Don't Bust My Gas

Speaker 2

I'm Phil Magnus, they call me.

Speaker 1

Phil, how are gas prices looking for you? ⁓

Speaker 2

They are certainly on an upward trajectory, although it seems to be hitting different parts of the country at different levels of intensity. It's out on the West Coast. I spend a lot of time out there in Oakland, California, which is where the independent institute's located. Not only do we have rising gas prices, we have gasoline that's heavily taxed. Whereas in the East, it's mostly responsive to some events that are happening in the foreign policy arena right now.

Speaker 1

Well, I'm in New Jersey, so I'm not allowed to get too close to the pump because the pain would be too much. In New Jersey, we're not allowed to pump our own gas. So we have attendants, gas attendants who pump the gas for us. So they're kind of this, you know, this block, you know, shielding us from from the pain. So ultimately, we don't really know how hard we've been hit until we ask for the receipt or we see the the bill later on on the on the credit card statement. But it's rough out there. You alluded to something happening in the world. I don't know what's going on in the world today. But yeah, why are why are gas prices up?

Speaker 2

Well, it's been some foreign policy chaos recently. So President Trump basically launched this war in Iran to oust the Islamic Republic regime that has basically run that country since 1979. And in some of the chaos of how this event is playing out abroad, the Iranian government or what's left of it decided to close the Strait of Hormuz, which is that narrow strip of water that connects the Persian Gulf, basically it's opening out into the main ocean channel. So it's the area where oil transport from Kuwait, Iraq, Saudi Arabia, all of the Middle Eastern oil producing states tends to flow out of that corridor and into the world. And when you have ships that are going through there that are being subject to drone and missile attacks because of this war that's going on, it's really kind of created a choke point. on the transit of oil.

Speaker 1

really puts into perspective, the world is so big, but yet you have all these small kind of crevices connecting it. And you would you would think by now in the year 2026, like, ⁓ we would have figured out another way to get oil from that area in the in the Middle East, all the way over here. But I mean, you're basically stuck with tankers right these gigantic ⁓ ships in order to bring it over you can't airlift it I guess that would probably be pretty dangerous to do.

Speaker 2

if you were trying to airlift oil. And again, as tanker ships, ⁓ despite being kind of an older, clunkier, less exciting technology, are still ⁓ among the more viable and economically efficient ways to move massive amounts of oil. Our ocean lanes are time-tested and honored means of shipping things. ⁓ Pipelines, by contrast, are expensive. Oftentimes, they go through areas that are not politically stable, especially getting from the Middle East to, Europe or ⁓ some of the other ⁓ oil-consuming areas of the world. ⁓ What are your options there? You either put it on a ship and sail around the oceans, or you put it in a pipeline that might be going through somewhere like Syria that is also in a very war-prone area.

Speaker 1

This reveals a lot, think too, on how the war is being fought because the ships being targeted in in Hormuz, they're not military ships, right? They're commercial vessels. And I don't think a lot of people are sort of paying attention to Iran is targeting civilian vessels. And what does that mean when it comes to something we've heard a lot of, you international law? Cause it sounds illegal. It sounds like something you you're not supposed to be doing.

Speaker 2

Well, I think that's exactly the case. mean, Iranian government is not necessarily known for following international law all that well. You know, the same part, ⁓ they... This is a regime that has a history of sponsoring terrorism. It's also a regime that kind of flailed in response to this war breaking out. The United States did attack Iran. And then what did Iran do? They turned around and they fired a bunch of missiles at their neighbors. ⁓ Just kind of this scatter shot. approach to draw attention to itself. And I think it shows kind of that they recognize there's a conventional military disparity. Iran's not going to go toe to toe with the United States Navy. They would be obliterated just in battle. But one thing that they can do is they can inflict costs. on other people. And one of their ways of targeting the rest of the world is to make our gas prices go up, to make our energy harder to obtain. So that means that they are going after civilian vessels that are trying to go through this narrow, roughly 20 mile wide stretch of water connecting the Persian Gulf to the main ocean lanes.

