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Accusations and Idiocy Are Not Sound Energy Policy

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As demonstrated at this week's Senate hearings with oil industry executives, most of our elective representatives, just like most of our presidential candidates, wouldn't know sound energy policy if it bit them on the ass, and many of them appear not to understand even the most basic workings of business or the economy.

As Senator Dick Durbin and the other brainless demagogues on Capitol Hill grilled representatives of the major oil companies, what few actual questions they managed to get in between self-promotional speeches and spouting irrelevant sound-bytes, seemed to betray a fundamental ignorance of how the oil industry works, how companies make profits and what the real problems are at the root of current high gas prices.

To a large extent, they just kept making the same statement disguised as a question – a statement which came down to accusing the oil companies of profiteering and somehow creating the current climate of high prices. To their credit the company executives were relatively calm and tried to methodically explain basic principles of supply and demand and teach some third-grade level math to the Senators, but they ended up being repeatedly berated and insulted for their efforts.

The questioning appeared to be based on the assumption that high gas prices were part of a conspiracy to get more profits for the oil companies, and the Senators seemed unable to comprehend that higher prices produce higher profits, but that those higher profits are not the cause of the higher prices. Some of the basic math involved seemed to consistently elude the Senators as they stubbornly refused to see the issue from any perspective other than the presumption that the oil companies were out to get the American people. Republican Senator Arlen Specter may have asked the stupidest question when he asked why "profits have gone up so high when the consumer is suffering so much," making the bizarre suggestion that there is any kind of connection between how oil companies make their profits and consumer suffering.

It became quite clear where the hearings were going when the Senators began to change the direction of their questions and started asking the executives what their salaries were, on the assumption that gross profits were the result of gross personal enrichment by executives. This was a line of questioning which didn't exactly pay off when they discovered that most of the executives they questioned earned considerably less than most of the Senators would make just from speaking fees if they were to retire from public office.

The truth which the Senators seemed unwilling or unable to come to terms with is that oil prices are high because demand is high and supplies are limited. One would think that any idiot could see that if raw crude is selling at $120 a barrel, then the oil companies which manufacture it into gasoline would have to increase their price proportionately to cover that increase in their cost. It doesn't even take a genius to understand that a company might want to spread the cost increase out over time, because while that might raise prices a bit in the short term it would hold the consumer price down and keep it more stable in the long term.

Despite the massive amounts of money involved, the oil industry falls into one of the most basic business models, one which ought to be easy to understand. They take a resource, manufacture it into a final product and then sell it to consumers. The end price is derived from the cost of the raw materials, the cost of processing it into the final product, plus a small percentage of profit. Limited supply has raised the cost of the raw materials. Limited processing capacity has raised the price of processing the final product. But the irony is that, as businesses go, the actual rate of profit of the oil companies is relatively low compared to many other industries. Net profits for oil companies average around 8%, slightly lower than the 8.5% average net profits of Fortune 500 companies as a whole. That is also considerably lower than companies in some sectors like the tech industries where typical profits are closer to 20% or even higher, such as Google and their impressive 25% net profit.

What's more, despite the accusations of profiteering, oil companies have actually reduced their net profits by about 1.7% since March of last year, so while prices have been going up, they have actually been cutting their profits to try to keep prices down, at least a little bit. Some companies are an exception to this. The smaller companies which usually have the lowest profit margins like Murphy USA have actually slightly increased their profits, while some of the larger companies have reduced theirs more than the smaller companies.

Of course, the way these profits work is what has created the false impression of price gouging, which these opportunistic politicians have been playing up. Net profits are set as a percentage of gross profits. So if oil products are selling at a higher price, that same percentage of profit will end up being more money as a result. Most of us should be familiar with this phenomenon even if we aren't involved in business. We can see it just by looking at the sales tax we pay on things we buy. If you buy something for a dollar with 8% sales tax, you pay 8 cents. If the price of the item goes up to $1.50, you pay 12 cents in tax. So if the price is higher the state makes more money without ever changing the tax rate. Oil company profits work in pretty much the same way. If oil is at $2 per gallon they make 16 cents. If it goes to $3 per gallon they make 24 cents.

The goal which these Senators are pushing towards with their efforts to paint the oil companies as piratical profiteers, is the institution of a Windfall Profits Tax similar to the one which we had in the 1980s, where the government just declares that certain companies are making too much money, and takes it away from them through a special arbitrary tax aimed just at them. This idea is being pushed particularly hard by Senator Hillary Clinton and some of her Democratic allies in the Senate. Putting aside the fact that such a tax is inherently unfair – with many companies in other industries making far higher profits and not being punished for it – it also doesn't work.

The problem with a Windfall Profits Tax is that these oil companies are international operations. If the tax rate they are charged in the US goes too high or is seen as unfair, they can just move more and more of their operations overseas and outside of US jurisdiction. This is exactly what happened under the previous Windfall Profits Tax, with the result that domestic oil production fell, overseas oil production increased, and a tax which was supposed to raise $320 billion ended up bringing in only $40 billion.

What's more, this sort of tax actually does nothing to help out consumers, because it is more likely to raise the price of gas at the pumps than to lower it. The tax is just figured into the overall price of producing the gas, plus that price might even increase slightly because of increased transportation costs associated with offshoring more production. Then, as an additional bonus, a side effect would be the shutdown of some domestic production and refining, costing jobs and incomes inside the US. Such a tax might even lead to gas shortages as the companies placed priority on selling gas in other markets, where profits were regulated more fairly. The ultimate irony is that, even if every cent of oil profits were returned to the consumer in the form of gas price reductions, it would likely only drop the price of a gallon of gas by about 30 cents – hardly the kind of massive relief people are looking for.

