Gas, Hot Air, But No Ignition

The NY Times reports on the bipartisan mockery of the Republican fuel-air bomb plan to provide $100 rebates to voters annoyed by high gasoline prices.

Captain Ed delivers so vigorous a thumping of the proposal that I have shamelessly ripped off his title.

I continue to be intrigued by the problem identified in this passage:

Democrats were pushing for a 60-day suspension of the federal gas tax of 18.4 cents a gallon, and the Senate Republican leadership settled on the rebate.

Those leaders and Finance Committee aides said many Republicans opposed the Democratic plan because they feared that oil companies, which pay the gas tax, would not pass savings on to the public, or that the laws of supply and demand would push the price up again.

I noted that problem in this post, where I did a miserable job of distinguishing between short and long term equilibria.

My current position on cutting the tax at the pump is this - IF the tax cut arrives with sufficient advance warning, it will call forth new supply, resulting in lower prices.  Why? 
Let's suppose consumers have been paying $3.00 per gallon, including 18.4 cents in Federal taxes.

Eliminating the federal tax does not, in itself, change consumer demand at the current level of supply; consequently, retailers "ought" to be able to continue to sell available supplies at $3.00 per gallon and simply pocket the excess.

However, that is presumably a highly profitable situation that will prompt a response by retailers and suppliers - retailers should bid up what they are willing to pay to suppliers, who should then cast about for more gasoline.  Eventually (and I don't know the lead times here), refiners should adjust their output mix in favor of gasoline and away from heating oil, kerosene, etc.  Diligent entrepeneurs may even move gasoline from Canada, Mexico and Europe to the United States.

I don't know whether these adjustments could occur in the time frame in question (which I assume is roughly Fourth of July to Labor Day).  But after all adjustments have occurred, I would expect more gasoline to be available in the US at a lower price.  Why that makes any sense at all in term of promoting energy conservation, I can not say.  However, I suspect Congressman of both parties may find it an appealing way to conserve their own seats.

Comments

[noah]

There was a nice chart last week giving average retail gas prices in certain european countries (and the US) accompanied by taxes per gallon. If you subtract away the taxes, the price per gallon was pretty close from one country to another.

Sure if the US does away with taxes, there will be more supply because there will be more demand!! Supply (amount sold) is by definition equal to Demand (amount bought)!

[noah]

The chart was at Opinionjournal.com.

[Appalled Moderate]

I guess letting the free market work is not an option to our politicians? Sheez. Until the law of unintended consequences is repealed, there is no way to predict how this will all work out, except that the results will not be what the politicians want.

The Dem proposal wouldn't seem to work that well, as I don't think refinery capacity is as flexible as you are assuming.

[noah]

Actually referring to that chart again...the average price (less taxes)in europe was a bit lower than the US which would seem to run counter to your thesis (all other things being equal which of course they rarely are).

[noah]

Didn't watch MTP yesterday but quoting second-hand here (and by memory from KJL@NRO):

Russert: So we have rising demand and falling supply. Explain the rising prices?

So we have yet another bubble-head that don't know beans about economics!

Trivia question: At what famous university can you actually take a course entitled Economics 101?

[cathyf]

Remember, though, that demand for gasoline is quite inelastic (Price Elasticity of Demand). This means that relatively small boosts in gasoline supply will drive the price down sharply.

Let's do a calculation. I'll indulge in round numbers because I'm lazy. :-) Suppose the price of gasoline is $3.00 at the pump, and that $0.30 in taxes are eliminated. If the elasticity of demand is 0.2 (as the chart in the article specifies), then what would the increase in supply need to be for consumers to capture the entire thirty cents? (i.e. for the retail price to go down to $2.70)

0.2 = X%/10%
X = 0.2/10 = 2

In other words, a 2% increase in supply would allow consumers to capture all of the tax decrease for themselves. (Don't cry for the oil companies, though, since their sales go up 2% for exactly the same profit margin, they would see a 2% increase in profit under this scenario.) A 1% increase in supply gets them half of the 30 cents.

Eventually (and I don't know the lead times here), refiners should adjust their output mix in favor of gasoline and away from heating oil, kerosene, etc. Diligent entrepeneurs may even move gasoline from Canada, Mexico and Europe to the United States.

Given that we are only talking a 2% change in supply here, I think that the lead times are not that big a deal.

(Ah, a posting which contains algebra. My day is now complete. :-)

cathy :-)

[AB]

If we're going to have a free market let's have a FREE market - not one in which oil companies are given tax "incentives" or where they're permitted to bankroll friendly politicians.

The high price is a necessity, seems to me, if we are ever going to see that free markets actually do respond to human needs. People won't conserve gas unless they're forced to and no one will invest in alternative energy sources until the potential profits make it attractive. In the end these high prices are the best motivation we've got to get us off the oil pipe.

I don't know why the conservative politicians don't just come out and explain to the citizens that in a capitalist paradise like ours, we only need to wait for the free markets to exhibit their infallible perfection. It's almost like they don't even have any faith in their one true religion. Or that they're ashamed to be open about it.

[Tom Maguire]

The Dem proposal wouldn't seem to work that well, as I don't think refinery capacity is as flexible as you are assuming.