Speaker 1

Now I was born in 1982. So I was born after the oil crisis of the late 1970s. think it's one of the pox on President Carter. I remember hearing stories about people lining up for gasoline and that sort of thing. It's sort of like here we are again, but it's different now. Do you see us being hit as hard this time around as we were in the late 1970s?

Speaker 2

So probably not, provided that we don't make some of the same policy mistakes that occurred in the 1970s. So there are a series of oil crises that break out. One of them is that Iranian Revolution in 1979, a little bit earlier in the 1970s in the Nixon era, there was an OPEC oil squeeze. It's an attempt to flex ⁓ market conditions in favor of oil producing nations. And in both of these instances, there was a clamor to bring prices down at the pump and to do so by putting in price controls. or rationing mechanisms, or you could only go to the pump on certain days of the week, depending on when your number was up. These are all political responses to the fact that ⁓ prices of oil goes up, gasoline becomes more expensive. People generally don't like that. That's a way to lose an election, is if you're presiding over an economy when energy prices are going up. So what do politicians do when they're faced with that? Well, they go back to their tools of economic control. and they attempt to cap the prices by force of law. They tell gas stations, well, you can no longer charge the actual going market rate. You have to keep your price below what's been prescribed here, or we ration through lines, is the other approach there. The problem with this approach is it obliterates the mechanism of the price signal ⁓ in gasoline markets as its own rationing device. In other words, if you hold price is too low, well what happens to gasoline at the pump? Well, people will fill up their tanks at the lower price. may even... acquire and hoard more gasoline than they otherwise would get in a normal price ration scenario. In other words, it's a short path to getting to gasoline shortages, to ⁓ not being able to meet basically what consumers are seeking in their consumption patterns of gasoline because it's all politically allocated now. And that's when you get to these scenarios of gasoline lines in the 1970s.

Speaker 1

Well, if taking on one oil producing behemoth wasn't enough, we also have had ⁓ some things happen in Venezuela as well. What impact, if any, is that having? Because it's like, okay, each hemisphere, we're kind of...

Speaker 2

oil markets. So Venezuela is historically an oil exporting country, although they've had a problem. They're an oil exporting country that has been under 25 years now of socialism. And something happened in the early to mid 2010s as the socialist regime started tightening down its control of oil fields and started appropriating for the public, i.e. the socialist leadership, ⁓ control of oil rights that had previously been in the private sector, well, private companies pulled out of Venezuela. and it allowed their infrastructure that previously could produce a substantial amount of ⁓ oil going to the international market. ⁓ It allowed it to degrade because ⁓ most private companies found that they couldn't reliably do business with the Venezuelan government when the socialist revolution could threaten next week to just seize all of the ⁓ equipment that you installed there with your own money and declare that it's now the people's equipment and build a mansion for Nicolas Maduro. That's essentially the scenario that happens over the last decade or so. Venezuela's oil exporting industry has basically dwindled down to a very small trickle of decrepit, obsolete infrastructure. Now, President Trump... ⁓ rather infamously back in January, stepped in and had this midnight raid that seized Nicolas Maduro and took him into ⁓ custody ⁓ as an international criminal. I think Maduro was a thug, but we can debate all the conventions or defiance of conventions on seizing the head of another country, even though he was an illegitimate leader. But nonetheless, that had other repercussions because President Trump has now tried to step in and coax US oil companies to return to Venezuela to basically tap that previously underutilized oil economy that they had that had been suppressed by socialism for the past decade or more. Now, I think we're seeing a lesson unfold in some of the pitfalls and perils of attempting to centrally plan an economy outside of the United States with US direction right now because Even though oil production has increased in Venezuela, a lot of it seems to have been kind of these ad hoc deals that the Trump administration has struck with Delce Rodriguez, who is the communist socialist Marxist successor to Nicolas Maduro. She was the vice president who's now been moved in as a placeholder. But you still have extreme regime uncertainty in Venezuela because she's not very popular. She's a holdover from the old Maduro era. And no one's quite sure what's happening. next in terms of are they going to have a free election that actually puts in a stable and legitimate government.

