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Political Magic Tricks and the Price of Gas

By Richard Larsen
Published - 05/15/11

One of the greatest tools of magicians is misdirection, or distraction. While causing attention to be drawn to a nonessential hand movement or gesture, the other hand is engaged in the prestidigitationthat creates the magical trick. Some politicians, obviously having learned the art, are giftedly adept at the process.

A superb case-in-point was the dog-and-pony show conducted by the Senate Energy Committee this week as they brought in the top oil company chief executives to grill them on high gas prices and threaten to eliminate oil company tax deductions. That was the distraction and misdirection. What it was designed to do was play to populist frustration over high gasoline prices.

Meanwhile, the real trick has been played by their political leader in the White House and his Department of Energy, which somehow seems inappropriately titled. It would be more accurately referenced as the Department of Non-Energy, as it continues to do everything possible to restrict domestic production of the black gold, increasing our dependency on foreign supplies, and consequently contributing to the higher gas prices we all pay at the pumps.

Drilling, refinement, and delivery of oil products for our daily consumption adds up to about 16% of the cost of gasoline. Crude oil prices, determined by the commodity exchanges like the Chicago Board of Trade, comprise 70% of the cost of a gallon of gasoline. Federal, state and local taxes make up the remaining 14%.

That means for a gallon of gas priced at $3.65, we’re paying about $.58 to the oil companies for their costs, excluding the actual cost of the crude oil. Of that, about 7-9% is profit. On a percentage basis, a 9% profit on $4.00 gas versus $3.00 gas is 30% higher, resulting in record quarterly earnings by the oil companies in the first earnings quarter. But because of those record earnings, they become perfect scapegoats for the populist politicians in the White House and the Capitol, and play well into their magic trick of misdirection.

The oil companies pay over $12 billion in taxes, or about $35 million per day. So while the magician-politicians are pounding the table decrying the record profits of the companies that do all the heavy lifting to keep America moving, they’re collecting about the same amount of cash with the other hand. And what do they do to earn their share? They make it nearly impossible for the oil companies to explore, drill, and refine their product. Now how’s that for gratitude?!

The major oil companies generate a relatively modest profit. The five biggest oil companies (Exxon Mobil, Shell, BP America, and ConocoPhillips) average a 6.05% profit margin. Collectively, the S&P 500 average profit margin is 8.9%. Oil company profits pale in comparison to other sectors, especially information technology which boasts an average 18% profit margin. That includes the likes of Microsoft with a hefty margin of 33%, and Apple Computer with a 22% margin.

And now the magician politicians want to eliminate the tax breaks that the oil industry gets. They get no subsidies (cash outlays). They only get the same kinds of tax breaks that any other business entity is eligible for. As former Colorado Congressman Bob Beauprez said this week, “Contrary to popular opinion and the President's spin, oil and gas gets no taxpayer funded subsidies. The tax code does allow them certain tax credits and deductions to encourage continued investment in an industry that is heavily front-end loaded with capital expense.  These are the same kind of incentives available to Coca-Cola, General Electric, Ford, and Microsoft and other companies doing business in the U.S.”

As mentioned a few weeks ago, we have to acknowledge that this administration likes high energy prices for ideological reasons. During his presidential campaign, Obama declared that energy prices would "necessarily skyrocket" on his energy agenda. And his current Energy Secretary, Steven Chu has said that he thought our gas prices needed to be much higher as a means of weaning us from our reliance on fossil fuels. He told the Wall Street Journal two years ago, "Somehow we have to figure out how to boost the price of gasoline to the levels in Europe." At that time, gas prices averaged $8 per gallon there.

It’s obvious by now that their means to help drive up gas prices is to do everything within their power to thwart and restrict domestic oil production.

Just as it is with most aspects of our economy, from health care to energy, the largest contributor to higher costs is bad policy and poor regulation. Don’t be misled by the magic tricks of misdirection and distraction by the ruling political class. The politicians advancing an anti-oil ideology are the ones to be most upset with over high gas prices, not the ones who deliver it to us.

