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It's Official: We're Screwed

Well, in the face of constantly-rising gas prices in the United States (good lord! They're almost up to the levels Europe pays!), Congress has valiantly swung into action to the defense of the American consumer and done... well, nothing.

With great fanfare and much bloviating and boasting, Congress passed -- by huge, veto-proof margins -- a measure suspending additions to the Strategic Petroleum Reserve, a stockpile of about 700 million barrels of oil. Currently, the government buys about 70,000 barrels a day and sells about the same, keeping the stock "fresh." (Why a product that's been sitting in the ground for millions of years has an apparent "shelf life" is something I don't quite understand, but that's what they do.)

For comparison, the United States uses about 21 million barrels of oil a day. That means that the Reserve has enough oil to keep the United States going for 33 days -- presuming we change nothing about our way of life AND we use nothing but the Reserve, two extremely unlikely events. A bit more relevant number is 0.33 percent -- that's how much more oil that is available for consumers with the cessation of the Strategic Petroleum Reserve suspending its stock-rotation plan.

If that was all that Congress was planning on doing, I wouldn't be too upset. This move is pretty much nothing, and "doing nothing" is usually the wisest move for the government to make when it comes to messing around with the economy. But it's an election year, and since we can't feed Christians to lions any more (throwing them to the ACLU often leads to similar results, but is less entertaining) , the mob's blood lust must be sated somehow.

So the Democrats are going after Big Oil.

Maybe I'm just too simple, but I just can't wrap my head around the logic here. Someone please tell me where I'm wrong:

1) The biggest component right now in the skyrocketing price of gas is the skyrocketing price of crude oil.

2) The people who set the price of the oil -- the oil producing countries, mainly represented by the Organization of Petroleum Exporting Countries (OPEC) -- are the ones who are making out like bandits in this whole mess.

3) Big Oil doesn't sell crude oil, it buys it and refines it into useful stuff. This means that a rise in crude oil prices doesn't directly translate into money in their pockets.

4) Big Oil's record profits are almost entirely based on their having consolidated. While the numbers of their profits have gone up, their profitability -- as measured by their profits as a percentage of their total income -- has pretty much stayed the same. In fact, their rate of return is actually considered pretty mundane for big companies.

So, the Democrats' proposed solution to this? Shoot the messenger! Beat the crap out of the middleman!

I exaggerate, but only slightly. Here's how the Boston Globe chooses to describe their plan:

A Democratic proposal to impose a windfall profits tax on oil companies, roll back tax breaks for the industry, and provide new protections against price-gouging is expected to face a GOP-led filibuster when it reaches the Senate floor as early as next week.

It's simple. The Democrats know they can't bully and threaten the oil-producing countries, who are the ones making the big bucks right now, but they can hassle the oil companies. It's a variant of the old song: "If you can't be with the one you love, love the one you're with." Or, in this case, if you can't beat up the guy who's causing you problems, beat up someone who's within reach.

Let's look at these proposals:

1) Impose a windfall profits tax on oil companies.

As I noted, there are two ways of measuring profits: actual dollars, or percentage of total income. If Congress decides to put a cap on the actual dollars the oil companies can claim as profit, then watch the tax lawyers have multiple orgasms all over the place as they do everything they can think of to cut back that profits. bonuses for employees and executives, buying new equipment and companies, and all sorts of dodges that haven't even been invented yet. I'll go out on a limb and say that after the first year, it will be almost miraculous if a single oil company pays a dime in "windfall profits."

2) Roll back tax breaks for the industry.

Tax breaks are the traditional "carrot" part of government influence on economic policy. These tax breaks are, for the most part, intended to encourage companies to do things that don't, on their own, make economic sense. In short, they're the government saying "we want you to do certain things you wouldn't do on your own, so we'll pay you to do it." As I understand it, this involves things like researching alternate forms of energy, finding new sources of oil, and improving energy efficiency.

In other words, the kinds of things that reduce our oil consumption and cut the costs of maintaining our way of life.

So, why not get rid of them, just when we need those sorts of things the most?

3) Provide new protections against price-gouging.

