Centerfield: Congress to start debating Oil Industry again. Where can this really go?

April 24, 2006

Congress to start debating Oil Industry again. Where can this really go?

I noticed, in passing, the Senate today, was starting to debate many issues surrounding the Oil Industry...mainly about price and so forth. I just caught a glimpse of a reporter outside the Capitol talking about it and then a clip of Harry Reid making statements about the problem on the Senate floor. Reid's comments were what you what expect: a criticism of the the adverse effects the high prices are having on most Americans and the need for intevention to provide some kind of immediate relief.

Hey, I'm all for discussing and solving the huge geopolitical and socio-economic riddle that is ENERGY. And though I'd LOVE to believe that there is malfeasance and price gouging occuring, how can we really say??

Most of all, I'd like to believe these guys aren't just showing a half-hearted effort to get angry constituents off their backs.

I open it to discussion: What CAN they really do? tapping reserves is a short-sighted measure. What can be done about the real problem?? is there anything??

Some may say that diverting money from subsidies and excused royaly payments would cause an increase in production cost, less new drilling and higher costs in the long run. others would say they don't need the subsidies and they're doing just fine without them and that that money should go into consevation and alternative energy research.

Where do we go? Is this just a lollipop for good will with voters or is there a feasible agenda??

I'd love to know......

Posted by John at April 24, 2006 07:51 PM

Comments

What exactly is the "real problem"? It's simple supply, demand, and risk. The demand for oil has been getting larger as China's economy has developed. At the same time, supply has remained fairly steady, and the risk caused by the uncertain future of the Middle East keeps long-term contract prices high.

In the meantime, higher prices are causing energy consumers, both individuals and businesses alike, to change their behavior. Demand for more fuel-efficient cars is going up, so can companies are making more of them. I saw an article the other day where Walmart is spending a hefty sum of money to redesign its fleet of 18-wheelers to become much more energy efficient. I'm sure we will see an increase in sales of insulation over the summer, as well.

Our gasoline prices are still cheaper, given our much lower taxes, than what they pay in the European Union. When you adjust for inflation, you see that real gas prices are still well below the record highs of the late 1970s and early 80s, and are barely above the price in 1949. In 2004, the average price of regular unleaded was $1.88 in year 2000 dollars. The average price in 1949 for a gallon of regular was $1.64. The highest historical price was in 1981, when a gallon of regular unleaded was $2.33. The price has gone up some since then, but we're still shy of historical highs. And just as those historical highs didn't last that long, these may not, either.

In the meantime, as I say, higher gas prices cause people to invest in energy-saving technology on their own, not through inefficient tax-dollar transfers and government mandates. Those investments will help reduce demand, and thus prices, once the current problems ease up, and will help the environment, too.

Posted by: PatHMV at April 24, 2006 09:02 PM

I'm reminded of Bush in 1999, chiding Bill Clinton about high gas prices and demanding that he do something about it. I wish I had the exact quote. I bet it's priceless.

oh for the shoe on the other foot. One doesn't see it too often tothis extent but when you do, hilarity descends upon ones life and one is left chortling for a week or more.

More to the point though, you'll see sturm and drang, you'll see oil execs testifying (not under oath I bet), they'll pass law or two, maybe even cut a tax break. Bush will do an executive Window Dressing. Ultimately the Republican congress will do squat beyond mere window dressing. They know from which teat they suck upon and it is not milk they get. Nothing will happen unless their polls go really south but by then it will be too late. It probably already is. With multiple governmental failures they're being tagged with "The Party That Can't Govern Straight" label and they themselves stuck it on with JB Weld. They are, after all, in charge. Someone should have reminded them that when they took over Congress that 'responsibility' is one of the consequences of holding and wieldng power.

You'll have to excuse me now... I've gotta go chortle some more.

Posted by: Marcus at April 24, 2006 09:09 PM

So what you're saying, Pat,is that this "debate" is a lollipop for voters.

I fully get what you're saying...which is why I posed the question. With that in mind, can there be any realistic purpose to these debates other than shmoozing for votes?

Posted by: John at April 24, 2006 09:09 PM

Pat, as I noted below, those governmental mandates were extremely efficient in cutting energy use in the US and it was done with a growing economy.

Posted by: Marcus at April 24, 2006 09:11 PM

Hell, they have to look like they are doing something. Even if they don't do anything. An executive of an oil company gets a $400M retirement package as oil climbs to record levels. Politicos phones and email boxes had to be going nuts on that.

It is legit supply and demand. However, This is a case of prices going up and their own production costs not going up. Plus, it still has me wondering about the peak oil question. I don't hear the Saudi's talking about being able to increase their production any more. They may have the reserve; but just not the ability to pump it faster.

Political football. I don't see the costs going anywhere but up. All of the cheap places to get oil from are pretty much being utilized at their max. Only new stuff of a significant quantity will require more expensive retrieval methods. [By significant, I mean a site that would produce more then what would be a three monh US supply of oil] If the high price starts to make people give more serious looks at conservation, it may be a good thing.

Posted by: Jim M at April 24, 2006 11:13 PM

Side conspiracy nut comment: What about the possibility that the Iranian President is really a sly fox and not a kook? Maybe he is just talking crazy to manipulate the oil market?

OK, enough of my tin-foil hat for the night.

Posted by: Jim M at April 24, 2006 11:18 PM

While politicians offer a lollipop, the alternative energy industry is growing by leaps and bounds.

Today, ADM broke ground on a biodiesel plant in North Dakota that will produce 85 million gallons per year from canola. Last week, an 80 million gallon plant broke ground in Indiana. And I just read about a 96 million gallon plant under development in eastern Oregon.

That's 261 million gallons. From three plants. I'm not including the other 40+ smaller scale facilities already under construction.

We produced 75 million gallons last year. 25 million the year before that.

We'll hit a billion very fast at this rate.

Posted by: JonBuck at April 25, 2006 02:02 AM

Don't wait for ADM to help knock down prices too soon. They're making too much money from the ethanol shortage.

Ethanol was about $1.50/gallon last year. The changevoer from MTBE to ethanol as oxygenator in the mandated regional/seasonal blends is one of the major bottlenecks in gasoline production right now, and ethanol is up to $2.50/gallon or more. So the refineries are paying top dollar for both oil and ethanol.

The BIG supply bottleneck driving prices is actually in refining capacity, not oil supply itself. It's been thirty years since we built a new refinery in America.

Posted by: Tully at April 25, 2006 08:25 AM

Don't wait for ADM to start advocating switchgrass as an ethanol source instead of corn, even though the amount of energy derived from switchgrass is much higher than corn, with far less use of chemical pesticides and fertilizers, an overall better CO2 profile, and is much better at holding the soil and filtering contaminants prior to entry into rivers and streams.

http://bioenergy.ornl.gov/papers/misc/switgrs.html

However, I'm not specifically advocating ethanol. Ethanol and other biofuels shouldn't be the goal. Reducing carbon emissions should be the goal.

Posted by: tim at April 25, 2006 09:39 AM

If look at that graph of Pat's, you notice that those prices that are "well below" the 1970's peak are also "well above" all the other points on the graph. People are bent out of shape for good reason: they're feeling the pain of substantially higher gas prices. They've been substantially higher for long enough now that hopes of these increases being transient are fading, which makes people even grumpier. How much rippling will we see? There's bound to be some...

One thing I'd like to see is the feds developing a more coherent comprehensive long-term strategy, and for the states to buy in. If various state regs cause transition problems, maybe we need more uniform regs. If we are serious about alternative sources, maybe we need to find ways to fast-track efforts and to control nimbys who slow down and stop efforts at improving energy supply and flow. Right now in my area, here are a couple things going on.

1)Local groups are fighting the siting of an LNG terminal. Maybe they're right that the location isn't the greatest, but let's have some powerful leaders step up and work together and get the facility sited. No one is arguing we don't need the fuel.

2) More nimbys and a powerful coalition of rich ones this time, with powerful friends are fighting the siting of a windmill farm in Nantucket sound, which apparently will sully the view of many rich shoreline real estate owners...way out on their ocean horizon view, you'll be a able to see a tiny cluster of blurry white spinning stars, which rich nimby-ers claim will destroy the character of the area, be against god, unamerican. and what about the children? :-)

We need to find a way to see these windmills as the beautiful sight of free renewable energy. We can't let Ted Kennedy conspire in congress to tweak the laws to get a bill written that gives the governor veto power over such an effort, so that Mitt Romney can veto windmill farms. This is happening right now,
and its not a GOP/democrat issue, it's rich buddies uber alles.

What I'm saying is that we need leaders to be serious about this in a concerted way which says that we as Americans need to be serious about it too, and accept small sacrifices here and there to try and make things better. I think a good argument can be made that various programs, regs, and subsidies can help push things, and I believe we should explore them. I can see the offering of a big prize for development of the best biofuel, as opposed to just letting ethanol be the winner because past subsidies have placed in a spot to be the miracle answer. I can see surtaxes on low-efficiency vehicles if used for non-qualifying purposes. I can see substantially upped fuel efficiency standards. I can see encouraging the development of household gray water rcycling systems. I can see changes to packaging (standardizing and limiting), limits on junk mail, taxes on wasteful disposables (why do juice cartons have plastic caps now?) and dangerous disposables like batteries, and a better focus on making recycling easier and more useful instead of byzantine. Lots of things that say "there'll be some changes made."

We need to do more than bitch. We need to accept changes and make some small lifestyle sacrifices to push things in a more sustainable direction. Conservation is a virtue all by itself, so why not tax living large a little bit more? We should get very serious right now about declaring that an important holy grail for the 21st century is ample sustainable supplies of energy, most likely renewable ones. We need the story of the last oil well to be a happy ending, not a nightmare.

Most importantly, we don't need to go chicken little. We just have to be serious and start doing smart things, and stop being blase about the vast quantities of everyday crappy choices (like the plastic caps on the juice cartons) that we accept or even embrace without 2nd thoughts.

Posted by: bk at April 25, 2006 09:39 AM

Adjusted for inflation, we're on the high side for gasoline prices from historical, but still under both the 1930's and the '81 peak. Adjusting taxes out brings it down a bit more. The lowest inflation-adjusted prices in history were in the mid to late '90s. In terms of disposable income, same. In terms of disposable income, the highest historical prices were in the mid '30s, when a gallon of gas (at seventeen cents a gallon!) as measured in share of disposable income was four to five times what it is today. Of course, we drive a lot more today.

Posted by: Tully at April 25, 2006 10:39 AM

How is "disposable" income calculated, in laymen's executive summary terms? Someone has to make a judgement that sorts essentials from optionals, right?

