Month: July 2022

Econ 101:  Oil Price Cap

Among U.S. (and E.U. and some other primarily Northern countries) objectives in reacting to Russia’s invasion of Ukraine, is to diminish its capacity to continue this war, in part by reducing its export (largely oil and gas) income with minimum damage to the U.S. and other embargo supporters and to pressure it to the bargaining table sooner rather than later (we are trying to do that aren’t we??). As you can see from the previous sentence, this is not a particularly simple issue.

One measure being promoted by U.S. Treasury Secretary Janet Yellen is to cap the price at which we are willing to buy Russian oil.  If we just stop buying Russian oil all together (effectively a price of zero), global oil supply would presumably fall, and oil prices would rise. We know, of course that Russia will redirect its sales to countries not participating in the embargo, such as China and India, to the extent it can and the oil these countries would have purchased from Saudi Arabia and other suppliers would then be available to us and global oil supply would not fall as much as we might have expected nor would prices increase as much as otherwise. Much could be written about this (the limited potential of embargoes if not everyone participates), but I won’t.

The idea of Secretary Yellen’s cap is that rather than buying no Russia oil we (and all embargo participants) would continue to buy it but at an agreed price that is below normal market prices in normal time (the price cap). Thus, hopefully, Russia would still sell its oil to the West but would earn less foreign exchange from it and the West would have more oil than with a total blockage and thus avoid sharp market price increases.

“There are several outstanding issues to settle on the price-cap idea. Those include figuring out exactly how to enforce it, convincing other nations to subscribe to it and deciding the sales price at which Western countries would permit the purchase of Russian oil. Looming over the proposal is also the presumption that Russia would continue to sell oil at a price mandated by the U.S. and its allies.”  “WSJ: Janet Yellen begins Asia trip to win support for cap on Russian oil price”

“Some economists and oil industry experts are skeptical that the plan will work, either as a way to reduce revenues for the Kremlin or to push down prices at the pump. They warn the plan could mostly enrich oil refiners and could be ripe for evasion by Russia and its allies. Moscow could refuse to sell at the capped price…. 

“Mr. Biden… moved swiftly to ban imports of Russian oil to the United States and coordinate similar bans among allies. In some ways, the price-cap proposal is an acknowledgment that those penalties have not worked as intended: Russia has continued to sell oil at elevated prices — even accounting for the discounts it is giving to buyers like India and China, which did not join in the oil sanctions — while Western drivers pay a premium….

“The cap plan seeks to keep the Russian oil moving to market, but only if it is steeply discounted. Russia could still ship its oil with Western backing if that oil is sold for no more than a price set by the cap.”  “NYT Biden gas price cap Russia”

John Bolton, whose view I don’t generally share, said about Yellen’s oil price cap: “The proposal, academic and untried, faces multiple practical obstacles and uncertainties. Widespread sanctions violations by Russian maritime cargoes already exist, with no reason to think the oil-price cap is more enforceable.” “WP: Biden oil price cap-Russia Sanctions”

Such efforts to “hurt” Russia cannot avoid also hurting us. What other approaches might the Biden administration consider?

“The White House… has held off for months on backing a gas tax holiday, amid divisions within the Democratic Party and skepticism a roughly 18.4 cent-per-gallon discount would be passed on to consumers….  In private meetings with senior Energy Department officials to discuss ideas for boosting supply and lowering prices, some industry representatives have instead used the sessions to push for longer-term priorities like building pipelines and easing environmental restrictions.”  “Politico: White House-Biden-gas prices”

“Rep. Kim Schrier, D-Wash.,… called it “infuriating” that spikes in gas prices were “happening at the same time that gas and oil companies are making record profits and taking advantage of international crises to make a profit. This must stop.″ “PBS: House approves bill to combat gasoline price gouging”

When the supply of a product falls short of its demand, the gap can be closed in one of two ways. Both involve rationing a scarce commodity as is required for anything in limited supply which is virtually everything. The first approach—the market approach of price rationing—allocates the product to those who want it the most, i.e. those who are willing to pay the most for it. The second approach—the administrative allocation approach—allocates the product to those the government agency responsible for choosing who gets it, determine are most worthy or in most need of it based on the criteria the agency sets (which in practice invariably includes friends and relatives). History has clearly documented which of these methods of allocation works best.  Some of you will remember the long lines at gas stations when President Richard Nixon capped gasoline prices (another form of rationing).

That leaves measures that encourage increased supply from everywhere except Russia or that facilitate reducing demand. “Biden officials are openly pleading with Big Oil to pump more, not less. ‘We want them to get their rig counts up. We want them to increase production so that people are not hurting,’ [Energy Secretary Jennifer] Granholm said.”  “CNN: Gas prices-Biden-inflation” A higher price at the pump provides the market a strong incentive to increase supply, but that generally takes years to achieve much of an increase. In the interim profits of the suppliers will be higher than usual.

Some months back policy sought to reduce the consumption of carbon omitting products as part of our effort to slow global warming. For that objective an increase in gasoline prices would be a good thing, whether from a gas tax or restrictions on finding and pumping more oil out of the ground.