I have no idea what I am assuming. I know there is a seasonal cycle to refinery output - at one point, heating oil is emphasized in anticiaption of winter, and at another they switch to emphasizing gasoline for the summer driving season.

But - for all I know, they pretty much max out on gasoline production in the summer, and can't make more even if it is more profitable to do so.

That would depend on the physical laws, in conjunction with than economic ones - the chemistry of squeezing a bit more gasoline and a bit less heating oil may, at some point, involve a huge increase in the marginal cost.

Or, it may be a pretty smooth sliding scale, in which case they will just shift a bit to gas since (following the tax cut) it is more profitable.

Perhaps the same is storage as well.

Until the law of unintended consequences is repealed, there is no way to predict how this will all work out

Hillary is working on the appropriate legislation.

[noah]

Actually it was John Derbyshire quoting Russert:

Russert, challenging Energy Secretary Sam Bodman: "Oil demand is up. Supply is down. So why are prices rising?" (exact second-hand quote!!)

[JohnH]

Cathy
There is nothing wrong with your algebra, but the 2% increase in supply that you are hoping for is very unlikely to occur, due to the structure of the oil market. The only way that consumers would capture all of the reduction of taxes in your example is if the price to demanders falls by the entire amount of the tax reduction. This will only occur if the supply curve is flat, i.e. perfectly elastic. Draw a demand-supply scissors diagram with two supply curves--one including the tax and one excluding it. Then it is clear that the market price does not fall by the entire amount of the tax reduction unless the supply curve is perfectly flat.
We know that the supply of gasoline and of crude oil is far from perfectly elastic. In fact it is quite inelastic, so that the market price will not fall by anything like the amount of the tax. If producers could expand by 2% (almost two million barrels per day worldwide) they would certainly do so.
You can do this problem with algebra, but it is more complicated than just using a demand- supply diagram to answer the question.
If you use a constant elasticity assumption such as demand elasticity at -0.2 and supply elasticity at 0.3, then you have to use exponential supply and demand curves like this:

Qd = aP^-0.2
Qs = bP^0.3

Solving this for a Price of $3 per gallon and a change in supply price equal to the federal tax will tell you how much price will fall and supply will rise.

[AB]

And what explains the windfall profits of the oil companies? After all, if this was only a reflection of $75 barrel oil, there'd be no explanation for them to be raking it in as they are.

Bush has been a good little conservative and rejected windfall profits tax out of hand, saying he wants these wonderful humanitarian corporations to re-invest their own profits in future sources of energy. Since I've got all the free market experts here, can someone point me to the philosophy point that explains where an interest in the common good can also be created through the magic of unimpeded capitalism?

[cathyf]

And what explains the windfall profits of the oil companies?

Well, if you really think that there are "windfall profits" (whatever that means) for the oil companies, and you think it's good for the oil companies, why don't you go into the business and pick up some of those profits? Even if you have no useful skills and are too stupid to learn any when it comes to the engineering and scientific disciplines of getting oil out of the ground and to consumers, you can have a piece of the action by buying call options and/or selling put options on crude oil and/or gasoline at the NYMEX.

In other words, if you think it's so easy, let's see you do it...

cathy :-)

[Greg F]

Since I've got all the free market experts here, can someone point me to the philosophy point that explains where an interest in the common good can also be created through the magic of unimpeded capitalism?

You are able to post messages here with an object (your computer) "created through the magic of unimpeded capitalism" that has resulted in the "common good". Unless of course you don't consider the low cost and availability of computers is a "common good".

[Greg F]

And what explains the windfall profits of the oil companies?

Please explain the governments windfall and why it should be increased with another tax.

[cathyf]

JohnH, I agree that it's more complicated, but my real point about the extreme inelasticity of short-term demand is that one way or another, what we perceive as "big" moves in price are not very big when you look at the effects they have on everything else.

And there are questions of locality (lots of taxes are local) and predatory behavior of one government against another that make things really interesting. For example, if one county cuts their sales tax by 50%, and gets people from all of the surrounding counties to drive in to fill up, then it's not unreasonable to expect the prices to fall by the entire amount of the tax cut. The elasticity of supply is close enough to infinite -- the tax-cutting county just gets all of the extra supplies from the trucks diverted from neighboring counties. Everybody in the tax-cutting county wins -- 1) if the amount of gasoline sold more than doubles, then the government ends up with more revenue, 2) if the profit margin stays the same for sellers, they get more profits on the higher volumes, 3) consumers get more gas at lower proces. The losers are all in the neighboring counties -- and as everybody knows, they don't vote in the tax-cutting county, so no politician in the tax-cutting county cares about their problems.

cathy :-)

[AB]

See, I'm asking perfectly rational questions and all you can give me is more defensiveness. I don't need silly charts and number twisting. I KNOW my government is massively in debt. I KNOW the oil companies are experiencing record profits. Don't twist and insult. Just for once.

Explain to me - a representative of your average American taxpaying gasoline consumer - why the laws of supply and demand have allowed oil companies to be so profitable while the consumers on whom the economy depends are suffering. Don't insult me by telling me to buy stock when I can't afford to pay the bills I already have.Just use your superior knowledge to explain it to me.

