Wednesday, June 11, 2008

Saving Money & the Environment by Recycling Old Roadbeds

While skimming through the Denver Post newspaper at the airport while waiting to board my plane to take me home from a business trip, I ran across a small article stating that the rising price of oil is not only driving up the price of fuel needed to operate gas powered cars, trucks, airplanes, etc. but also the cost of building and repairing roads as the asphalt used in the roadbed. However, I reminded of the article a couple of days later when, while driving through a construction zone on my way to work, I observed a large machine, the rear end of which was biting off huge chunks of the old roadbed and conveyor on the front end was steadily pouring the finely ground roadbed material out the front and into a waiting truck. Obviously that old roadbed was being recycled and would find its way back into either the new roadbed they were laying down or another one.

Asphalt is basically crushed stone mixed with bitumen, a heavy tar substance which is what remains after a barrel of crude oil has been refined into gasoline and other usable products.

However, as the price of a barrel of oil rises so to does the price of the bitumen. Being basically a useful waste byproduct, bitumen has never been a high priced product. However, there is demand for it (for things like tar paper, asphalt shingles for roofs, etc. as well as for road building) and, as the price of a barrel of oil rises so too does the price of the bitumen left in the barrel after refining and this is driving up the cost of road building.

Waste is a relative concept that is closely related to scarcity. A scuba diver relying on the limited amount of compressed air in his tank for survival, is careful in his use of that air while, surrounded by a seemingly unlimited amount of air, those of us on the surface barely give a thought to our use of air. We tend to use and discard with ease things which are free or inexpensive while caring and conserving those things that are expensive. That is how the free market efficiently manages resources.

Road building material costs are going up today partly because the rising price of oil is pulling up the cost of bitumen. I say partly because, in addition to the rising cost of the barrel of oil which contains the bitumen, the supply of bitumen itself is shrinking due to the fact that, at $100 plus cost of a purchasing a barrel of oil, refiners have a strong incentive to invest in expensive technologies that allow them to produce more high end products, like gasoline, from the oil thereby leaving less waste in the form of bitumen as, at $4 per gallon, they will make more money selling the gasoline than by selling the bitumen.

In Western United States, state and local governments generally contract out road construction to private companies which bid on the projects (in the East and Midwest, the governments themselves frequently have their own crews for road construction and maintenance). Contracts, of course, are awarded to the lowest bidder which means that, to make a decent profit, the construction company must keep their costs low. Hence, the investment in asphalt recycling equipment to reduce the cost of the major ingredient in the road construction process.

While campaigns and slogans urging people to voluntarily recycle only about 30% of most solid wastes are recycled. With the price mechanism of the free market, rather than government PR people and their slogans, pushing asphalt recycling, we find that 80% of asphalt is recycled rather than being dumped in landfills and newly pumped bitumen used for road construction.

Contrary to popular environmental myths, the free market is not only Eco-friendly, it also works better than environmentalist nagging.

Links: Asphalt Recycling and Reclaiming Association asphalt pavement is the surprise leader in recycling of materials with about 80% recycled vs about 33% or less for other solid waste Salt Lake Tribune -Pricey oil paves way for asphalt to skyrocket

Sunday, June 01, 2008

Demand vs Quantity Demanded

When talking about Demand and Supply it is important to differentiate between the terms Demand (or Supply) and Quantity Demanded (or Quantity Supplied). While they sound the same, they are not interchangeable.

When we use the term Demand we are referring to changes in the entire demand curve. While when we refer to Quantity Demanded we are referring to a movement along the demand curve.

Remember the Law of Demand states that certis pariubs (economic speak for other things being equal) a change in price will result in quantity demanded changing in the opposite direction. Or as your book (Economics Today, The Micro View, and the Macro View, 14th Edition, by Roger LeRoy Miller, 2008, Pearson Education, Inc) in Chapter 3, page 52 states:

When the price of a good goes up, people buy less of it, other things being equal. When the price of a good goes down people buy more of it, other things being equal.

The Law of Demand deals exclusively with changes in price and quantity and, because of this, when we are describing changes under the Law of Demand we have to prefix the word Demand with the word Quantity. Thus, we refer to a change in Quantity Demanded rather than a change in Demand which refers to some other factor (income, tastes, changes in compliments and substitutes, etc.) changing.

While some will dismiss this as merely an exercise in semantics, it is important and will lead to problems in both understanding what is going on with demand and supply as well as lead to wrong answers on tests.