Speaker 1

A couple of things that this whole global situation has done that I really enjoy. One of them is that there's a meme of Marco Rubio sitting on a couch and ⁓ he looks like he's not having the best time of his life. And basically everything that happens in the news cycle, people end up putting basically a new costume on Marco Rubio. So that's been a lot of fun because everything going on, it's like, here's Marco Rubio dressed as like the Ayatollah. And also in personal news, I have a lot of friends reaching out to me asking, Hey, Lou, I didn't know you were the Ayatollah because apparently, this this salt and pepper beard and me wearing glasses makes me look exactly like the Ayatollah. So so I'm dealing with that. I do have one of those hats. Ladies and gentlemen, if you go over to my YouTube page, the Lou Perez, you could you could watch my video right now. And I'm basically cardboard from the neck down. True. ⁓ The other good thing that I think has happened with all of this chaos

Speaker 2

was had.

Speaker 1

is that the world is reminded about how important oil is and how much the world runs on oil. So much to the point where there's also chaos happening in Cuba. And one of the things that they're dealing with is that the lights are out in Cuba and they are in need of oil and a grid and all this. And you have environmental activists like Greta Thunberg coming out and saying we need to basically open up the ports and get oil to the Cuban people. So someone who has spent most of her young life raging against oil is now acknowledging the importance of oil.

Speaker 2

That's the wild thing. Although people on the socialist communist left, they always have an exemption from environmental restrictions when it pertains to a socialist communist country. view environmental degradation as a thing of capitalism, but when Cuba does it, or the Soviet Union, or China, they tend to look the other way. That's why you have Greta Thunberg is basically saying, she's blaming capitalism for not sharing enough capitalism with the socialist utopia of Cuba. And therefore capitalism is somehow Cuba's problem.

Speaker 1

Yeah, and obviously, you know, anything that goes wrong in Cuba is the fault of the United States. And it seems like with gas prices as well, whoever's president is always going to get blamed. And I remember when President Biden was in office, people were blaming prices on him. And you had, you know, people coming to his defense and saying, look, the president isn't responsible for gas prices or egg prices, etc. And then when it changes, the administration, the same people would say, look, gas prices were better under that administration, et cetera. Can one person affect gas prices that much? Is it different this time?

Speaker 2

Typically not really. I there are a multitude of international factors at play here. I you have to remember also that energy prices more broadly are affected by other ongoing wars. The war between Ukraine and Russia, for example, has shut down and disrupted several pipelines that used to run through that region. So we already have that happening. ⁓ Yes, presidents can do certain actions that worsen the situation. And I would say, you know, attacking Iran without really having a plan on what was going on in the Strait of Hormuz, has at least temporarily thrown a wrench into the international oil market, ⁓ even to the point that the administration seems to have been caught in. off guard by this. When they were being asked questions, I mean, you saw the press conference the other day, was like Pete Hegseth and Donald Trump, and they're saying, well, the ship should just sail through there. The straits are open, we've declared them so, but the ship should sail through there, even though they're going to get drones ⁓ launched and attack them. You can't really plan for these types of things, but you can make certain foreign policy decisions that, at least in the short run, cause a major disruption that sends shocks through the markets because oil, gasoline, energy in general is such a major component of transportation. It's an energy input into producing things. It matters just quite a bit for ⁓ all sorts of economic decisions that are going to play out over the course of the next several years. But you get these really short term sudden shocks. And the question here is what do politicians do in response to those shocks? If you the price mechanism work, it at least buffers it and becomes its own rationing device. If you try to intervene in those shocks and restrict the price mechanism from working, Well, that's when you get shortages and gas lines. think so far in response to Iran, I've only seen a couple of countries announce that they're going to try to put in price controls. I'm hoping the United States does not follow that path. ⁓ It was like Hungary put in price controls on its oil. So they're really kind of a weird outlier in that respect, but the temptation is always there.

Speaker 1

Yeah, I don't have enough cargo shorts to fill up with oil. You know, here's a little a little something too. I remember this, I forget how many years ago, but there was a little bit of ⁓ a crisis not not too long ago in my living memory. And my parents, guess, were in a good position in that my dad was working and my mom was a stay at home mom. So she was able to take the car and wait in line to get to fill it up with gasoline and to get whatever she needed. That doesn't help if you you're a single person who can't afford to spend say three hours waiting to fill up.

