Oil prices drops like a hooker after a tire iron to the face

http://www.breitbart.com/article.php?id=D94S28T80&show_article=1

This is bad. Oil needs to back up to June-July prices

I filled up my gas tank tonight for less than 14 bucks. Tell me why this is bad. Because some people lost their jobs?

You do realize that downsizing is an absolute reality for companies trying to survive in this economic environment, right? UAW even agreed that jobs would be lost at the Big Three work toward sustainability.

I'm as liberal as the next guy, but companies must cut their work forces if they are in trouble. Keeping people around will only make the company go under and... everyone loses his or her job.

No, because when oil prices go down, productions goes down. When production goes down, shit breaks less. When shit isn't breaking, it doesn't need to be fixed. If it doesn't need to be fixed, I'm not getting money.

See the problem here?

PB, I hate to say it, but Shel is right (though not exactly for the reasons he says, but close). This is very bad. Sharp declines in commodities prices because of demand destruction from liquidity seize-up is a precursor to deflation.

Consumer confidence / money supply DOWN --> prices DOWN --> production costs UP --> wages/employment DOWN --> consumer confidence / money supply DOWN...

rinse and repeat.

Yeah for once this isn't ENTIRELY selfish

There's millions of people in the oil industry, and we are all feeling it

Not just oil. Any and all commodities industries are getting raped right now. Prices falling is good for consumers in the short term, but prices also have to reflect a stable money supply. If they don't, you either get rapid inflation (when there are too many dollars chasing too few goods) or a deflationary spiral (too few dollars chasing too many goods).

Fuck other commodities

Oil is the only one that matters

As much as I want to cock-punch you for being the douchebag you are Shel...

...you're right.

This thread delivers.

Also, Grakk admitting that Shel is right (twice) is almost sigworthy.

The oil price is good because it gives a bit of a aggregate supply shock to the economy. On the flip side to this, it puts significant downward pressure on the price level -- oil is a factor input to everything. The federal reserve is already (unofficially) transitioning into quantitative easing instead of a pure interest rate policy; they're already pulling out all the stops to combat deflation.

The real reason that a low oil price is terrible: car manufacturing incentives are completely turned on their head. The Big Three are in trouble because of the oil price shock (consumers began to substitute to more efficient (foreign) cars). That is, they failed the test of the market and are now in a lot of pain because of it (good). But with a low oil price, those social gains will be lost. Liberals talk a lot of bull about putting regulatory requirements in to ensure fuel efficiency. These have never really been successful. The best way to incentivize the production of fuel efficient cars is to make fuel expensive.

The best public policy idea.

= Shift taxes on good things (work) to taxes on bad things (burning fossil fuel). This both improves living conditions, improves national security, gives incentives to innovate, and stimulates the economy via (I'd choose payroll) tax cuts.

WE LANDED ON THE MOON!

I got a deflation alert


In my pants

I can get gas for $1.69 right now. The Big Three are in trouble because they have banked profits instead of investing in efficiency AND they are producing cars nobody wants anymore.

Sounds to me like they have a problem.

Exactly. The question that an economist asks is, as a company seeking to maximize their profits, why would they ignore fuel efficiency? Well, because they had very little incentive to care about it. Between cheap gas in America (even at it's most expensive points gas is cheap compared to most developed countries), and ridiculous federal regulatory loopholes, American car makers have had an out right directive to make highly fuel inefficient, large, and ostentatious vehicles (they're called SUV's).

Short run cheap gas gains are not worth the long term misdirected production plans (INERTIA) that result from missaligned incentives (the last 15 years of american cars).

This is a very simple case of an externality.

I read that and still have no idea what you are trying to say in response to me.

K.

Over the last decade, the federal gov't has allowed a significant loophole in its regulations for fuel efficiency. So called "light trucks" do not have to comply. More or less. Low and behold, the suburban wet dream, the SUV is a "light truck." This means that comparatively, SUV's are relatively cheap to make (not that they are avsolutely cheaper, but because they are exempt to regulations they are more profitable as a percent of revenue). This basically means that for every SUV sold (omg explosion over the last 10 years), car companies have been able to dance around fuel efficiency regulation. Now, these regulations exist to make up for an externality -- the social cost of pollution and the social cost of supporting unstable nations in the middle east are entirely external to the workings of US car markets. The purpose of those regulations was to reduce the inefficiencies resulting from private parties not (being able to directly) account for the external costs of their actions. Unfortunately, the gov't fucked up, and instead simply shifted the incentives from fuel efficient vehicles to "light trucks".

Companies have an incentive to make money. That is what they do. When the govt stacks the deck in favor of "light trucks" when they mean to create higher fuel efficiency standards, what are profit maximizing firms to do except work within the regulatory environment they cope with?

The basic chain as I see it goes: using fossil fuels creates externalities, congress wants to limit these -->> fuel efficiency regulations. BUT! stupid loophole for "light trucks" instead of creating an across the board increase in fuel efficiency simply makes "light trucks" comparatively cheap to make ->>> zomg SUV = LIGHT TRUCK!!!?? Big three say, WIN! Silly congress, you fail at ur job.