I won't say such a task is necessarily suspect, but it's sure fraught with peril beyond clear judgenments such as food and shelter(inc. some utilities) and some clothing. How do you count healthcare costs? If your company "pays" for them, do they not count as a cost for you, even though they come from your "total compensation?" What about cell phones and computers, are those optional costs that count as being purchased with disposable income? How about private school or college costs? Not an easy thing to do, this determining what's disposable income.

Posted by: bk at April 25, 2006 12:08 PM

How is "disposable" income calculated, in laymen's executive summary terms? Someone has to make a judgement that sorts essentials from optionals, right?

Nope. Disposable income is dead simple. Income after taxes and any transfer payments from the government, i.e., ALL available after-tax income. NOT to be confused with discretionary income (income remaining after fixed-cost "essentials" spending such as food, shelter, clothing, etc.) which is indeed more difficult to measure, primarily because of differing definitions of what is "essential" spending.

(Digression--"poverty line" is the point where the individual spends ALL disposable income for essentials, and has zero discretionary income. Below poverty line, there is not enough money for all the essentials.)

Posted by: Tully at April 25, 2006 12:25 PM

We drive more now then at anypoint in our history. Gas is a bigger chunk of the family budget because of this. Now, I know that my move to my current place and the choice that I am making for my new place are being driven to reduce my fuel cost. My monthly gas cost has gone from $150 a few years ago to almost $300/month. That is $1800 of lost spending power for mself per year. That is a big chunk of money to remove from one person. Now, I probably drive more then most. It takes me about 30-45 minutes to get anywhere. Hence, I have to move closer to where I need to be. Smaller place because I can not afford something similar. I am on the extreme edge of having to contract my personal economics; but, if prices do not stabilize and the trend coninues, my issues could begin to extend to more of the general population and, possibly, lead to a significant economic slowdown.

Congress should have granted some protection of liability for MTBE to allow more time to phase into alternatives. Ethanol is a logistical problem becuase it can not be transported very well in pipelines. This slows down production, too. I do not see ethanol as a serious alternative. I think hydrogen fuel cell could work IF we can find a reasonable way to produce large quantities. Production and distribution is the biggest problem in our fuel systems. Therefore, demand is probably going to outsrip supply on a rgular basis. The only way to reduce fuel prices in the long term is going to be to decrease demand since increasing supply is becoming increasingly difficult. Going after the oil companies won't help. Eventually the market will take care of the problem. Consumers will demand more fuel efficient cars once they start feeling the pain. Hybrids are still not a good economic cost unless fuel costs continue to skyrocket because of the time required to recover the extra costs.

As much as I think that the oil companies are getting excessive profits and wasting the money, I do not think a tax on profits will do any good.

Posted by: Jim M at April 25, 2006 12:32 PM

Well I take a look at the New-o-rama today to see what our politicians are doing and here's the summary.

Hastert and Frist want investigations by the FTC and the Justice Dept. okay, blustery but to what effect?

Dianne Feinstein is offering a bill that would make all fo the futures and derivative trading in oil/gas/etc transparent. Right now about 80% of that trade is done online, without any scrutiny whatsoever. That's a good one. Does nothing to regulate actual trading, but does make the market more self regulating because everything would be Available for scrutiny. Could be effective in making it harder for traders to fool around with the market itself. With public trading the JD and the FTC as well as the SEC could keep an eye n things where none is now. Passage in a GOP Congress? ...I give it a 40-60 now, probably 50-50 after Memorial Day and we see higher prices at the pump.

Rep. Jack Kingston, R-Ga., wants to mandate cuts in domestic oil consumption and boost alt fuels.
Okay, but mandate? Isn't that like a republican swear word? And just how do you mandate cuts?
Who gets the fuel? Sorry, bad idea and it's not even a traditional, old school GOP idea.

Barbara Boxer, she of the 20,000 coffee pot and thousand dollar hammers expose fame, plans to introduce a bill this week that would require the government to buy more fuel efficient vehicles, copying San Francisco's own policy.
Good idea, intent obviously to drive the market as well as reduce government fuel consupmtion - saving tax dollars. BTW, buying fuel efficient doesn't mean you ahve to buy too small or expensive hybrids whose maintenance history has yet to be really written. There are plenty of cars out there that get 30+ mpg under average conditions. Passage chances? middling

bush, stop filling the reserves,cut some environmental regs to increase gas supplies.
Minimally effective. The Reserve doesn't draw that much on a daily basis and the refineries that are converting to summer formulations can't really increase production while they are in conversion. Although the cynic in me sez the oil companuies will drop prices and say it's because of Bush policy to make him look good because they fear a Dem takeover of either Senate or House.

Intersting. who says Dems don't have great ideas?
That's just a Fox fantasy anyway.

Tully,
Gee willikers you mean to say gas isn't expensive?
Doesn't matter, it still costs more. When our budgets are already squeezed by high health insurance premiums (I had to up my deductible yet again) and high housing costs those fuel increaes are magnified. If health and housing had remained the same as gas in terms of price increases over the past 40 years you would be right. But that is not the current reality. For those of us on tight budgets it hurts.

Posted by: Marcus at April 25, 2006 02:28 PM

When our budgets are already squeezed by high health insurance premiums (I had to up my deductible yet again) and high housing costs those fuel increaes are magnified.

So do higher taxes, the usual Dem "solution" to everything--but gas is still not hitting records yet in real terms by historical standards. Doesn't make it hurt any less to pay for it, of course. I'm on a tight budget with kids, too.

Fuel-efficient vehicle purchases are something we've worked on here for a long time, and is always a good idea to consider. We've also been buying multi-fuel vehicles for many years. When sitting in the middle of a major natural-gas field and and thousands of square miles of farmland, having a fleet that can burn gasoline, propane, or ethanol just seemed reasonably bright. Whatever's cheapest is what gets used. Right now we're burning a lot of propane.

Posted by: Tully at April 25, 2006 03:21 PM

How 'bout a fed tax to maintain gas prices at 3.50 to 4.00 a gallon with all going into alt fuels development?

Posted by: c3 at April 25, 2006 04:23 PM

How 'bout a fed tax to maintain gas prices at 3.50 to 4.00 a gallon with all going into alt fuels development?

That would probably be the worst thing. Would shock the hell out of the economy and probably start a recession, further decreasing tax revenues. Yeah, it would spur conservation; but at too large a cost. Better to let supply and demand settle the price then put a tax burden like that on. I would rather see a windfall profit tax then that one. Not that I think either would be effective.

Posted by: Jim M at April 25, 2006 05:29 PM

Gee, Chris, d'ya think the taxpayers will buy it? (Watch out for villagers with ropes and torches!) :-D

How 'bout we just drill in the Gulf and ANWR and off the Cali coast instead? Mine out some of that oil shale? Build some more refineries to ease the seasonal production bottleneck? How 'bout some more nuke plants, to cut the strain on fossil fuel usage? We've already got wind farm tech, and solar is getting better all the time.

The obvious--if prices stay high, there's plenty of private-sector funding available for alternate energy and efficiency research. It's only when energy is cheap that the private sector doesn't look for alternatives.

Stripping the tax goodies from the oil industry wouldn't bother me a bit. We pay for it all, one way or another. Just don't trust that it will bring prices down. It won't. If we stripped ALL the oil company profits out of gasoline, it'd knock prices down about 9%. We'd get about twice that result by removing the various taxes levied on gasoline at the pump.

Not that Big Oil isn't enjoying the price runups. They are. Just as they suffered under the price crash of the late '90s.

Posted by: Tully at April 25, 2006 05:33 PM

Higher taxes or higher debt? We accumulated 760 Billion in debt and obligations last year including pensions and benefits to those that are in uniform over in Iraq and Afghanistan today.

Debt like that never made sense to the Republicans of yesteryear or most of the Democrats of today.

As it is I don't hear anyone calling for higher taxes so your tax bogeyman is a bit off kilter.
Higher gas prices are going to put a dent in most people's discretionary spending regardless.

Posted by: Marcus at April 25, 2006 08:51 PM

Higher gas prices are going to put a dent in most people's discretionary spending regardless.

No argument there. I'm arguing for perspective.

Posted by: Tully at April 25, 2006 09:06 PM

Gee, Chris, d'ya think the taxpayers will buy it? (Watch out for villagers with ropes and torches!) :-D

Yeah, I figured I'd get that response.

But I gotta say, I'm disgusted at the Congressional Dems public pronouncements today, especially Pelosi "When you have a President and Vice President who work for oil companies what do you expect?...Cause and effect." Puuhleese!

Posted by: c3 at April 25, 2006 09:49 PM

How about this?

Dynoil LLC Confirms it will Build a 100,000 Barrel per Day Bio-Diesel Refinery
Dynoil announces it will build a 100,000 barrel per day Bio-Diesel Refinery in the Houston, Texas, US Gulf Coast. Total production of Bio-Diesel will be approximately 1.5 billion gallons per year.

Posted by: JonBuck at April 25, 2006 11:28 PM

I think Pelosi has a point. Energy conservation measures were short-changed under this administration and as you may have noticed, there hasn't been a significant bump up in CAFE standards or increase in spending in energy conservation technologies. Let's be frank about this. Republicans, at least those inpolitical power, have normally treated energy conservation as an anathema. So in a sense perhaps c3 is right, maybe it's not because Bush and Cheney are oil guys, maybe it's because they're just Republicans.

Posted by: Marcus at April 26, 2006 02:49 AM

I agree that conservation would be a far more effective way of correcting the current situation in the short run followed by making alternatives more economically feasible. I am not a big government mandate guy; but when it comes to fuel mileage, I think it would be effective. The auto companies always cry "it will raise the price." I seem to recall that line being used for mandatory airbags. Look at it now, they are stumbling over themeselves to put airbags in ever possible crevace of the car now. The american auto industry is one of the most uninventive on the planet these days. That group does need kick in the ass. You would think them losing money would be a sign; but I truely think the folks running the American companies are about as incompetent as some of thes inbred European monarchs of the past.

Posted by: Jim M at April 26, 2006 11:33 AM

It seems clear to me that a combination of factors driving prices right now. There is the basic supply/demand equation for world oil prices. On top of that you have a high degree of price speculation going on due to political uncertainties in some of the supplier countries... and you have profiteering due to that speculation.

In addition to that, in the U.S. you have a real supply crunch not in availability of basic crude oil but in REFINING it. We have a shortage of refining capacity.... that was only exascerbated by the last hurricane season..... on top of that you have so many different type of blends required from region to region and SEASONLY as well (we are entering the summer season) that the refineries can't maximize efficiency.