This should be most entertaining. Consumers most directly feel the pinch at the gas pump, so it's usually the gas stations that feel their wrath. But as I understand it, they don't like high gas prices, either. They get told what they can charge for gas by their suppliers, and it's usually set as a certain price above what they pay. In other words, they make just as much money off $4.00/gallon gas as they did off $1.00/gallon gas.

But when gas prices get too high, people buy less. That means that higher gas prices mean gas stations make less money.

If there is any real "price-gouging" going on here, it's at the supply point. It's the folks selling the crude oil that are making the big bucks based on the current prices, and Congress can't do squat about them.

Actually, that's not true. There are quite a few things that Congress could do about the suppliers of oil, but that would require something too closely resembling courage, and we can't have that. Things like:

1) Easing restrictions on producing more domestic oil.

2) Cutting back the number of "regional blends" of gasoline required, to make the existing fuel supply more flexible in response to regional crises.

3) Giving Iran a good bitch-slap and telling them to knock it off. Right now, every now and then they stage some sort of military "incident" in the Persian Gulf that makes the oil-producers nervous, and that's always good for a few bucks' hike in the price of a barrel of oil. And since Iran is an oil exporter itself, it's to their benefit to keep tossing out these little scares.

4) INCREASE tax breaks for companies that work on reducing our dependence on foreign oil.

Of course, these are all fairly minor measures. They don't address the real problem here: an increase in the global demand for oil.

China and India, just to name two nations, are experiencing huge jumps in their oil consumption. They are now competing with us to buy oil. And as anyone who knows anything about economics knows (I just barely qualify here), if you have more people wanting something and willing to pay for it, then the price will go up to pretty much "whatever people are willing to pay."

All that, though, is irrelevant. Common sense is always the first victim when Congress gets involved, especially in an election year. At those times, actually fixing problems takes a distant back seat to appearing to do something.

It's the ultimate triumph of style over substance, of what Billy Crystal lampooned with his Fernando, who said "it is more important to look marvelous than to be marvelous."

God help us. Mark Twain said it best: "no man's life, liberty, or property is safe while the legislature is in session."


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Comments (23)

J,ya got that one right,but... (Below threshold)

J,ya got that one right,but Im afraid all I can do is sit here and shake man head cause I know that the polls(Dems&Rep) aint gonna do the right thing for the people,just themselves. sad really to see what has become of our country.

OF I were the CEO of Chevro... (Below threshold)

OF I were the CEO of Chevron, the world's largest private producer of geothermal energy, and they dumped a windfall tax on me I'd go on a world-wide satellite feed and broadcast that I was immediately ceasing all production of geothermal energy and using the cash saved to pay the tax bill.

Then sit back and laugh my ass off as the letters of condemnation came in to Congress from around the world from every nutcase environmentalist and ecco-weenie protesting their stupidity.

<a href="http://www.eredux.... (Below threshold)

Check out this US Carbon Footprint Map, an interactive United States Carbon Footprint Map, illustrating Greenest States. This site has all sorts of stats on individual State energy consumptions, demographics and State energy offices.


Yeah, I can understand why ... (Below threshold)

Yeah, I can understand why they'd spend their time concentrating on instituting new protections against price-gouging. I mean, since they've investigated it so many times and come up with nothing. It's more important to continue to imply that there's a problem with price-gouging so they can appear to be doing something about it, right?

3) Big Oil doesn't... (Below threshold)
3) Big Oil doesn't sell crude oil, it buys it and refines it into useful stuff. This means that a rise in crude oil prices doesn't directly translate into money in their pockets.

4) Big Oil's record profits are almost entirely based on their having consolidated. While the numbers of their profits have gone up, their profitability -- as measured by their profits as a percentage of their total income -- has pretty much stayed the same. In fact, their rate of return is actually considered pretty mundane for big companies.

I work in an industry where we don't make our cut of the final product a multiple of our material costs. We don't even add a fixed amount to our material costs right away. Short term (which can last for a few years) we eat increased material costs because we're under intense competition.

If oil is experiencing increasing profits in the face of increasing material costs, there isn't enough competition in that industry. And with the government restricting the building of refineries for current players, they are even less likely to approve a refinery for a new player.

Reducing the number of blends would help this a lot. But I also think building a new refinery or two is necessary and combine that with reaching for the anti-trust bat for motivation in case the industry has become too attached to their situation.

