Why Do Higher Gas Prices Anger You?

Nevertheless, the happy-go-lucky contemporary of Jevons' would have been correct. I just did a little Googling on "19th century price of coal", "price of coal", and "consumer price index". For simplicity, I'm assuming that the dollar's value was constant from 1830 to 1913, which isn't as crazy as it sounds because the USA was on a gold standard at a constant $20.67/ounce then. From 1913 till today, we have data on the consumer price index.

Based on this very crude back-of-the-envelope calculation, I caluclated the real price of a short ton of coal, in 2005 dollars. With a few hours' work, I could get it right, but even the crude picture gives you the idea. For what it's worth, here it is:

1830: $220 ($11 in 1830 dollars) 1860: $110 ($5.50 in 1860 dollars) 2005: $84.20 ($84.20 in 2005 dollars)

Jevons' book is very serious, very well-argued, and very persuasive. But it is wrong. And, to answer one of your later points, Britain's (and the world's) energy supply was secured by new energy sources that Jevons didn't know about. Our vision of the future is constrained by our present lack of imagination. Our actual future is not. It is easy for us to mix up the two, but it's still a mistake.

I would suggest that we use the formula $100 * log (P1/P0), where P1 and P0 are the real prices at the end and at the beginning of the betting interval. If the price of your chosen resource increases tenfold, you get $100 dollars. If it decreases to one-tenth, I get $100 dollars. If it doubles, you get $30, if it halves, I get $30. That sounds about right to me, but we can put another factor before the log if you don't like $100.

I was originally going to suggest $const * P1/P0. But then I but found that this wouldn't be fair, because P1 has a lower bound (zero) but no upper bound. Better to work with logs, which are so elegantly scale-invariant and have a de-facto bound on either end. Also, since I'm the one betting on lower prices, this would put me at an advantage over the non-log-alternative, so you'd better ask a math teacher if this is still fair. After all, that's what you marry them for.

but cant I just put it on the 3.30 at Newmarket?

What is the newmarket, and what is the 3.30 on it?

Sorry you wouldn't understand

Newmarket is a famous English horse racing ground not too far from here.

3.30 as in 15:30 as in the time of the horse race.

Your betting formula is quite neat. But why not just do it the Simon/Erlich method i.e. just the difference between the real (inflation adjusted) prices?

Works for me -- I just thought mine was neater. (And the two converge when P1 and P0 are about equal.) We can go with that one if you want.

from this site

There one which compares prices as well - will look in my favourites for it later.

That's a very neat site -- thanks, Walter! (And it looks like I got lucky in assuming that the CPI in 1913 was the same as in 1830. Only 7% difference. Pew!)

The multiplier you would want to choose in the context of the coal discussion depends on what you want to compare. By contrast, choosing the consumer price index compares the cost of coal costs compared to other things on which you could spend your money instead. Using the unskilled wage or GDP/capita compares how hard people have to work and save to produce a ton of coal. The CPI, which I chose; is among the measures that downplays the fall in the price of coal, so is on the ideologically inconvenient side for me. Nevertheless, I think it's the most appropriate one here: We know people work more productively now than they did 175 years ago. But the suggestion about oil as a depleteable resource is that oil has gotten scarce in a way that other commodities have not. The CPI is the index which best captures whether this is true.

Oil has not "gotten scarce". There is more oil spewing out of the ground than at any time in human history. My entire point is that this volume for entirely geological reasons is near peak, while demand continues to rise incessantly. Even now supply has been able to meet demand (but notice US stategic oil stocks are being used, helped by European stockpiles). And while supply and demand may influence the price, they dont affect the earths crust.

In any case the demand for oil is pretty inelastic. People dont buy that much less if the price goes up. They jsut dont spend on other things. Oil is needed for such trivial things as "getting to work", transporting goods, and keeping warm.

I admit demand is inelastic in the short run. But in the long run it's pretty elastic. For illustraion, you might compare how large the cars in European streets are compared to the cars in American streets, how well insulated European houses are compared to American houses in comparable climates, the share of sprawl in new housing construction here and there, et multae cetera.

Oh, and that tiny little thing called Plastic, which is pretty much invaluable to our modern world.

Plastic: the forgotten critical product of oil refining.

