Saturday, February 11, 2006

Iraq, Oil Scarcity, and Gas Lines

Summary: You wouldn't think that in a country that has a huge oil production potential that there would be gas lines. But there are. This blog post explains how something like that could happen.

I have just begun to read what promises to be one of the best ever explanations of economics, a book entitled Basic Economics by Thomas Sowell. In the introductory chapter he talks about the concept of scarcity--that there is never enough of most things to satisfy the desires of those who want them.

It got me thinking about something I never thought I would see in a land of plentiful oil: gas lines. Almost every day in Iraq I see cars lined up, sometimes by the hundreds, waiting to buy gas. Yes, oil is scarce in Iraq, but not in the way that it is scarce in some other places like Japan. There is a ton of oil per capita in this place, so why would there be gas lines almost everywhere I go?

First of all, you need security. In a country that is beset by insurgents, getting the product to the consumer is riskier than it would normally be. Insurgents make threats on producers and consumers, and they occasionally blow up a transmission pipeline. If the insurgents would just go home, this particular problem would be...well...only a little bit better.

Secondly, refining capacity is required for turning oil into gasoline, diesel, etc. (You know...that Saddam is such a great guy. He used to have some asesome palaces.) With all the oil Iraq was selling to the world (before Saddam attacked Iran, the Kurds, Kuwait, and the Shia') it easily had enough financial wherewithal to keep its refining capacity up to date. But most refineries here are at least 20 years out of date, and some have not even been upgraded since they were built in the 1950's. So there's a ton of oil to be had, but no way to get it to the people. As a side note, I know a lot of guys who get paid to pretty much do nothing at a refinery near where I patrol.

Finally, because gasoline and other end-consumer products are scarce, the best way to direct them to where they're needed most is through a natural pricing mechanism. Somehow (I have a sneaking suspicion it has something to do with either Saddam or Hugo Chavez) gas prices are kept at an artifically low price in Iraq--something like the equivalent of 4 cents per gallon. So, Iraqis have no incentive to manage correctly the amount of gasoline they consume, through driving less, car pooling, or fuel economy, for example. (Any consumer is prone to mismanagement of any scarce good in this kind of situation, especially when it's perceived as free or "not mine"). To make matters worse, surrounding countries, such as Syria and Jordan, have no artificially set price for gasoline. Okay a role play here: you're a fuel delivery guy in Iraq. You can sell your gas to Iraqi gas stations for about 4 cents, or you can go across the border and sell it for something like a dollar. Question: What's the name of the fuel delivery guy? Just kidding. Have you decided yet what you would do?

These three huge problems conspire against the Iraqi people having gas in the right places, and they have caused a resource that is already scarce to become tremendously scarcer. And, just magine what Iraqis could be producing if they didn't have to sit in gas lines.

1 comment:

Anonymous said...

Frank. I hope you are doing well while on duty. I am glad to see your blog site, it helps me feel like I am staying in touch with you. When are you scheduled to return home? I am praying for you often, and hope you will return to your family safely. I appreciate your courage by serving in the armed forces, and by serving the Iraqi's that want to have some help from the nuts that seem to be everywhere these days.

How much time do you have to respond to messages etc? What are you currently doing (as far as what you can say about it)?

God speed my friend.

Todd Starley