Greenspan the Magnificent

In some ways, Federal Reserve Chairman Alan Greenspan reminds me of a phoney psychic. He makes cryptic remarks of a generalized nature about the economy and people act as if he is a guru expressing some profound wisdom. Notching the interest rate down in 1/4 % increments over a few years and now starting to slowly notch it up does not seem to me to be rocket science or to have actually had any significant effect on the economy. Those who think Greenspan has kept our economy from being worse than it is probably also think the Department of Homeland Security has kept another 9/11 from happening.

Analysts and Congress act as if they understand what Greenspan pronounces and then go ahead and say and do whatever they want without regard. Business people don't pay heed to Greenspan, but they do pay attention to their customer base and work force, two groups they can more clearly understand. Indicators such as consumer confidence and the unemployment rate mean more than anything Greenspan says.

The price of oil and gas in America is at an all time high. So what does the guru have to say about that? "We must remember that the same price signals that are so critical for balancing energy supply and demand in the short run also signal profit opportunities for long-term supply expansion", he says. What the hell does that mean? Analysts interpret it to mean let the market handle it rather than have the government do anything. The law of supply and demand is supposed to take care of it Oil suppliers and consumers will work it out. By my analysis, the remark is pure supply side economics - oil companies will look for more oil to sell at these gouging prices.

According to this free market economy approach, higher prices will create more incentive for suppliers to explore for more oil and to do research and development "that will unlock new approaches to energy production and use that we can now only scarcely envision", in Greenspan's words. The Saudis have no need to explore - they are sitting on the mother of all oil fields right now. US oil companies are using the price gouging to secure rights to drill in the Alaska National Wildlife Refuge, which will add a little trickle about 10 years down the line - so if Greenspan is right, maybe at that time gas will go down a nickel a gallon, if the oil monopoly wants to make it look good for a little while. Hey Al - when the supply in the world is limited and in control of an oligarchy of monopolists, they have no reason to lower the price, and if they do find new reserves, they will just try to encourage demand to increase. I can see the ad now: "Huge new oil fields found in ANWR! Plenty enough to justify buying that Hummer and heading up to see the last of this vanishing wilderness!"

As far as research & development go, the Saudis and oil oligarchists have done nothing to come up with alternatives to oil. They have no reason to kill their golden goose. American taxpayers have subsidized the oil industry throughout its history, including the most recent version - authorizing them to drill for oil in ANWR. Oil buys politicians who prevent using taxpayer money to meaningfully subsidize other companies who want to develop alternative energy sources.

American autos consume 1 out of every 9 barrels of oil produced in the world. Will higher prices result in reduced demand or a move to more fuel efficient autos? Public transportation and car pooling are used only by those who have no choice or are public spirited. The roads are full of cars driven by a single occupant that will only reduce demand if forced to by a stronger external force than increases in gas prices. In the first gas crisis in the 1970's, my brother and I debated what the effect of increasing gas prices would be on American auto usage. Most Americans were driving big US built gas guzzlers getting maybe 10 or 12 mpg. As I recall gas then was maybe 50 cents a gallon, and my brother said if it got up to $2.00 someday, the market would take care of it and people would start driving little foreign cars. Well, he was right in that gas is $2.00 per gallon and people are drivng little foreign cars, but he was wrong about the reason. Cars got more fuel efficient as a byproduct of meeting environmental protection requirements.

Greedy American autoists do not hesitate to buy gas guzzlers that qualify for exceptions to the EPA rules. They don't mind paying for these beasts, many of which also have excessive maintenance costs, nor do they mind adding to the pollution problem. Wiser Americans who gave Japanese autos a try when they beat Ameriocan automakers in complying with the EPA standards have not found much reason to stop buying Japanese. Economy, quality and dependability in one package is hard to beat. By taking government action to protect our air quality, we ended up with better cars all around. Credit for this goes to the environmentalists (the same people who opposed oil drilling in ANWR) not to the auto and oil industries. By the way, if you want to see how many gas guzzlers are actually on the roads you drive, don't waste your time looking for them in the HOV lane - those behemoths usually only carry one occupant.

Greenspan also has a related prophesy regarding the course of world politics. He said that the resolution of "current, major geopolitical uncertainties will materially affect oil prices in the years ahead." In other words, as governments of nations with oil reserves are overthrown, oil oligarchists will have better opportunities to get their hands on more oil to increase supply and expand profits from gouging.

I say it is time to make the American oil producers pay back the subsidies in the form of price controls and special taxes. If they do not want to explore on their own dime, without subsidies, then let the market react to any resulting shortage - either American drivers will reduce demand or they will pay whatever prices they have to for more oil from elsewhere. Give meaningful incentives to companies competing with oil to deliver energy and fuel by more desireable alternate means and give significant tax incentives to purchasers of energy efficient cars - tax breaks for Hybrids instead of Hummers.