At $4, Everybody Gets Rational - Washingtonpost.com

Here is another excellent gas price article containing accurate economic principles.

Yes, the non-economist (ie, average citizen) doesn’t get it on how higher gas prices will ultimately lead a nation’s economy to conservation, energy independence and efficiency in the long run.

Hey, I’ll be honest: I don’t like higher gas prices any more than I do going to the dentist, but I am glad they are rising as I see and read about SUV purchases falling off a cliff, driving habits changing right before my very eyes, and the quantity demanded for gasoline falling fast.

By CHARLES KRAUTHAMMER | Posted Friday, June 06, 2008

So now we know: The price point is $4.

At $3 a gallon, Americans just grin and bear it, suck it up, and, while complaining profusely, keep driving like crazy.

At $4, it is a world transformed. Americans become rational creatures. Mass transit ridership is at a 50-year high. Driving is down 4%. (Any U.S. decline is something close to a miracle.) Hybrids and compacts are flying off the lots. SUV sales are in free fall.

The wholesale flight from gas guzzlers is stunning in its swiftness, but utterly predictable. Everything has a price point. Remember that “love affair” with SUVs? Love, it seems, has its price too.

America’s sudden change in car-buying habits makes suitable mockery of that absurd debate Congress put on last December on fuel efficiency standards. At stake was precisely what miles-per-gallon average would every car company’s fleet have to meet by precisely what date.

It was one out-of-a-hat number (35 mpg) compounded by another (by 2020). It involved, as always, dozens of regulations, loopholes and throws at a dartboard. And we already knew from past history what the fleet average number does.

When oil is cheap and everybody wants a gas guzzler, fuel efficiency standards force manufacturers to make cars that nobody wants to buy. When gas prices go through the roof, this agent of inefficiency becomes an utter redundancy.

At $4 a gallon, the fleet composition is changing spontaneously and overnight, not over the 13 years mandated by Congress. (Even Stalin had the modesty to restrict himself to five-year plans.)

Just Tuesday, GM announced that it would shutter four SUV and truck plants, add a third shift to its compact and midsize sedan plants in Ohio and Michigan, and green-light for 2010 the Chevy Volt, an electric hybrid.

Some things, like renal physiology, are difficult. Some things, like Arab-Israeli peace, are impossible. And some things are preternaturally simple. You want more fuel-efficient cars? Don’t regulate. Don’t mandate. Don’t scold. Don’t appeal to the better angels of our nature. Do one thing:

Hike the cost of gas until you find the price point.

Unfortunately, instead of hiking the price ourselves by means of a gasoline tax that could be instantly refunded to the American people in the form of lower payroll taxes, we let the Saudis, Venezuelans, Russians and Iranians do the taxing for us — and pocket the money that the tax would have recycled back to the American worker.

This is insanity. For 25 years and with utter futility (starting with “The Oil-Bust Panic,” the New Republic, February 1983), I have been advocating the cure: a U.S. energy tax as a way to curtail consumption and keep the money at home.

In May 2004 (and again in November 2005), I called for “the government — through a tax — to establish a new floor for gasoline,” by fully taxing any drop in price below a certain benchmark.

The point was to suppress demand and to keep the savings (from any subsequent world price drop) at home in the U.S. Treasury rather than going abroad. At the time, oil was $41 a barrel. It is now $123.

But instead of doing the obvious — tax the damn thing — we go through spasms of destructive alternatives, such as efficiency standards, ethanol mandates and now a crazy carbon cap-and-trade system the Senate debated last week. These are infinitely complex mandates for inefficiency and invitations to corruption. But they have a singular virtue: They hide the cost to the American consumer.

Want to wean us off oil? Be open and honest. The British are paying $8 a gallon for petrol. Goldman Sachs is predicting we will be paying $6 by next year. Why have the extra $2 (above the current $4) go abroad? Have it go to the U.S. Treasury as a gasoline tax and be recycled back into lower payroll taxes.

Announce a schedule of gas tax hikes of 50 cents every six months for the next two years. And put a tax floor under $4 gasoline, so that as high gas prices transform the U.S. auto fleet, change driving habits and thus hugely reduce U.S. demand — and bring down world crude oil prices — the American consumer and the American economy reap all of the benefit.

Herewith concludes my annual exercise in futility. By the time I advocate the tax floor again next year, you’ll be paying for gas in bullion.

Eight reasons you’ll rejoice when we hit $8-a-gallon gasoline - MarketWatch - by Chris Plummer

I selected this article because I really believe in it. It wasn’t until I became a fan of studying economics that I began to believe that rising gas prices are in the LONG TERM ECONOMIC INTEREST of the US economy as these higher prices will incent consumers and businesses to move towards alternate forms of fuels.

