Tuesday, April 29, 2008


You know, it's one thing when a Republican proposes a tax cut that will only help large corporations and hurt the rest of the country. But when a leading Democratic presidential hopeful echoes him, that really just takes the cake. I don't know if she just doesn't understand the economics of supply and demand, fails to understand what this tax will save/cost, or is just being naive, but this is just ridiculous.

At current gas prices, about $3.50 per gallon, the average American will spend $420 for gas over the three months being proposed (1000 miles per month, 25 mpg vehicle). Of that, a total of $7.36 $22.08 (over three months) goes to the government in tax. That isn't even half a tank of gas saved should the tax be revoked for a few months. And that is at current prices; gas is expected to reach $4 per gallon or more by the time this "holiday" is proposed to go into effect. That $7 $22 won't cover a quarter tank of gas. I might be able to get to work and back on that, but I live a mile or two from work.

Then there is what that tax pays for. $7 isn't much for you or me when it comes to gas, but $7 from all of us over those three months is several hundred million dollars that go to maintain roads and bridges. McCain doesn't have any idea of how to make that up, so at least Clinton does improve on that plan by also proposing a "windfall" tax on the gas companies. The thing is, that tax is just going to be passed on to us the consumers in the form of raised gas prices. So, if you're following all this, Clinton is proposing to lower front end gas taxes for three months, but raise taxes on the gas companies that will then raise the cost of gas to compensate.

All of this completely ignores the fact that gas prices are (largely) determined by the amount of gasoline available. Now, I expect that, largely, supplies are being kept lower by these companies in order to help push prices up slightly, but there are a number of things entering into this.

One is the supply of raw oil. Much of this comes to us from the Middle East, where Clinton is doing some saber rattling of her own to match Bush's and McCain's. This heightens the instability in the region and causes crude costs to go up.

Next is refining capacity. This is where, I think, oil corporations are doing the most to keep prices up. Oil companies would like you to think that they aren't being allowed to build new refineries. This is completely untrue. In 25 years, 1975 to 2000, there was one application to the EPA for a permit to build a refinery. There are environmental requirements that must be met to build a new refinery, as well there should be. But there is nothing creating a blanket ban on building new refineries. Instead, oil companies are holding out for a tax break ransom, holding these high gas prices over our heads and threatening to move them higher unless they get paid to make new refineries instead of paying to do it themselves.

I say we don't negotiate with these economic terrorists and instead encourage lower consumption through higher CAFE standards and increased development of alternative energy sources. These are the proposals that Sen. Obama has voted for and supports expansion of.

EDIT: Fixed amount saved in the tax holiday. Originally I had calculated it for only one month.


oily said...

You're wrong about oil refineries. The permitting process is a killer, as it is with any processing facility that involves hazards and major safety issues. In other words, there is no STATED ban on construction. But there is a de facto ban due to the extreme hurdles that must be crossed.

The NIMBY problem arises immediately.

But your claim confirms the point that there are too few refineries. Since you claim the oil companies could build new refineries "if they really wanted to", then that means you are claiming they don't really want to build new refineries.

In business terms that means the vertically integrated oil companies don't want to invest in domestic refineries because compliance with regulations is too costly.

If you want to see new refineries built, have the government tackle the job. See how that works. Empower a government agency to get into the refinery business. The space shuttle will look cheap in comparison.

The oil industry operates in several segments: Exploration & Production; Oilfield Services; Gathering & Transmission; Refining & Marketing.

Only major companies like Exxon operate in all industry segments. Most operate in a single segment.

Should the government order Exxon to build more refineries?

Should the government give low-cost loans to oil companies as an inducement to build more refineries?

As far as the impact of your ideas goes, we will see far higher prices for gas if we follow the Obama plan. Worse, there's no reason to think we'd ever see lower prices or even lower individual gas bills.

People cannot be forced to buy new cars, just as oil companies cannot be forced to commit billions of dollars to capital-intensive projects.

On the other hand, the solution is simple:

Open up all domestic property to oil drilling. It would take less than a year for oil to flow from many properties that are off-limits today.

New wells would expand supplies and lower prices much faster than new CAFE rules would decrease consumption. Anyway, as I've said, AGGREGATE CONSUMPTION is on a one-way trip -- up.

Also, the Clinton Plan for a Windfall Profits Tax is too funny. Let me spell it out for you. If a special tax in enacted to confiscate legitimately earned profits, the oil companies can simply increase their cost structures to lower profits. Or fiddle with depreciation. There are other options as well.

John J. said...