On top of that I really DO feel that you do have some degree of profiteering on the part of the energy companies right now. For instance Cheveron-Texaco posted record profits last quarter.....not just record profits for Cheveron-Texaco or the energy industry...but record profits for ANY company, EVER in recorded history (or so I have been told).

I feel that this is due to too little competition within the industry in the U.S., not just horizontaly but verticaly as well. Having just a handfull of players responsible for the entire production chain from initial exploration through retail sale provides tremendous opportunity for price fixing. I really wonder if in part this situation has been brought about by a too lenient policy by the FTC in the past about allowing mergers and aquisitions in the industry? I could be completely off-base but I wonder if there is justification to look into some Anti-Trust actions.

Posted by: cengel at April 26, 2006 01:45 PM

I'm a proponent of competition too, but with the enormous cost of drilling, refining and distributing oil and it's various byproducts I can't see it being very easy for a small company to break into the business, let alone be competitive.

I'm really not all that pissed off at the oil companies. We're the ones that drive 100 miles a day (well, not me, I ride a bike to work).

Posted by: tim at April 26, 2006 02:03 PM

"I'm really not all that pissed off at the oil companies. We're the ones that drive 100 miles a day (well, not me, I ride a bike to work). "

Tim, that's a different arguement alltogether. But as one of those people who does drive a 100 miles a day I feel compelled to point out that people don't drive 100 miles a day for the fun of it.... if given the choice I'd prefer to be able to ride a bike (or walk) to work too. The simple fact of the matter is that for very many people in many areas of this country if they want to find affordable housing and a decent atmosphere in which to raise thier children they have little choice BUT to drive 100 miles a day..... but now we are getting into my "over-population" rant....and you REALLY don't want to get me started on that ;)

Posted by: cengel at April 26, 2006 03:17 PM

It was ExxonMobil, weighing in with $36B profits for 2005, on revenues of $371B. The amount is a record, but a 9.7% profit margin on revenues is upper mid-range for successful corporations, and pales in comparison to, say, Big Pharma. For a different comparison, WalMart makes about 6% on revenues, and now falls to #2 on the overall-revenue list. ExxonMobil is now the largest company in the world in terms of both market valuation and gross revenues.

For some historical comparison, when oil was $15/bbl in 1998, ExxonMobil earned about $8B on $171B in revenues, about a 4.7% pre-charge profit margin. This resulted in them being sued for OVER-stating profits, as some institutional investors claimed they should have reported major losses in the value of their reserves against their balance sheet.

They don't need to price-gouge or "profiteer" in any classic sense right now, they're just having a good time holding that margin and selling into high demand. Oil company profits for gasoline on a per-gallon-sold basis stay pretty steady as a percentage at roughly 8-9%. Higher prices mean higher profits, as long as they can hold margin. Which is easy when demand outstrips supply.

To "profiteer" in the classic sense (price-gouge) they'd have to increase margin during a price/demand rise. (To be "public-spirited," they'd have to cut margin. Then their shareholders would sue the hell out of them. And win.)

Posted by: Tully at April 26, 2006 06:37 PM

Cengel:

That comment about driving 100 miles a day wasn't meant at you personally. I had a couple of months this winter where my natural gas bill hit $350, with the thermostat at 66 and the heat turned off upstairs. I feel your pain. And we still manage to drive our two vehicles a total of about 15000 miles per year even without a commute to work.

I just don't think congressional investigations are going to lead anywhere. The price of oil - and natural gas - are a result of supply and demand pressures.

If anyone has any data on just what effect increasing our refining and distribution capacity would have on the price of gasoline I would be interested in seeing it. For instance, if our refining capacity doubled in 10 years, how much would that reduce the price of gasoline in the U.S. if the world wide oil price remained about the same? My guess is increasing refining capacity would not reduce the price of gasoline very much, and even if the price dropped 25% it would still be over $2/gallon and a lot of people would still be complaining about it.

Posted by: tim at April 27, 2006 09:42 AM

If we had unlimited refining capacity, it would still be over $2/gallon. Gotta boost crude supply too.

The major determinants at the moment are crude oil prices and refining capacity. Crude oil prices are the result of world demand and perceived risk in the supply chain, the former being mostly the saber-rattling of Iran and Venezuela. If both of those nations shut up today, world crude prices would drop roughly 40% or more. (And a lot of circling-shark market speculators would cry, and the rest of us would smile and have no pity.)

Crude oil cost is about half of the price of gasoline. The remainder is refining costs, marketing and transportation costs, supply-chain profits, and taxes. Refining cost varies widely by producer and blend, but averages in the 15-20% range. Distribution, transportation, and marketing run 12-15%. Taxes likewise vary by state, and range from 32.4 cents/gallon in Wyoming to 51.9 cents/gallon in California.

The oil companies take profits all along the chain, some of them amortized and such as field cost recoveries, etc., so it's tough to seperate that out other than as an overall share, which runs 8-10% right now, but obviously runs much lower when crude gets cheaper. Oil company profits come mostly from their own field crude-oil production and from refining. "Retail" profits go mostly to the distributors and retailers--and taxing authorities.

Capacity choke at the moment is mainly a function of all the seasonal "boutique" blends. If the refineries weren't changing over seasonally and we hadn't had any shut down by Katrina, gas right now would likely be 25-30 cents/gallon cheaper. That's the "seasonal demand premium" of 5% or so seen every year at this time as summer demand kicks in and the refineries slow down for blend switchovers, doubled for the inelasticity of demand, and is a fair proxy figure for supply-chain "choke" from refining capacity. If the oil companies worked at breakeven instead of their usual 8% or so profit margin, you could knock off another 25 cents or so.

Which would still leave us over $2/gallon, on the basis of current crude prices, breakeven production/distribution costs, required retailer profits, and, of course, taxes. Federal tax is 18.4 cents/gallon, state and local vary.

To get back down to $2/gallon or less would require crude prices of roughly $45/bbl or less. Which would be right about where both gas and oil would be without Venezeula and Iran rattling sabers. To hit the all-time peak of December 1979 (in inflation-adjusted dollars) crude would have to hit about $98/bbl, and gas would be $4/gallon or more.

Posted by: Tully at April 27, 2006 10:46 AM

Tully,

They can afford to hold those relatively high margins for two reasons - there are so few major players in the field that competition pressure is reduced and they can engage in de-facto price fixing. Secondly they have a bit of a verticle monopoly going on in that they control a vast swath of the product life cycle from production to retail sale.

Tully, has world-wide demand really INCREASED 50% over the last year.... because prices at the pump have. Has production capacity dropped 50% over the past year? If you cant answer yes to either of the above two questions then you can't rely on supply/demand arguements alone to explain away current high prices. There is something else going on, and I have a pretty good idea what it is at least in part.

The fact of the matter is that with most industries when you have situations which significantly raise the cost of getting a product to retail sale profit margins tend to DROP rather percepitously..... not stay the same or even rise.
The fact that the oil companies aren't being affected that way tends to tell me something about the unhealthy lack of competition pressures.

Now, I'm not complaining about companies wanting to maximize proffits.... that's what companies do.... that's what we all want to do. However, when a vital resource is in the hands of just a few players who have domination of that resource from production to retail sale....and can pretty much dictate the price they want to recieve for that resource... there is a word for that... I think you know what it is.

As a consumer, it's well within my rights to hold that the energy companies are making an unhealthy level of profit while the country suffers. It's certainly fair to press our elected official to investigate whether there are legitimate Anti-Trust and unfair restriction of trade issues going on in the energy industry. Furthermore those same energy companies recieve ALOT of benefits both directly....and indirectly from the Federal government (i.e. my tax dollars).... it is certainly fair... considering the record proffits those companies are posting.... to press the government to start withdrawing those benefits unless said companies become more responsive to consumer demands.

Given the profits they are making from the prices they are charging.... ExxonMobil needs those tax dollars alot less then I do..... And I'll bet you a free lunch Tully, that once the oil companies start hearing the words "Anti-Trust investigations" and "withdrawl of federal incentives" your going to start seeing those record profits become a little less record and prices at the pump dropping..... that is, if the Feds actualy look like they are being serious about it....rather then paying lip service to the idea while waiting to retire so they can become industry lobbiests.

Posted by: cengel at April 27, 2006 10:49 AM

If you cant answer yes to either of the above two questions then you can't rely on supply/demand arguements alone to explain away current high prices. There is something else going on, and I have a pretty good idea what it is at least in part.

Yes, I can. Easily. Re-read what I said. Crude prices are high because of perceived supply risk. Just as they were in December of 1979. No American oil company has to do a single damn thing to make out well when the WORLD market for oil pushes crude prices up with ridiculous risk premiums. All they have to do is keep pumpin' and processin' and sellin' into the demand, and the money rolls right in! They don't need to fix prices right now. The time to look for price-fixing is when crude is cheap. That's when the oil companies' margins get really squeezed and they have some real incentive to start pimping up and padding prices and profits.

This part isn't rocket science. Just as low crude prices and low demand mean low profits (and thus incentive for cheating), high crude prices and high demand mean high profits and reduced incentive for cheating. World crude prices are driven by the buyers competing for available supply. No one has cut back supply, so the price increases are due strictly to demand.

Back in the '90s there were examples to be found of oil companies restricting supply to push up prices. Today they don't need to bother.

That's without even pointing out that gasoline demand is inelastic, so your percentage play is both pointless and meaningless.

Posted by: Tully at April 27, 2006 12:02 PM

Tully,

That doesn't explain the ability of oil companies to hold onto thier profit margins as prices soar.

Look your a bright guy, brighter then I am about economics.. I am sure. So this should be patently obvious to you. What happens when the cost to market for a staple product suddenly skyrockets? Consumer Price Consciousness also increases, right? You certainly aren't going to tell me that price consciousness over gas isn't high right now, right?

High Price Consciousness means that people are starting to base thier purchasing decisions based more on price then other factors. For staples where demand can be inelastic that translates not so much into a decision of whether or how much to buy (i.e. overall demand) but a decision of WHERE to buy. In other words, when prices are high you are much more likely to drive to the station a half-mile away because it has cheaper prices then you are to fill-up at the station on the corner because it's location is convenient.