Cycloptichorn

If this is so, prices will surely shoot up throughout the next years, and you should have no problem at all accepting my bet.

Comparing US with Europe is not useful because of widely differing government tax rates on petrol and petroleum products.

Yes. That is exactly the comparison: different tax rates create different end prices for oil and its derivatives in both regions, causing consumers to pick different points in the tradeoff between gas-saving and other desireable features. If you were correct and consumers didn't respond to the incentives set by the price system, different tax rates wouldn't produce different mobility patterns. But they do, and that was my point.

well ok Thomas I'll concede that one.

But oil is not really a free market. Or rather it is a free market, but some people have battleships and armies to supply.

found this interesting

from http://www.intnet.mu/iels/PO_consequences.htm

Geopolitics and World Peace

High prices and subsequent scarcity of oil cannot be a trivial event from a geopolitical perspective. Throughout the 20th century, security of oil supplies had always been a prime factor in the foreign policies of powerful nations. Indeed, on the eve of the First World War (1914-1918), Imperial Germany tried unsuccessfully to secure its access to Middle Eastern oil by making an alliance with the declining Ottoman Empire and build the Berlin to Baghdad railway line. On the other hand the British, always craftier than the rest, managed to transform the Middle East into its sole playground and ensured that its mighty Royal Navy was in a position to control the sea lanes to safeguard a ready supply of oil from Persia.

Indeed, only a few years before, the Royal Navy, spurred on by Winston Churchill, decided to switch its fleet to oil. The tactical advantages of this transition to oil were far too great to have any second thoughts about the matter. Oil based ships were faster, more powerful and above all could have a greater range due to the greater energy concentration of oil compared to coal. Imperial Germany and Austria had access only to limited Romanian oil. It has been said that the abundant oil supply enjoyed by the Allies during the First World War was a major contributing factor in their victory over Imperial Germany.

Similarly, during the Second World War, the Axis forces were continually hampered by the lack of oil. Although Japan invaded Indonesia for its oil, it had immense difficulties in shipping enough oil to its industry and over-stretched forces due to US submarines rampaging throughout the Pacific. Germany fared no better as it had access only to Romanian oil. It failed in its endeavour to invade the Caucasus to secure its oil resources when the Soviet Red Army stopped the Germans at Stanlingrad and defeated them in Crimea. It is interesting to note that Germany produced half of its oil by coal liquefaction. Although it had ample coal, a competent workforce, a large industrial base, and was motivated enough by the war effort, it failed to supply enough oil to its war machine. Therein lies a lesson for us, even though it is technically possible to produce synthetic oil from abundant coal supplies, it does not follow that we could substitute a large fraction of what is consumed daily from conventional oil with oil from coal liquefaction. Germany failed to do it. This is fact. On the other hand, the Allies never ran short of oil as the US, which was the largest producer then, and Venezuela did supply all the oil needed for the Allied war machine.

regarding betting...just read something about oil going to $100/barrel. So yes I have no fears about accepting your bet, but I'm not going to, would not like to take money off a friend

Seriously I dont think its a very good idea to bet over 3 years. I cant remember what I did 3 minutes ago.

On the other hand ........if you promise faithfully to remind me when I have won ... then yes ok you are on

And the bet is....

I bet you $25 that the price of Texas light crude is higher in real terms (inflation adjusted) at close of trading on NYSE on 10 Oct 2008 than today.

Nice and simple, no logarithmic scales or price differentials. Higher I win, lower you win. Alternatively, you can send me $10 now and owe nothing in 2008...

I believe that NYMEX, the leading exchange in the oil business, quotes "Light Sweet Crude" without the "Texas" in it. NYMEX quotes are the easiest to keep track of on the web, so I suggest we use these. But dropping the "Texas" does not make or break the bet as far as I am concerned.

Deal.

Whoooa!!!!!!

Exciting isnt it. Will be buying my Financial Times tomorrow morning...

and starting to save pennies, just in case.

ps Its a good job we arranged this outside of trading hours, or news of it could upset the market dont you think?

Oh -- and the price will be inflation adjusted according to the consumer price index. Thanks to G.W. Bush's fiscal policies, I think a major boost in inflation is definitely possible -- but that's not what the bet is about. Right?

Have fun reading the Financial Times. It's a good paper even if you don't care for the finance stuff.