Economics Quiz

Sunday, November 20, 2005
(From James Hamilton via Jane Galt):
Sometimes I like to base exam questions for my students on recent news. Here's an exam question to see how thoroughly students understand the economic issues associated with today's allegations about oil companies and the Cheney energy task force.

EXAM ESSAY QUESTION (answer on separate paper)

Senator Frank Lautenberg (D-NJ) today issued the following press release:

In the four years since the secret Cheney task force met, we have seen gas prices double and oil company profits skyrocket. What went on at these secret White House meetings that may be motivating oil company executives to deny their participation? Now it appears that some Big Oil CEOs might have lied to Congress to cover up their involvement with the White House task force. What are they trying to hide from the American people?

Your assignment is to describe in detail the possible economic mechanisms whereby the actions of this task force might have contributed to a doubling in the world price of oil. Be sure to address in your essay the following issues.

1.) The Cheney task force resulted in the Bush energy plan released in May 2001. Discuss in detail three elements of this plan that led to an increase in oil prices. Be sure to explain how this happened despite the fact that the legislation proposed in that plan was not passed by the Senate and, if passed, would have increased energy supplies.

2.) Even if one ignores the Bush energy plan itself, explain how secret consultations by the task force could have resulted in higher oil prices. Recall that the five executives who were called before the Senate last week represented BP, Exxon-Mobil, Shell, Chevron, and ConocoPhillips. Including all their global operations, these five companies between them produced 10.1 million barrels of oil per day in 2004 (data from Petroleum Review with a tip of the hat to The Oil Drum), which would represent 12% of global production of 83 mbd. Describe the precise actions these companies could have taken that could have led to a doubling of oil prices. If possible, bolster your argument with a numerical example using plausible elasticities and actual production figures.

3.) Develop further Lautenberg's theme that the statements made by those called before the Senate were knowingly false. In particular, refute the claim by ConocoPhillips CEO James Mulva that in 2001 he had been the chief executive of Phillips and that Cheney met with someone from Conoco, which at that time had been a separate company.

4.) Perhaps the most important accusation made by Senator Lautenberg is that the statements by the oil company executives before the Senate committee were misleading. Describe some of the economic harm that can result when someone in a position of power makes statements that could result in a misunderstanding of the facts by the American public.
I'd say "read the whole thing" except that is the whole thing. But it's a fascinating exam. I'd love to see some answers.

(Note to commenters: I'm 2000 years old and I've had a hard week, I'm entitled to be a little irascible. Comments that bring up the Iraq War, claim that Cheney was trying to help his oil buddies without answering any of the questions in some substantive manner, or are simply unutterably stupid, will be deleted without mercy or remorse.)

8 comments:

terrye said...

Seneca:

There you go again, complicating things with fact and logic.

I wonder how the students did on the exam?

Buddy Larsen said...

Thanks for the PS plea to be not stoopid. I grew up in the oil patch, dad made it high enough up the ladder as a geologist that I could see into the character of the industry, and I can tell you straight, that it's the last place you're gonna find that den of thieves and swindlers that your friendly local Democrat so loves to demagogue. The Dems would just prefer that, if the government can't own the industry, then it shouldn't exist, and we should all just freeze in the dark to show them right-wingers a thing or two. As with the war, the Dems are the persistant "K" factor, the friction that must be overcome to convert energy into motion, or necessity into policy.

truepeers said...

Buddy, you, your dad, Cheney, and all your buddies in oil are just tools of the Jewish-Masonic-Bolshevik-Neocon global conspiracy. You all think everything you do is on the level, the markets are free, yada yada yada, but you're being manipulated from behind the scenes by the youngers of the elders of San Francisco Bay.

And such thinking makes the Demoncrats what, exactly?

chuck said...

The Dems would just prefer that, if the government can't own the industry, then it shouldn't exist...

I think it is just the echo of the war against Standard Oil and Rockefeller. Some of the Democratic talking points go back over one hundred years. Make one wonder why they consider themselves "progressive".

Syl said...

chuck

I think it is just the echo of the war against Standard Oil and Rockefeller. Some of the Democratic talking points go back over one hundred years. Make one wonder why they consider themselves "progressive".

Bravo. Keeper. Eminently pastable, repeatable, shoutable, and all that.

:)

Syl said...

Seneca

This is why it's so hard to argue with 'them'. It takes more than a phrase to counter their logic. No matter how extremely well-thought-out and fact-filled the refutation is.

What bothers me the most is that Lautenberg knows the realy story and doesn't care.

Buddy Larsen said...

Truepeers, right, "prove it ain't so!". And what of Rockefeller & Esso? Pure capitalism, probably too powerful, no doubt needed some congressional oversight--but meantime, stuff folks wanted came on the market, and fewer and fewer of 'em were freezing in the dark.

Buddy Larsen said...

"Profit" being that which capitalizes the needs of life "tomorrow", we have a jabberwocky in the term "progressive". Unless it's "Hey, I'm making progress moving backwards!"