In a a situation like that where you have a healthy level of competition what INEVITABLY happens is that one or more of the competitors will cut profit margins so they can reduce prices and attract a larger share of the market (becuase price has become the primary driver for purchasing decisions).... this forces other competitors to also reduce prices or start loosing market share. The fact that you have incredibly high price consciousness right now, but the oil companies are able to hold and even increase thier profit margins should tell you just one thing..... that there is an unhealthy lack of competition in the market and possibly COLUSION among the major players in order to keep proffits high. If there weren't you would have competitors sensing an opportunity to cut into thier counterparts market share by undercutting thier price..... it's MUCH easier for them to do that now when base oil prices are high then when they're cheap because not only is there greater awareness among consumers (i.e. people are paying more attention to how they are buying thier gas) but the oppourtunity exists to drop MARKUP and still maintain gross revenues (i.e. if you sell a product for $1.00 and have a 10% profit margin on it you are earning $.10 per unit sold..... if you are selling the same product for $2.00 you can drop your profit margin to 5% and STILL EARN $.10 per unit sold). The fact that no one is trying to take advantage of that is simply unnatural.

I suspect that part of the problem is not only that you have so few compititors but that the competitors also tend to own the entire product chain. Imagine if ADM owned not only the farms that produced grain, but the plants that processed it into flour, the bakeries that baked that flour into bread, the trucks that transported that bread to supermarkets and every single supermarket that sold that bread to consumers. You'd have a situation very similar to the one you have with energy companies and gas today..... and not so dissimilar to the old feudal system where serfs had to depend on thier lieges mills in order to grind grain that they produced from thier lieges field. Pretty good deal for the liege...not such a good deal for the serf.

Posted by: cengel at April 27, 2006 01:12 PM

Thanks for the numbers Tully. I don't see much chance of gas dropping below $2 any time soon, although I see crude is dropping some since last week.

I just wish Congress would get behind increasing fleet efficiency instead of bashing the oil companies. As a Democrat, I wish my party would have offered to back off on drilling restrictions in exchange for higher CAFE requirements. Even if it would have been turned down by the GOP (and it likely would have, or gutted in conference), it would have been a good compromise.

Posted by: tim at April 27, 2006 03:05 PM

Cengel, they hold their margins because they can, and if they fail to it actively weakens them against the competition. In the short run, supply is fixed and demand is inelastic. They will have a certain amount of product to sell, the market will pay them $X for it, and they WILL be able to sell all of it at the current market price at any given time. They have no reason to cut prices, because no one will (or really can) undercut them, and they can sell all they have at market.

There is no "price" competition in the oil markets. Crude's a homogenuous product, a commodity, and it sells for what it sells for, as determined by the clearing price of demand for available supply. Refined gasoline is the same. Rent-seeking sales behavior as you posit it occurs at the retail/consumer end--but the oil companies are wholesalers, not retailers. Your corner gas station can diddle for a penny or two to grab share from the guy across the street, but the oil companies have no reason to. NONE. Indeed, they have some very powerful incentives not to.

The lack of price competition shows how tough a business it is to get into, and emphasizes that it's an undifferentiated product. It's an oligopolic commodity because the conditions are such that it must be. You can't just mortgage your house, drill a well, and build a backyard refinery. You wanna compete with ExxonMobil? Go right ahead! The buy-in is about a half a TRILLION dollars. Over 70% of the world's oil business is owned by governments for a reason. The "private" players like ExxonMobile are the exception.

if you sell a product for $1.00 and have a 10% profit margin on it you are earning $.10 per unit sold..... if you are selling the same product for $2.00 you can drop your profit margin to 5% and STILL EARN $.10 per unit sold

Yeah, but why would they do that, when they can sell each and every unit they produce at the market price at any given time? It would be insane--and their shareholders would sue the bejeezus out of them, and win, making it a double loss. The only players who could do that would be the government-owned players, such as BP or Aramco or TotalFINA--and they have no reason to either. Certainly not for us, they don't. Their own taxpayers would protest more than a wee bit at subsidizing Americans.

You want a real shocker? A single barrel (55 gallons) of oil produces about 27 gallons of gasoline. If the only thing it produced was that gas, and if oil was at $75/bbl, what would be the cost of gasoline from the crude input alone? Let's figure it out....

$75/27 = $2.78/gallon. That's without adding in one dime for processing/refinery costs, transportation from field to refinery to station, or any profits at any stage of the game, etc. And it's a nickle more than I could pay right now on the corner.

But that barrel also produces other products (plastics, motor oil, etc.) out of the remaining contents, which in turn produce revenues that keep gasoline prices down and supply some profits, etc.

Posted by: Tully at April 27, 2006 04:21 PM

tim, Congress could get behind fleet efficiency, but there's still that little problem about us being a nominally free country. If I want to drive a Hummer (I don't) and pay $3/gallon, that's MY business.

Boosting CAFE standards sounds good to city dwellers. Get out into red-state America where pickup trucks are often a neccesity and not a "lifestyle choice," and try selling that. Don't forget to wear your Kevlar, and drive that up-armored Hummer....

Posted by: Tully at April 27, 2006 04:27 PM

We have alot of pickups in Iowa too. I own a 66 Chevy myself.

About the free country thing. I don't think driving is covered in the constitution or any of its amendments. The old saying is true, driving isn't a right; it's a privilege.

If the government wants to mandate conservation as a national security measure it can. Remember ration cards in WWII. It might not go over too well in Kansas (or Iowa), but neither will $5 gas or rationing.

You are correct that political risk is responsible for much of the current rise in prices and as you say the rise may be temporary, but it's quite possible rising world wide demand will continue to increase prices. And new political developments can continue to affect supply such as the recent announcement of Saudi Arabia cozying up to China for future oil business.

I think our government (which is us after all) should have a coherent energy policy going forward that includes mandated conservation. I mean, how is it different than trying to put social security on sounder footing by mandating personal savings accounts?

Posted by: tim at April 27, 2006 04:58 PM

Tully,

I'd buy that arguement if we had gas stations that were selling out of product and rationing like we did back in the 70's. Aside from a transitory distribution disruption due to Katrina I haven't seen a single station with a "No Gas" shingle out have you?

ExxonMobile has the same incentive to undercut ChevronTexaco that any competitor does.... it could be selling ChevronTexaco's product (and reaping the proffits) rather then ChevronTexaco. Are you saying that ExxonMobile has no way of obtaining any portion of the product/operations that ChevronTexaco is now selling? If that's truely the case, then it points to a problem I've already mention...namely having the same corporation act as producer, wholesaler and retailer (i.e. a Vertical Monopoly).

Look, if the situation is exactly as you say it is.... and the oil companies are producing exactly enough to sell all thier product and not a drop more... then what incentive do they have to invest in any technologies/processes that would boost yield in the short term? It sounds like it would only reduce the proffits they could get by creating a surplus and dropping thier proffits? A good situation for the oil companies....but a bad situation for the rest of us.... and one we shouldn't stand for.

Are you saying that no technologies exist that could boost production (or provide alternative fuels) in the short term? I believe that about as much as I believe that 1 Ghz processer speeds could never be exceeded. What about Fischer Tropsch? Was it you or Bob that mentioned it could produce oil at about $40-50 per gal.

Look I'm a big believer in capitalism... but capitalism only works well for society as a whole when there is healthy market competition. Oil is a staple for modern society. If the situation REALLY is as you describe it and there is no market competition among the oil companies then I say we just nationalize the bastards and be done with it. At the very least we would be saving the cost of multi-million dollar compensation packages for Executive screwups.... we could pay civil servant salaries to screw up with equal lack of efficiency.

Posted by: cengel at April 27, 2006 05:53 PM

You're speaking nonsense--shortages happen when you try to fix prices. The last time I saw an "Out Of Gas" sign was when Carter decided that he could fix prices--and we got the inevitable shortages. Predictable as sunrise. You'll see them for absolute certain if the government tries price-fixing this time. There's no reason at all to see them when market-pricing is in effect, other than the occasional "panic run" shortage. Gas is at the market-clearing price. If the price were too low, we'd see shortages and the price would rise some more. If the price were too high, we'd see surpluses and price-cutting would ensue until excess inventories were cleared.

You do understand how the free-market system works? Supply and demand? Market-price rationing? What happens when you increase demand by artificially holding prices below the market-clearing price? C'mon, this is first-semester basic econ.

ExxonMobile has the same incentive to undercut ChevronTexaco that any competitor does.... it could be selling ChevronTexaco's product (and reaping the profits) rather then ChevronTexaco... then what incentive do they have to invest in any technologies/processes that would boost yield in the short term?

No, it doesn't, and no, it can't. Exxon has the exact same incentive NOT to cut price as Chevron does. Am I speaking to a wall? Exxon can't sell more gasoline--they already sell all they produce, and they're running at max production capacity. As is Chevron. The only way they could possibly sell Chevron's product is to buy Chevron--and then they'd still sell at the market-clearing price, and overall national production capacity would not have increased. (And they'd still be sued if they got soft-hearted and cut prices below market price.)

That's the short run. Production capacity can be expanded in the long run by building more refineries and pumping (or buying) more crude. But we haven't built a new refinery in America since Gerry Ford was President, AND we've closed off all our major known untapped fields to production. The Gulf. The Cali and Florida coasts. ANWR. And more. Under those constraints, domestic production is pretty much close to max, which is why our dependence on foreign oil has risen. That's not the oil companies' fault--remember who insists on keeping those fields closed off and who's consistently stopped new refinery construction. Hint: It's not the oil companies.

And because we're so dependent on foreign oil, we are subject to world market prices for it. Gonna march into Russia and demand they cut prices? Right now those prices are high due to expanding world demand, and "risk premium" pricing because of Iran and Venezeula.

If the situation REALLY is as you describe it and there is no market competition among the oil companies then I say we just nationalize the bastards and be done with it.

And the US stock market would collapse, and a depression such as we haven't seen since the 1930's would descend. Maybe worse. Would that cheer you up? Nor would gasoline be cheaper, other than maybe by some of that 9% profit margin. That's assuming that the government could run the companies as efficiently as private industry. BIG assumption. That's if it passed muster with the Supremes.

The market "competition" in the oil chain is all with the owners of the oil fields, and all they can control is how much they produce. The market sets the price. Oil is fungible--nationalizing the US oil industry would still give us control of less than half our usage. Wouldn't knock down the cost of imported crude a dime, other than the effects of that depression on demand. Indeed, it would drive it up--producers would want their own "risk premium" to ship goods to a nation with a track record of confiscating their industry assets.

If the government wants to mandate conservation as a national security measure it can.

Yep, Tim. And after the next elections, the new party in power would have new ideas about rationing. It's a free country. Unless you're going to cancel elections and send in the troops?

Posted by: Tully at April 27, 2006 07:32 PM

To get back to the origins of thread....

What CAN they really do? tapping reserves is a short-sighted measure. What can be done about the real problem?? is there anything??