And, while I agree that capitalism often DOES create products that better the common good (as per computers), it is also true that we have known for over a generation that we needed to shift our society to a non fossil fuel basis. Far from evolving us towards that inevitable restructuring, the oil companies - and their political envoys - have worked hard, with lots of corporate welfare, to PREVENT us from moving in that direction. Conservatives didn't even want fuel efficiency standards on cars. You want a form of capitalism where there is no regulation, but LOTS of "incentives". Please explain, without insult if that's possible, what a society can do in this situation, fronm a capitalist standpoint. The middle class is tapped out and the investor class is only interested in short term profit. What's the hopeful answer here?

[Greg F]

Profits vs. other industries and breakdown of who gets what from your gas dollar.

The Boutique fuels. Think economy of scale.

The government pointing their finger at the other guy to distract attention from it's part.

[AB]

Gee, that article never mentions the $35 billion in incentives to the oil companies. Why is that?

There's simply no intellectual honesty in most of these discussions. No politician will say that the high prices are a good thing, because they will stimulate the needed energy research. And no conservative uber-capitalist will ever admit the limitations of "free markets".

Yes, the ethanol part of the bill might have been a sop to the farm industry. And why not? Is it only the most powerful industries that deserve the corporate socialism? We need to develop ethanol and biodiesel fuels, not only to power our technology, but to develop a new industry in those blighted parts of the country that used to depend on agriculture.

The number games may make you feel validated, Greg, but they mean absolutely NOTHING to average people. Capitalism isn't a religion and it isn't in our Constitution. We have every right to adjust and redefine its parameters to meet the needs of PEOPLE...as has been done, especially recently, for the benefit of corporations.

[Appalled Moderate]

TM:

Based on your summary, lower gas prices today mean higher fuel oil charges in December. It also would be robbing New York City (fuel oil) for the benefit of Atlanta (suvs and long commutes). As a Georgian, I thank you, but as a baseball fan, I would settle for the return of Tom Glavine.

As a timing issue, well, the pain would happen AFTER the election. Somehow, that unintentional consequence would seem very intentional around the time heating oil bills came around.

[maryrose]

Drive less, get a smaller, start riding your bike. Boycott those stations whose prices are always a little higher than the rest. Then prices will come down. We had a mild winter so let's use money for heating oil to give everyone a rebate, kind of like a tax cut. Free money from the government is always welcome especially since we just paid Hem in April.

[maryrose]

should be smaller car.

[AB]

So bribing voters with free money is ok in the free market system, but applying a windfall profit tax towards development of new industries is a sacrilege? Even if those industries would employ US CITIZENS (imagine that!), revitalize local areas that are floundering and get us on the path to cleaner energy that would FREE us forever from the need for oil wars?

I heard an investment analyst this weekend recommending that we stop making ethanol and just rescind the tariff on Brazilian ethanol - the industry they've developed (through regulated markets) that is making them energy independent in very short order. He had NO interest in developing a new American industry. We are at a point where this most rabid strain of capitalism has become a threat to our future and is even anti-American at its core.

[Greg F]

I don't need silly charts and number twisting.

IOW, you don't want no stinkin facts. And without any facts you make the accusation of "number twisting". Proof please?

Please explain, without insult if that's possible,...

Projecting are we? I provided verifiable facts and you dismissed them out of hand without a shred of proof. That sir is an insult to everybody’s intelligence.

...what a society can do in this situation, fronm a capitalist standpoint.

Anything that "society" would do would be socialism, a failed economic system. The system called capitalism relies on individuals making their own choices. This has proven to be the most efficient system at creating wealth.

Gee, that article never mentions the $35 billion in incentives to the oil companies. Why is that?

And you have a breakdown of this "$35 billion"? I would like to see it. I would also like to see it compared to wind power and alternative fuel incentives on a per unit of energy basis. I think you will find that the alternatives are subsidized at a much higher rate. So AB, are you going to just carp about it or are you actually going to provide some substance for your assertions?

[noah]

AB, what would be the point in explaining anything to you since you have thoroughly demonstrated in the past an imperviousness to reason and facts?

[AB]

Greg, you pointed me to a chart that showed the government is making more profit than the oil companies. This is simply counterintuitive and FAKE. ARe the oil companies in massive debt and owned by foreign dictatorships, as we are? I'm not interested in games.

I can account for most of those tax incentive giveaways < a href ="http://www.nytimes.com/2006/03/27/business/27royalties.html?ex=1301115600&en=3d20a1d2c260ea67&ei=5090&partner=rssuserland&emc=rss"> here

How did a supposedly cost-free incentive become a multibillion-dollar break to an industry making record profits?

You tell me, Greg. You only seem to be interested in the facts that support your religion. If the economy is based on people making "choices", then it isn't working out too well. People don't have the "CHOICE" whether or not to go to work, which for almost all of us requires a car. And if all we're doing is letting "choices" decide for us, why the hell are we giving so much government socialist welfare to the CORPORATIONS.

I know many of the facts are inconvenient for you. It's easier when you aren't wedded to a religion. Americans don't regard pure, unregulated capitalism as part of their national heritage. We are fighting for our lives out here - wondering how we will heat our homes, get to work and what kind of jobs will be left for our kids. We want solutions, not self serving numbers games. We know we are headed away from a fossil fuel society. The question is how do we stop the oil companies from preventing us from getting there before it's too late?

