child's mentality. The bottom line is the bottom line. I am paying $2700/year more for gas than 5 years ago."

Perhaps so, John, but let’s compare apples to apples.
In 2006 Dollars, which are worth less than they were 5-years ago, we’re paying an average of $2.91/gal for unleaded regular w/10% ethanol. This time last year the price was $2.20—without the alcoholic content.

For comparison, in March 1981, when the first Iraq War started, gasoline was running $2.75/gal in today’s dollars. In fact you are paying $2,700 more a year for fuel, but part of that increased expense is because those dollars are worth less now than 12-months ago, and much less than 5-years ago.

One of my regular respondents, A. Nony Mous, wrote:

"My first DVD player cost me almost $400. By the logic you seem to be using, that DVD player should now cost me at least $500. Technology is making oil exploration easier and less expensive, but as long as we keep buying gasoline ay $3+ per gallon the oil companies and refiners have no incentive to find enough new source to drop the price down to below $2."

Let’s compare oranges to oranges: Technology-based products, like DVD players, are not resources; they are manufactured items. Technological improvements in chip speeds and memory capacity, as well as the fact that there are a couple of dozen DVD makers to choose from, have actually sent the price of DVD players down. You can make as many of them as you want...which is why the prices were so low before Christmas 2004, women were having catfights in the aisles at WalMart for $99 DVD's. Always the low price leader in family entertainment.

Oil is a commodity, comes from only one planet, and while technological applications have made it more affordable to find and refine, the laws of supply and demand, plus a little geopolitical friction, have kept the price higher. Consider, too, that without oil running above $40/bbl, the technologies being used today would not exist, and there would actually be less oil (because it would be more technically difficult to get), and the price would be even higher.

Incentivization for the oil companies right now comes from
a.) a requirement to repay investors, and
b.) the quest to locate and produce more petroleum so that the oil companies can repay investors, as well as the people that work for the oil companies.
None of these oil companies is in business to sell you gasoline under $2/gal.
Get real, man.

A. Nony Mous also wrote back to ask whether The Mailman is, in fact, a millionaire.
He is, indeed, several times over.


Mike Norman said...

A common mistake is to say the dollar is worth less thanks to inflation and therefore there has been some kind of net loss, either in terms of purchasing power or standard of living. For the most part this is not true. The only true losers are holders of non-interest bearing currency and to creditors in the amount equivalent to the difference of the current inflation rate minus the interest rate charged at the time of the loan. Business profits and/or dividends tend to rise faster than the rate of inflation and this is what tends to drive the economy, employment and wages. So, you are not losing.

Anonymous said...