In the short run, not a damn thing but make noise and demogogue. In the long run, they can open up exploration in the "banned areas" like ANWR and the Gulf, encourage conservation and efficiency and alternate fuel studies, let the oil companies build more refineries to increase gasoline production capacity, and deploy more nuke plants, windfarms, and solar to pick up fixed capacity and provide energy for alt fuel production. Also (not easy at all) "lower the temperature" that drives that massive "risk premium" in the world market. Note that all of the above help do that to some degree.

Dumb idea (economically): Penalize monetarily the oil companies. Is there anyone here so dim they don't realize that any added costs will be passed on to the consumer?

Posted by: Tully at April 27, 2006 07:57 PM

No, Tully, see, those evil, money-grubbing greedy no-good oil companies, if you raise their taxes, they'll just happily cut their profits to pay them, rather than pass on the increased taxes to their consumers.

NOTE TO THE DENSE: If the oil companies are conspiring to profiteer as you allege, then they WILL pass on the extra taxes... the taxes will hit all companies equally, so they won't have any competitive pressures to absorb them; they'll just hike prices even MORE.

Posted by: PatHMV at April 27, 2006 09:26 PM

Sorry Tully, your arguement is logicaly inconsistant. You argue that prices are high because demand is high and oil companies are maxed out on production therefore they can sell every unit they produce as soon as they get it on market..... they have no surplus to sell off and no ability to increase production....hence no incentive to try to capture market share from any of thier competitors.

Well what happens when demand outsrtips supply and production capacity is maxxed? This isn't rocket science either.... inventories fall and distributers start to sell out of product... that's what. Certainly not all distributers all the time.... but you'd expect to see occaisional, short term instances where inventory levels at certain distribution points are at zero.

But that's not what we see happening is it? No... somehow the oil companies with production maxxed and no surplus inventory seem able to magicaly respond to fluctuation in demand across individual distrbuters and keep all thier distrbuters inventories filled all the time. Want to explain to me exactly how they are able to do that if demand is higher then supply, and they have no surplus production capacity and no surplus inventory?

Either there is no surplus capacity to sell more product...in which case we should be seeing transitory inventory shortages OR there IS capacity to sell more product.... in which case opportunity to grab market share (hence competition) SHOULD exist. You don't get to have it both ways.

"And the US stock market would collapse, and a depression such as we haven't seen since the 1930's would descend. Maybe worse."

Sorry, if I'm a little skeptical about buying "sky is falling" rhetoric designed to protect the oil companies profit margins.
The Sky didn't fall when we broke up Standard Oil, it didn't fall when we broke up Ma Bell and it won't fall if we shake up the current oil industry players.

Here is a political reality test for you Tully. You have a staple product that the populace of a nation is dependant on. The production and sale of that product is in the hands of a very few players. There is little market share competition among those players (your own contention). The price of that staple skyrockets. The profits of those few players also skyrocket.

Now what exactly do you think the reaction of the populace is gonna be if that situation persists for any length of time? I'll give you a hint...I'm conservative...and have been described by alot of people on this site as being near the right end extreme of the spectrum for this site....and I AM starting to give credence to the idea of nationalizing the bastards.... If I'M ready to do that what do you think the Lefties are doing? In other words there is ALOT of momentum among the populace to start taking political action against the oil companies ACROSS the POLITICAL SPECTRUM.

There are basicaly 2 options here. Either the oil companies find a way to drop prices.... or if they can't do that they drop profits so the populace knows that at least they aren't getting rich of of everyone elses suffering. If they don't do either of those things the populace WILL take thier business away from them. People are willing to see companies make healthy profits....but they AREN'T willing to let companies PROFITEER off of a capitive audiences suffering.... and that is exactly what the oil companies are doing.

It doesn't matter if they are holding the same Margins on the product as they have in the past.... thier NET PROFITS are WAY UP. If I have a 50% margin on a $1.00 product then I can buy a stick of gum. If I have a 50% margin on a $1,000,000 product then I can buy a house.... the public GET's that....and the oil company exec's better realize that the public gets that if they want to keep thier business.

"If the price were too low, we'd see shortages and the price would rise some more. If the price were too high, we'd see surpluses and price-cutting would ensue until excess inventories were cleared."

Except that staples don't work quite that way....and oil is pretty much a staple to modern nations. You need 3 oz's of salt a day to survive (hypotehtical...I don't know the actual numbers). If the price of salt rises from $10/OZ to $200/OZ overnight you are still going to be buying 3 OZ's of salt the next day.... you don't have a choice about it. If the price of salt drops from $10/OZ to $.01/OZ people aren't going to run out and start buying 300 oz's of salt a day.... much more then 3 oz's of salt a day isn't particulary usefull to a person.

Oil is pretty much the same way. People don't purchase it because they desire it...people purchase it because they require a certain amount to live thier daily lives.... they can't do with less and they have no particular desire for more.
Beyond a fairly modest range..... peoples daily consumption of oil doesn't vary with a fluctuation in price..... which is why you haven't seen demand fall through the floor with the current rise in prices....and why the oil companies have been able to reap such huge taxes.

........

"NOTE TO THE DENSE: If the oil companies are conspiring to profiteer as you allege, then they WILL pass on the extra taxes... the taxes will hit all companies equally, so they won't have any competitive pressures to absorb them; they'll just hike prices even MORE."

Pat, I'm not talking about raising taxes on them. I'm talking about letting them know they are going to be the subject of Anti-Trust action or Price Regulation or even Nationalization of thier industry... if they don't do something voluntairly to reign in profits or lower prices. You think even the HINT of THAT won't start getting them to scale back on thier record proffits a little bit?

Posted by: cengel at April 28, 2006 11:39 AM

Tully:

I said nothing about mandating rationing as a solution to the current problem. I mentioned rationing as something that was done in the past as an example of what government can do. I also made it pretty clear I think punishing the oil companies is unjustified, wrong headed and unlikely to solve supply and demand driven price increases.

I said nothing about calling out troops, cancelling elections or annulling the constitution. Our troops are pretty busy right now.

What I did advocate is a national energy policy that included increased conservation by raising CAFE standards along with increased domestic production and refining capacity. More supply, less demand = less price pressure. Seems workable to me. But I guess that's too radical for some who insist on the "right" to use as much oil as they want.

Apparently there are limits to a person's patriotism.

Posted by: tim at April 28, 2006 11:42 AM

Well what happens when demand outsrtips supply and production capacity is maxxed? This isn't rocket science either.... inventories fall and distributers start to sell out of product... that's what.

Dead wrong in a free-market system, and you just flunked Econ 101, Supply and Demand. What happens is the price rises until it reaches a new market-clearing equilibrium. If the product is one of somewhat inelastic demand (as gasoline is), then the increase in price will be disproportionate to the increase in demand. Gee, where have we seen that lately? Oh yeah--at the pumps!

Sorry, if I'm a little skeptical about buying "sky is falling" rhetoric designed to protect the oil companies profit margins.

It's not "designed" for anything, cengel. It's a statement of probability, and an accurate one. Your arguments are emotional ones, not empirical. If you nationalize the US-based oil companies, all you gain is an ownership change in US production, which is already maxed under current conditions. And the repercussions, both economic and political, would be large. If you break them up, you lose some economies of scope and scale, AND have a major negative effect on the stock markets world wide (but worse here). If you impose price-fixing, you get shortages, and those shortages get worse the farther out of line with market pricing the price-fixing gets. As Jimmy Carter so graphically proved.

And you and tim can both drop the ad hominem approach. I'm not an oil company shill, and I don't make this stuff up. Insulting my motives or patriotism will not change the facts. If you can't handle truth, enter a monastery. You can be pissed off at Big Oil all you like, but it still won't change the market fundamentals. Congress knows this--see above for what they can usefully do.

All of the realistic approaches for systemically and substantially lowering gasoline prices are long-term approaches. Period. Short-term approaches are counter-productive--the only one that would have a real net effect would be to drop the excise taxation levels. Which would have a short-term negative effect on government revenues, with ambiguous long-term effects on same.

There is no magic wand to wave more gasoline into existence tomorrow. The market price is determined by supply and demand. Screwing with the commercial producers (and remember, MOST of world crude and gasoline production and distribution is in the hands of foreign governments, not private companies) will not positively affect market fundamentals. To use another commodity analogy, beating up the farmer won't make more grain magically appear. Nor will it encourage additional future farming.

And to point out the Really Bloody Obvious, if current prices weren't market-clearing prices, we'd have a gas surplus, and you would indeed see competitive price-cutting by producers, at ALL stages of production and distribution.

Posted by: Tully at April 28, 2006 12:27 PM

"Dead wrong in a free-market system, and you just flunked Econ 101, Supply and Demand. What happens is the price rises until it reaches a new market-clearing equilibrium. "

----------

Again, doesn't work quite that way with staples. Increasing price doesn't increase supply.... it's supposed to decrease demand. I get that.... BUT with certain types of products demand is FIXED it can't be reduced beyond a certain amount. If a person requires 1 quart of water a day to live and you have a market of 10 people.... The demand for water is fixed at 10 qt's a day... it can't go less then 10 qt's a day no matter how high the price of water is raised unless some-one dies off, right? Thus if water production was maxed out at 10 qt's a day in that market you'd expect the distrbution point to have zero inventory of water at the end of every day right?

Oil is a product where, in the short term, it's very difficult to change consumption habits....and doing so often involves a lowering of the quality of life for individuals....are people really going to accept lowering thier standard of living in order to make oil industry exec's rich.

Furthermore, alot of the places you are advocating opening up for drilling are Public Lands right? In fact, don't the oil companies already produce on quite a few federaly owned areas? Public Lands are supposed to serve the public interest right? So why should we open up drilling rights on public lands to corporations that have amply demonstrated that they place thier own private interests ahead of the public.

Fine, I'll bite with expanded oil drilling on public lands...... but not to any PRIVATE CORPORATION. Why should I support an oil executive earning a 400 million dollar salary by drilling on lands that are held in trust for me and my neighbors and our children? We want to allow oil extraction on public lands ....lets mandate that such contracts can only be granted (or renewed for those that already exist) to non-profit corporations.... and if there aren't any lets create one. As long as there is the potential to at least break even on a product, you can bet that there will be some-one out there willing to do it.

Furthermore, no one is beating up on the oil companies right now....they are making a windfall. They'd still be making a windfall and still be in business if there were price regulations.....as long as the cost they were able to sell thier product at exceeded the cost to produce it.

But you are wary of regulations...fine. Lets just provide them with some competition. They can pump and produce on all the private resources they want.... they just can't use public ones.... those are reserved for organizations that actualy SERVE the public interest.... Oh and no more Federal research and exploration grants....and no more federal subsidies or tax breaks...and no more Federal resources devoted to protecting pipelines and distribution points.... they can pay for thier own security.