Accepting the idea of a Windfall Profits Tax means accepting the idea that government should decide how much profit companies can make on their products. If the government goes after the relatively modest profits of the oil companies why shouldn't they go after the much larger profits in the tech industries and service sector? If this kind of tax caught on, the effects on the economy would be devastating, with more and more businesses moving out of the country, massive loss of jobs and chaos in the stock market. We're already struggling on the brink of a recession. Unsound tax policy like this is one thing which absolutely would send us into a depression.

Through all of this the most ridiculous part is that the real solution to our problem with high gas prices has been staring us in the face for years. Real solutions have been part of energy plans proposed by the Bush administration since 2002 which have been voted down over and over again by ignorant legislators like Dick Durbin. All we need to do to alleviate the suffering of consumers is to increase domestic oil production and build more refineries to process the oil. Yet those solutions have been blocked at every opportunity, because of the same motivation which is behind these attacks on the oil companies, a virulent anti-capitalism masquerading as environmentalism, which insists that no more drilling or oil processing be allowed.

We still have vast and untapped reserves of oil, not just in supposedly environmentally sensitive areas like the blighted waste called ANWR, but off the coast of Florida and in the Gulf of Mexico and even all over the West and Midwest, in areas which the current high oil prices make potentially profitable targets for alternative drilling and extraction methods. Lifting drilling restrictions in these areas and permitting the building a few new refineries would provide substantial short-term relief to the gas price problem and give us more time to work on positive long term solutions like expanding nuclear power and developing superior alternative fuel vehicles.

Perhaps the reason that these Senators are coming down so hard on the oil companies is that it distracts people from looking for the real villains in this story, and the truth is that our problems originate with the unwillingness of our legislators to pass any kind of realistic and responsible energy policy. They have to demonize Big Oil, because the real bad guys here are those irresponsible Senators who don't have the vision or the will to use the resources we already have to solve a problem which they have essentially created through policies which serve special interest groups whose goals are incompatible with the best interests of American consumers.

These Senators are failing in their Constitutional responsibility to provide for the 'general welfare' and every overpriced gallon of gas we pay for ought to remind us to hold them accountable. What a sad commentary that all three of our major presidential contenders come from that chamber of foolishness and irresponsibility.

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About Dave Nalle

  • Lumpy

    Nice to see u in full rabid rant mode. Love that dino too.

  • http://www.rapturenutballs.blogspot.com Baritone

    I imagine the oil CEO’s wives all get together now and have coupon clipping parties just to keep up their spirits and help get their kids off of those mac & cheese diets.

  • jamminsue

    Dave,
    Two things come to mind. First, it would be much better if ALL our Senate and Congress members, Democrats and Republicans alike, grew a backbone and set up an all-out program like the Hanford Project in the 40’s and Star Wars in the 80’s to find alternate energy sources for all our energy needs. Nuclear is not a good answer as the by products are unacceptable.
    Second, there are specific things that oil is critical to that we should save our oil fields for – like medicine, and a few other important things like that.

    I usually do not agree with you, and in this case do not from the point of view of using our oil fields as a temporary stopgap, that will only delay the time when we have to pull up the bootstraps and get the job done. Kudos that you seem to be getting the idea we need to find new ways to create energy.

    I agree the Windfall Profits Tax is not a good thing for the reasons you enumerated, and we cannot afford to loose any more manufacturing industries in this country, our manufactuing level now is so far below what we should have, it scares me whenever I think about it.

    I agree that the Senate’s hearings were little more than a circus. We as citizens should write our Senators and tell them how embarrassed we are that they participated in such an expensive, useless spectacle.

    Dave, keep on writing, you give us all lots to think about, even if, in my mind, your answers are wrong.

  • http://www.republicofdave.com Dave Nalle

    >>I imagine the oil CEO’s wives all get together now and have coupon clipping parties just to keep up their spirits and help get their kids off of those mac & cheese diets.<<

    Baritone, your sarcastic comment gets to the heart of the inability of so many people – especially on the left – to understand that there is no relationship between what a CEO is paid and what a company charges for its products or what it pays its workers. Until the left starts to understand how business works and sheds the mindless hostility towards anyone successful, they pose a genuine threat to the overall welfare of the country.

    Dave

  • Clavos

    Until the left starts to understand how business works and sheds the mindless hostility towards anyone successful, they pose a genuine threat to the overall welfare of the country.

    Not gonna happen, Dave.

    Not until everything is either owned by, or at least tightly controlled by the government.

    I am reminded of Atlas Shrugged.

  • troll

    ‘price’ and ‘cost’ are not synonyms

  • http://www.rapturenutballs.blogspot.com Baritone

    sory davey i don git whut yur sayin r u sayin i aint gotno mind cud be il go see ifn ican fine it n git back wich u ina wipstich i gess we gotta lurn how bidnes wurks so weuns can grabonto r peec o pi i lik pi im lef handid

  • http://www.republicofdave.com Dave Nalle

    Sounds like Baritone is a Clinton voter.

    Dave

  • http://www.rapturenutballs.blogspot.com Baritone

    rong. im votin fur that barrics alabama fella i decidid i don go fur them pantsoots

  • Arch Conservative

    “Until the left starts to understand how business works and sheds the mindless hostility towards anyone successful”

    Never gonna happen Nalle.

  • Lee Richards

    Dave,
    You make some good points about our lack of comprehensive energy policy. In large part, though, you do what the oil companies want us to do:start with the conclusion they like and then reason backwards, assembling facts to fit and support it. Low profit margin still adds up to record billions for them.

    Supply and demand IS at work; you accept the oil companies(and Saudis)stated explanations/excuses for low supply;in the face of those record billions “limited supply” is making for them, I doubt and question their every statement.

