Thursday, June 12, 2008

Big Oil vs. Big Government

Nobody likes oil companies, except the Bloated Plutocrat of course. They are environmentally unfriendly. And they make way too much profit. Well, right now at least. The last “oil crisis” that I witnessed was rather different. In 1998 I was living in Dubai and the price of a barrel of oil dipped below $20. Persian Gulf governments were in a tizzy over the massive revenue shortfalls and falling budgets they were facing. There was talk of suing EU governments for the disproportionately high taxes that they imposed on the retail selling price of gasoline! North Sea rigs were set to shut because they couldn't produce at that price. Oil companies were losing money then. But ever since then they have made OBSCENE profits according to Barack Obama and his Senate Demagogues, sorry, Democratic colleagues, that introduced a piece of political hustle called The Consumer-First Energy Act of 2008, largely comprised of a 25% windfall profits tax on U.S. oil companies. While I agree that Exxon-Mobil’s first quarter earnings of $10.9 are pretty much obscene, it seems that over the past ten years, Exxon-Mobil and other US oil companies have reaped profits on par with the rest of US manufacturing companies – approximately 8 cents on the dollar invested. Oh. Fortunately the Bill is going nowhere.

Oil prices are high because the US won the Cold War and discredited Godless Communism, the economic aspects of which have been chucked out the window everywhere but North Korea and the London School of Economics, even if China and others maintain the political aspects of Marxism-Leninism that keep the ruling oligarchy in power. Meanwhile with even “socialism” a dirty word outside the retrograde South American countries that Venezuelan President Chavez has purchased with oil revenues, China and the formerly bumbling socialist India, Russia, and most of its former satellites are all witnessing strong economic growth rates based largely on the benefits of a free-market economic system and freer global trade regime that the US has championed pretty much since its independence from Britain. Gasoline costs $4.00 a gallon in the US because you bought that Made in China 64” Plasma Screen TV last year. The plant that made that TV has expanded fivefold in the last 9 months and the shift supervisor when your gargantuan teletheater was produced (he’s now Director of Operations) has upgraded from moped to Toyota sedan. Both these developments mean that more fuel is being used elsewhere in the world (as oposed to the 25% of global oil consumption in the US), driving up your pump prices at home. So when Senator Charles Schumer of New York spews lickspittle while screaming about oil company profits, it begs the question as to whether he, or any of his colleagues in the Senate, understands basic economics.

Mind you, McCain isn’t much better, but he’s marginally more honest about his grasp of economics. He and Senator Clinton’s proposals for a Federal gasoline tax holiday represented the worst kind of pandering. With McCain one hopes that it was at least partly driven by an orthodox view that cutting taxes is never a bad idea. He was at least honest when he almost, sort-of, admitted he was tax-cutting for votes. Clinton was just desperate, but compounded pandering with stupidity by proposing another windfall profits tax on Big Oil to fund her vote-soliciting gas tax holiday. But both of them should have realized that the best they could hope for would be that gasoline retailers would split the difference with consumers, resulting in a massive 9 cent per gallon price reduction (while prices are climbing). Offering gasoline retailers a potential 18 cent per gallon windfall wasn’t very smart. But it didn’t raise serious questions about the mental health of either Senator. Not so for the sponsors of The Consumer-First Energy Act of 2008. Oh, and Obama was opposed to the gas tax holiday. But he was in favor of it before he was against it. (In 2000, he supported a Bill in the Illinois legislature that would have temporarily suspended the state gas tax).

Who do you think would be victorious in the battle of wits between the Seven Mental Dwarves of the Senate (all of them named "Dopey") that sponsored this Bill and the Finance, Taxation , and Law Departments of America’s oil companies? Would such paragons of virtue as Sen. Harry Reid prevail as a latter day Mr. Smith against the rapine oil companies? Or would a 25% tax hike on US oil companies simply be passed on to the consumer, further driving up gas prices? I know which way I would bet. But Sen. Chuck Schumer was particularly irate that the authorization for the US Attorney General to sue OPEC producers for their “monopoly” powers included in the Bill should be voted down. The fact that the US remains one of the worlds Top Five oil producers (number 2 after Saudi Arabia by some measures) and that its single largest source of imported oil is Canada (not an OPEC member to the best of my knowledge) seem to have eluded Chuck.

Can we go back to Economics 101? Supply and Demand. Right now, demand for oil is extremely high at just under 87 million barrles per day. This is higher than markets had envisaged, but already showing signs of falling. New oil fields (and oil fields are being discovered as I write) as well as oil sources that are not profitable at lower prices (Canada’s Athabasca Tar Sands, for example) take time to come on line and meet this higher demand. Similarly, high fuel prices create inflation and slow economic growth as well as discourage oil consumption, which in turn brings down demand for oil. Within 18 months from now, the price of a barrel of oil will be back in the $90 - $100/bbl range. Perhaps the Seven Mental Dwarves who sponsored The Consumer-First Energy Act of 2008 should instead draft Senate guidelines requiring that members of the Senate have obtained a basic educational level that includes passing Econ 101. That of course would thin the Senate out considerably AND substantially diminish eligible candidates. Supply and Demand.

Sadly, the Bleeding Heart refused to speak with me or provide written remarks for this piece. He said that Your Genteel Moderator had gone too far, and that accusing Senate Democrats of stupidity (which I do, but do not believe is confined to the Democrats) and the high price of gas to the failure of Communism (which I do, but he resents, having done a junior year abroad at LSE) was “absolutely unacceptable”. The Bleeding Heart believes that his hybrid SUV is the answer to the oil crisis. The Bloated Plutocrat was unable to file comments. He is at an Exxon-Mobile Board meeting and invitational golf tournament…

PS – Your Genteel Moderator must confess to a degree of bias in this matter. I dislike oil companies. In early 1990 while still at University but looking for a job, I went to interview with Occidental Petroleum in Los Angeles. That day they let go more than 10,000 people. This was because oil prices were low and they were scaling back exploration and refining activities. They didn’t offer me a job.


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