I'm happy to go the free market route.... but lets make it a REAL free market.... no more Government assistance of ANY kind to the oil companies. Again why should we devote public resources to organizations who clealry serve thier own interests far more then they do ours?

Posted by: cengel at April 28, 2006 04:06 PM

You've got that backwards, and you're wrong about "staples." Demand for gasoline is not fixed, merely inelastic. Your description of "fixed demand" is for a "flat" (horizontal) demand curve. But the curve remains downward-sloping, not horizontal or upward-sloping (and if you ever find one of the latter, notify me immediately and we'll split credit for locating the mythical Giffen Good). We can and do drive less when gas is more expensive. We can and do drive more when gas is cheap. Ask any RV owner! What's fixed in the short run is supply. What floats to allow the two to adjust is price. This results in a change in quantity demanded due to price changes, a shift along the demand curve.

[A note here--an increase in price does NOT "decrease demand." That would be a shift of the demand curve itself--which is also occuring, but as an increase, not a decrease. What a change in price does is change the quantity demanded. That doesn't change either the slope or position of the demand curve, but causes movement along the curve. Overall world demand is actually increasing as well, i.e., the curve is moving outward. Supply is not keeping pace. But that's another lecture, Econ 201.]

RE: rant on oil companies using public lands--No problem. Go right ahead. Whatever. They pay oil royalties now, and no doubt have diddled some sweet deals out of the pols over the decades. Be aware that increasing costs to industry still results in higher prices to consumers. One way or another, we pay the tab. Be aware that their leases are legally binding contracts. Be aware that government isn't all that good at running businesses efficiently, and that the capital investment to go into business for themselves is enormous. And be aware that "non-profits" have their own agency problems. BTW, many of those untapped reserves are technically in international waters, open to the first on scene. If we don't get off our butts, Cuba and China will be sucking off our reserves from two inches outside the boundaries in the Gulf of Mexico, laughing their asses off. We'll get all the enviro effects but without domestic-law safeguards and technology to prevent or ameliorate them, but we'll get none of the oil.

RE: Fat salaries for oil execs--PLEASE go right ahead, but be aware that's a problem across the board with ALL major corporations. We're just seeing extreme examples, and I agree they're despicable. The only avenues of approach are via the shareholders, or the government. Grotesque levels of executive compensation has long been a pet peeve of mine. Have at, best of luck, call if I can help.

But it has nothing to do with world oil market fundamentals, and no matter what we do, we'll still be subject to the world market fundamentals for oil and gasoline. Which means we're back to the items I noted above.

Posted by: Tully at April 28, 2006 05:32 PM

Tully,

I certainly can't match your command of the field. Prehaps you are right and I am wrong. I will simply end with this observation.

People posess an inate sense of what they consider "fair and reasonable". Whether this is based on logic or not doesn't matter...it simply exists... it's part of human nature.

In trade, people all posess a perception of what they consider a "fair price" for a given commodity. Essentialy the value that commodity has to them and what they are willing to trade to get it. This value may change radicaly from person to person but it exists for every person. In a free market, people will pay upto this amount for a given good ... and no more. If seller offers a good for higher then this price.... the buyer will decline and be unable to sell that good. This is what sets the market price for a given good or service right? The maximum price at which the target consumer considers the good a fair trade. It's why you'll pay more from a phtograph from a proffesional photograher then one from your uncle Bud, right?

There are certain goods that it becomes incredibly difficult or impossible for a buyer to do without (food, water, fuel to heat your home)..... and consumers will pay a price even beyond what they consider "fair and reasonable" to aquire them if they have no choice. This rarely happens for long because for most goods and services.... some other supplier, sensing an opportunity to gain market share, will enter the market and attempt to sell those goods at a price closer to what the buyer would consider "fair and reasonable" ....and buyers will flock to them which of course forces other producers to lower thier prices in response. I'm sure all this is very basic to you and you know it better then I do.

However, sometimes a situation exists where there are extremely high barriers to enter a market as a producer...or simply no way for an alternate source to arise to offer those goods. In such situations buyers have little choice but to continue to purchase the good at prices that are beyond "fair and reasonable"..... however buyers will feel extremely ill-used by the situation and will feel that they are being extorted....particulary if they see the seller growing extremely wealthy off of the arrangement. Such situations will not persist for long...because the buyers will eventualy take action to rectify the percieved injustice. If they can't easly take economic action (by finding an alternate supplier)... then they WILL take political action to deprive the seller of thier ability to proffit off such an arrangement... not can, not may but WILL. Yes, such a reaction may be an entirely emotional reaction....it doesn't matter it will happen...it's basic human nature.
Property Rights, even civilized society is based upon the notion of "fair and reasonable" treatment.... when a majority of society feels it is being subjected to unfair or unreasonable treatment by some source... if the treatment is painfull enough to it...it WILL take action against the percieved source of such treatment....whether such action is logical or not doesn't matter...it'll happen.

Right now the oil companies are treading on very perilous ground.... public sentiment is SEETHING against them. If this situation persists for long... the public WILL take action to strip those companies of thier ability to proffit from it's misfortune. It doesn't matter whether this action is entirely based on emotion rather then logic...it doesn't matter whether the action will ultimately prove beneficial or banefull to the public....it'll happen. Because people act as much with thier guts as with thier heads.

And you know what Tully, the way I'm feeling now.....I'd gladly pay $4/gallon just to make sure the greedy bastards who run the current oil companies never see a single dime more.

Posted by: cengel at April 28, 2006 06:38 PM

But cengel, your solution, government control, will result in MORE expensive oil and LESS availability. If government nationalizes the industry there is not SOME barrier to entry but 100% barrier to entry.

If you want more oil (the only way to reduce the price), you need to direct your emotions toward the Congress and the environmentalists who have refused to allow more oil exploration and the construction of new oil refineries.

If you let your emotions demand a fix which doesn't address the root cause of the problem, THEN THE PROBLEM WILL CONTINUE. It's called cutting off your nose to spite your face.

Posted by: PatHMV at April 28, 2006 07:28 PM

But hey, if you want to admit that complicated policy decisions should be made on the basis of emotion rather than facts, logic, and reason, go right ahead. You'll be a perfect pawn for pandering politicians.

Posted by: PatHMV at April 28, 2006 07:30 PM

There's a another angle to consider, though it's really a moot point right now and has been for a long time:

Perhaps if government had stopped subsidizing oil "for the common" and giving it special favors long ago, "the market" would have produced a better solution by now. Yes, it may have seemed noble all these years to give these firms that extra economic push but now, people are increasingly seeing the harm from it:

Subsidies and priviledge have masked a ticking geo-political time bomb with public money.

Perhaps food for thought on government intervention in "non-common area" commerce outside of public protection/saftey and trust-busting.

Posted by: John at April 28, 2006 07:51 PM

I'm not very good at economics, but I'm trying to learn and have questions.

Why is it that the oil companies have a fixed profit margin? What determines that margin? I grasp that if oil companies were to attempt to cut prices, the shareholders would sue them. But still.

Also, I assume we give these guys a fair degree of tax breaks. I'm understanding that the implication here is that were we to get rid of them, that would result in greater costs to the company which would then be passed on to the consumer. But why would it be passed to the consumer? If they can raise prices higher than they are now, why haven't they raised them? Wouldn't raising prices cause surpluses if they're charging above the equilibrium level (oh man, then there's inelasticity of demand -- this is too much for my small brain.)

If all tax breaks do is lessen the cost to the consumer, why don't we just give as many companies as possible a lot of tax breaks?

Is it just that the oil industry is special in that there's a huge barrier to entry and normal corporate welfare concerns don't apply?

And isn't there something we can do to either force or prod the companies into using their profits towards developing alternative technologies?

I understand that people generally look to scapegoats and that it is unfair to blame oil companies for factors out of their control, but again why must their margins be fixed (and why are they at the levels they are), and surely we can something to prod these guys to use all this dough for a better purpose?

For instance, I'm not sure it would be a bad idea if we taxed those profits and used those profits to help lower income people who need to drive. Like if you're on welfare, you get a discount at the gas station, or something like that.

But, I'm very much out of my domain of expertise. Heck, I didn't take a single econ course in college, so. . . .

Posted by: Adam at April 28, 2006 07:57 PM

Adam,

two comments:

If all tax breaks do is lessen the cost to the consumer, why don't we just give as many companies as possible a lot of tax breaks?

Well, that's the business end of the general anti-tax argument in a nutshell...for what it's worth.

Is it just that the oil industry is special in that there's a huge barrier to entry and normal corporate welfare concerns don't apply?

It's always corporate welfare. If it was deemed special, it was by shortsightedness. It'd rather have left them subsidy-free and forced them (and us) to adapt a long time ago.

Posted by: John at April 28, 2006 08:08 PM

Yeah, I guess also what I meant is why don't we take away those tax breaks now, or at least make those tax breaks dependent on developing alternative technology, or something like that.

I guess it just kind of surprises me that if (1)we take away their subsidies, the oil companies can in effect just say, (2) oh yeah, well, screw you, we'll just raise prices anyway.

It just seems that this is a good opportunity, since the public is thinking about it, to take some reasonable, and market-oriented, government action.

I fear that Pat will harangue me with free-market arguments, but what I'm really wondering is if a case can be made for government intervention here, and in what form. I'm not, at least at first, looking for a rebuttal of those interventions. I'm just wondering if there are any actions we can take that aren't merely just some sort of quasi-Marxist, doomed to fail, demagoguery.

Posted by: Adam at April 28, 2006 08:23 PM

Adam,

government invention, in this case, is masking a weakness in the market and now we're all paying for it...not just in gas prices but worldwide stability. Who'd give a rat's ass about 70% of the foreign news if oil wasn't an issue??

Mind you, most of what we see is NOT free markets. A free market would have left these oil companies to sink or swim and leave others to do it better or with some other fuel source. It's like, to say, if the government subsidized Coke (and shafted other drinks,, Coke would have maybe two flavors and there would be no pepsi. Just a simple example. Don't pick at it.

SHAME ON DC. SHAME!! their shortsighted "term to term" popularity contest has hurt our long term well being so they could keep us quiet and make us happy in the short run with super cheap fuel. But like a parent who keeps stuff his kid with candy everyday to keep him quiet and content, the accumulated problems will come later.

Don't get me wrong. Government can and should handle "the commons"...those things that shouldn't be left to market forces that are for everyone's benefit whether they like it or not like the Post Office and Defense. Then are they're murky areas that I'll leave for another post.