  • Clavos

    in the face of those record billions “limited supply” is making for them, I doubt and question their every statement.

    Me too. I think they are taking a leaf from the DeBeers Diamond Market Playbook and holding back oil to create an artificial shortage.

    In fact, I’m convinced of it.

    I’m talking about the Saudis and other towel heads, not the oil companies.

  • http://www.republicofdave.com Dave Nalle

    Lee, I don’t have to take the oil companies’ word for the limitations on supply or refinery capacity. The facts are easy to verify Because we’re buying most of our oil from outside the US, we’re at the whim of the oil market. That market sets prices based on supply, and supply has increased only slightly over the last decade while demand has increased enormously.

    Clavos blames the Arabs, and they are certainly partly to blame, but on the other hand who can blame them for intelligently controlling what is essentially their only economic asset so that they don’t run out? IMO the real blame rests on the Chinese whose consumption of oil has increased so much that it’s the primary factor in the increase in prices, and that problem is only going to get enormously worse in coming years.

    Dave

  • bliffle

    It’s all part of the Vast Left Wing conspiracy to undermine American Freedom and cede USA sovereignty to a vast One World Oil Community.

    Venal congressmen, who’ve failed to make their fortunes in the Private Economy are susceptible to the bribes (masquerading as ‘campaign contributions’ of course) freely offered by the Vast Oil Producers Cooperative that owes no allegiance to any nation, least of all the USA, and is free to export capital gains to Foreign Agents in Dubai or wherever. They live everywhere, have residences and offices everywhere. Their allegiances are to no one.

    The Vast One World Commune of oil providers resembles nothing so much as a Russian Commune from the Soviet Era. They would love to loot our natural resources in ANWR, for example, to pour the oil into their international oil market for their own benefit at the expense of the USA.

    And when US citizens are bled dry from excess prices and can no longer afford oil, the Vast Leftist Oil Commune will sell it to China, Burma, Asia, wherever, where they are even now stimulating demand with advertising propaganda.

    Back in 1973 when we had a wakeup call with the OPEC boycott it was the OneWorlder Socialist oil providers who beat back the independent entrepeneurship of redblooded american businessmen who were seeking to provide alternate energy for alternative energy users and vehicles.

    As makers of electric cars, hydrogen powered cars, propane ppowered cars, started to find customers the Vast Oil Socialists realized their grip on commisar-like power was threatened by these weenie little upstarts was threatened and they took steps to crush the upstarts and increase their own subsidies. They increased their own unneeded subsidies more to exhaust the Federal budget of energy funds than because they needed the money.

    The oil situation is just one phase of Socialization of One World under the control of people in remote places: foreign countries. Socialism from the top down.

    Our soft-on-crime Liberal Justice Department simply refuses to enforce laws against bribery and corruption, reserving their enforcement for the poor occasional weenie who defies their authority and becomes a whistleblower. It’s a page right out of the Moscow Trials! Accuse the non-conforming one of the very crimes he accused others of!

    The Vast Oil Communal Movement even recruits their own politicians from the ranks of failed businessmen, who they know are susceptible to their bribes and blandishments because of their low esteem and known inability to earn an Honest Income in the Private Sector.

    Leftist Big Government Mid-level manifestations of the Vast Fabianist Oil Conspiracy, such as the famous Carlson Group laid the groundwork and practiced their chops back in the 30s by coppering the play of Hitlers Germany by guaranteeing currency thru the Bank Of International Settlements (betraying their One World Socialist intention by boldly using ‘International’ in their own name! Defying one and all! Could anything be more communistic and anti-individual than that!)

    What they say about the Fabians was right: They are wolves in sheeps clothing. Appearing to be busineessmen in Blue Brooks Brothers Suits, they are really the cadre of the Vast International Communist Corporate Conspiracy.

    Even the ‘corporation’ itself was established as a communist organization. Can anything be more socialist than an outfit that has extraordinary privileges and no responsibility?

    Communisn! Socialism! Fabianism! All sneaking into our culture by sly tricksters pretending to do good things for USA citizens but really owing allegiance only to the Vast Conspiracy they are part of and submerge their own character and pesonality into.

  • Brad Schader

    Kind of a difficult subject for me, but money always is. I find it hard to understand how the oil companies are paying more for oil than they ever did, yet still are making more profits than they ever did. One would assume that, if the base product raises in price, then the profits should either go down or remain constant. On the other hand, I do know we pay less per gallon than most European countries do per gallon because our government helps the industry, but the government gets its money from us, so we are really paying just as much as Europe, only the difference is hidden in taxes.

    Right now, this is a pure political move with no power or reason. The parties know the public is pissed at gas prices and this, being an election year, is one of the few times the government actually tries to appear to pander to us.

    Basically, there are questions that need to be asked and no one wants to ask them or answer them.

  • bliffle

    “I find it hard to understand how the oil companies are paying more for oil than they ever did, yet still are making more profits than they ever did.”

    Not difficult at all. OilCos are middlemen, brokers, so they levy a surcharge as oil goes thru their hands and increasing cost works in their favor. rather like a real estate salesman who has a vested interest in higher prices.

    They use their oligopoly power to exclude competitors and keep the commissions sweet. Just as in real estate.

    A more advanced analysis deals with ‘Inelastic Demand’ a seemingly simple concept that increases complexity a lot.

  • Baronius

    Very good article, Dave. I wonder, in how many Senate debates has the stupidest thing been said by Arlen Specter? The man is to stupid statements what Tiger Woods is to golf.

  • http://www.rapturenutballs.blogspot.com Baritone

    I can’t say that I know that much about it, but isn’t it at least possible that the oil companies do work to one degree or another with the suppliers of crude oil?

