Bang For The Buck

Via Instapundit comes an interesting discussion of energy policy and personal behavior. Nick Schultz, writing in Forbes notices that despite increases in gasoline prices over the last few months, people aren’t really changing their behavior that much and despite the increase in gas prices over the long term consumer confidence remains extremely high. Schultz believes he knows why:

The answer might be in some of the long-term trends that the short-term media lens is too cramped to see. Energy prices may be rising, but energy itself is much less important to consumers and to the overall economy than it once was.

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.

This goes a long way toward explaining why even when gas prices rise this summer–higher than they were throughout the 1990s–people will still be driving more; it’s much more of a value than it was a generation ago.

What’s more, so-called energy intensity is declining rapidly. That means we produce more with less energy. According to, “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).”

Reynolds also points to this chart showing inflation-adjusted gas prices over time – while energy costs are high, they’re not as high as they once were, and the amount of production you get per unit of energy has increased since the last major gasoline crisis in the late 1970s.

Alternate energy sources would be nice, but Popular Mechanics has done the real world math and found most of them lacking. It takes one barrel of oil energy to produce roughly 35 barrels of oil " meaning that petroleum is an incredibly energy-efficient fuel source. There isn’t anything we have that’s a realistic substitute for oil. We can make things more and more efficient, but that eventually succumbs to the law of diminishing returns. The one set of laws Congress can’t dick around with are the laws of physics – and those are the ultimate determinant of what works and what doesn’t.

Ultimately, we can’t rely on unrealistic solutions for energy production. Wind, solar, and geothermal production are excellent supplements to our energy supply, but they can’t replace oil. Hydrogen cars aren’t yet practical, but may be some day. Hybrids are becoming more and more practical, but they still don’t make economic sense yet. We can, and should conserve energy wherever possible by shutting off lights, driving sanely, and walking more. But mandating those things on a government level aren’t the right solution.

If anything, government power can make things much worse. Socking oil companies with fines will only reduce refining capacity, which is already dangerously low. Artificially lowering prices will inevitably lead to massive shortages. Continuing to subsidize inefficient methods of energy production takes away from the economic incentive to create efficient ones.

Markets are all about the laws of supply and demand – laws which are designed to deal with situations just like the current energy problem. Allowing the market to come up with the solution rather than overreacting based on fear and temporal political advantage is the smartest course of action – not that such a thing will prevent Congress from doing it.

2 thoughts on “Bang For The Buck

  1. I was puzzled at the run to sock the Oil Co.’s when the price of a barrel of oil was $70. Doesn’t that put the starting price at sometime like 2.50/gal ?Then you add taxes/transportation,overhead etc.

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