But the last thing you should do is raise taxes. Not only will they pass 100% of that to the customer, the lack of competitive pressure means they will try to make up some of the lost profit by tacking on a little price increase of their own.

The only thing that's going... (Below threshold)
Mac Lorry:

The only thing that's going to stop the upward march of oil prices is some real risk of over supply and dropping prices. It's estimated that 20 to 30 percent of the price of oil is the result of speculation. As the average gas price pass $4 per gallon in a few weeks more and more Americans are going to change their driving habits by driving slower and driving less. Some are going to trade in their large SUV or pickup in order to switch over to a more fuel efficient vehicle. Some will do this even though they are going to be taking a loss on their trade-in.

How fast American drivers reduce their consumption of gas is going to be a key figure in the future price of gas. If we do it fast enough and deep enough we can make oil speculators take a blood bath. The threat of a substantial and sudden reduction in demand would minimize speculation. Well, at least until OPEC cuts production to keep the price high, but that will be after the initial blood bath, so it would still have a lasting impact.

For the future we have to get off gasoline for our transpiration needs. Key technologies include better batteries, fuel cells, hydrogen production, nuclear power plants, solar, wind and other non-oil power sources. The government is not going to get us there on their own. We have to demand they move in this direction with our money and the force of law.

Once again, you get appeara... (Below threshold)

Once again, you get appearance over substance. Actually CHANGE things in Washington? We can only HOPE things won't get worse if the Democrats get into office!

What a second...didn't the ... (Below threshold)

What a second...didn't the Gorebots say that the price of gas should be HIGHER, so consumers would be forced to conserve?

Silly me...the Gorebots wanted a TAX to be imposed that would force the price of gas up.. That the GOVERNMENT would get the 'windfall profit' from the consumer instead of the oil company.

The suggestion of a windfal... (Below threshold)

The suggestion of a windfall profits tax is wonderfully stupid and compltely useless. It appeals to the lesser lights of the population as a "punishment" for making large sums of money as though that were inherently evil. Democrats, the wealthiest of all of us, gleefuly mine that brainless envy.

It is part of Obama's nature that he would want to punish the successful as he bred to be a socialist.

But worse and most ignorant of all is the notion that somehow the money from such a tax would do a thing for any of us. The revenues would be used to pave over the little left of West Viginia that isn't already been concreted or for building more bridges to nowhere.

Come on, Jay. You're not th... (Below threshold)

Come on, Jay. You're not thinking outside the box. It's so simple.

I work in the Big Oil indus... (Below threshold)

I work in the Big Oil industry. And right now, our profits do come from crude sales. The refining side of the business is barely breaking even.

That being said, the Big Oil majors only control about 9% of the total crude reserves - the rest are controled by national oil companies - some of them friendly to the US, like Petrobras in Brazil, but most ambivalent to hostile -- Saudi Aramco in Saudi Arabia, Gazprom in Russia, PDVSA in Venezuela, and the National Iranian Oil Company.

Most of the "record profits" are funnelled back into new development projects such as the oil sands in Alberta, CA and new technologies to find more oil and increase recovery of known oil deposits.

P.S. When are we going talk about windfall profit taxes on Big Acting or Big Atheletics? I think congress should be allowed to determine how much an actor or athelete should be allowed to make.

I beleive the purpose behin... (Below threshold)

I beleive the purpose behind the Strategic Oil Reserves was to provide fuel for critical war-time manufacturing (now mostly outsourced) and for the military, not to keep personal transportation going.

I'm not an oil expert, nor play one on T.V, but I suspect that Crude Oil begins to oxidize once pumped from the ground and exposed to air. Not sure though.

The best way to get the politicians to do the right thing is to stop reelecting incumbents. Start voting for some new, fresh, relatively non-corrupt senators and representatives. If they don't perform, vote them out the next time. Eventually they will get the message.

The thing about the "windfa... (Below threshold)

The thing about the "windfall profits" that really frosts me is how it screws the stockholders. A retired schoolteacher friend of mine very wisely invested in Exxon Mobil stock. It's her pocket Congress is picking with this nonsense, and the pockets of millions of people with Exxon Mobil in their 401k.