    Are we really to believe that there exists no collusion between various entities in the industry? That seems at least as naive as what Dave claims regarding Senate Democrats.

    Dave goes out of his way to lift the oil companies and oil producers above any culpability in all this. He met my bit of sarcasm with a rebuke above, but I feel that his position has as I suggested an element of naivete’ in it as well.

    I don’t know what to say about bliffle’s diatribe. It’d be interesting to see some actual proof of those left wing commie oil cartel claims.
    I do think it might be connected to some of the more recent UFO sitings out in the southwest U.S. and Mexico. It’s a forgone conclusion that all extra-terrestrials are “fellow travelers.” To resist is futile.

    B-tone

  • Lumpy

    I think bliffle is off his meds. someone give the man some flouride and quaaludes quick.

  • troll

    That market sets prices based on supply…

    …the market sets prices based on speculation about future supply – something of a different matter

    real world economic phenomena are never quite as straight forward as they appear to be in the Republic of Dave

  • http://www.rapturenutballs.blogspot.com Baritone

    So true!

    Over the past couple of months, speculators have been elevating prices without any concrete connection to actual supply and demand. And it is important to reiterate that it is the OPEC countries that are controling the supply. What the world is paying for gas and other oil products now has little to do with actual costs of production, delivery, refinement, transport and retail operations.

    Dave also “blames” China. Should China get out of our way? Are they to be considered no more than young upstarts, interlopers, who should have more respect for their capitalistic elders?

    B-tone

  • http://www.republicofdave.com Dave Nalle

    >>That market sets prices based on supply…

    …the market sets prices based on speculation about future supply – something of a different matter

    real world economic phenomena are never quite as straight forward as they appear to be in the Republic of Dave<<

    What is the functional difference, troll? There is none. To be entirely accurate, the pricing is based on the relationship between expected supply and expected demand. But as ‘speculation’ goes, trends in supply and demand are pretty easy to predict. Plus since they average prices over extended periods of time any unexpected changes in the real price are levelled out.

    Dave

  • http://www.republicofdave.com Dave Nalle

    Dave also “blames” China. Should China get out of our way? Are they to be considered no more than young upstarts, interlopers, who should have more respect for their capitalistic elders?

    While I agree that China does have as much right as anyone to use oil, it remains a fact that their increase in use has a major impact on the market, so we can still blame them even if we acknowledge that they aren’t doing anything that is wrong – just something that’s inconvenient for us.

    Dave

  • troll

    What is the functional difference, troll? There is none.

    well actually:

    the one model allows for and explains rising prices without a corresponding decrease in supply and the disconnect between cost and price that Baritone points out

    the other doesn’t

    ‘pricing is based on the relationship between expected supply and expected demand’ (why didn’t you say so in the first place) doesn’t reduce to ‘That market sets prices based on supply’

    …I have yet to figure out your undoubtedly propagandistic motive for presenting the oversimplification except that it is representative of the simple minded analysis that we are going to have to listen to from McCain…it must be your desensitization conspiracy

  • Zedd

    Arch sed:

    “”Until the left starts to understand how business works and sheds the mindless hostility towards anyone successful”

    Never gonna happen Nalle.”

    Oh ARCHIE why don’t you try!! Help the left understand business. Will YOU help? Share your wisdom PLEASE. Save America will ya will ya?
    I’m sure Clav will chime in. One for the Gipper (I know its from a movie but… whatever that means… I know its suppose to make Reps feel all swelled up). Do it, do it do it!!!

  • bliffle

    There’s not a person on BC who understands economics or who has ever taken an Econ course.

    A few weeks ago I posted a take-home assignment for lower-division Econ from a local college and NOT ONE person on BC ventured an answer to EVEN ONE of the problems.

    Some of the fools attempted to denigrate the questions themselves: the sure reaction of an ignoramus.

    Go back to Community College before you start pontificating on matters of which you are uninformed.

    And no, touting an ideology promoted by Hayek or Friedman or Krugman will not obviate the need to understand economics.

  • Cindy D

    Have a look at “Who killed the Electric Car.” It deals well with some of the information your analysis is missing.

    1) The Oil Industry isn’t selling Prada Handbags. 2) It has actually acted against the interests of the safety, health, economic and long-term welfare of the citizens of the US. I think we need to have a bit of control for those reasons. 3) George W.’s part is also explained in the documentary.

    ANWR: Chopping off whichever toe you have the least use for to stave off your hunger for a meal is no way to live.

    All I can say is you are missing information that leaves your position uniformed. Now, if someone told me that I would go out and find out what I was missing. But, that’s just me. Maybe it’s because I’m a lefty.

  • http://www.republicofdave.com Dave Nalle

    …I have yet to figure out your undoubtedly propagandistic motive for presenting the oversimplification except that it is representative of the simple minded analysis that we are going to have to listen to from McCain…it must be your desensitization conspiracy

    As a general rule, troll, I find it helpful to write for the audience. As bliffle points out later, our readers are not MBAs or economists and a simple explanation might suffice. No propaganda to it. At the most basic level, when dealing with a commodity supply drives prices, even if it is far from the only factor. This is particularly true of a commodity like oil where there is constant demand. Demand only plays a large role when there’s a possibility for slackening of demand, which really isn’t possible with oil.

    And Bliffle, I’ve got one undergrad Econ course and two graduate economics courses (maybe too specialized to be relevant), plus years of business experience. I didn’t see your set of Econ 101 questions, but I’d be willing to take a stab at them if there’s any constructive purpose to be served by it.

    Dave

  • Cindy D

    Clav,

    Do you belong to the Ayn Rand Cult or something?

    You find “towel heads” appropriate?

  • Cindy D

    Oh, BTW the Arabs blame the weakened dollar.