Speaker 2

This is a classic illustration of the perils of price controls. When you don't allow the price mechanism itself to ration, by fluctuating, going up or down in response to various conditions of the market, ⁓ something else steps in and rations it for you. And in that case, the rationing mechanism is your time waiting in your car at the line to go into the gas station. We saw predecessors of this in the Soviet Union. The rationing mechanism for the shoe store, when the one shipment of shoes came in a month, was you go stand in line and and get these horrible, completely ugly, poorly functioning Soviet shoes and that was your pair for like the year.

Speaker 1

If you're lucky, it's like I get left shoe, I wait four months for right shoe. Exactly. It's so funny what you're talking about. you rationing and that sort of thing. ⁓ I just started watching a zombie movie with my son called Apocalypse Z. ⁓ yeah. And ⁓ it ⁓ takes place in Spain. So already, you know, those socialists in Spain. to talk about, know, there are a bunch of scenes where people like in the supermarket, you know, grabbing what they can and being told, please only take like two items. And ultimately it's like, no matter what price controls they try to levy, you got zombies that you're gonna have to deal with so thankfully we're not there we're not there yet we're not there at zombieville yeah

Speaker 2

Well, this is something every time there's a natural disaster, say there's a hurricane that hits the Gulf Coast, you get these politicians on TV and they say, we're going to stop the price gougers. Well, what they're actually doing is they're disrupting the signal that's being sent. say you're on the Gulf Coast, it's been powers knocked out by a hurricane and they say, we're going to ban price gouging on getting generators. The fact that you're doing this destroys the signal to the guy 600 miles inland. who's wanting to load up a trailer full of generators that they purchased at the local Home Depot and Walmart and drive them to the coast where it's needed because there's no longer a mechanism to sell them. So it's basically taking the incentive away to be entrepreneurial, to ⁓ actually meet the needs of disaster relief, and as a result, you get no generators.

Speaker 1

know, speaking of the United States, I when I think of the United States, I think of oil country. ⁓ I don't know, is there a movement or is there a scenario where we're kind of like, okay, we're just going to keep our oil here and live off of this oil while the rest of the world suffers? Yeah, we're gonna hoard the oil, right?

Speaker 2

all the oil. think sometimes like the president thinks in that way. you ⁓ know, this is not just a Republican Democrat thing. There are always politicians that think that way. And you hear the rhetoric about, let's make the United States energy independent. But the reality is oil trades on a global market. ⁓ It's responsive to global forces, whether we like it or not. ⁓ Because, you know, that's going to determine maybe the price of oil goes up enough and we start exporting some of that oil that we have. Because there's an opportunity to fulfill that market need to sell abroad. Trying to just like close down the borders and become the oil kingdom and hoard as much oil as we can, you you're forgoing economic opportunity on that. And you're also trading only internal to the U.S. market, trying to isolate it off from the world market. You create all sorts of perverse incentives and distortions internally whenever you do that.

Speaker 1

And I remember reading about, I believe it was, maybe it was Kevin D. Williamson from National Review had had a piece about the different kinds of oil. And you don't even, and I hadn't even thought about that. mean, the idea that you have a ton of different kinds of cooking oil. Obviously you're going to have a bunch of different kinds of dinosaur juice. You know, like what impact does that have? Because I think the oil that is coming from Venezuela is different than the oil in the middle, in the Mideast, et cetera.

Speaker 2

It alters the refining technologies that you need. I mean, you have to fine tune your refineries ⁓ depending on the source and the type of oil that's coming out of the ground. Some of it's more pure than others. Some of it requires different technology to be enlisted to convert it into gasoline or something usable. And these are complex capital intensive machines. If you've ever been on the Gulf Coast where you see some of the big oil refineries in the United States, you know, those are tailored to oil. sources in the United States. It's not like you can just suddenly ⁓ start taking oil from the Middle East, bring it over to the Gulf Coast and run it through the exact same refinery the same way you would have a local oil source from a rig just off of the ⁓ coast there. ⁓ And what this means is when you start disrupting supply chains, it's not really easy to divert ⁓ oil to just a different refinery somewhere else in the world because there are particular changes you have to make in the technology of refining. And anyone in the oil industry will tell you this. know, this is capital intensive and it's time intensive to change what a refinery process is. In some cases, you may have to install entirely different equipment and machinery. I think just reflects the reality that oil coming out of the ground is not the same. in every single location and the local infrastructure has developed to reflect that.