Wonder what would happen if... (Below threshold)

Wonder what would happen if the oil companies just decided not to do business in the U.S. anymore in response to the actions of congress. You have to wonder why they even bother now.

The big "tax breaks" that people often refer to is the depletion allowance. That's like depreciation in that it provides for the replacement of assets being used, something every business is allowed. What "big oil" gets in these "tax breaks" doesn't come close to replacing oil consumed.

Why the hell can't these yoyos in Washington can't figure out that we need a comprehensive energy program that address both supply and demand? Just think about how long it's going to take to replace the auto fleet in this country. If Americans replaces 5% of the auto fleet each year, it will take 20 to get rid of the cars on the road today. That's if we start today and replace them with more fuel efficient autos. In the meantime, we're still going to need gas to fill up our tanks.

This has become so damn political that the consumer will have it all figured out and the problem addressed long before our elected officials ever do.

Mac Lorry is quite right ab... (Below threshold)

Mac Lorry is quite right about speculators in the commodity pits of MYMEX adding an appreciable amount to the price of crude and gasoline. Having worked there and still in contact with veteran traders, I can say with a degree of certainty that they think Americans will not give up their McMansions and gas guzzlers anytime soon. They are also wary that the Bush administration IS gonna "bitch slap" Iran, panicking the planet and driving the price even higher.

Halting additions to the Strategic Petroleum Reserve, which is currently about 97% full, ain't gonna do jack diddly to the price of a barrel of West Texas Intermediate.

"Big Acting or Big Athel... (Below threshold)
P. Bunyan:

"Big Acting or Big Atheletics"

Don't forget Big Suers (pronounced and smells like "sewers"). There should be at least a 95% windfall profit tax on any trial award or settlement that nets the lawyers more than, oh about $1,000.00 or so.

Before the politicians pass... (Below threshold)

Before the politicians pass any windfall profit legislation they need to explain to the people exactly when profits cross the line and become windfall profits.

That's simple, Tonto. It's... (Below threshold)

That's simple, Tonto. It's when profits rise above 0. $1? It's a windfall - tax it away!

Jay, I have to correct you ... (Below threshold)

Jay, I have to correct you on an obvious flaw in your article. I'm no economics expert, but by the gods I know useless trivia about late night TV shows!

The Crystal quote is: "It is better to look good than to feel good."

"You look marvelous!" was the other catch phrase.

During all of these oil con... (Below threshold)

During all of these oil conversations, we seem to forget about how volatile things are in a place that's our 4th largest supplier of oil behind Canada, S.A. and Mexico: Nigeria.

And the 5th largest supplier isn't too lovey-dovey with us either: Venezuela.

It seems to me that securing the safe flow of oil from places like Nigeria, S.A. (constantly thwarting attacks from terrorists), Angola, Iraq and so on would quell investor fears and drive down the price of crude since the commodities market is greatly dependent on speculation. (I also hear that many 401k's, bonds, etc. are investing in the commodities market, which is also helping drive up the price of crude.)

Vladimir "Man of Year" Putin's antics in shutting out U.S. companies from tapping into gas fields has got to be playing a role in all this too.

It's estimated that 20 to 30 percent of the price of oil is the result of speculation.

Mac Lorry, isn't it even higher than that? Or am I thinking about the cost to insure the oil while its in transport?

It seems to me that the rea... (Below threshold)
Dave A.:

It seems to me that the real winner is not the oil companies, but whoever owns the oil in the ground. A few weeks ago, people were offering $100 for a barrel of it. Today, they're offering $127 without the owner having lifted a finger. There once was a time in this country when people drilled for oil in their own back yards. Maybe they will again.

Here in Alaska, the total g... (Below threshold)

Here in Alaska, the total government take (state, local & fed) is 85% of the well head value. That's right for each dollar's worth of oil coming from the North Slope, 85 cents goes to gevernment, 15 cents to the oil companies.

Out of that 15 cents they have to pay their people, pay for oil field infrastructure and transport the crude to market.

I bet you didn't know that.

Thought you would get a chu... (Below threshold)

Thought you would get a chuckle out of this in keeping with the title of this entry. It was featured on Michelle Malkin's site yesterday.






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