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"Party of the People" Not Serving Our Energy Needs

By Richard Larsen
 
Published – Idaho State Journal, 08/03/08

The political party in control of congress touts itself as the “party of the people,” as represented by their party name. Their legislative priorities then are subject to scrutiny to ascertain their commitment to pursuing the interests of the people they claim to be the voice for.

It seems obvious that one of the primary concerns of “the people” is the high price of gas. Having gone from $2.19 per gallon in November of 2006 when they took over, to $4.00, the price of gas is dramatically affecting the prices of everything, because of the high cost of transportation.

Since high fuel prices are such a concern we would assume that the leadership of the “party of the people” would want to do something about it, right? Well, obviously that’s assuming too much. Rather than dealing with the crucial energy issue at all, Congress strikes out on its 5 week August recess. But they did take the time to deal with one really critical issue: apologizing for slavery and Jim Crow laws of the 19th Century. Wow, that makes it so much easier to pay $4.00 for gas! So much for legitimate legislative priorities.

Without so much as allowing a discussion on their own proposals to reduce high gas prices Congress is now officially on recess. There is no indication whatsoever that Congress will follow the President’s lead and rescind the Congressional ban on offshore drilling in the outer continental shelf. In other words, what matters most to “the people” is not a concern of the Congressional leadership. They wouldn’t even allow their own plan to be voted on, which was conspicuously absent any substantive recommendations to increase our supply.

Congress has no viable solutions to alleviate the pricing pressure of oil. Their “solutions” have been anything but that. Speaker Pelosi recommends releasing 10% of the Strategic Petroleum Reserves to alleviate pricing pressure. That amounts to about 2.5 days of U.S. consumption. I’m sure that’ll make a big difference. Harry Reid (true to form) wants to sue OPEC. I’m sure that will drop the price. Senator Obama wants to give us another stimulus check, which again, does nothing to solve the pricing problem. And his most recent recommendation this week was to put more air in our tires. And they all want to tax oil companies more. That sure creates incentive to produce more! Can these people really be so devoid of logic and detached from economic reality? If this is the best leadership the “party of the people” can muster, they should be disbanded and start a new party that has at least a modicum of common sense and economic consciousness.

All they had to do before their recess (I think we could actually argue that they’ve been on recess since they took control two years ago!) was agree to rescind the Congressional ban on offshore drilling. Witness what happened two weeks ago after the President announced he would rescind the Executive Order banning outer continental shelf drilling. The price per barrel dropped from $147 on July 11 to $122. That’s a 17% drop in the price of crude based on the market’s perception that supply might be increasing. That’s even with the threat of a tropical storm disrupting operations in the Gulf. The weekly report from the EIA (Energy Information Administration) indicated a drop of 2.1% in gasoline consumption from a year ago, and inventories increased by 3mm barrels the prior week. That type of news typically causes crude prices to drop about 1-1.5%. The only other factor then is the President’s announcement. If Congress was to follow the President’s lead we would probably see crude oil drop to $100 per barrel, and drift slowly toward the $80-85 level that is fundamentally justifiable.

Many contend that it would take years to start seeing any production from offshore. However, a Sanford C. Bernstein & Co. analyst said recently that there is a lot of offshore crude that can be produced relatively quickly. The Minerals Management Service said that of the estimated 18 billion barrels of oil in off-limits coastal areas, almost 10 billion are off the coast of California. California could actually start producing new oil within a year if the moratorium were lifted, because the oil is under shallow water, has been explored and drilling platforms have been there since before the moratoria.

There are some who think that the President has been asleep at the wheel on the energy issue, and have choked at a gnat over the Vice President’s “secret” meetings with energy officials early in the first term. From that series of meetings, the President’s energy plan was spelled out in detail, calling for more expanded drilling domestically, more funding for alternative energy sources, and expanded implementation of nuclear energy into the mix. A drastically watered down version was finally enacted in 2005.