For the moment, encouraging more production by Saudi Arabia and other (non Russian) members of OPEC would be helpful. Finally rejoining the JCPOA (Iran deal), Trump’s withdrawal from which Max Boot called the “single worst diplomatic blunder in U.S. history” “WP: Trump-Biden Iran nuclear deal dead with no alternative”, would, among other important things, increase an important source of oil supply, as would dropping sanctions on Venezuela. If we can make deals with Saudi Arabia, given all it has done, deals with Iran and Venezuela should be no brainers.

Ending the war in Ukraine promptly is the most important measure for addressing the shortage of oil (and food more generally). “End the war in Ukraine”

What is appropriate to teach our kids?

Obviously, the knowledge and skills taught to kids should be appropriate to their age. At whatever age kids can meaningfully absorb the history and message of religions, for example (don’t ask me what age that is), the real question is what they should be taught about them. Given our constitutional separation of Church and State and our commitment to individual choice and the enriching benefits of a multiethnic population, public schools can not “teach Christianity”. But it is highly desirable to teach students about Christianity, Islam, Hinduism, Buddhism, and the other major religions—their histories and beliefs. Parents have a right to be satisfied that what is taught fairly represents their religion.

At an appropriate age kids need to learn about races—about why some kids in the room are black, white, brown, and yellow. At an appropriate, presumably older age, they need to learn the history of these races and especially slavery as it is particularly relevant in America, as are Chinese rail road workers and the internment of Japanese Americans during WWII.

At appropriate ages kids also need to learn about how their bodies function and how to keep them healthy. As they approach puberty, they will want to know all about what is going on in their bodies. If they are not given this information in the classroom, they will seek it elsewhere. Current controversies over teaching information about sexuality and sexual functions to kids at the age needing and wanting such information and over the availability of affinity clubs for young teenagers to discusses these pressing questions, reflects, in my view, two serious mistakes in confronting this issue. The first is to overlook or deny that kids will seek out what ever information they can about every aspect of sex whether presented in the classroom or not. The second serious mistake is the claim that teaching about homosexuality and providing clubs in which kids can discuss their questions about it with their piers will recruit heterosexual students to join up with the gays as if being gay is so desirable. We cannot chose our sexual orientation.

I want to focus on the second of these. We are born with our sexual attractions. We are not and cannot be recruited from it to its opposite. The survival of the species requires that most people are heterosexual and happy to procreate and so overwhelmingly most people are heterosexual. Those who are not are acutely aware that their attractions are not the norm. As they attempt to establish their goals for their lives, most homosexuals try to hide from, or deny to, themselves that they are different. Most would rather not be. But they cannot change the facts. Their goal should be to accept the facts and carry on building the most fulfilling lives possible. This is much easier today than earlier because of honest and factual classroom information and public role models of successful gay men and lesbian women.

Sixty-five years ago as I struggled to sort out my own attractions (yes I know that that was a rather long time ago and a different world) I did not know any, or of any, gay people as models or better still to talk to. There was no Will and Grace, or Peter Buttigieg, or Peter Thiel, or Lily Tomlin. I had only heard of child molesters—bad people who were run out of town. I hated what I felt. It threatened to destroy the life I hoped to have. So I buried it away for many year at the cost of considerable internal pain. What a relief it would have been to have learn in class that some people are just that way and can have otherwise normal lives.

Thus, it is quite distressing to me that some poorly informed parents are rising up against such instruction. While I assume that they mean well, I see their actions as child abuse. They mistakenly believe that homosexuality is a choice. They understandably don’t want their child to make that choice. But it is not a choice. We often say that God made us homosexual, and we chose to be gay.

All children need the facts about the various urges god gave us and help with their struggle to accept their own sexual orientation and to fit in with the rest of society. Clubs at which they can socialize and feel comfortable and discuss the fact of their homosexuality can be a helpful part of their development. Despite the enormous progress in public understanding, ignorance persists in some quarters on which the Washington Post gives an interesting report:

Flyers at school advertising Safe Place club meetings, “set off a wave of parent anger and rumors that Safe Place club advisers including Melissa Panico, a teacher who has LGBTQ children, would “indoctrinate” students.

“Spurred by these concerns, legislatures in at least 19 states have passed or are considering laws that bar discussion of sexual orientation and gender identity for younger children while limiting teaching on those topics for older students….

 “’Safe Space’ signs had to come down. The posters were ‘political in nature,’ he wrote, and might cause ‘disruption to the learning environment.’ The signs could run afoul of two legal considerations, he added: ‘One, will what is posted or worn be seen as indoctrinating our students to believe or think in a certain way. Two, would we allow anything that represents the opposite viewpoint?’” It is hard to believe that these were the words of an adult educator.  “Gay-straight alliance-indoctrination-school club”

Progress has been made but we still have a ways to go:

“When Sen. Barry Goldwater, dubbed “Mr. Conservative,” learned that his grandson and grandniece were gay, he worked for new laws that would protect their civil rights. When Newt Gingrich became speaker of the House, and his lesbian half-sister, Candace, became a gay activist, he took a more neutral stance. “It’s a free country,” he told the press. State Sen. William “Pete” Knight has been estranged from his son since learning four years ago he is gay.

“And now, Dick and Lynne Cheney are faced with their decision, how to handle in public what is essentially a private matter: the sexual orientation of their daughter, Mary.”  “The Cheney’s”