[Neo]

So far, all the politicians have an "F" on this issue.

Sunday's Meet the Press, pretty much encapsulated the whole argument.

Durbin represented the politicians with pontifications that could come from either party; all were useless short term solutions that accomplished, at best, a "feel good" non-fix; any EST trainer would have been proud. It also highlighted the "wallet-ectomy" approach of most politicians who sense anyone with money in their pocket.

The Energy Dept and oil company folks seemed to have the only argument that possessed any sense of reality; the problem is here, it is a problem bigger than any one oil company and it won't go away by taxing anything.

My personal take was that the subsidies that the oil companies get should be made contingent on reinvesting most of those huge profits, but only if the politicians give aid and comfort on the NIMBY and BANANA front in regard to oil drilling and refinery building. It's a "share the pain" approach.

Meanwhile, alternatives will pretty much have to come from mostly government funded research, as the industry will pay their share, big time, when they are rolled out. This best allows for a government "blessing" of sorts that guarantees that noone gets stuck inventing something that will ultimately be disapproved by the some government bureaucrat.

[AB]

The link

Need an edit feature on here.

[AB]

The link

Need an edit feature on here.

[Tom Maguire]

Folks with uncanny memories (or access to the site logs here) will recognize Greg F as an old but irregular commenter. Greg, you may not have recognized AB/Katrina/JayDee as a logic proof, argumentative lefty ranter.

From APpalled:

TM:

Based on your summary, lower gas prices today mean higher fuel oil charges in December.

Well, maybe it will be a warm winter - all that extra gasoline consumption might trigger renewed gloabla warming.

Glavine looks great right now, and looked great over the weekend. Fortunately, we all know the Mets are simply positioning themselves for a fall from a loftier height.

[Greg F]

I heard an investment analyst this weekend recommending that we stop making ethanol and just rescind the tariff on Brazilian ethanol

Good idea.

- the industry they've developed (through regulated markets) that is making them energy independent in very short order.

Really? You have proof of this? Perhaps I could give you a place to start.

Just a few months later, Brazil -- which had worked toward energy independence since the mid-'70s oil crisis and had already mandated that the percentage of ethanol in its fuel be raised to 24% -- was forced to import ethanol refined by the Archer Daniels Midland Co. (ADM ) when the nation's sugar-cane crop suffered a devastating drought. Brazil understood that a year of poor crops was just as damaging to its national fuel supply as Iran taking its oil off-market would be to the rest of the world.

Is 30 years short order?

Moreover, the promise of energy independence that Brazil has explored through ethanol is widely misunderstood. Recently a Brazilian official, commenting on our third and most recent attempted conversion to ethanol, said that when Brazil tried using agricultural crops for ethanol, it achieved only a 1:1.20 energy conversion rate, too low to be worth the effort.

Do you understand the "1:1.20 energy conversion rate" means?

But the part of Brazil's quest for energy independence that the media usually overlooks is that ethanol wasn't the only fuel source the country was working on: Its other, more important, thrust was to find more oil. To that end, last week Brazil's P50 offshore oil platform was turned on. Its anticipated daily output is high enough to make Brazil totally oil independent.

It would help if you had even a basic understanding of Brazil's energy sector.

Brazil is the third-largest oil producer in Latin America and posesses the second largest oil reserves in the region. Due to intensified oil exploration and development, particularly in the offshore Campos basin north of Rio de Janeiro, and falling domestic consumption, Brazilian oil imports have dropped substantially since the 1970s. Even though Brazil continues to import enough oil for its fiscal accounts and domestic prices to be affected by changes in the international oil price, the country's transition to becoming a net exporter in the next couple years should alleviate the some of these pressures.

The state-owned oil company, Petróleo Brasileiro S.A (Petrobras) is the largest company in Brazil. The company relinquished its monopoly rights for oil exploration, refining, extraction and distribution in July 1998, when the National Petroleum Agency sold 92% of Brazil's oil basins and began opening the oil sector to foreign investment. Petrobras Petrobras is considered a leader in deep-water production technology and continues to expand crude oil output largely thanks to the production of offshore wells. The company aims to increase production to 2 million barrels a day by 2005 and to increase proven reserves to 13 billion barrels by 2005.

Brazil is one of the world's leading producers of hydroelectric power, with a potential of 106,500 megawatts. Hydroelectric power provides nearly 90% of the nation's electricity. Federal utility Centrais Elétricas Brasileiras S.A. (Eletrobrás) owns half of Brazil's installed capacity and key nationwide transmission lines. Eletrobrás is responsible for coordinating and supervising the expansion and operation of the electricity system. The electricity distribution network is mostly privatized, while generation and tranmission remain largely under government control. Brazil's first commercial nuclear reactor, Angra I, located near Rio de Janeiro, has been in operation for more than a decade. In addition, Angra II is currently being developed and plans for Angra III are in the works. The three reactors would have combined capacity of 3,000 megawatts when completed.

[Appalled Moderate]

AB:

A few questions for you:

First, what is your problem exactly? Is it that oil prices have gone up, or that oil companies are making money?

