Once again, everyone’s talking about high gas prices and big oil company profits. Some Republicans are even talking about a windfall tax of Big Oil. I blogged on that bad idea last September after hurricanes Katrina and Rita and it’s still a bad idea.
If you want sill more proof that it’s a bad idea, check out Jason at Texas Rainmaker who shows that oil company profits are not as high as in some other sectors and a huge chunk of the cost of the gallon of gas is in taxes. So why don’t politicians take the step they have in their control by reducing those taxes? If not couldn’t we say that they’re just as greedy as these mythical Big Oil executives who are gouging consumers?
No, instead they play on the ignorance economics of the average consumer:
The Democrats threaten to take oil company profits and invest them into “rebates” for consumers to make the public think they’re playing Robin Hood - taking greedy profits from evil big oil and giving it to the poor, average American so they can afford gas - completely ignoring the fact that the “rebates” will be offset by the oil companies passing such cost along to those very consumers.
But let’s look at two things higher gas prices bring us:
1. Conservation - people generally don’t buy what they can’t afford
2. Incentive to oil companies to explore - higher gas prices encourage gas exploration into areas previously restricted by cost, or exploration into alternative fuel sources altogetherBut if government is taking away the profits and giving them to consumers as “rebates” then consumers have no reason to conserve, and oil companies have no incentive to explore. How do I know this? Because that very scenario played out in the 1970s and early 1980s.
Meanwhile, there’s also evidence that part of this steep rise in the cost of gas comes from government mandates for ethanol, which the farm industry has been pushing for, but which it wasn’t ready to supply the raw goods for.
Technorati Tags: gas prices, politics, taxes
Dom, I disagree on the incentive to gas companies to explore…if they have profits of 5% over costs, there really isn’t incentive to have more supply of refined gas since they may make more in revenues, but as the cost decreases dramtically, their profits also shrink. I don’t buy the argument that there is not enough supply of oil. We might be short on refining capabilites. The UD should also pursue a policy of energy independence by drilling extensively in the Gulf where the largest reserves in the world are located.
Just a few years back, some on the liberal side of the political spectrum argued Americans are not paying enough for gas so there is no incentive for us to conserve. My local congressman stated he thought a $5 per gallon tax would be a good idea to get Americans to drive less.
Now that market forces (free or not) have driven gas prices somewhat higher, some of the same liberals (and of course, scared Republicans) are telling us we are paying too much.
If politicians are truly concerned about our pocketbooks, then they should reduce our tax burden. At the end of the day (year) I pay far more in total taxes than I do for gas. And with driving, I do have some options are far as cutting back or minimizing that expense.
With taxes, if I don’t pay, the taxman will come knocking on my door.
What if you can’t conserve?
This is from my blog today at http://www.uponchristianhill.blogspot.com
Have you tried public transportation?
My husband works about an hour away, off an exit of a major highway in Eastern Massachusetts. Interesting we talk about distance in terms of time, not length of miles? It doesn’t matter if is ten miles, or a thousand what matters is the time it takes to get there.
As the cost of gasoline goes up, my husband took time from his lunch hour to see if public transportation was available from Lowell to his place of employment. We live right near a bus stop, so he has access to Gallagher terminal. Well technically he could get from Lowell to a near by mall, which was across the highway from his office. It would take four transfers and about three hours one way to reach his destination!
Eastern Massachusetts is sprawled out and built around its highways. If you haven’t traveled down the 93 and 128 corridors you can witness a transformation of commuter friendly condominiums being built for easy on/off access to from the highway. Unfortunately our public transportation systems do not match the traffic patterns that cross over one another through intersections and clover leafs, leaving us dependant on automobiles from some time to come.
Ah yes, it’s a grand conspiracy of those dastardly conservatives.
We live in a free-market economy. Go read my earlier blog entry that I linked above: Who gets the $200 billion in profits? Shareholders. Who are those shareholders? Retirees vested in their pension funds, middle-class folks with IRAs, etc.
Only in liberal minds would companies making a profit be a bad thing for our country.
If you start with the premise that Oil Companies are evil, then you will end with that same premise. You argument, such as it is, is full of assertions without evidence and vitriol disguised as rhetoric.
Dom, I certainly don’t subscribe to the idea that energy companies are evil, but they are companies and they are charged with maximizing profit. I do think that the whole free market arguement about oil doesn’t play well with this particular commodity because of the type of commodity it is. Our entire economy and to a certain extent relies on oil, which is a national asset. By it’s nature there is going to be some regulation involved and there has to be.