I am also no longer in support of US offshore drilling, not because I am an environmentalist, but an economist that understands that it will be necessary to take higher, painful increases in petroleum to incent businesses and consumers to pursue alternative energy and more efficient transportation solutions. Voluntary conservation or asking oil companies to pursue alternative fuel development is nice in concept, but poor in results.

I now root for “steadily climbing oils prices” to provide greater incentive to move faster to more efficient forms of transportation and spawn alternative energy solutions. It’s a little like going to the dentist: it’s not fun, but it is necessary and will leave us in better condition when its over.

For one of the nastiest substances on earth, crude oil has an amazing grip on the globe. We all know the stuff’s poison, yet we’re as dependent on it as our air and water supplies — which, of course, is what oil is poisoning.

Shouldn’t we be technologically advanced enough here in the 21st Century to quit siphoning off the pus of the Earth? Regardless whether you believe global warming is threatening the planet’s future, you must admit crude is passé.

Americans should be celebrating rather than shuddering over the arrival of $4-a-gallon gasoline. We lived on cheap gas too long, failed to innovate and now face the consequences of competing for a finite resource amid fast-expanding global demand.

A further price rise as in Europe to $8 a gallon — or $200 and more to fill a large SUV’s tank — would be a catalyst for economic, political and social change of profound national and global impact. We could face an economic squeeze, but it would be the pain before the gain.

The U.S. economy absorbed a tripling in gas prices in the last six years without falling into recession, at least through March. Ravenous demand from China and India could see prices further double in the next few years — and jumpstart the overdue process of weaning ourselves off fossil fuels.
Consider the world of good that would come of pricing crude oil and gasoline at levels that would strain our finances as much as they’re straining international relations and the planet’s long-term health:

1. RIP for the internal-combustion engine

They may contain computer chips, but the power source for today’s cars is little different than that which drove the first Model T 100 years ago. That we’re still harnessed to this antiquated technology is testament to Big Oil’s influence in Washington and success in squelching advances in fuel efficiency and alternative energy.

Given our achievement in getting a giant mainframe’s computing power into a handheld device in just a few decades, we should be able to do likewise with these dirty, little rolling power plants that served us well but are overdue for the scrap heap of history.

2. Economic stimulus

Necessity being the mother of invention, $8 gas would trigger all manner of investment sure to lead to groundbreaking advances. Job creation wouldn’t be limited to research labs; it would rapidly spill over into lucrative manufacturing jobs that could help restore America’s industrial base and make us a world leader in a critical realm.

The most groundbreaking discoveries might still be 25 or more years off, but we won’t see massive public and corporate funding of research initiatives until escalating oil costs threaten our national security and global stability — a time that’s fast approaching.

3. Wither the Middle East’s clout

This region that’s contributed little to modern civilization exercises inordinate sway over the world because of its one significant contribution — crude extraction. Aside from ensuring Israel’s security, the U.S. would have virtually no strategic or business interest in this volatile, desolate region were it not for oil — and its radical element wouldn’t be able to demonize us as the exploiters of its people.

In the near term, breaking our dependence on Middle Eastern oil may well require the acceptance of drilling in the Alaskan wilderness — with the understanding that costly environmental protections could easily be built into the price of $8 gas.

4. Deflating oil potentates

On a similar note, Venezuela’s Hugo Chavez and Iran’s Mahmoud Ahmadinejad recently gained a platform on the world stage because of their nations’ sudden oil wealth. Without it, they would face the difficult task of building fair and just economies and societies on some other basis.
How far would their message resonate — and how long would they even stay in power — if they were unable to buy off the temporary allegiance of their people with vast oil revenues?

5. Mass-transit development

Anyone accustomed to taking mass transit to work knows the joy of a car-free commute. Yet there have been few major additions or improvements to our mass-transit systems in the last 30 years because cheap gas kept us in our cars.

Confronted with $8 gas, millions of Americans would board buses, trains, ferries and bicycles and minimize the pollution, congestion and anxiety spawned by rush-hour traffic jams. More convenient routes and scheduling would accomplish that.

6. An antidote to sprawl

The recent housing boom sparked further development of antiseptic, strip-mall communities in distant outlying areas. Making 100-mile-plus roundtrip commutes costlier will spur construction of more space-efficient housing closer to city centers, including cluster developments to accommodate the millions of baby boomers who will no longer need their big empty-nest suburban homes.

Sure, there’s plenty of land left to develop across our fruited plains, but building more housing around city and town centers will enhance the sense of community lacking in cookie-cutter developments slapped up in the hinterlands.

