production perception, originally uploaded by pbo31.

The only way we can truly judge other people’s beliefs is through their actions. Through this lens it really appears that Americans aren’t much bothered by $90+ a barrel oil. How else can you explain that people are clamoring to use more domestic petroleum resources? There is a lot of oil on the North Slope of Alaska, but where’s the support to extract that oil–especially since we can do it in less-environmentally impacting ways than ever before. There’s oil on America’s outer continental shelf, and yet people are not clamoring to extract that.

While American’s don’t seem to be very bothered about $90+ a barrel oil, OPEC loves Americans attitudes toward oil. American love to use oil, but we don’t want to produce more domestically. This op-ed from Investor’s Business Daily makes these points and argues that increasing domestic production would bring prices down. It is true that increased domestic production will help bring prices down, it would take a few years. It takes time to drill new wells and install new production infrastructure.

There are a few reasons about why Americans do not seem to be much bothered by the price of oil. The most likely possibility is that we don’t spend a large percentage of our incomes on gasoline. A second possibility is that people think the recently-passed energy bill will do anything. Jerry Flint in Forbes throws some cold water on the energy bill:

Solving the energy problem is easy if you pay no attention to the laws of physics. That’s the wonder of our Congress. To pass is easy; to achieve is something else. This is where I break your green heart. You know that Congress passed a law ordering all cars and trucks to average 35 miles to the gallon by 2020. It won’t happen.

Another part of that law mandates the production of 36 billion gallons a year of biofuels by 2022. That won’t happen either.

It’s not that automakers from Detroit to Tokyo to Stuttgart are just mean and don’t want to do it. They don’t know how. Of course, they don’t dare complain or criticize the law. We must all be green and happy about it.

Physics is the biggest reason that the 35 miles to the gallon standard won’t be met. People want more from their cars than in the past. The 1987 Honda Civic CRX HF would get 52 mpg under today’s fuel efficiency rules. But today’s cars have more safety features and more amenities. These amenities make cars heavier and less fuel efficient.

As for 35 billion gallons of biofuel, this is very unlikely to happen at a price that people want to pay. The reason is simple–the technology to make 21 billion gallons of ethanol from cellulosic sources is not commercially viable today. It is difficult to go from 0 to 21 billion gallons in a few years. It is possible this will happen, but it is highly implausible.

When oil is as expensive as it has been of the last few years, this creates incredible incentives for people to figure out new sources of energy. Someday we will be using different sources of energy, but we don’t know what those are going to be today.

We can’t predict how technology will improve over time, so let’s let investors and people in the market make their best guesses for the future of energy, instead of Congress picking a technology that lobbyists have convinced them will work. I’ll take the judgements of investors over Congress or the President any day. The investors are frequently wrong, but there is far less downside to investors making bad decisions than Congress.