Oily, BTU, Slapps, whatever you want to call yourself, oil refining companies, such as Exxon, BP and Shell, have been making more in profits than most countries world-wide. It is idiotic to think that they couldn't afford to meet the regulations that are in place to protect the environment and nearby population centers to build a refinery. Instead, they cut jobs and raise profits. They deserve whatever fines (windfall taxes if you prefer) are levied against them for such price gouging.

Rebecca said...

Hey John,

It's Rebecca-- Jaelithe's blogging buddy, and we've met at the Guild meetings and get togethers, etc. I don't know why I've never commented here, because I've been reading for a while. . . but I just wanted to let you know that I love you and your wife's brains :)

And that kid of yours is pretty darn cute too!

oily said...

john j,

Businesses invest in projects because the projects offer a return on the investment that is higher than putting money in Treasury bonds.

What you fail to accept is the fact that Exxon, or any other large oil company, is obligated first to its shareholders. The obligation is to earn the highest possible returns for them.

If building a new refinery offers a low return -- less than Treasury securities -- a company that builds a refinery is acting against the interest of its shareholders.

By the way, Exxon's profit margin is 10%. But Microsoft's profit margin is 22%-24%. Should the government confiscate MSFT's "excessive" profits?

It is nuts to think any company MUST invest its capital according to the wishes of people who know nothing about the business and its risks.

Every existing refinery in the US has been rebuilt and expanded where and when possible. These overhauls cost huge huge sums, and, whether you care to believe it or not, a couple of the refineries declared bankruptcy in the 1990s because oil prices dropped after the operators borrowed big bucks for rebuilding.

If you think Exxon and other big oil companies have a moral obligation to build new refineries, then you are taking the "free" out of free enterprise. You are suggesting the government should decide which businesses to support, which, in your case, suggests a move toward a centrally planned government.

If Exxon is hammered with "windfall profits taxes" that tax burden will reduce the capital Exxon has for building a new refinery and guarantee the company does NOT build one. Are you someone who believes companies can be beaten with taxes into doing what YOU think is the right thing to do?

By the way BP and Shell are not US companies. One is British, the other Dutch. If you think the price of fuel is high in the US, check England and Holland. With government regulation you get higher prices. That is where your ideas will take the US.

John J. said...

"Should the government confiscate MSFT's "excessive" profits?" I must recuse myself from this question due to my pre-existing bias against Microsoft.

As for building more refineries. It is clear that the lack of new refineries is driving the price of gas through the roof. Five companies control 50% of the refining capacity in America (Shell and BP are among those). Yes, it is good for their business to keep that refining capacity low as this drives up the price. But this is price fixing and it is illegal.

your pal said...

john j, you wrote:

""Should the government confiscate MSFT's "excessive" profits?" I must recuse myself from this question due to my pre-existing bias against Microsoft."

Why? This isn't a courtroom. This is a matter of opinion. Your response is just game-playing.

Why don't you give me the name of a "good" corporation?

You said:

"As for building more refineries. It is clear that the lack of new refineries is driving the price of gas through the roof."

Worldwide demand for refined products is rising. But the number of refineries is not. Hence, the proverbial bottleneck. It's a problem.


"Five companies control 50% of the refining capacity in America (Shell and BP are among those)."

That means 50% of refining capacity is handled by a much larger number of other companies. In other words, the situation looks normal.


"Yes, it is good for their business to keep that refining capacity low as this drives up the price. But this is price fixing and it is illegal."

You better hit the law books. An unwillingness to committ hundreds of millions of dollars to build new refining facilities is NOT price-fixing. Not even close.

Meanwhile, the bottleneck is what you want. YOu want to drive the US economy away from oil. The best way to achieve that goal is to raise the price of the refined products so high that alternatives replace oil.

But then you tie yourself in knots by arguing the silly point that the high price of gasoline puts too much money in the hands of oil companies while punishing consumers.

Thus, you seem to want the US to stop using oil while the price of gasoline remains low. This is an example of alternate-reality thinking. You should support an increase in the regulatory burden on oil refineries and restrict their operations even further.

That might convince people to find other energy sources, or start riding their bikes to work.

If, however, Exxon and other companies build new refineries, then oil use will increase. There is a theory known as Says' Law. It says supply creates its own demand. In the case of oil, this has been remarkable true.

Considering the pace of growth in China and India, and the desire for growth in every economy on the globe, the planet could consume 100 million barrels of oil per day NOW, instead of the 85 million the 6.5 billion residents of planet Earth consume today.

But guys like you oppose the spread of prosperity because it takes cheap oil to get things rolling.