The best and least popular and perhaps temporarily catostrophic thing the GOV could do is remove all subsidies and favors and enforce CAFE standards and send gas and the economy into a crisis (we'll call it "WITHDRAWL"). Then I'd let private investors use their own "incentive" REAL INCENTIVE, to satisfy the market and we live happliy ever after...until the next things happens.

Posted by: John at April 28, 2006 08:47 PM

Yes, the government can allow more oil drilling in Alaska and off our coasts. And the government can allow construction of new gas refineries. That won't fix the immediate problem, but it will help long term.

To the extent government has caused part of the problem, it is only because it has subsidized sprawl with the construction of highways over the years, and because the portion of our defense budget devoted to helping guarantee stability in oil-rich areas of the world is not paid for with gasoline taxes. This artificially low price has encouraged the demand growth and failure to adopt even more conservation measures which play a large part of the current problem.

So we see that, to date, government intervention (providing incentives for gas consumption) has increased demand while at the same time reducing supply (prohibiting new wells and refineries).

Want to rant and rave and RAGE at the people responsible for high prices right now? Go yell at every Congress for the past 30 years. Well, them, and the Iranians and radical Islamists who are causing so much middle eastern turmoil right now.

But DO NOT further F*** things up by getting the government MORE involved in the process.

Posted by: PatHMV at April 28, 2006 10:32 PM

Geez Pat, I'm not ranting or raging at anyone. (Though maybe you were talking to John or addressing us collectively.) I don't doubt that the US has a long history of sketchy policies. Excuse my naivete, and I have a lot of it -- as I'm sure you noticed ;) but if bad government intervention has caused problems, couldn't we like have good, sensible government intervention. I mean -- at least theoretically, it could do some good.

I'm all for drilling where need be drilled, building new refineries, nuclear plants, etc. But what about providing incentives for alternative technology as well, taxes on gas guzzlers, and maybe some tax-cuts or something to help ease the pain for those most ill-suited to handle it -- at least temporarily? And all that good stuff Brian was talking about?

I didn't mean to be mean to you or anything, I just knew you would go all free-market on us ;) and that's an important perspective, but I was looking for some Tully-approved (i.e. economically sound) government interventionism, that's all.

It's probably just my youth talking, but I'm usually for a muscular two-handed (left and right) approach to things. Like pay teachers a lot more, but chunk the union, so we can attract good teachers. Not that I know much.

Posted by: Adam at April 29, 2006 02:17 AM

Adam, I was speaking of the other ranters and ragers who have been posting in this thread.

Your second paragraph has some possible interventions the government could take. They all take the form (except subsidies for low income people) undoing some of the bad incentives that have been in place for decades as I described. As I noted (way back up in that first post I made here) higher prices (or higher taxes on large-consumption vehicles) will help reduce demand for those gas guzzlers and increase demand for energy saving models. I would oppose subsidies or tax-cuts for the poor, because they are affected by economic pressures as well, and their behavior must also be influenced by market forces.

But please note that NONE of those economically sound possible government interventions will have the affect of reducing prices right now, and none of the pandering politicians are proposing them, and the public will be really ticked off at you if you propose doing anything to actually raise the price of gas right now.

Posted by: PatHMV at April 29, 2006 10:20 AM

Why is it that the oil companies have a fixed profit margin?

They don't. In lean times (for them, not us) they make much less money, and their margins get squeezed down tight. We don't complain then, do we? In good times (for them, not us) they make more money and their margins grow a bit. They're in a business where our pain is their profit. And vice versa.

Executive compensation issues and corporate governance problems are not exactly unique to Big Oil. I've been whining about them for years. That's a systemic corporate problem--to attack it, we have to take on a big chunk of the corporate world. I personally think that an extra tax tier for the overly-well-paid is a fair idea. As is not allowing salaries over a certain level to be deductible expenses for reasons of corporate taxes. That would force the compensation issue back on the shareholders. If they want to cut their AFTER-tax profits to overfeed their execs, fine.

Posted by: Tully at April 29, 2006 01:02 PM

"And you and tim can both drop the ad hominem approach."

Hey, don't lump me in there. I asked a few questions and voiced my opinion about what I think is a reasonable compromise that would increase supply and reduce demand, or at least slow the growth of demand. Raising CAFE standards is a long term solution as it takes 10-15 years for the nation's auto fleet to turn over.

But what I got as a response was I'm some sort of a threat to the republic for suggesting such a thing as raising CAFE standards IN ADDITION TO ALLOWING INCREASED PRODUCTION. If anybody should be insulted it's me.

What Tully and Pat both apparently feel is the only solution is to increase supply. Tully mentions encouraging conservation in passing without any particulars and based on his response to my idea, whatever conservation is done should be voluntary. I have serious doubts that will do much.

So we can let the market forces work, and if gasoline goes to $5/gallon more people will buy efficient cars. In the mean time, lots of people take a hit in the wallet and the economy potentially suffers. We can raise the gas tax by a buck or two to create the same scenario, but all that does is hit the people in the wallet and harm the economy.

But if we look forward a decade to a fleet that gets 50% better mileage than it does now, we don't harm car buyers, because they were going to buy a car at some point anyway, or the economy.

If you guys think that's a radical idea, then you aren't centrists, at least when it comes to this topic.

Posted by: tim at April 29, 2006 03:20 PM

I understand tim's complaints as I understand the other point of view.

The bottomline though with these opposing points of view is that any real progress will take time and no solution is going to solve anything in the short run.

increasing supply will take time.
decreasing demand (for real) will take time.

My dispassionate point of view is one of removing the conditions that distort and manipulate the energy market thereby prolonging the viability of petroleum under realsitic conditions. Doing so will forces market-movers to get off their arses and produce the solution.

Even at $3 per gallon, we're still somewhat complacent. Neccessity is the mother of invention, or in this case A BETTER WAY.

Innovation has brought us so much in others areas since the dawn of gasoline engines. Yet, gasoline engines have evolved very little. We let this happen by shielding its market weaknesses.

We must pull back the covers and let permanent real change take place.

Posted by: John at April 29, 2006 04:03 PM

But if we look forward a decade to a fleet that gets 50% better mileage than it does now, we don't harm car buyers, because they were going to buy a car at some point anyway, or the economy.

First off, I never spoke for or against CAFE standards. In checking the stats, I did learn that average U.S. fleet fuel economy improved to CAFE standards pretty rapidly after they were imposed. So for passenger cars, they seem to have succeeded. BUT two caveats apply.

The first caveat is that buyers may indeed be hurt. Car makers must make design trade-offs to achieve that fuel economy. Weight must be saved, power must be reduced, etc. If cars could be made more fuel efficient for no real cost, don't you think carmakers would have done so long before now? They're not owned by oil companies, after all. With higher CAFE standards, companies may be forced to produce smaller, lighter cars which don't accelerate very well because they only have a 4-cylinder engine. And generally speaking, smaller, lighter cars are more dangerous to the occupant than larger cars. Would you feel safer being hit by an SUV when you were driving a Hyundai or a Cadillac? And the more efficient cars may cost more, too.

The second caveat is that, as government plans INEVITABLY do, loopholes in the old CAFE standards encourgaed the development of the gas-guzzling SUVs, because they allowed lower mileage for "light trucks". Again, government regulation, well-intentioned as it was, distorted the market in an unintended and largely unforeseen manner. Still and all, the CAFE standards were generally beneficial. And as something of an indirect tax, they serve to help eliminate some of the tax subsidies which encourage gasoline consumption (a problem which I noted much earlier in this thread).

As I said at the beginning, however, expensive gasoline, if sustained, will accomplish all of these conservation goals all by itself. But NO politician right now to do anything at all. All the politicians, in both parties, are massively pandering to the public who has been hit by the high gas prices. And they are, generally, proposing solutions which would cause significant damage to the oil and gas market in the long run.

By the by, it will take BOTH increased production AND improved efficiency in order to keep oil and gasoline reasonably priced as our population and our economy grow in the future. So I'll give you your heightened CAFE standards if you'll give me ANWR and the outer continental shelf.

Posted by: PatHMV at April 29, 2006 11:59 PM

Apparently there are limits to a person's patriotism.

Sneer at my patriotism in person, tim, and you can find out exactly how ad hominem I consider it.

You offered commentary on rationing as mandated conservation, and various other forms of governmental interference in the market. Note the word "mandated," which applied to everything you offered. The market is us. By all means, please explain to us how forcing people to act against their will or restricting their freedom to make their own decisions is "patriotic" in a free nation, and objecting to it "unpatriotic."

If the government wants to mandate conservation as a national security measure it can. Remember ration cards in WWII.

I give mandated conservation short shrift because market interference always results in higher costs or shortages to consumers, or both, one way or another. Always. Short-term "mandated conservation" is rationing, whatever label one might care to apply to it. Price-fixing below market price is rationing through shortages, as Carter found out. If you leave the market alone, rationing occurs through price shifts balancing production and consumption. There is always rationing of goods, the question is how, natural or government-forced.

BTW, CAFE standards were amended last month for the purpose of forcing SUV's and light trucks to get better mileage. CBO estimates that those changes will add about $228 to average vehicle cost of ALL new cars, with annual costs of $3.6 billion to consumers. While also increasing traffic congestion and miles driven and traffic accidents, with accompanying increased mortality. They also may result in automakers making bigger vehicles, as the compliance formula for individual models is based on vehicle "footprint."

The current estimate of highway mortality due to existing CAFE standards is 3,000 extra highway deaths a year. No solid estimates yet on how much the new standards will boost that. But interference in the market always carries costs, both monetary and/or "other." The Law of Unintended Consequences never sleeps.

You want cheaper gas? Boost supply by increasing domestic production and refining capacities. Democrats have blocked all attempts to seriously expand domestic production and refining capacity for three decades. They continue to do so, while complaining about the high cost of gasoline.

You want fuel alternatives? As they become cost-competitive, you'll get 'em. With or without governmental action.

Posted by: Tully at April 30, 2006 12:42 PM

Tully,

You want fuel alternatives? As they become cost-competitive, you'll get 'em. With or without governmental action.

I think, as I've repeated, that alternatives would come faster if DC didn't subsidize the oil industry...though I may result in more short term pain.

Drilling ANWR would take years to affect the energy market. Besides, I would expect that any passing legislation to allow drilling would be laden with perks and unfair monetary favoritism for these companies resulting in more deviation from "market based outcomes". Dispassionately cutting all this "strategic" aid to oil companies would empower those coming up with alternatives and precipitate the best long term result...though it would surly cost some pols their jobs in the mean time as public backlash and fihnger-pointing would come in the form people reasoning the further temporary jump in gas prices as the fault of the president...regardless of which party pushed for the subsidies.