But here we sit with $4.00 gasoline, with a lame-duck President no one listens to, and a congress that is perpetually on a mental recess. “The people” deserve better.

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Democrats Like High Gas Prices

By Richard Larsen
 
Published – Idaho State Journal, 07/13/08

The phrase “energy independence” is used by many of us who maintain a preference for self-sufficiency in our energy needs with the corollary of increased self-determination as a nation by not being beholden to other nations. As we see with the current oil crisis, those other nations can literally hold us over a barrel in fulfilling our consumption needs.

There are many reasons why we find ourselves in this situation, but one of the most significant factors is that we have literally had our hands tied in procuring and refining oil domestically to fill our needs. Although we have ample oil reserves to meet our needs, the strength of the environmental lobby and the Democratic Congress prevent us from accessing those reserves. Many current leases for off-shore drilling by U.S. companies are not producing in existing wells because the bureaucratic requirements for permits to actually make those leases productive precludes many from being exercised. 

The dirty little secret, that is not really a secret but is definitely dirty, is that the Democrats like having oil this high priced. In 2000 when President Bush took office, the price of a gallon of gasoline was about $1.44 nationally. By 2006, when the Democrats took control, it was as at $2.10. Since that time, it has spiked to over $4.00 per gallon.

The Hill, official Capital news publication, declared earlier this week, “House Democrats are in a bind on the focal point of their energy plan. Worried that a floor vote on any energy-related measure would trigger a Republican-forced vote on domestic drilling, the leadership has scrubbed the floor schedule of the energy legislation that it vowed to tackle after the Fourth of July recess.” They still, even while in control of Congress, continue to function as obstructionists to solutions for our country’s economic woes!

Recently while on the stump, Senator Obama was asked about the high price of oil. He didn’t object to it being high priced, his consternation was that it “rose this quickly.” His solution: “We need to do what I called for months ago and pass a second stimulus package that provides energy rebate checks for working families, a fund to help families avoid foreclosure, and increased assistance for states that have been hard hit by the economic downturn.” In other words, he wants a band aid to buy votes instead of addressing the causes of the oil crisis.

Recall four years ago, John Kerry, while running for the Presidency, declared that the Federal Government should impose an additional 50 cent tax on gasoline to help curtail consumption. They want prices to be high!

In Oregon last week Obama said, “We can’t drive our SUVs and eat as much as we want and keep our homes on, you know, 72 degrees at all times whether we live in the desert or in the tundra, and then just expect that other countries are going to say OK. You guys keep on using 25% of the world’s energy even though you only account for 3% of the world population, you go ahead and we’ll be just fine.” Karl Marx would be so proud.

To liberals like Obama, economics are zero-sum gains. If we’re doing okay, someone else is not because of us. And since we Americans enjoy such a high standard of living, we’re culpable for all the suffering in the world because we’re taking from the others. For anyone who understands the dynamics of market economics, this is pure gibberish. But from the perspective of socialistic, centralized control economics, it makes sense. So to liberals, what Obama is saying is like gospel, but to those who have even a modicum understanding of economics and common sense, it is idiocy.

Plus his facts are wrong (as usual, like the 58 United States), and lacking some key insights. Americans constitute 5.6% of the world population, and with our 20% of the world energy consumption, we produce over 25% of the global GDP, according to World Bank data.

I’m convinced that the underlying reason the Democrats oppose any viable solution to increasing the oil supply is that they see America as the problem not only with our consumption, but also because it ties so nicely into their notion of global warming. They want us to not use oil, and the higher the price is the less likely it is that we will continue to use it at current levels. That means fewer carbon emissions and all the irrational “end of the world” conclusions they draw from their fallacious ideological premise.

It is unfathomable to me that we would send “leaders” to Washington who condemn our standard of living and preach a form of minimalistic egalitarianism. What we need are solutions to our current challenges to facilitate our continued growth, not defeatist, effete denunciation of our American way of life!

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