Second, have you considered how much ethanol production in Brazil comes from areas that have been cut from rain forest? Not so good on the global warming front...

Third, how about a good governmental way of controling what you think needs controlling with oil, and brings us innovation? Think how "well" the Japanese did with HDTV back in the 80s--90s.

[AB]

As Brazil fills up on Ethanol, it weans off energy imports

After nearly three decades of work, Brazil has succeeded where much of the industrialized world has failed: It has developed a cost-effective alternative to gasoline. Along with new offshore oil discoveries, that's a big reason Brazil expects to become energy independent this year.... With government support, sugar companies and auto makers' local units delivered cost-saving breakthroughs. "Flexible fuel" cars running ethanol, gasoline or a mixture of both, have become a hit. Car buyers no longer have to worry about fluctuating prices for either fuel because flex-fuel cars allow them to hedge their bets at the pump. Seven out of every 10 new cars sold in Brazil are flex-fuel.

Yet Greg would rather invest in this foreign success story than help AMERICAN industries duplicate it. If you want the AMERICAN people to accept your Capitalism-as-Religion, don't you think it's at least fair that your political representatives are up front about it with them? Just tell them, listen, citizens, Capitalism is more important than your family, your future or your country. Wouldn't that be letting them make a real "choice"? Something tells me the idea of real citizens making actual free CHOICES is the thing that most scares the bejesus out of conservatives. Otherwise they'd just tell it straight, and they never do.

Thanks, Tom, for the ridicule. I'm attempting to engage this guy in a rational debate. Are you so insecure you need to undermine it?

[AB]

I began, AM, by saying the high oil prices are a necessary evil.

Second, I don't care about Brazil. As I've said in nearly every post here, I care about AMERICA. We can produce the same results from one of our greatest natural resources, farm crops. Even Bush agrees on this, gives it lip service anyway. I'm thinking of AMERICAN industry, at all levels. Just using Brazil as an example that human beings CAN make change, when they aren't bound religiously to any one economic model.

Third, I think the concept of an Apollo project for American energy independence would be a winning issue for the first party that gets behind it. It can start with our utterly failed education system - giving incentives for math/science students (investing in people for a change). It can include government incentives and funding for both innovative fuels AND the technologies to utilize them.

It's amazing how conservatives are so trusting in such a passive mechanism as waiting for "free" markets to get around to responding to our needs. Which happens around the time we run out of money to keep funding their welfare.

[noah]

Instapudit has a link to analysis that suggests we are headed to another boondoggle wrt ethanol. It claims that the only crop that makes sense for ethanol production is sugar cane which can't be grown in the US. But I bet we will drive off the cliff anyway because it FEELS so good!

Europe has had high retail prices for gasoline for decades. Why hasn't the market there turned to "alternative" fuels? Answer: gasoline is hard to beat. Liberal hand wavers always return to their mantra of alternative fuels whenever they want to excuse their aversion to increasing the oil "supply" domestically.

[Neo]

I don't get the idea that this is the way to fix anything.

President Evo Morales nationalized Bolivia's natural gas industry and oil.

[Greg F]

Greg, you pointed me to a chart that showed the government is making more profit than the oil companies. This is simply counterintuitive and FAKE.

That about sums up your ability to use logic or confront facts that do not support your beliefs. If it is "counterintuitive" then it must be fake. No facts need be included. Funny thing, much of what we know about nature is "counterintuitive". I asked for facts and you provide nothing. Your beliefs are nothing but blind faith. I asked for a breakdown on the $35 billion. Instead I get a NYT piece. Try the EIA, they have more facts on energy they you would care to know.

Folks with uncanny memories (or access to the site logs here) will recognize Greg F as an old but irregular commenter.

Tom, you either have an "uncanny" memory or you spend way too much time looking at your site logs. ;o)

[noah]

Years ago Jonah Goldberg visited ANWR during the Summer. According to him the coastal plain is swarming with mosqitos and other amazing insects that prey on the poor caribou by parasitizing their upper aerodigestive tract and subq tissues...hardly a garden of eden! Of all the foxes inadvertently killed (killing one intentionally will get you fired or arrested) or found dead up there...ALL are rabid! The native Alaskans who claim ANWR as their homeland favor drilling. The mendacious Left enlisted a rival group that has no rights to bring forwards spurious claims of ownership and oppose drilling.

[AB]

Greg, try explaining these things in your own words. The NYT article I linked you to explained all the subsidies oil companies have enjoyed. How does a free market priest like yourself justify government subsidies to oil companies, in effect, "subsidizing fish to swim"? Why do so many free marketeers welcome government "socialism" as long as it goes into the pockets of the rich and powerful?

I don't advocate the Brazilian method of energy innovation. But at this point, conservatives are nothing but elephants blocking the road to the future. Whatever happened to Yankee Ingenuity? We're wedded to your version of Capitalist Religion like a cannon ball around our ankles as we sink into the lake.

Like I said, Greg, do you think Conservatives can ever be STRAIGHT with the AMERICAN people who have the right to know what "choices" they're being allowed to make and what ones they're not? If you can't explain this in simple words, all you're going to see is more drowning American workers getting emotional and irrational about the effects of expensive oil on every aspect of their lives. Doesn't sound positive for the one party that currently holds all the reins of power - and incidentally, all the responsibility for outcomes.