7. Restoration of financial discipline

Far too many Americans live beyond their means and nowhere is that more apparent than with our car payments. Enabled by eager lenders, many middle-income families carry two monthly payments of $400 or more on $20,000-plus vehicles that consume upwards of $15,000 of their annual take-home pay factoring in insurance, maintenance and gas.

The sting of forking over $100 per fill-up would force all of us to look hard at how much of our precious income we blow on a transport vehicle that sits idle most of the time, and spur demand for the less-costly and more fuel-efficient small sedans and hatchbacks that Europeans have been driving for decades.

8. Easing global tensions

Unfortunately, we human beings aren’t so far evolved that we won’t resort to annihilating each other over energy resources. The existence of weapons of mass destruction aside, the present Iraq War could be the first of many sparked by competition for oil supplies.

Steep prices will not only chill demand in the U.S., they will more importantly slow China and India’s headlong rush to make the same mistakes we did in rapidly industrializing — like selling $2,500 Tata cars to countless millions of Indians with little concern for the environmental consequences. If we succeed in developing viable energy alternatives, they could be a key export in helping us improve our balance of trade with consumer-goods producers.

Additional considerations

Weaning ourselves off crude will hopefully be the crowning achievement that marks the progress of humankind in the 21st Century. With it may come development of oil-free products to replace the chemicals, pharmaceuticals, plastics, fertilizers and pesticides that now consume 16% of the world’s crude-oil output and are likely culprits in fast-rising cancer rates.

By its very definition, oil is crude. It’s time we develop more refined energy sources and that will not happen without a cost-driven shift in demand.

Holiday weekend retail sees big crowds, but no splurging - Nov. 25, 2007

Black Friday; a most interesting phenomenon of American culture. A day when consumer demand in retail product markets is at its strongest, the day after Thanksgiving when, still lightheaded from excess tryptophan and mashed potato intakes and an NFL overdose from the previous day, millions of Americans stumble full-bellied from their beds and flock to the malls and big box retail outlets of suburban America to give thanks to the gods of consumerism: Wal-mart, Target, JCPenny, Nordstroms, Macey’s… all the holy temples of our sacred religion open their golden gates to the hoards of consumption-crazed pilgrims, all hoping to pay tribute to their beloved deities with their almighty dollars.

Although deep discounts brought out much bigger crowds of holiday bargain hunters, a major retail trade group said Sunday that shoppers actually spent less money this year over the crucial Thanksgiving weekend.

The National Retail Foundation’s (NRF’s) 2007 Black Friday Weekend Survey said more than 147 million shoppers hit the stores over the Black Friday weekend, up 4.8 percent from last year.

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by Caleb Liao and Drew Venkatramen

Just how important is the caramel frappuchino to Starbucks? This podcast will explore the demand for a particular product from the ubiquitous coffee chain, a new branch of which has recently been opened across the street from Shanghai American School.

SAS students overwhelmingly favor the sweet, caramel goodness of the beloved Frappuchino, but how much would they really be willing to pay for already the steeply-priced beverage. At its market price of 32 kuai, customers seem to arrive in droves from the SAS campus; but could Starbucks do better by charging a higher price? What if they lowered the price, would it make a difference in their revenues? This podcast explores the market for the crowd’s favorite coffee beverage, the caramel frappuchino, and tries to learn something about demand, elasticity, and firm behavior in the process!

 

 SAS Economists Podcast #5: What does the Caramel Frappuchino mean to Starbucks?: Play Now | Play in Popup | Download

By Claire Moon and So Yeon Yoon

For our second installment of the SAS Economists Podcast, Claire and So Yeon survey 55 students to discover what determines where they prefer to get their coffee fix in the Shanghai neighborhood of Gubei. They discover through their research that consumers base their decisions on a variety of reasons, and that price, while important, is not the only factor that determines which particular products consumers will purchase. Location, tastes, size of the market, and various other factors all play a role in consumer’s decisions between two alternatives in a competitive market like that for coffee in Gubei, a trendy neighborhood with no shortage of coffee outlets.

Click below to hear this excellent and enlightening investigation into consumer behavior and the determinants of demand for coffee in modern Shanghai!

 

 Determinants of demand for Starbucks vs. The Coffee Bean [5:24m]: Play Now | Play in Popup | Download

New York Times - Don’t Even Think of Touching That Cupcake

I had to post this article. It would have been a crime not to. Seriously, there are economic implications to bans on cupcakes in school and changes in attitudes about cupcakes. You are bright AP and IB Economics students, you figure out the economic implications and then post a comment with your economic analyisis. What does this attack on cupcakes really mean from an economist point of view?

And what is presidential hopeful Hillary Clinton’s stance on the great cupcake debate? The writing’s on the wall folks… promise #9…