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Monday, May 01, 2006

Energy Secretary Bodman: 'Demand Exceeds Supply'

by Calculated Risk on 5/01/2006 01:41:00 AM

UPDATE: on the same theme, see pgl's Gasoline Prices: Russert Tries Demand & Supply, and Dr. Hamilton's More political pandering and Mish's humorous take: Panic Over Oil

MarketWatch quotes Energy Secretary Samuel Bodman saying "Demand exceeds supply" in the market for gasoline. Here is the excerpt:

"Suppliers have lost control of the market," Bodman told NBC's Tim Russert, when asked what the reason for the latest spike in U.S. gas prices. "Therefore demand exceeds supply."
I don't think 'demand exceeds supply'. Too funny.

For some reason, relatively high gasoline prices bring out the silly comments and dumb proposals. Senator Frist has proposed sending most Americans a check for $100 - he is thinking small - why not $1 million?

And some Senate Democrats have proposed a 60-day Moratorium on gasoline taxes. Wouldn't that encourage demand?

And Condoleezza Rice proclaimed:
"... if anything has surprised me as secretary of state, it is the degree to which the kind of search for hydrocarbons is distorting international politics."
This was a surprise?

Both the supply and demand curves for oil and gasoline are very steep. Demand is fairly inelastic over a wide range of prices and supply is essentially fixed in the short term (it takes time and significant investment to bring new product to market). Any short term proposal has to be aimed at reducing demand - like increasing the gasoline tax, not decreasing it.

But raising the gasoline tax has political ramifications - remember this Bush Ad?
In the 30-second spot that harkens to the bumbling Keystone cops of the black-and-white silent movie era, an announcer says, "Some people have wacky ideas. Like taxing gasoline more so people drive less. That's John Kerry." The ad's image is of 1920s-vintage cars going around in circles.
Also the impact of high gasoline prices falls disproportionately on lower income Americans. That is the problem with a short sighted energy strategies - like giving tax credits to companies that buy large SUVs. On this point, Josh Bolten is correct:
"This is a very large problem ... It's not going to be solved in the short run by some silver bullet."
So lets get started. And remember the goal is to significantly reduce total oil consumption. This will reduce the price of oil and gasoline, help with Global Warming, and as the Secretary of State just realized, positively impact international politics.