Do you agree?

Posted by: John at April 30, 2006 03:41 PM

I think, as I've repeated, that alternatives would come faster if DC didn't subsidize the oil industry...though I may result in more short term pain.

Sure. Raising the gas tax 500% would have the same effect. Remember that it's an election year, and remember how much the voters love higher taxes and higher gas prices. Fact: All increases to production costs will be passed along to consumers. As alternative fuels become cost-competitive, you'll get 'em. With or without governmental action.

Drilling ANWR would take years to affect the energy market.

So will absolutely any other "solution" to gas prices. Congress has spent thirty years choking off supply and processing to get us to this point*--it won't be fixed overnight. There is no silver bullet. ANWR's just the most visible piece of it--the ANWR reserves are not as great as the east Gulf or the West Coast fields.

DIGRESSION: Even if increased efficiency such as higher CAFE standards reduces fuel demand (instead of just effectively increasing supply, allowing us to drive more miles) there are other effects. For example, some states are so worried that better fuel efficiency will lower actual demand that they now want to start taxing mileage instead of fuel. Oregon has even proposed putting GPS units in vehicles to track your mileage, so they can tax you for it. Privacy advocates (rightly, IMHO) object to such Big Brotherism.

Besides....Do you agree?

Not necessarily. You're essentially arguing that we should artificially increase gas prices to speed up alternative-source development, and that you feel we need to do so because gas prices are high. No?

The rest is political, and requires political approaches. You don't like Big Oil. I don't either. But I don't want to screw the public just to punish Big Oil--and Big Oil would just pass added costs onto you and I. Seems a wee bit counter-productive.

Figure out how to screw Big Oil without punishing the consumer, I'm with you. Maybe we can use the same tactics to punish Big Pharma, Big Insurance, Big Retail, MicroSatan, etc. But as much as I despise Big Corporate in general, it plays a crucial role in sustaining our nation. They got big by supplying us with what we want better and cheaper than their competition did. Our wants are not going away.

For extra fun, there's the possibility that oil is not a fossil fuel after all, or at least not exclusively, and that it's naturally replenished. I don't know enough to have an opinion about the related science there, I just throw it in for argument's sake.

[*--The "up" side to that being that we also have thirty years of technological improvements in drilling and transporting and processing in a much more enviro-friendly fashion. And thirty years of efficiency and alt-fuel research.]

Posted by: Tully at April 30, 2006 06:30 PM

tully,

You're essentially arguing that we should artificially increase gas prices to speed up alternative-source development, and that you feel we need to do so because gas prices are high. No?

Quite the contrary. I'm asserting that for as long as the government has been subsidizing Big Oil (among other "Big's"), they've been keeping oil prices articicially low...as has OPEC when they decided to decrease production back in the 70's til the Saudi's bucked the policy in the 80's.

My assertion is a total free market based assertion that these subsidies over all these years have empowered oil for the status quo at the expense of all other innovation...be it alternative fuel or fuel efficiency.

Posted by: John at April 30, 2006 06:43 PM

OK! I'll re-phrase. You're essentially arguing that we should naturally increase gas prices (by eliminating subsidies to domestic oil production and allowing prices to adjust) to speed up alternative-source development, and that you feel we need to do so because gas prices are high. No?

But it still won't do the consumer any good. All costs still go to the consumer, whether they're taken by the oil companies or the government in taxes. You're admittedly arguing for higher gas prices. As I said, that seems a wee bit counter-productive--unless your agenda is something other than affordable energy. (An oil company exec would argue that subsidies offset the artificial barriers and penalties Congress has thrown in their face--and with some justification.)

And it won't do a damn thing to reduce our dependence on foreign oil. By reducing incentive to produce domestically, it would have the opposite effect in the short to- medium term. In the long run, the results would be mixed.

I know, I know--you're going to argue that we need the alt-fuel development for this reason or that. Fine. But that's a completely political argument, not an economic one. If you're going to diddle with markets, do it directly. Trying to do it indirectly leads to greater unintended consequences. If you want to boost spending on alt-fuel development, argue it directly.

Unless you can drag up some impressive numbers for a real assessment of that, I think it's a pretty weak argument. OPEC breaking wind has a thousand times the price effect that any domestic sweetheart lease or tax break could.

Posted by: Tully at April 30, 2006 07:37 PM

PatHMV,

No essentialy, I want to reduce the amount of oligarchical control the oil companies currently have over the American consumer (and the economy in general). What that does to actual prices at the pump is of secondary concern to me.

Basicaly the oil companies have us over a barrel right now. It's kinda like you purchased an airline ticket and half-way through the flight the airline tripled your ticket fee.... doesn't leave you much choice but to pay, you can't realisticly get off the plane in mid-flight. The typical solution for a consumer in a free market when a good is over-priced is to refuse to purchase the good (or purchase less of it or purchase an alternative) thus forcing the seller to lower thier price. We've been made so dependent on cheap oil right now that is not really an option in the short term..... in the long term we could certainly do that (and hopefully we will).... but in the short term they've got us by the shorts and they know it.

In this situation the only stick we consumers have is the threat of government regulation and it's a pretty potent stick. If Big Oil knows that if it keeps posting runaway proffits, the public is going to get P.O.'d enough that they start demanding government price-regulation/Anti-trust/Nationalization it's a pretty strong incentive for them to keep thier proffiteering in check.... it's pretty much the only incentive that exists right now since we can't change demand that much in the short term.

I'm in favor of using that stick if we need to prod them a bit (running at 8% proffit instead on 10 is ALOT better then being put out of business entirely). You and Tully seem to be in favor of unilateraly disarming us... I'm not. It's that simple.

.......

"But hey, if you want to admit that complicated policy decisions should be made on the basis of emotion rather than facts, logic, and reason, go right ahead. You'll be a perfect pawn for pandering politicians."

It's not a question of SHOULD....it's a question of DOES. Ignoring basic human nature is not a good recipe for understanding politics. That is the same problem that Communism has.... in theory it should work brilliantly.... except that in practice it entirely ignores human nature.

The simple fact of the matter is that if prices continue to be high and Oil Companies continue to post record proffits then the public WILL get p.o.'d enough that they start to DEMAND government interference.... and the Pol's WILL respond to that pressure if they see the opportunity pander. It's basic human nature.... and I'm entirely happy with that because I have next to ZERO sympathy for proffit hungry Oil Execs. If fear of government interference is an effective stick to use to keep thier gluttony in check then I'll happily accept it....even if you guys don't think it's the proper stick.

Posted by: cengel at May 1, 2006 11:04 AM

Pat:

Thank you for agreeing demand isn't the only part of the equation. I'm not a big proponent of off shore drilling, but I will acknowledge oil companies are much more willing now to take precautions and bring environmental groups on board at the beginning, so I could live with it if we also get a more efficient fleet.

Tully:

I think you better scroll up a little to see who started this little spat:

"tim, Congress could get behind fleet efficiency, but there's still that little problem about us being a nominally free country. If I want to drive a Hummer (I don't) and pay $3/gallon, that's MY business.

So, I'm supposed to keep my mouth shut in Kansas or make sure I'm wearing armor? And I'm supposed to not be offended by that? Try that in person in Iowa and you won't get very far either.

And the views of red state pickup drivers are supposed to prevail over the views of coastal dwellers who don't want an oil slick on their beaches? I proposed something that gives a little to give a little, which usually is the only way things get done.

You insulted me directly as a response to my view. My patriotism comment was meant to those who share the view you gave as an example. If the shoe fits, fine; if not, I'll quote one of your favorite sayings: "your mileage may vary".

I'll also quote this from an article in yesterday's DM Register about a guy who's building a big ethanol plant, and I want to stress the article is only about increasing supply, so he may share your view on CAFE standards and not mine, but he made a comment I think a lot of people would agree with:

http://desmoinesregister.com/apps/pbcs.dll/article?AID=/20060430/BUSINESS01/604300345/1029/archive

"He sees a connection between founding an ethanol plant and being the father of two sons, 19 and 21 years old, whose peers are fighting and dying in the Middle East.

"By making domestically produced ethanol in plants like Lincolnway, Couser said, the United States can lessen its dependence on foreign oil and help prevent young people from being sent to war."

Whether or not he agrees with me on CAFE standards, he understands the deeper problem. Does the guy in the Hummer?

Posted by: tim at May 1, 2006 11:06 AM

One other thing:

I understand CAFE standards create unintended consequences. But in general they have been helpful.

Relying solely on market forces to manage our resources, in my opinion also can have unintended consequences. War is one. Massive amounts of pollution is another. Social unrest and economic disruption are others.

Recently I read the book "Collapse" by Jared Diamond. One of the striking themes in the book is the observation that some societies recognize the need to control their use of resources and thrive for centuries, while other societies were never able to make that adaptation, and died out. Fixating only on supply is in my view, a failure to adapt.

Diamond, by the way, is "cautiously optimistic" on our future. But he also advocated instituting demand controls.

Posted by: tim at May 1, 2006 11:43 AM

Cengel, how, exactly, do you believe the "oligarchical" oil companies got the price of oil to go up so high right now? How much would the price of a gallon of gas be reduced if the oil companies only made what you consider to be a fair profit? And what would you consider a fair profit to be? For that matter, how much would the price of a gallon of gas be reduced if the oil companies made ZERO profit?

I agree that politics must take into account human emotion and must respond to it. But sometimes that involves telling the screaming mobs that they are wrong... and if you start doing this EARLY (such as Tully and I are attempting in our own small way here), then that can, sometimes, keep the raving mob from doing something really stupid which will hurt them a WHOLE LOT in the long run.

Posted by: PatHMV at May 1, 2006 11:58 AM

And the views of red state pickup drivers are supposed to prevail over the views of coastal dwellers who don't want an oil slick on their beaches? I proposed something that gives a little to give a little, which usually is the only way things get done.

This is one of the stupidest things I've heard in this thread yet, and offensive (to us nasty redstaters) to boot.

As Tully pointed out, many people in rural areas (generally redstaters, even when living in places like California) use pick-up trucks for actual work, because they regularly have to haul stuff to and from farms, factories, etc. As opposed to the bluestaters driving Humvees because they are "hip" and "cool". Shall we start a list of Hollywood celebrities professing to love the environment as they toodle around in a Hummer with no cargo at all? Done any state-by-state comparisons of purchases of light trucks?

If the precious people of California don't want oil drilled on the outercontinental shelf (which is, by the by, not part

Centerfield

A Weblog of Centrist Voices in American Politics

April 24, 2006

Congress to start debating Oil Industry again. Where can this really go?