    I wonder how we got so many people all using up resources and aspiring toward the same ideas? Hope we figure it out before the population doubles again.

  • http://www.republicofdave.com Dave Nalle

    1) The Oil Industry isn’t selling Prada Handbags.

    Good thing, because those Prada sales girls are vicious.

    2) It has actually acted against the interests of the safety, health, economic and long-term welfare of the citizens of the US.

    Well sure. They’re selling OIL, not fairycakes. Sure, some companies have been unscrupulous. A couple stand out in that area. That doesn’t change their basic business model, though.

    I think we need to have a bit of control for those reasons.

    Of course. Like any industry there should be reasonable regulationf or public health and safety. That doesn’t mean price controls or rapacious tax schemes.

    3) George W.’s part is also explained in the documentary.

    I’m sure it is.

    ANWR: Chopping off whichever toe you have the least use for to stave off your hunger for a meal is no way to live.

    Developing ANWR does no significant harm to anyone or any valuable natural environment. If only as a symbol that we’re serious about solving our problems it ought to be developed. There’s no sensible reason not to.

    Dave

  • http://bloggingontheedgeofsuicide.blogspot.com/ Jet in Columbus

    Dave, I’d have to take issue with one of your points. In my opinion deveolping ANWR would only delay the inevitible running out of world oil reserves by only a few years-a decade at the most, BUT by bringing us a fresh source of oil, it’s giving us an excuse not to find alternates before it inevitably runs out anyway.

    “Oh… well we have more oil to make huge profits on, so let’s table the expense of trying to find another way to fuel transportation until it falls on the next generations find it in their lap…”

    That’s a winding road I hope we don’t go down sir.

    Respectfully
    Jet

  • pleasexcusethinterruption

    Anyone see the crazy congresswoman directly threatening oil execs with nationalization? She couldn’t even think of the right word and she got laughed at. I don’t think she could believe what she was saying. Check it out, it’s hilarious.

  • Clavos

    I hadn’t seen it before, PETI.

    It’s a scream!

    Did you notice even the people sitting beside her begin to crack up?

  • STM

    Clav, do you know if any editors are around? That idiot songlines has left a comment about my son on the Chalmers Johnson thread … can we flick it???

  • http://bloggingontheedgeofsuicide.blogspot.com/ Jet in Columbus

    Stan, do you want me to e-mail Chris Rose for you?

  • Clavos

    Stan,

    I just signed on myself. I don’t know if either Chris or Doc is online right now, but it’s early morning over in Europe now.

    I saw the comment songlines made; he’s a slimy creep.

    I think only Rose and Doc can edit comments. I can’t, and I don’t think Dave can, either.

  • http://bloggingontheedgeofsuicide.blogspot.com/ Jet in Columbus

    Stan, I just now sent Christopher an e-mail with the URL and the problem, don’t know how long it will be, but I tried…

  • http://bloggingontheedgeofsuicide.blogspot.com/ Jet in Columbus

    One or both probably have their hands full with the pornsite invasion we’re experiencing at the moment…

  • pleasexcusethinterruption

    The other moment I remember fondly was the Clinton interview with I think it was Stephanopolus in which when told 100 leading economosts have said lifting the gas tax will do little to nothing to help rising gas prices she said, and that it would only add to their profits, she basically said “Well I know that if we did it correctly we could make it work. If we used all the tools of the president we would design it in such a way it would work. You know economists don’t know everything. They’re elite.”

    NY Times article on it

    YouTube

    Also, how does one get a link into the name?

  • pleasexcusethinterruption

    Also, adding on to what Dave has said in the article:

    The price of oil per barrel has risen from $20 to over $126 – a 630% increase. In that time, retail prices have risen from about $1.20/gallon to $3.79/gallon (as of 5/19 – probably mid/low 3.80s today). That’s just over 300% – half of the increase in crude. I think we can therefore safely conclude that the price increases are due to the increases in crude oil prices. This accompanied with the 8.0% (high but not unusually so) profits margin tends to discredit the idea that U.S. companies are responsible for the price increases. Even if the oil companies fit the model of a perfectly theoretically competitive industry with profits = zero, the retail price would only decrease by 8% – not the decrease we’re looking for.

    Others blame the governments refusal to tap other reserves. Dave suggests this somewhat in the article. However, the estimates of protected oil in Alaska are around only 10 billion barrels. To put that in perspective, the U.S. consumes over 7 billion barrels a year. Yes, if it were used a a long term supplement to supply it would last much longer 10-30 years, but would also only bring down prices very slightly. So not only does it not help much to bring prices down, from a strategic standpoint I think it’s important to hold onto these reserves until we are in a real oil crisis. If you think it’s bad now, wait 15 years.

    The real problem is the inelasticity of U.S. demand. Despite drastic price increases, demand in the U.S. only declined .5% the first quarter. That tells me America is completely and utterly dependent on oil. We exhibit almost no reaction to price increases. Obviously much of the reaction will be long term.. but still .5% is nothing considering how fast prices have increased. We need to develope alternative energy sources NOW.. not in 10 years.. NOW. That is the only way to slow the price increase and prevent economic problems in the future. As Obama pointed out, even just beginning to take this problem seriously (which no previous administration has) would reduce oil prices in response to the predicted drop in the demand curve.

  • http://drdreadful.blogspot.com Dr Dreadful

    Stan, I’ve excised the offending comments on the Chalmers Johnson thread and sent Songlines a reprimand/warning.

    Sorry to have taken so long about it, but I was busy writing. And as Clav noted, it’s the middle of the night in England right now and Chris won’t see Jet’s e-mail for another few hours at the earliest.