[AB]

My only objection to ANWAR is the small amount of oil. Why go to so much trouble for, at best , 6-8 months worth of oil? Short sightedness seems to be an important element of the Capitalist Religion.

[RLS]

Look...gasoline prices are simply tied to supply and demand; for both crude oil and refining capacity.

Our main problem with supply is refining capacity. Demand for gasoline has increased substantially in the last 30 years, yet refining capacity has decreased in that same period. Add the fact that refineries are required to change refining blends for specific areas at specific times of the year and you get another decrease in refining capacities.

As for the oil company profits...what's the problem? No one complains about the profits that the soft drink companies make. Oil companies are making on average a 10% net profit on sales and you want to reduce it? Or add another tax? They make on average a measly $.09 per gallon on gasoline pumped, where the state and Federal govt rakes in on average $.40 per gallon.

What people are asking for is a reduction in the per gallon profit when sales increase. The answer is to let these companies reinvest in refining capacity by getting the hell out of the way by eliminating some of the onerous regulations.

For those of you that do not believe in the law of supply and demand, as the pork or beef producers what happens when they price themselves out of the market.

[noah]

According to AB's logic wildcatters in West Texas are going to a lot of trouble for nothing...ditto Brazilian oil companies because all additions to oil supply are less than total needs. We enacted incentives for drilling in the Gulf because no drilling was taking place...not only was that wrong because it subsidized oil drilling but because no oil strike would solve our dependence on foreign oil therefore ipso facto it is not worth doing.

[RLS]

...therefore ipso facto it is not worth doing.

Typical Left mantra...if it can't be done 100% perfect, then it is a failure and should not be done.

[AB]

Our main problem with supply is refining capacity.

Uh, no, our main problem with supply is that it's FINITE. And our demand is most definitely NOT. Once again, I'm left wondering why conservatives don't ever seem to care about what happens to their kids.

Some of this really IS quite simple. It seems like ignoring the obvious is right up there with short sightedness as part of Capitalist Religious Dogma. Now add in a healthy dose of fuck-you to the American worker and hypocritical loopholes so that government can intervene as long as it's on behalf of the megacorporations, and you've got yourself a nice little church.

Just try being STRAIGHT about this with the American voter. Just ONCE. It's all about "choices", remember? Not 3 Card Monte.

[noah]

AB...if its any comfort the know-nothing demogogues like you probably will win the rhetorical battle over high oil prices. So what? At the end of the day in order to keep on winning the US will need to increase its domestic energy supply...because thats what people want. You can't fool all of the people all of the time.

Can't you just hear Nancy Pelosi prattling on about Bush as speaker of the house? Whoo hoo...gets old and more Botox injections won't help.

[Tom Maguire]

...you spend way too much time looking at your site logs

Folks unfamiliar with the software packages that support blogging may not realize this (and it came up recently when Patterico busted Hiltzik), but I can single out a particular commenter and get a full history of their comments here in about ten seconds.

And why bother? Good point. But in this particular case, I was curious whether I should advise Greg F of the futility of his undertaking.

[AB]

Noah, it's very safe to call ME a know-nothing, but you're the one who hasn't noticed :

a. I'm in favor of high gas prices, and

b. I completely agree we will have to increase domestic energy production ... just not in the same reactionary way you mean it. As progressives like Brian Schweitzer become more prominent, we will indeed start seeing domestic energy production - ethanol and biodiesel. I know it's the nightmare of the capitalist priests, but people may someday have access to energy that DOESN'T get funneled through a giant international megacorporation first.

Choices, baby. I'm all for them.

[Sue]

AB,

Gas, Hot Air, But No Ignition.

Yep, you have finally found your nitch...

[noah]

Actually AB drilling in ANWR makes eminent economic sense. Fifteen or so billion barrels of oil is not to be dismissed out of hand (at present prices...about a trillion dollars worth). The north slope fields are declining...when they are exhausted the Alaska pipeline will be redered worthless. ANWR oil could easily supply a million barrels a day for fifteen years through the existing pipeline.

Nah...not worth doing. Believe me if the oil companies decided they couldn't make a profit not a single well would be drilled. But in your world such considerations are immoral, but its just fine and dandy to sink money into ethanol subsidies despite studies that indicate that it takes more energy to make ethanol than you get out of it (ie ethanol is a net energy sink).

[noah]

Oops my bad...assuming fifteen billion barrels would mean approximately 40 years at a million barrels a day!

[AB]

noah, how old are you, if you don't mind me asking? Whatever happened to the idea that Americans could solve problems, especially technological ones? Are you pessimistic because you're familiar with how far behind our kids have fallen in math & science preparedness?

Let's keep this simple: We can NOT rely for much longer on an oil based economy. It is a finite resource and one that forces us into unholy foreign alliances. The only thing that's keeping us addicted to it are the SPECIAL INTERESTS known as the oil industry and their powerful lobby groups.

We need to retool dramatically, drastically and quickly. Do you just not have any faith in America anymore - to innovate, to create new industries, new jobs FOR AMERICANS? Is that it? Why do you people hate your own country so much?

