I just ran across this article yesterday at CNNMoney.com. The original article can be found here:

Who’s to blame for high gas prices?

There are a number of statements that the article makes that touch on some important issues. Specifically, the article highlights the irresponsibility of some politicians when it comes to energy issues. It is an election year, and instead of discussing ideas that could actually help us deal with the difficult energy issues in front of us, we get a bunch of finger-pointing and posturing. Below I will quote various portions of the article, and comment:

Last week, Wisconsin Democratic Sen. Herb Kohl and Pennsylvania Republican Sen. Arlen Specter proposed legislation that would increase regulatory scrutiny of Big Oil, which Kohl says “has unquestionably enriched itself during this period of high prices.”

The last time I checked, it was not against the law to make money. Of course Big Oil has made money during this “period of high prices”. High prices are exactly why they made money, but they didn’t raise prices simply to make more money. It’s called supply and demand. The supply is becoming limited, yet the demand has not yet been stemmed. Prices are raised to stem demand and bring supply back in line. That means Big Oil makes money. I explained this in an earlier essay A Primer on Gasoline Pricing .

Taking on Big Oil six months before November’s election is a can’t miss proposition for politicians, of course. Besides calling on the federal government to make OPEC liable under U.S. anti-trust laws, Kohl’s Oil and Gas Industry Antitrust Act of 2006 would mandate the creation of a joint state-federal task force to investigate whether producers, refiners and marketers are sharing information in a bid to keep prices high.

Right. Can’t be supply and demand. It must be collusion, even though the FTC has investigated these charges again and again and found nothing. They really should force these legislators to take Economics 101 before allowing them to make laws.

There’s no harm in having the government keep a closer watch on the energy industry, and Kohl’s sympathy for consumers is commendable, but blaming Big Oil for high gas prices is a little like blaming McDonald’s for obesity. (Yes, I know that also makes for effective politics.)

Exactly. Where is the personal responsibility here? People make choices that determine how much they contribute to Big Oil’s coffers. But people don’t want to be held accountable for their choices. They want government to do something about Big Oil so they can continue to use energy at the current wasteful rates. It is time people woke up to the fact that the National Bank of Petroleum is starting to notice that their assets are being withdrawn at an alarming rate, and changes are inevitable. The government is not going to help matters by trying to keep prices low. That will only increase the rate at which we use up our remaining fossil fuels.

The idea that prices are set by Big Oil, not the traders at the NYMEX and other global bourses, is a misconception that seems to come into vogue whenever energy prices start making new highs.

Yet it’s an idea that seems to be held by >90% of the population. Oil is a global commodity. If China wants to expand their use of oil, it’s going to mean that we pay more due to tight supplies. As one little old lady said to me once after a presentation I made “It’s not fair that I have to pay more for gasoline because of China”. I just had to shake my head at the self-centered nature of her comment. I asked her if she would rather go to war with China to ensure that she could pay $1.50 for gasoline for a little while longer. Or maybe we could convince China that they must continue to ride bicycles, so we can continue to drive gas hogs.

Kohl’s bill, alas, won’t do much to lower gas prices. The real problem here is the reluctance of Washington to make more than modest improvements in fuel-efficiency standards for cars and trucks. At the same time, politicians and other leaders seem unwilling to at least jawbone more Americans into giving up their SUVs and Hummers in favor of more fuel-efficient cars. Suing OPEC under U.S. anti-trust laws may be smart politics, but what about actually telling voters that they, too, have to take some responsibility for the problem?

There is the crux of the issue. Too many politicians are gutless. They pander, but they don’t have the courage to propose real solutions to the problem. Passing windfall profits legislation may show the public that they will “stand up to Big Oil”, but it does absolutely nothing to address the real issues. Do they think windfall profits taxes are going to cause Big Oil to lower gas prices? Who are they kidding? Gas prices are escalating to stem demand. This ensures that gas is available. Lowering prices in this tight market would have the effect of ensuring that there would be gasoline shortages.

Last month, I spent a day on Capitol Hill watching Kohl, Specter and other members of Congress grill the CEOs of Exxon, Chevron, Conoco, and several other giants. It made for great theater but I was amazed that the Senators, including liberal Democrats, barely mentioned fuel efficiency and conservation in their public remarks.

That last line is the real money quote. Aren’t liberal Democrats supposed to care about the environment? Do they think lowering gas prices is going to help out there? Do they not understand that increased fuel efficiency and conservation are our best options at the present for extending our fuel supplies and sparing the environment?

Perhaps haranguing CEOs makes for better soundbites back home. But when oil CEOs like Chevron’s Dave O’Reilly spend more time talking about conservation than our elected officials, you know we’ve got a real problem on our hands – one that will last well beyond the summer driving season.

I love our democratic system, but pandering politicians may be our downfall. We do have a real problem on our hands. For the sake of all of us, we need more politicians to have the guts to propose some real solutions. These solutions will not be painless, and that’s why politicians avoid them. But if they don’t step up to the plate, we are going to pay a terrible price in the not too distant future.

I have a few essays in the queue (including a nifty biodiesel story), but I thought I would comment on an article in today’s Deseret News out of Salt Lake City. The article was entitled “Will U.S. Slap Tax on Big Oil Profits?”. (1) A few excerpts from the article, followed by my comments:

Republican Sen. Arlen Specter said Sunday that the U.S. Congress should consider taxing the “windfall profits” reaped by oil companies as a result of surging crude oil prices.