There aren’t enough refineries right now for a variety of reasons, some of which are environmental (states don’t want refineries and the feds can’t usually force it) and evergy companies don’t really have an incentive to build new ones. The problem is not supply of oil per se. There is plenty of oil. Why would Exxon, though, want to spend billions to build new refineries that would cut into their overall profits. The fact is that energy companies are going to have a cost plus a certain percentage in profits…let’s say 5%-6%. The public isn’t going to let them have more than that because of politics, so why should they decrease the costs by driving down the price of oil by adding new supply? It doesn’t make business sense.
I’m not sure I agree with a windfall profits tax. And if high prices get us to conserve or find alternative sources of energy, all the better. What does get my goat, though, is providing something like a billion dollar subsidy to the US oil industry in the recent energy bill when the industry is earning record profits.
The windfall tax is a stupid idea…the cost will just be passed on to consumers. The fact is that we have to have fuel; we can’t just stop buying it, or switch to a different brand. If we’re going to be forced to have a Leviathan, at least it ought to do something useful, like inform all the states in the Gulf of Mexico region that we will now be drilling oil there. Again, the Gulf has the largest oil reserves in the world…America could be completely independent of foreign oil if we decided to ignore the radical environmentalists and get to the oil. BTW, the best fishing grounds off the coast of Louisiana are around the oil platforms, which create articifical reefs. Then the feds decide that they are going to grease the skids for new refineries and go ahead and get them built. This would all take years, but is very doable. Brazil just became completely oil independent.
Ferde,
You need to take a class in economics. The evidence of supply constraints is in higher prices. Watch the news. OPEC is constraining supply, drilling for millions of fewer barrels to drive up the price. Oil refining capacity is also constrained after damage caused by the hurricanes last year.
You are relying on anecdotal evidence. That isn’t proof of anything. If you’d like to offer facts and evidence based on anything but your own preconceived notions, you’re welcome to.
Oh and if the draconian fuel efficiency standards in California, and the unrealistic federal CAFE standards, and the ridiculous MBTE/ethanol demands are not efforts at government-mandated “conservation” I don’t know what is.
Sydney explained who really sets oil prices. You’d prefer to bury your head in the sand and listen to the network news broadcasts as authoritative. So be it. But don’t expect anyone else to follow you.
Ferde: I did read your comments. I do not have a comprehension problem.
The fact is that you don’t understand economics. If the government says, “We’re going to penalize you $2 billion for your windfall profits,” there is nothing to prevent the oil companies from raising the per-gallon price of gas another 10 cents to compensate. The oil companies keep their profits and the consumer pays even more.
Logic doesn’t seem to be on your side here. You should look up “anecdotal evidence” and see what it really means. I didn’t deny highways are full of cars. I don’t have to go to California to see that.
What I’m denying is your interpretation of what that means.
Tohu: Assume I’m an idiot (it’s a stretch, I know). Explain Tyson Slocum’s testimony to the Senate hearing to me. Don’t just quote it. I need you to explain it in your own words.
You aren’t allowed to simply assert something is true. You must prove it. Nor are you allowed to argue from the negative.
If you think the administration is run by the oil industry, you must prove it before I will entertain the idea.
You must also disprove my evidence that there are no efforts at conservation. I’ve already cited conservation efforts. You choose to ignore them.
You have violated the Blog Commenting Principles Number 4: “He who asserts must prove” and Number Five: “Respond to the argument not the spelling” and Number Seven: “Do your own research.”
You have also engaged in the logical fallacies of the non sequitur, the straw man, and the red herring.
When you are interested in a logical and respectful discussion, I’ll be here.
Ferde- If the highways in California are clogged, it isn’t the administrations fault. The highways are clogged because people don’t carpool (I’m usually guilty). And, you have ALOT of people crammed in a small space. Just because there are alot of cars doesn’t mean that there is a HUGE supply of gas. All that means is that you have huge DEMAND for gas. Big difference. And Sydney is right about what makes oil expensive. For another commodity example, check out silver (ticker ZI) and gold (ticker ZG). Both trade on the CBOT, and before last week, their prices had soared. I received an email early last week that basically said this: Quick – name 3 things silver is used for. Silverware? no…. short answer, silver HASN’T increased in price because of increased demand for acutal, physical silver. It has gone up because traders (and those buying futures) had been buying and bidding up futures contracts.
—satire—I replaced Oil with Club Soda, and Energy with Bottlers from an earlier post. Club Soda costs approximately $7.56 a gallon here in Chicago, much more than Gasoline—
Dom, I certainly don’t subscribe to the idea that Club Soda companies are evil, but they are companies and they are charged with maximizing profit. I do think that the whole free market arguement about Club Soda doesn’t play well with this particular commodity because of the type of commodity it is. Our entire economy and to a certain extent relies on Club Soda, which is a national asset. By it’s nature there is going to be some regulation involved and there has to be.
