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Monday, April 24, 2006

The goods on government and gasoline

The hailstorm of lefty (and RINO's) rhetoric on gas prices continues showing why we desperatly need people who understand real world (versus Marxian or Keynesian) economics. There are reasons for gas and oil prices spiking:
  1. ANWR- Here's a shocker-anyone know why and how ANWR came into existence? Oil. Not as a dating service for caribou. In 1923 ANWR was designated as a strategic oil reservation. It was originally called the Naval Petroleum Reserve Number 4. When oil was found on the North Slope (Prudhoe Bay) attempts were made to develop the oil reserves in Naval Petroleum Reserve Number 4. All that changed in 1980 because of the watermelons (green on the outside, red on the inside) with the Alaska National Interest Lands Conservation Act . And you know nothing good is coming from an act with a name like that. There is absolutely NO good reason that the field in ANWR is not online right now. ANWR has been debated for decades. And again, no good reason. Radical enviromentalism and laws and regulations (passed and enforced by government) has stopped oil production there and elsewhere. Reason 1-government interference.
  2. Lack of refinery capacity versus demand. One of my clients has an oil well service company. I asked him over a year ago when was the last oil refinery built in America. He said over 30 years ago. I asked him why? Way too many enviromental regulations, way too much ongoing compliance and lawsuits. And he mentioned there have been many refineries that have closed because of the onerous compliance hurdles. There is a view that it's more profitable to import gas and diesel. Could be because it costs too much to build and run a refienry here because of regulations and compliance, all that add to costs and cut profit. So you have a Reason 2-government interference.
  3. Katrina and Rita. Taking #2 above with the 2005 hurricane season, we have this comment from a year before Katrina and Rita :Despite this (minimal) expansion (at existing refineries), however, domestic refining capacity is still stretched to the limit, as utilization at U.S. refineries is now averaging nearly 90% -- leaving no cushion room if something unforeseen happens." And now we've been hit. and with no cushion to begin with, supply is behind demand. Reason 3-natural forces coupled with government interference.
  4. Regional blends. The gas here in Minnesota is different than the gas in California that is different than New York that is different than Louisiana. Mostly due to environmental "concerns". And all the laws demanding different blends. Reason 4- government interference.
  5. Ethanol. With the new ethanol blending regulations the refineries are trying to keep up...and can't. Just a little something that those "smarter than EVERYONE else" politicos overlooked when they passed ethanol blend laws. Oh, and the fact that ethanol doesn't work, pollutes more, gives less mileage, costs more and drives up the cost of the food you eat...well, the politicos don't care. They're busy "doing something". Reason 5-government interference.
  6. Onerous taxes and Windfall profits taxes versus profits. Remember a low hanging fruit maxim of economics- if you want less of something, tax it. If you want more of something, subsidize it. Now, combine that with the term "the profit incentive" and see that the average oil company gross profit margin is 9%, which is normal American corporate profit. The Feds and states get between 300%-600% more than that in taxes. And that tax is paid by you. And you heard once, even once anyone in government even remotely suggesting that taxes be lowered ? That government take even a penny a gallon less? I haven't. And all they spew is that executives are paid too much. And with the threat of Windfall Taxes the incentive to go out and find more oil is gone. Why work more when your efforts result in less? Reason 6-government interference.
  7. Summer driving. Summer is car trip season. The refineries need to switch over to summer blends (see above). And they can't do that in a week. Higher driving demand, higher imported crude costs versus a seasonal changeover = higher cost.Reason 7- real world economics.
  8. Increased world demand. With decreased national exploration and an increase world demand (particularly in China and India) America competes for oil in a global market. Oil is a commodity. Reason 8- real world economics.
  9. "Alternative energy resources". This delusion has been around, and heavily subsidized, now into four decades. And with billions and billions of dollars spent and wasted, what do we have? Same thing we did at then outbreak of the first oil crisis in 1973. So, your money has been spent, again, on what "the smartest people in the world", politicians and regulators, know is best. Reason 9-government waste...and interference.
And with all the abundantly evident government interference and threats, so many of you still believe that the government can deliver low gas prices.
As Gerald Ford once said "Government couldn't brew beer for less than $50 a six pack."
Oh, and to date, I don't hear anyone, anyplace, anytime screaming for Congressional investigations into the bottled water industry where we spend $5-$10 a gallon...for water-that from the tap costs a quarter of a penny per gallon.


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