    I’ll touch bases with him as to what we should do about Songlines. Much as you’d like me to ban him, I really can’t justify it at this point. For one thing, he’s just trying to see what he can get away with. If we ban him, it’ll just confirm his suspicions that we’re all biased and intolerant of any opinion to the left of Himmler.

    For another, both Moonraven and JOM (sorry, Jet… shall I pause for a moment while you cross yourself?) said and got away with far worse for much longer before getting the boot. Let’s hope Songlines gets the message quicker than they did.

    Sorry, Stan, for any distress we’ve allowed Songlines to cause you.

  • http://www.maskedmoviesnobs.com El Bicho

    “I don’t think Dave can, either.”

    No, he can. Ask MCH.

  • troll

    bliffle – I may not understand economics but I know what I like

    (it’s been 4 decades since I sat in an economics class and I am distressed to hear that I’ve missed yet another exam…damn – !)

  • Clavos

    PETI #41:

    You’re dead on, both as to the source of the price increases, AND the urgency of developing alternative RENEWABLE fuels immediately.

    We need to initiate a full-on program on the order of the “man to the moon” project of the Kennedy presidency, and we need to start it yesterday.

  • troll

    peti – instead of harping on what I see as a non-explanation – ‘the price at the gas pump is dependent on the price of crude’ – I’ll go with your call for action on the alternatives front

  • Cindy D

    Dave,

    Of course. Like any industry there should be reasonable regulationf or public health and safety. That doesn’t mean price controls or rapacious tax schemes.

    But the oil industry has interfered with our ability (as a people) to develop cheap, clean fuel. For the simple reason that cheap, clean automobiles (for an example) do not benefit them. Oil scarcity benefits them.

    So, we have damage to health via air quality, we have global warming to contend with and now we have to pay gas prices that will affect our economy.

    The oil industry decided to hide (already developed and working) technology that is of benefit to us a people–technology that a reasonable government would have been interested in.

    The model we have chosen, has allowed huge and powerful industries to decide our fate. One of the reasons we are paying so much for gasoline now, is because the oil industry interests conflict with the interests of we the people. We could be paying about 60 cents a gallon right now. The technology was already in place.

    Oil scarcity benefits one industry, does oil scarcity benefit the rest of us?

  • http://www.rapturenutballs.blogspot.com Baritone

    Alternative energy sources are of paramount importance. Ethanol produced from corn is proving to be a poor alternative for a number of reasons. There is a plant that grows wild in many parts of the country, the name of which escapes me I write, but that is said to be a far richer source of ethanol than corn or other food crops.

    Solar energy, wind generators – under water “wind” generators – and the like have, at this juncture limited potential as regards their adequacy for use in vehicles and similar uses.

    Developing hydrogen as a fuel has some problems, but perhaps, given that hydrogen is available in abundance, it has as I see it greater potential – and the by-product of using hydrogen as a fuel is water.

    There are other sources being looked into, but none of the above are being pursued with the kind of financial backing, government and industry support necessary to significantly relieve our oil dependancy in what some believe is a very short time span until the world’s oil reserves are spent – some predict as early as around 2040 to 2050. That may be an alarmist view, but certainly by the end of this century crude oil will likely be a seriously diminished commodity. There is, in any even, damn little time to ponder this dilemma.

    I’ll likely be dead or at best dottering in a demented stupor (which some here have accused me of being in even now) before the shit hits the fan in all this, and in that, I guess I could just not give a shit. But my kids – all of our kids and their kids are likely to inherit this mess. Perhaps this is something boomers could do to distinguish themselves in the eyes of Clavos, Baronius and the rest of you that find us lacking in accomplishments. I’ll discuss this possibility with some of my fellow boomers at my next “It’s All About Me” class.

    B-tone

  • http://zardozz.com/zz/ ZZ Bachman

    “Perhaps the reason that these Senators are coming down so hard on the oil companies is that it distracts people from looking for the real villains in this story, and the truth is that our problems originate with the unwillingness of our legislators to pass any kind of realistic and responsible energy policy. ”

    A good portion of the high oil price situation is driven by greed and a herd mentality in the options markets. As long as the Federal Reserve appears to be willing to bailout the stock market by lowering interest rates, the dollar will continue to sink and commodity prices will rise. Oil is a double whammy because it’s increase will drive inflation in all sectors. Sooner rather than later the Fed will stop cutting and raise the interest rates — which will in turn strengthen the dollar. The resulting impact will be that the commodity traders will head for the exits selling and the spot oil prices will drop.

    The situation has very little to do with politics and everything to do with macro economics.

    Indirectly the situation of a low dollar and high commodity prices ironically is the result of fast money for loans and credit (sub prime etc.) do to an over accommodating Federal Reserve during the past 10 years. The inflation that has now been spawned by an overly weak dollar (resulting from the many rate cuts to “stimulate” the U.S. economy) can only be stopped by the Fed beginning to RAISE interest rates. When that happens there will be a mad dash for the exit door by speculators to sell interests in commodities, thus lowering prices.

    The high growth in Asia will slow as a stronger dollar will negatively impact their growth economy and thus their consumption capacity will slow as well and speculators will begin putting on a reverse trade shorting oil and other commodities and the spiral will begin to reverse itself.

    Although we like to think oil prices are somehow maniputlated by the OIL COMPANIES that myth is a fallacy. Oil is a “fungible” commodity and while OPEC does try to manipulate it by increasing or limiting production based on a general “alliance” of oil producing nations, the GREED factor usually wins out. Eventually they will pump as much as they can to take advantage of the high price but that increase supply will in fact begin to lower the pricing. There is more speculation at play in the oil market than there is a reflection of true supply and demand.