I understand the frustration with high gas prices even as oil companies rake in record profits. But what is Specter trying to accomplish? Does the good senator believe this will magically bring the price of oil down? Will it cause OPEC to open the taps, flooding more oil into the market? Or is the real purpose to punish oil companies for making money, so he can boast about it during his reelection bid? Would he stipulate that the money be allocated to somehow reducing our demand for oil, which is the real issue?

Specter, of Pennsylvania, earlier this month introduced legislation to strengthen antitrust enforcement of the oil and natural gas industry to counter the consolidation of production and refining operations. Sen. Byron Dorgan, D-N.D., is proposing a 50 percent excise tax on profits from oil sold at more than $40 a barrel.

Let’s think about that for a moment. A lot of oil is expensive to extract, and only becomes economically viable as oil prices climb higher and higher. As oil prices climb, the incentive to pump more oil increases. If more oil can actually be pumped, it should eventually result in an oversupply situation, and prices will come back down. (This is why the oil industry is cyclical). If more oil can’t be pumped, then prices won’t come down.

However, neither situation is helped by slapping a tax on oil over $40 a barrel. In fact, such moves decrease the reward for marginal producers, which may lead them to shut in production. Since foreign producers won’t be paying that tax, what do you think is going to happen? U.S. production will decrease further, imports will increase, and oil prices will remain high. If high oil prices are the objective, then this is a way to accomplish that objective.

“Windfall profits, eliminating the antitrust exemption, considering the excessive concentration of power are all items we ought to be addressing,” Specter said Sunday on CNN’s “Late Edition” program. “Anybody up for election this year ought to be working very hard, taking it very seriously.”

Oh, I bet they are. That’s why they ignore the real reasons for rising oil prices, and aren’t doing anything to address those issues. They are posturing and pandering, trying to make sure they get themselves reelected. The founding fathers would be rolling over in their graves if they saw the level of mediocrity that permeates our government today. Nobody has the guts to stand up and tell the truth.

Sen. Carl Levin, D-Mich., said President Bush should call oil company executives to the White House and tell them he’ll support a new tax on their profits unless they lower prices.

“I’ll bet that the price of gasoline would come down within a matter of days,” Levin said on the CNN program. “We need a windfall profits tax because these profits have been absolutely obscene.”

Wow! Is Levin this uninformed? Does he think oil company executives set the price of oil? Does he not understand that oil is a global commodity, and if China or India are willing to pay more for oil than we are, then that is going to drive the prices up? That’s sort of like asking a company to lower the value of their stock, because you want to buy some, but think it’s too expensive. It’s the price it is because that’s what buyers and sellers in the open market have agreed upon for a value. Oil company executives do not set the price of oil. This only happens in politician’s dreams.

Bush, in California over the weekend to promote his initiative on alternative fuels, said a lack of refining capacity in the United States and the thirst for oil in emerging economies such as China and India are contributing to increased energy costs. He said he recognized the price of gasoline is hurting consumers and warned that the price is likely to go higher.

Like him or hate him, Bush is correct about this. I bet even the good senators would agree with this. So, let’s pose a question. A lack of refining capacity is a problem that is putting a lot of pressure on gasoline prices. Expanding refineries takes lots of capital. If we extract more money from the oil companies in the form of punitive taxes, are they likely to spend more money or less money on capital projects? Now, is this likely to make the refining bottleneck better, or worse? Again, if your goal is to have gas shortages and drive the prices even higher, then they are on the right track. Like I have said before, we tried this already and it didn’t work. (2) From a 1990 Congressional Research Service report:

“The windfall profits tax reduced domestic oil production between 3 and 6 percent, and increased oil imports from between 8 and 16 percent. This made the U.S. more dependent upon imported oil.”

This report should be required reading for legislators who think a windfall profits tax is a good idea.

Specter has focused his attention on oil industry consolidation and competition. “We have allowed too many companies to get together to reduce competition,” he said.

There were more than 2,600 mergers in the oil industry in the 1990s, according to James Wells, director of natural resources and the environment for the Government Accountability Office. A study by the GAO, Congress’ research arm, found that concentration of market power may have added as much as 7 cents to the price of fuel, he said.

As much as 7 cents? I think Senator Specter has identified the culprit. Gasoline prices are “as much as” 7 cents higher than they would be had they stopped those mergers. This is clearly the source of spiraling gas prices. If it was “as much as” 7 cents, I wonder what the lower estimate was. It really sounds like Specter is on a wild goose chase.

While politicians pander, I am still waiting for someone in government to have the guts to suggest that a potential solution to this problem is to encourage Americans, somehow, to conserve. I am waiting for someone to explain that cheap oil is not an American birthright, and as long as China and India compete for the same oil, there will be no more “cheap” oil. Of course more expensive oil will enforce conservation eventually. Maybe the politicians are much smarter than I think, and this is part of the plan. If we adopt the policies they are advocating, oil prices will spiral out of control, gas will no longer be affordable, and we will finally start conserving. Maybe there is a method to their apparent madness.

References

1. “Will U.S. Slap Tax on Big Oil Profits?”, Deseret News, April 24, 2006.

2. Glassman, James K., “Windfall Profits” Tax on Oil Companies, Capitalism Magazine, September 26, 2005.