As for ANWAR, I agree, if there's a profit to be made there, a REAL profit - for the AMERICAN CONSUMER - then I say let them go for it. I have heard conflicting information to what you say regarding the amount that is there. It's hard to get the truth from our "liberal media", especially since all we get from your side is self interested doublespeak and deliberate confusion - a la Greg's contention that the US government is actually running a bigger profit than the multinational oil companies.

Sue, yes, it's easier to sit on the sidelines and not contribute. But like I've said, I have an investment in the future and the last five years have shown us what happens when we trust in Corporate Socialism to solve our problems.

[Greg F]

And why bother? Good point. But in this particular case, I was curious whether I should advise Greg F of the futility of his undertaking.

I appreciate the thought Tom. I was aware to AB’s true believer status. Someone like him/her just regurgitate the talking points they see in the media. My philosophy is there are lurkers (I lurk here often enough) who are not “true believers” and the information provided may be helpful to them. I am under no illusions that someone as innumerate as AB can be rationalized with.

[AB]

God, what pompous bloviators you are. I'm an easy target for retirees, I realize that. But fact is you can't make a simple case, Greg, and you can only preach to the choir, not one person more. I'd like to see you walk up to any Joe Schmoe on the street, a completely apolitical anybody, and convince them, in actual English, that the US government is running a bigger profit than the oil companies. It's patently ridiculous.

Seems like common sense language is as foreign to you as the concept of the common good. Don't kid yourself that that's ever going to be a winning strategy. The only way you guys ever got this monkey elected president was because he made the average American feel like at least they were smarter than him.

[noah]

Screw you AB...I have been calling for reform of education for decades. But look whose blocking education reform...the NEA...a bunch process and PC obsessed know-nothings.

And I am wondering about your level of knowledge as well. At the fundamental level "net free energy" doesn't come from nowhere. You need to take a hard nosed look at your assumptions. As I pointed out upthread Europe has been living for decades through add-on taxes with a big spread between the "cost" of gasoline and what they pay. So where is the magical solution that you posit to exist to replace gasoline? The incentive to find that magical solution has existed for decades. It is ironic indeed to read that thru government subsidies that Germans have taken to installing solar panels in a big way. Germany is one of the last places on earth that solar power will be truly economical. Do you really think that Germany or any state for that matter can subsidize its way to prosperity?

Maybe you live in NYC and don't own a car so you can look down your nose at those that do.

If not you should be very thankful that the oil companies are supplying you with a fuel that is cheaper than milk or coca-cola or evian! We could not survive without the institutional expertise of corporations...and that is a fact jack. Get over it.

[Appalled Moderate]

AB hopes that through a large "Man on the Moon" government project, we will have a breakthrough on technology that will bring us energy that we may produce on a small scale without a massive distribution system controlled by big somebody or other.

I thought the left had a problem with "internal contradictions" of an economic system.

[Rick Ballard]

"We could not survive without the institutional expertise of corporations"

Of course we could. People live in squalor and poverty all over the world without the benefit of corporations just as every population that has taken to the shining hope of the serfs collar called socialism is incapable of generating a "next generation".

Next you'll be telling us that dystopic nihilism has actually failed when we all know that all that is required are better people.

The ship is just over the horizon Noah, all that is needed is a gentle onshore breeze. (Ships steered by socialists are incapable of tacking).

[noah]

Rick, you are right. I forgot about the option of bequeathing squalor to our grandchildren who won't be needing those higher math and science skills will they?

[Greg F]

The NYT article I linked you to explained all the subsidies oil companies have enjoyed.

I did a quick scan of the article and don’t see where your $35 billion comes from. Please provide a breakdown. From the article:

But last month, the Bush administration confirmed that it expected the government to waive about $7 billion in royalties over the next five years, even though the industry incentive was expressly conceived of for times when energy prices were low. And that number could quadruple to more than $28 billion if a lawsuit filed last week challenging one of the program's remaining restrictions proves successful.

This is not a subside, It is a reduction or time limited elimination of a royalty payment. The royalty payment according to the article appears to be 12 percent. Even if you assume the worse, $28 billion divided by 5 is only $5.6 billion/ year.

Now go do a comparison to the subsidies that alternate energy receives on a per unit energy basis. One example. The energy content of a barrel of oil is roughly equivalent to 1700 kWh. The Federal government is subsidizing wind mills at 1.9 cents/kWh. To subsidize oil to an equivalent level would amount to giving the oil companies $32.30 for each barrel of oil. That $32.30 is only one of the subsidies that wind gets, others include tax exemption from land taxes, depreciation allowances ect.

I'd like to see you walk up to any Joe Schmoe on the street, a completely apolitical anybody, and convince them, in actual English, that the US government is running a bigger profit than the oil companies. It's patently ridiculous.

LOL … Still nothing to support the belief. In spite of the references with all the data, AB stills insists with no data to counter, that it can’t be true. A true believer.

[RLS]

...that the US government is running a bigger profit than the oil companies. It's patently ridiculous.

I guess if you say that it is "patently ridiculous" then it must be untrue. How do you refute that the Government (Federal and state) have an average tax of $.40 per gallon and the profit that the oil company takes is on average $.09 per gallon?

You know not what you are talking about.