There aren’t enough bottlers right now for a variety of reasons, some of which are environmental (states don’t want bottlers and the feds can’t usually force it) and Bottling companies don’t really have an incentive to build new ones. The problem is not supply of Club Soda per se. There is plenty of club soda. Why would Canada Dry, though, want to spend billions to build new Bottling Plants that would cut into their overall profits. The fact is that Bottling companies are going to have a cost plus a certain percentage in profits…let’s say 5%-6%. The public isn’t going to let them have more than that because of politics, so why should they decrease the costs by driving down the price of Club Soda by adding new supply? It doesn’t make business sense.
—
I think replacing Oil with Club Soda shows the fallacies of the argument in most stories about Oil “shortages” very well.
JBP
JBP, if oil were treated just like any other commodity and if it were just like any other traded commodity, than I think your satire would make sense.
So Tom7,
Why not campaign to treat it like any other commodity, rather than a political football to justify military adventure, huge taxes, massive Breshnev-Style central planning, and a litany of ten-o-clock scholars calculating our doom.
Oil is about 1/3 the price of Club Soda. There is no Club Soda shortage. Why is there an Oil Shortage?
JBP
Well I think it’s likely because companies don’t have much incentive right now to actually go out and get the oil that is sitting under our noses in the Gulf, the fed and various state governments make it bureaucratically difficult to go get it and then refineries are expensive to build and no one wants them in their back yard. I think those are some reasons why the price is high. But I don’t think oil will ever be treated like another commodity with no regulation because it is not a commodity that we can do without. Do you think there is enough competition among oil exploration and refiners in the US?
Tom7,
I am with you on the lack of competition, but the profits are huge right now, so the incentives are here.
We could import Brazillian Ethanol for $1.10 per gallon if there was an open market. We could stop over-regulating and licensing oil companies and refiners and allow some startups in the industry. It is political interference that prevents competition.
My (satirical) point is that there are too many cooks spoiling the market for oil. How about some campaigning for a “hands off” approach rather than state-worship approach?
JBP
JBP,
I maintain that one of the reasons why there isn’t more incentive to build more capacity and find more oil is precisely because the profits are so high…I don’t think the guys in the game right now want the prices to drop…now if we deregulated stuff and let more folks get into the production side and eased environmental restrictions and told Floridians that we’re going to drill off their coast and in ANWAR, I think that is the answer.
I don’t begrudge the oil companies their profits…they are acting like companies should. And I absolutely do not advocate any windfall taxes.
Well yes, I think cost of goods is fairly low and they should be…if we’re going to say that the end of govt and the economy is expediency not virtue and make a god of free markets, global economy and cheap labor, then we should certainly get the benefit of cheap goods. The problem with oil, unlike any other commodity, is that it is singularly unique in that the price of every single other commodity depends on oil so it isn’t just gas prices going up…milk, paper goods, apples, and everything else is going to rise also, and already have. Go get your club soda at Walmart, or start drinking your scotch straight up, the way it should be.
JBP,
You are wrong…in fact I work in the technology sector…much of the energy crunch in CA was caused by the amount of energy being consumed by technology companies and plants…have you ever been inside a data center? A ton of energy is used to create chips, computers, software, etc not to mention to run all the servers companies need…what about the people they employ and the cost to put them all up in buildings where they crunch code…think coke is more relevant to the cost to build software than gas? This is nonesense.
I also started up an energy practice for a software company…I can tell you any commercial customer (it doesn’t matter what line of business they are in) takes into account energy costs. It is why energy marketers will go to ABC manufacturing plant, use models to crunch all the relevant numbers (weather data, market prices, ABC’s historic energy usage) and then give them multi-year contracts to supply power, because they companies need to know what their energy costs are going to be in order to operate profitably.
Also, the food and water comparison doesn’t work either. I get great water free from my well. If filet mignon starts costing me too much to eat, I start eating spam…I don’t have those options when it comes to fuel. Now you can argue what the environmentalists argue that I need to change my habits to use less fuel, but that is a different question.
Also, Brazil is a great example…they just became energy independent…producing more oil than they use. We should do that and tell OPEC to go whistle.
T7,
How about with fuel, walking to work? The population inner city areas is dropping. People have chosen to pay to drive. Maybe they could chose to save money and not drive. Or maybe they just like driving. However, trying living in the suburbs or city without water. You won’t last long.
The California crunch did not have much to do with oil, nor did it have much to do with supply and demand, rather a failed regulatory scheme covering electricity.
Still, check cost of goods sold breakdown for Microsoft. I do not think you will see a line item for oil, like you would with a steel company or chemical manufacturer..so called “old economy” companies.
JBP