    Failed U.S. Energy policy, to develop our own oil sources and alternate energy like nuclear power, rest squarely on the shoulders of our two party system and the short term thinking leadership that panders to every tree hugging liberal for a vote. “The tree hugging chickens have now truly come home to roost” — as one perverted reverend might say.

    Thanks for a great article Dave…

  • http://www.republicofdave.com Dave Nalle

    Jet. ANWR is mostly symbolic. The Gulf Coast and Florida Coast oil exploration is far more essential and would produce more meaningful amounts of oil, as would expanding development of oil shale and other sources. Hell, even coal-oil ought to be on the table. My objection here is to a policy where we do NOTHING to address the immediate problem.

    However, even if we did optimize our resources, the main effect that would have would be to help the US economy by keeping the oil companies active here instead of overseas, which is good for jobs and tax revenue here in the US. Making better use of our resources would not substnatially lower the price of gas, because as mentioned before, oil is a fungible resource and there’s a hell of a lot of it being pumped.

    On the other hand, for national security alone, being able to to rely on domestic oil reserves and production if we had to would be a very good thing, and we’re making no effort to do that.

    PETI. The idiotic congresswoman you linked to is Maxine Waters from LA. She’s an avowed marxist from the Progressive Caucus and a complete moron.

    I should have addressed it in the article, but you’re quite correct to point out that the OPEC sheiks have a good point when they blame the high price of oil on the weak dollar. However, that accounts for only about half of the increase in price. Based solely on the dollar oil should be at about $80 a barrel, and it’s at $130.

    As for alternative energy, as you guys should know from my part articles I’m all for it. However, we’re never going to see $2 gas again, no matter what we do, and as long as the price of gas remains high there is a real economic motivation for commercial development of alternate fuels and more efficient vehicles.

    Remember that the leading producers of biodiesel and ethanol in world are oil companies. The problems right now are the subsidies for making ethanol from corn (ridiculous) rather than sugar and the fact that subsidized biodiesel is being shipped to Europe instead of sold in the US because they can get a better price there and the diesel market is larger.

    We need to start getting more biodiesel vehicles on the market. Half the vehicles in Europe run on it and here in the US there are virtually no vehicles except trucks which do. All of the Ford cars sold here in the US are manufactured in diesel versions in Europe and get a minimum of 20% better mileage and can run on biodiesel. Why aren’t they available here in the US? Unnecessary protectionist regulation is the answer, btw.

    Dave

  • Cindy D

    B-Tone,

    You owe it to yourself to see, Who Killed the Electric Car.

    The cars were already on the road in California, they were leased to a lot of people. We already had not a notion of a solution, but a working solution.

    The excellent and fair documentary, shows the various reasons for the death of the electric car —none of which had to do with it not working.
    It worked, it was speedy, it was clean, a system of charging stations was partially developed.

    Interesting thing…..why is it that no one seems to know this? I mean you would think that this would be big news, right?–That everyone would know about the EV 1 Electric Car.

  • pleasexcusetheinterruption

    One thing I should note is that return on equity, not return on revenue, is probably the more relevant statistic with respect to are their profits obscene? As that same article Dave linked to shows, return on equity was a very high 22% even though return on revenue was only 8%. The API (a biased source) chose to only compare the industry based on return on revenue and not the more obscene, more relevant, return on equity figure. Not sure how this change the analysis…

  • Lumpy

    I think the EV1 is actuallt pretty widely known. It’s also only one of many electric cars currently in production. but for much of the country they are not realistic. commuting distances are too great and they have no AC, which is death in the south. Plus batteries were enormously expensive to repiace.

  • http://www.republicofdave.com Dave Nalle

    PETI, oil companies always have high ROE relative to other companies because they have low payroll expenses and high capital expenses. Since little of their overhead is payroll, when the price of crude goes up their ROE goes up faster than net profit.

    While oil companies do have high ROE, they are hardly the highest. Airlines and many tech companies outpace oil companies on ROE. Exxon, which has the highest ROE of any of the big oil companies is only ranked 42nd in ROE of Fortune 500 companies.

    Dave

  • bliffle

    This is the take-home assignment I cribbed from a local college econ course assignment that the Prof makes available to his students on a website. Please remember that this is a lower division course, 1st quarter, so it is taken mostly by 18-20 year old students who are freshmen and sophomores.

    It was assigned on a friday, to be turned in on monday.

    I wasn’t taking the course. I think I took it 100 years ago. Maybe 200.

    I confess that I had great difficulty with most questions and the math questions were a relief.

    Give these class problems some consideration without skimming over them and you will see the complexities develop that we usually do not even consider in our kindergarten discussions of econ here at BC.

    I offer this not to embarrass anyone but to make these points:

    1-econ is more complex than people ordinarily give credit. A simpleminded set of rules is insufficient.

    2-econ is all about numbers. Math is inescapable.

    3-“supply” and “demand” are tenuous realities. Nobody knows any supply curve nor any demand curve, only one point on each: the equilibrium point.

    4-a person doesn’t qualify as an economist just because he read a Classic Comics synopsis of “The Road to Serfdom”.

    ——————–clip———————–

    Econ 101b:

    Problem Set 1: National Income Accounting: Due at start of lecture, Feb 1 2007:

    Economics 101b Problem Set 1

    1.

    Explain whether or not, why, and how the following items are included in the calculation of GDP:
    * Increases in business inventories.
    * Fees earned by real estate agents on selling existing homes.
    * Social Security checks written by the government.
    * Building of a new dam by the Army Corps of Engineers.
    * Interest that your parents pay on the mortgage they have on their house.
    * Purchases of foreign-made trucks by American residents
    2.