What's an alternative policy to direct regulation? A symmetric incentive that is un avoidable =>>> influence the demand for transport. How to do this? Tax fuel. If fuel is expensive, ppl will want to minimize their consumption of it -=>>> car makers will see what is most profitable (what people want) and will shift to fuel efficient cars.

The reason why this solution is so painfully obvious?? Why are the big three failing??? Because with the oil price shocks demand reacted in exactly the way outlined above. BUT, they were not making what ppl wanted, so they failed the test of the market.

What we need is not low fuel prices, because in the long run, low fuel prices create an incentive to fail to innovate and create new transport technology.

GO GO GAS TAX.

(rereading that, omg incoherent, oh well, I'm drunk)

Okay, I see what you're saying, but Toyota is still the best auto seller in the US (I realize they are hurting too, but they have never been supplanted that I know). Toyota was never into the idea of "zomg we should sell giant vehicles as our bread and butter." Now, Toyota isn't American and may not have seen the same incentive that the Big 3 did, BUT they still beat the Big 3 for sales so as I see it, the Big 3 are being punished for not adoping the "efficient sedan" that Toyota has built its brand upon (Camry in this case, with good alternatives like Prius for higher dollar amounts).

Why should I feel bad because the US industry hasn't seen the waves coming and abandoned short-term profit for long-term stability?

Oh, I'm not telling you to do one thing or feel another thing. I'm just trying to say why the fall in the price of oil (although certainly a nice short term shot in the arm) can in the long term potentially work against exactly what needs to happen (alternative energy and reduced dependence on foreign oil).

Never before has govt successfully been able to legislate a dictum around such an issue. I saw the run up in oil prices (prepare the tar and feathers) as a needed event for the long run efficiency of the US. Now that we're seeing a drastic reversal... well, I am glum.

But that's not to say that we can't do anything. The most effective (and transparent) method to disincentive a behavior is to tax it. Moreover, increased revenues from taxing things that are bad can be used to reduce taxes on things that are good (work).

Potentially, it's a gain, gain situation. Reduce payroll taxes to encourage employment and increase fuel taxes to discourage pollution and the support of hostile regimes.

Three comments:

Toyota has had a 30 year head start in fuel efficient vehicle production for the very reasons Kamma outlined. Namely, that gasoline taxes in every country except the US routinely exceed the cost of raws. In this case, Japan was dealing with gasoline rations, cramped population density and other downward pressures on auto use ever since, well...since we bombed them back into the stone age. I'm not saying that is a catch-all excuse for the Big 3, but it certainly could stack the deck in Japanese auto-maker's favor.

Second, the Big 3 have until the last ~20 years, been stupefyingly generous with their UAW concessions. When times were good, an auto-industry worker could expect a 2-year severance furlough before being fired, during which they would receive 80-90% of their base pay. While the unions are finally figuring out that they ate their seed corn in the 90's and 2000's, large numbers of workers have already retired under the old system, which places a large entitlement burden on domestic auto companies. Toyota on the other hand, comes from a country where worker's unions are relatively weak.

Third, while I agree with Kamma that a gas tax would be a good motivator to secure a more efficient future for vehicles, the sequence of events that has unfolded already (namely the explosion of "light-truck" class vehicles and the baggage that entails) almost guarantees the crucifixion of any lawmaker who votes to raise taxes, especially in the current senate term. With the Democrats so close to a filibuster-proof supermajority, (I may eat my words here...) they would have to be IDIOTS to raise federal taxes on consumer commodities. The fact that we are in the worst recession since the 1950's compounds my belief that very little will be done on the taxation front.

Which is why I said to raise gas taxes and lower payroll taxes. Certainly don't increase revenue -- just shift the tax burden. I mean, if we really want to go there, we need to scrap our whole I-want-a-loophole-too tax system.

My favorite metric for why our tax system is a piece of swiss cheese:

Quote :

At 39 percent, the U.S. combined statutory corporate tax rate is reported to be 8 percentage points higher than the OECD average. More recent data collected by the OECD show that the OECD average corporate tax rate has fallen to 28.4 percent in 2006, almost 11 percentage points below the U.S. tax rate...

Although the United States has the second highest statutory corporate tax... U.S. corporate income tax revenue (federal and state) as a percentage of GDP paradoxically is much lower than the OECD average — 2.2 percent in the United States versus an OECD average of 3.4 percent — over the 2000-2005 period.

From this pdf

So stop me if you've heard this one, but I'm seeing a lot of poor illiterate people complaining about commodity consumption taxes combined with payroll tax cuts.

It's the same arguments you heard when rumbling about flat taxes starts. I think their arguments are B.S. of course, but their vote still counts the same as mine. They didn't get to be poor by being financial wizards...

Never said it was politically viable. Just said it is what should happen.

https://www.youtube.com/watch?v=2I0QN-FYkpw&NR=1

made me rofl

i like the part where he mentions santa clause