Friday, June 20, 2008

Oil Prices: Reason Trumped By Transparent Pandering

The recent rise in oil prices and the corresponding rise in gasoline prices has brought out many complaints from the masses.  The rise in prices makes sense given the limited ability to increase the supply of barrels.  As wells have become depressurized and the rate of new discoveries has slowed it has become much harder to get achieve increases in the supply of oil.  Furthermore, in order to keep supply steady oil companies have been forced to move further offshore and pay for more expensive deep water drilling and expensive oil well re-pressurization ideas like pumping natural gas into oil wells.  So supply has remained constant recently and may actually begin to decline in the coming years.  Meanwhile, the demand for oil, driven primarily by China's growth, has been steadily increasing.  Any middle school economist can tell you that prices are bound to rise.  Combine this rise in oil prices with the lack of excess capacity in refining and we have a recipe for high gasoline prices. 

The demand increases may slow soon if the U.S. economy continues to slow and drags the rest of the world down with it.  Furthermore, the high price of oil and gasoline may lead some businesses and consumers to switch to substitutes like natural gas or electricity for their energy needs that were previously met by oil.  Higher prices may also lead to less demand from consumers as they make decisions about energy use which conserve energy such as driving less.  So the rise in oil/gasoline prices may ultimately serve to decreases in demand if it induces conservation or substitution.

Given this rudimentary analysis, the Prince looked on with disgust as Hilary Clinton and John McCain lined up to endorse a plan to suspend the federal excise tax on gasoline for the summer travel season.  How do they plan to make-up for the tax shortfall that will be created by cutting the 18.4 cent per gallon tax?  You guessed it, by introducing legislation to impose a "windfall profits "tax on oil companies.  The Prince puts "windfall profits" in quotes, unlike the New York Times, because The Prince thinks that framing oil company profits as "windfall profits" is misleading.  What does "windfall profits" even mean?  Does it mean undeserved, unexpected, higher than normal and/or ill-gotten?  The Prince really has no idea what this phrase means.  As far as The Prince is concerned it is nothing more than a label trotted out by politicians to vilify the oil industry to appease ignorant voters.

It has been awhile since the Prince has seen such a transparent attempt to pander to voters by proposing legislation that is stupid and inequitable.  Let's go to wonderland for a second.  "Look at me! I am on the side of the working man who weeps when he has to fill up his truck with $4,00 gas.  I am going to take ill-gotten gains from the big bad oil companies and give them to the working man by dropping the excise tax."  Let's just throw the shareholders of these terrible oil companies under the bus.  Doing that will definitely lead to the kind of investment in extraction and refining that we need to increase supply.  Right.  Does this sound as crazy to you as it does to the Prince? 

Let's go back to the real world for a real statement from the McCain campaign as quoted by the New York Times.  “It's clear Barack Obama's not strong enough to provide immediate relief at the pump, and it shows he doesn't understand our economy or have the ability to deliver for hard-working Americans,” said Tucker Bounds, a McCain aide. “Senator Obama's arguments against John McCain's gas tax holiday are complete fiction, and the reality is that he used to support a gas tax holiday before he was running for president.”  Really, he doesn't understand the economy?  Any middle school economist could tell you that this plan is stupid and does nothing to lower the long-term demand for oil or encourage more investment to bring on more supply.  Statements like the one made by Mssr. Bounds absolutely disgust The Prince and give him no confidence in his representatives ability to make decisions based on reason.

"Gas tax holiday" there is another phrase that does not make sense.  It makes this legislation sound like a sweet deal for everyone like a free trip to the Hawaii or something.  Anyone who sat down and took a look at the history of boom followed by over investment then bust in the energy sector would never argue for a "Gas Tax Holiday" financed by a "windfall profit" tax.  The truth is profit desert has nothing to do with this question.  Oil companies have to have incentives to make investments in bringing more supply online.  They will only make the investments if they think they will get the returns on this investment.  The government changing the game by taking profits from the oil companies when times are good and not giving the companies any help when the industry is over-invested should give oil company investors fits.  The oil companies' shareholders deserve the return on the investments their companies made.  Politicians should not have the authority to take from these shareholders who took the risk and give this to consumers who want cheaper gas.

This proposed legislation is so obviously political and it does nothing to solve the problem of high oil and gas problems.  In fact, in choosing to impose a windfall profits tax on oil companies the legislation makes it less likely that supply will be increased in the future and offers decreases incentives to conserve energy.  Removing this excise tax may make sense as a way to stimulate spending on non-energy purchases.  Yet, it's purpose clearly is just to appeal politically to consumers who want short term savings on gas and are not looking at the long-term implications of this savings.  Politicians should be looking at the long-term costs of this legislation.  While the Prince is an independent and does not support Obama, Mssr. Obama does get it right by opposing this legislation.  It takes courage to take this stand considering how damaging it may be politically.  Mssr. Obama makes the decision for the right reasons too.  While he doesn't argue that the industry should be protected from a "windfall profit" tax, he does firmly argue that the plan would save consumers little and do nothing to curtail oil consumption and imports.  Let's get back to reasonable energy policy and not these politicized concessions that offer short-term political gains but no real long-term solution to the problems we face in the energy sector.

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