[RLS]

And that $.40 per gallon does not include the myriad taxes that any corporation or company pays for real property taxes, business personal property taxes, FICA & medicare taxes, SUTA & FUTA taxes, inventory taxes, earnings taxes (in some locations), vehicle taxes, licensing fees and permit taxes, etc.

And those are only the ones I can think of off the top of my head. Add in to that the fact that commercial enterprises pay a premium for telephone and internet services and utilities over consumer customers.

I really wonder what the $.09 per gallon represents in return on investment for these "mega corporations".

I remember a time in the late '70's when interst rates were so high that some banks halted "consumer lending" because they could make more mone, with no risk, investing in Fed Funds (overnight loans to other banks). This further squeezed supply of credit, thus driving rates even highter. The reason for this wasn't the "law of supply and demand" but the law of "unintended consequences". Since there was a "cap" on rates banks could charge for loans - it no longer made economic sense to lend money.

[Greg F]

EIA Primer on Gasoline Prices

Federal, State, and local taxes are a large component of the retail price of gasoline. Taxes (not including county and local taxes) account for approximately 23 percent of the cost of a gallon of gasoline. Within this national average, Federal excise taxes are 18.4 cents per gallon and State excise taxes average about 21 cents per gallon.2 Also, eleven States levy additional State sales and other taxes, some of which are applied to the Federal and State excise taxes. Additional local county and city taxes can have a significant impact on the price of gasoline.

In AB's universe the numbers from a Federal government agency is "patently ridiculous".

[RLS]

As an addendum, I would like to add that I, as one business owner, pay more cumulative taxes (federal, state & local, plus use, sales, licenses, etc) than profit that I make.

Now that is patently ridiculous.

[Jimbo]

As long as we're (sort of) moving onto the subject of alternatives to Oil, I tracked down http://denbeste.nu/cd_log_entries/2004/06/AnewManhattanProject.shtml
">a fairly pessimistic Steven den Beste discussion from a few years ago.

...just to add a bit more technical analysis into the mix. Kind of like a garlic/vampire thing to AB I suppose, but that's sort of a bonus.

[larwyn]

Greg F,
Great clear explanations - doubt they will be understood.

Can you try to 'splain percentages as return on capital and fact that oil companies operate on a 9% profit margin.

Keeping in mind that Kerry et al win the "word" people vote. I'll try to make it simple to begin.

I have 1000 to invest and I want to 9% - I get it and make $90.00 "profit"

I have 10,000,000 to invest and earn 9% - I do it and my "profits" are now at the gouging level of
$900,000.00!!!!

Still the same 9% profit margin.

That is why CNN,MSNBC, NTY etc will never talk about actual profit margins.

Let's get Hollywood to operate on a 9% profit margin, so a family of 4 can go see "United 93" for less than $15.00!

[larwyn]

Another dirty secret - some states
tax gasoline at a percentage.

The higher the price the more they rake in!

Imagine that!

[Greg F]

The myth of Brazil and ethanol is evident in the headline that AB posted:

“As Brazil fills up on Ethanol, it weans off energy imports

Brazil produces 2.01 million barrels of oil a day. At a conservative 19.5 gallons of gasoline / barrel their yearly production is 14.3 billion gallons/ year. At the same time Brazil produces 4.23 billion gallons of ethanol a year, about 30% of their potential gasoline production by volume. While the 30% looks impressive it is also misleading as there are 2 issues that need to be addresses. Converting sugar cane into ethanol requires energy in the manufacturing stage. That is a reason I asked AB:

Do you understand the "1:1.20 energy conversion rate" means?

The energy conversion rate is the ratio of the input energy needed to manufacturer the ethanol to the energy content of the ethanol. A gallon of ethanol has an energy content of about 84,000 Btu. It takes a little over 70,000 Btu’s to make a gallon of ethanol for a net gain of about 14,000 Btu’s. In effect Brazil's net energy gain in gallons of ethanol is 2/3 of a billion gallons.

The second issue is energy content. A gallon of gasoline has about 125,000 Btu/ gallon. Ethanol, at 84,000 Btu’s/ gallon, has about 2/3 the energy content of gasoline. That would make the 4.23 billion gallons of ethanol the equivalent of 2.85 billion gallons of gasoline.

Taking into account both the energy input and the lower energy content the net energy gain of the ethanol production is equivalent to less than ½ billion gallons of gasoline, or less then 4% percentage of their potential gasoline production.

The reality is Brazil reduced it’s energy imports by more then doubling their domestic oil production since 1998. They went from less then a million barrels a day to 2.01 million barrels a day. The implication of the headline is nonsense, they drilled their way to energy independence.

Larwyn,
I think you did a good job of explaining percentages as return on capital. The only thing I would add is inflation. The media likes to report “record profits” without any reference to inflation. If your inflation adjusted profits were exactly the same every year the media could still report you had “record profits”. I would be willing to bet they don’t forget about inflation when it comes to negotiating pay raises.

[Jake - but not the one]

I hope you all weren't surprised by this $100 offer. I mean, this IS what this Republican government thinks of all of us. We can be bought off for a pittance - the better to leave them alone to steal the family jewels, so to speak.

Oh, why can't we have a better government?

Well, maybe next year we will.

Jake

[kim]

Jake, do you want the government involved in gas prices?
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