Speaker 1

So prices are up now. When are we going to see prices go down if things start to come around? Because it seems like prices will go up and even if things start to look good, they will stay up for a while. And why is that?

Speaker 2

I mean, there is some stickiness that emerges. think uncertainty is probably the biggest thing right now. But you already saw, you know, when Iran started attacking these ships in the Straits of Hormuz. what happened, oil and gasoline prices, they shot up, they shot way, way up. And then it kind of leveled out and it's actually come down a little bit, especially in response to some intelligence assessments that have given more certainty about what's the state of the Iranian regime, what is the will of the United States to continue this war, are other countries going to step in and maybe start escorting ships through the straits? That's one of the discussions that's underway right now is to try to to bring in naval forces there, then they can become like an escort to the ship and shoot down the drones that are being fired at it. We know that that increases some economic certainty of what to expect because what was looking like a ⁓ pretty severe disruption from a closure under penalty of just terror attacks and rockets fired randomly at ships now maybe has some naval interference there that could protect it. Again, we don't know. how this war is going to play out. We're a little over two weeks into it. And I think the administration has given some very mixed signals about their long-term intentions. ⁓ As that starts to attain greater clarity, well, then you start seeing things ⁓ adjust on the oil market internationally. You also see oil sources elsewhere adjusting, maybe their production, pulling oil out of the ground that previously would not have been economical to produce. ⁓ at lower prices. So there are all sorts of market mechanisms at play that almost kick in naturally. know, when oil spikes in one region of the world, it suddenly makes it economical to start pumping oil out of the ground in other regions that might have been more capital intensive under much lower prices.

Speaker 1

I mean, I'm just thinking about being a captain of a tanker and people saying like, hey, don't worry, you they're going to be sending drones at you, maybe some missiles, but we're going to make sure you have some security. Because even then I would be like, whoa, whoa, whoa, whoa, whoa, hold on a second. I didn't sign up for this. I didn't set up to be a target. know, I think what I want to know too is, you know, what does this mean for the gas pump attendant in New Jersey? The guy who keeps me so safe from getting out of my car. possibly slipping, you know, what does it mean for him?

Speaker 2

He's in one of those states, I mean, you have the gas station attendant job preservation act or whatever it is that's keeping it in place. I have this superfluous vintage ⁓ law dating back probably to like the 1920s or something when someone asserted that for safety reasons, we need a ⁓ specialist to pump your gas in New Jersey. And we've now gotten to the point, I think every other state, Oregon used to have that same law and I think they were either repealed or discussing repealing it or something like that. But every single other state, you can pump your gas on your own except for New Jersey. Well, there's a reason behind that and it's not safety. The reason is you have a very large concentrated constituency of people that are employed at gas stations that have job security by pumping gas. ⁓ every time that there's a discussion to repeal that law, which seems antiquated, superfluous, maybe never needed in the first place, we have that concentrated interest group to contend with that is always going to go down to the state house and lobby to ensure that the regulation remains in place because that means their job is secure.

Speaker 1

And let me tell you when it comes to safety, there was one gas station, local gas station. not going to, ⁓ I don't want us to get sued, so I'm not going to say who it was. But I stopped going there because I realized when the guy was pumping our gas that he was on his cell phone. And for those of who might think that I'm crazy, there are actual studies that have been done where if you're on your cell phone pumping gas, it's more likely to blow up.

Speaker 2

It triggers like the electrostatic storm something. I've seen these videos online and the gas station goes whoosh.

Speaker 1

Look, with the way this war is going, I don't know if he's a sleeper cell. I don't know what's going on, but you got to be really careful on who you allow close to your vehicle in times like these. in times like these, I'm very fortunate to have Phil Magnus as my cohost. And we are very fortunate to have you listening to Happy Hour Econ. We will be back next week. We hope that gas prices are much lower than.