Thoughts on oil, free markets, and socialism


April 13, 2010 by The Mormon Worker

Oil has a very low price elasticity – prices have to soar to affect demand even a little. A given price doesn’t affect demand much at all. This is because oil is crucial for so many aspects of life in modern industrial societies. We need oil to: stay warm (this is rare in Utah but in east coast cities such as Boston, oil is the main way to heat a home); to get to work (we all live in the suburbs and commute a long ways to work); and to eat (oil is necessary for the machinery used in farming, and to produce fertilizers, and to transport food from across the country or even across the world. How else can we eat strawberries in winter? They have to come from a long ways a way).

So even if the price of oil goes way up, we can’t reduce our consumption a whole lot (we could maybe buy a more fuel efficient car, turn the heat down a few degrees, drive to Moab for the summer vacation rather than Disneyland). But none of these measures can really drastically reduce the demand for oil because most of our infrastructure and our entire mode of living relies on oil.

So this causes two problems, number one it pollutes the earth. Even if you don’t buy into the global warming stuff, the exhaust from cars pollutes the air (living in Utah Valley we all know what it’s like to breathe the air in winter) and secondly, eventually the supply of oil will run out. It may not be in ten years or twenty or even a hundred, but in addition to the environmental damage, eventually we will have to get along without oil.

So why not just stop using it? Well as mentioned above, we can’t stop using oil in the short run, just like a factory can’t drastically change its output in the short run. There just simply aren’t substitutes for oil that will keep our society running and people fed and our economy moving based on the type of infrastructure we now have.

Another problem is that the developing countries are beginning to consume more and more oil, just as Americans have been using lots of oil for years now. The US, with 5% of the world’s population, produces about 25% of the world’s CO2 (a good measure for energy use). So as more and more people in China and India begin buying and driving cars, instead of riding bikes or mopeds, and as more and more countries industrialize, demand for oil will continue to increase, even as new sources become harder and harder to find.

So as demand continues to increase, even if the current supply of oil could stay constant (which is doubtful because we can’t find new sources of oil as quickly as we are using current sources) the price of oil will continue to rise. This will make everything that relies on oil more expensive, especially food, especially for poor people.

So, to make the changes necessary it will take a long time, and the changes will need to be planned and deliberate, just like a company has to plan and be deliberate about changes to its production in the long run by building new plants, and developing new technology. New infrastructure needs to be built that does not rely on oil, new sources of energy need to be developed, new methods of transportation need to be discovered or utilized, people need to move closer to where they work, food needs to be produced locally, etc.

In short the foundation of our entire civilization will have to change. However, there is currently no way to make these massive changes, due to reliance on the invisible hand of the market to guide our decision making. In a market system, decisions are made on the basis of what will maximize profit for a private individual or corporation. So, making a rational decision in a market system means to make the decision that will maximize profit and keep a private corporation in business.

This will ensure that oil will continue to be used because the system we now have requires oil for the economy to function and for short term profits to be made. So for these massive changes to made that we know are necessary, we need an economic system in which rational decisions are based not on what will maximize profits, but rather on what will meet the long term needs of the world’s population, and which will preserve the environment and ecosystem, upon which our survival depends.

So, even though market forces and a capitalist economic system are often good at regulating the supply and use of various commodities, in the case of oil, the combination of low price elasticity and the importance of oil to everything we do, suggests that only a socialist economic system will allow us to make the transition away from oil that is so crucial for our continued existence.


2 thoughts on “Thoughts on oil, free markets, and socialism

  1. J. Madson says:

    This is worth watching. It is a gripping documentary even if you disagree with his claims.


  2. Brooks W. Wilson says:

    The Market System is not a panacea. Adam Smith and his Wealth of Nations is the most misquoted and misunderstood economist of all time. Most people who quote his treatise as a bible haven’t even read it.

    “Ironically, Smith’s epic work The Wealth of Nations, which was first published in 1776, presents a radical condemnation of business monopolies sustained and protected by the state. Adam Smith’s ideal was a market comprised solely of small buyers and sellers. He showed how the workings of such a market would tend toward a price that provides a fair return to land, labor, and capital, produce a satisfactory outcome for both buyers and sellers, and result in an optimal outcome for society in terms of the allocation of its resources. He made clear, however, that this outcome can result only when no buyer or seller is sufficiently large to influence the market price—a point many who invoke his name prefer not to mention. Such a market implicitly assumes a significant degree of equality in the distribution of economic power—another widely neglected point.”

    Adam Smith lived in a different world. He could not possibly have conceived of the complexity and corruption of what has developed.

    Call it Socialism or whatever you want but with out control by society of energy, we are doomed to price-creep of gasoline, increased consumption/pollution and eventually running out of gas, air or the earth whichever happens first.

    Anyone who thinks Socialism is evil needs to read Act 4: 31-37 or D&C 104.

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