    Calculating real magnitudes:
    * When you calculate real GDP, do you do so by dividing nominal GDP by the price level or by subtracting the price level from nominal GDP?
    * When you calculate the real interest rate, do you do so by dividing the nominal interest rate by the price level or by subtracting the inflation rate from the nominal interest rate?
    * Are your answers to the two parts the same? Why or why not?
    3.

    Suppose that the appliance store buys a refrigerator from the manufacturer on December 15, 2007 for $600, and that you then buy that refrigerator on February 15, 2008 for $1000:
    * What is the contribution to GDP in 2008?
    * How is the refrigerator accounted for in the NIPA in 2008?
    * What is the contribution to GDP in 2007
    * How is the refrigerator accounted for in the NIPA in 2007?
    4.

    Why do (some economists) think that the interest rate and the level of the stock market are important macroeconomic variables?
    5.

    What are the principal flaws in using GDP per worker as a measure of material welfare? Given these flaws, why do we use it anyway?
    6.

    Suppose a quantity grows at a steady proportional rate of 3% per year. How long will it take to double? Quadruple? Grow 1024-fold?
    7.

    Suppose we have a quantity x(t) that varies over time following the equation: dx(t)/dt = -(0.06)x + 0.36.
    * Without integrating the equation, tell me what the long-run steady-state value of x–that is, the limit of x as t approaches in infinity–is going to be.
    * Suppose that the value of x at time t=0, x(0), equals 12. Once again, without integrating the equation, tell me how long it will take x to close half the distance between its initial value of 12 and its steady-state value.
    * How long will it take to close 3/4 of the distance? 7/8 of the distance? 15/16 of the distance?
    8.

    Now you are allowed to integrate dx(t)/dt = -(0.06)x + 0.36.
    * Write down and solve the indefinite integral.
    * Write down and solve the definite integral for the initial condition x(0) = 12.
    * Write down and solve the definite integral for the initial condition x(0)=6.
    9.

    What is the difference between the nominal interest rate and the real interest rate? Why do (some economists) think that the real interest rate is more important?
    10.

    Which do you think is a more important macroeconomic variable, real GDP per capita or the unemployment rate? Why?

  • http://www.republicofdave.com Dave Nalle

    This is the take-home assignment I cribbed from a local college econ course assignment that the Prof makes available to his students on a website. Please remember that this is a lower division course, 1st quarter, so it is taken mostly by 18-20 year old students who are freshmen and sophomores.

    Sounds like the same course I took 30 years ago. Which means I still recognize most of the terms. If I had any idea where my textbook was I’d be in okay shape since it’s a takehome.

    I confess that I had great difficulty with most questions and the math questions were a relief.

    Some of the questions are subjective or at least appear that way. I’d be interested to see the intended answer. Answering them would be hard without having taken the specific course. Math is always easy, but the first few questions aren’t terribly hard either.

    Give these class problems some consideration without skimming over them and you will see the complexities develop that we usually do not even consider in our kindergarten discussions of econ here at BC.

    Well sure. But how are we supposed to have really complex discussions of economic topics when none of us are really economists, we all have varying levels of economics knowledge, and most of those of us who have even taken an econ course took it years and years ago?

    At the same time, while getting the perfect answer to an economic question requires a lot of knowledge, a broad range of data and some hard work, it is also true that you can reach a reasonably good answer to a lot of economic questions based only on the most important data and some basic principles. A lot of questions have correct answers which may not be perfect, but are also not wrong. And in fact, even when you have all the recommended variables to take into consideration your answer may still not be perfect because of unaccounted variables.

    1-econ is more complex than people ordinarily give credit. A simpleminded set of rules is insufficient.

    I’d disagree. Simple rules can be sufficient to provide a minimal answer to a question. More work may be required to provide a fully qualified answer, but that does not make the simple answer wrong, just less right.

    3-“supply” and “demand” are tenuous realities. Nobody knows any supply curve nor any demand curve, only one point on each: the equilibrium point.

    Despite the substantial use of math in economics it will always be imprecise.

    4-a person doesn’t qualify as an economist just because he read a Classic Comics synopsis of “The Road to Serfdom”.

    You don’t have to be an economist to discuss the economy or have an opinion on it. You can even come up with fundamentally sound conclusions working from limited data.

    For example, in the case of oil, it is not wrong to say that limited supply causes the price to be higher. It may not be the ONLY cause of higher prices, but you’re still not wrong to point to it as a major factor in high gas prices.

    Dave

  • Cindy D

    @#53

    Lumpy,

    The EV1 is not in production. They were taken out of the hands of the lessors by GM and destroyed, in this way people would forget all about them.

    You have some of the consumer objections/fears there (the documentary finds the consumer is also responsible). However what the consumer was offered is not what was actually possible.

    GM purchased the new battery technology (which would have made the cars go farther than 60 miles per charge) and then GM silenced the inventor of the new battery technology. GM then kept the new battery technology secret and put the old battery technology in the cars.

    Here is what the cars could actually do:

    * 1997 EV1 with lead batteries from Panasonic Storage Battery Co., up to 110 miles at up to 80 mph;
    * 1997 HondaEV with NiMH batteries from Panasonic Energy PEVE, up to 140 miles at up to 80 mph;
    * 1999 EV1 with NiMH batteries from GM-Ovonics, up to 160 miles (140 EPA certified) at up to 80 mph;
    * 1997 Toyota RAV4-EV with NiMH batteries from Panasonic Energy, up to 120 miles at up to 80 mph. Last sold in Nov., 2002, these are still running fine, even though Toyota has refused to sell replacement batteries;

    EV1.org

  • bliffle

    A colleague of mine had one of those (an EV2 IIRC, which had replaced the old EV1). It was a nice car, we used to zoom to lunch sometimes in it, and it was a real pleasure: quiet, smooth and fast! A little expensive, I think it cost $600/mo to lease.