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25 April 2006

Congress Responds to Populist Ignorance Over Economic Fact

This morning's Wall Street Journal has an excellent editorial that exposes Congress' hypocrisy in legislating a gasoline shortage to benefit Archer Daniels Midland and other ethanol manufacturers, and then trying to divert the blame for it to the industry which is struggling to comply with the massive changes resulting from this mandated switch to ethanol.

Clearly, the major underlying factor behind high prices at the pump is $75 crude oil. The "seven sisters" used to control the global price of oil, but today crude is a geopolitically priced commodity that has shot up in value because worldwide demand for it has eaten completely into the excess productive capacity that Saudi Arabia formerly maintained. When the Saudis had millions of barrels per day of spare capacity, offline and ready to go back online on short notice, oil prices were held artificially low. Today world demand growth (not just US demand) has caught up with total productive capacity, and if you took Economics 101 in college, the result is not a surprise to you.

The ExxonMobils and the Shells and the Chevrons have no control over the price of crude oil, but since they produce it themselves, they will profit from today's higher prices. And they should, because they invest billions of dollars of extremely high risk capital to find and produce the stuff so that we can buy it from someone other than Iranian mullahs and Venezuelan dictators.

Crude oil is not the only factor in the price of gasoline, however. We have an acute shortage of refining capacity in this country. We are not only importing crude oil to run the refineries that we do have, but we are also importing gasoline and other refined products in increasing amounts because a new refinery has not been built in America since the early 1980s. Our domestic refineries are running very close to 100% of capacity, the only curtailments being periodic in nature and driven by maintenance schedules and safety concerns. And what happens, class, when a commodity is being produced at very near the full capacity of an industry to do so? Anyone? Anyone? That's right, the price goes up.

We have made it impossible to permit the construction of a new plant in the US because of the outcry of environmentalists who drive their SUVs to Sierra Club meetings where they propose more and more limits on industrial development, and then have the gall to complain about the costs of filling their tanks. Our politicians have fallen prey to this because NIMBY trumps macroeconomics in terms of votes in their congressional districts.

Most recently, as the WSJ editorial points out, we have legislated the shuttering of MTBE plants, the current source of the oxygenate that gives our gasoline octane (remember, way back when it used to be lead). MTBE substantially reduced auto emissions, eliminating the lead that contributed to acid rain, so Congress pushed the industry to invest billions of dollars in the production of MTBE. Now, we've found that MTBE "might" pollute our groundwater if it is not stored correctly -- although it has never been shown to be a carcinogen nor has not been proven to have hurt anyone -- so Congress has, cheered on by the ethanol lobby (e.g. ADM, other major corn producers), mandated another multi-billion re-tooling of the refining infrastructure. These major changes do not occur without supply disruptions, and we will experience those this summer. And class, what happens to the price of a commodity when it's supply is disrupted?

Another major element in the price of your gasoline is the federal and state tax burden. Here's a link to an interesting article from the Tax Foundation that shows how excise taxes on the sale of gasoline far exceed the profits of the entire oil and gas industry.

So the problem is with our Congress. These guys (and women, we can't forget Cynthia McKinney) do not care about fixing our energy dependence problems. They are merely doing their political calculations, and they know that lining up against "Big Oil" is an easy winner with a poorly educated populace. So Congress has succumbed to the pressure of left wing interest groups to prevent the industry from investing in new refining capacity in the US, or in large exploratory projects in Alaska and offshore. They are the ones who have driven up the price of our fuel, and the government is the biggest beneficiary of this increase even as they sanctimoniously excoriate oil industry profit margins.

Americans do have an addiction to their cars, and it will take economic forces to break us of that bad habit. Higher oil prices will lead to smaller cars, not because the government demands it but because consumers demand it. Smaller cars and smarter driving habits will eventually bring those prices back down, but it will take awhile. Eventually, we will find another way to fuel our cars besides petroleum. But that won't happen until the "other way" is economic, which it isn't today even at $3.00 gasoline.

It took awhile for us to get into this mess, it will take awhile for us to get out of it.

The absurdity of US energy policy should be a major consideration for Texans, which would be a net exporter of energy on a stand-alone basis. Texans understand that the industry produces jobs and produces the fuel for the entire economy, entails a great deal of risk, and requires a healthy profit incentive. The other 49 states ignore supply and demand and the other inexorable laws of economics at their own long term peril.

7 Comments:

Anonymous Anonymous said...

A very thought-provoking and insightful article on one of today's major problems . . .

7:54 AM  
Anonymous Nellie said...

Well put. Here's a similar editorial by Thomas Sowell, out this morning, making many of the same points.

http://www.realclearpolitics.com/articles/2006/04/oily_politicians.html

8:10 AM  
Anonymous Nellie said...

Guess I can't insert a hyperlink in a comment, but you can click and paste it to your browser.

8:17 AM  
Anonymous Anonymous said...

....and the Retardlicans seem to be no more led by intellect and reason than the Dumbocrats on this issue. Consumer populism holds swap because it grabs headlines.

This is proof that the GOP is approaching the Dems in terms of intellectual bankruptcy.

8:30 AM  
Anonymous Jim in Midland said...

http://www.realclearpolitics.com/articles/2006/04/its_hard_out_here_for_a_pump.html

I can't stand Ann Coulter in three minute bursts (geez, imagine being married to her), but I think she is dead on correct in the article linked above.

8:44 PM  
Anonymous Steve said...

http://www.slate.com/id/2140613/nav/tap1/

Even Jacob Weisberg on Slate has it right about our idiot politicians.

6:55 AM  
Anonymous Michelle said...

http://tks.nationalreview.com/archives/096212.asp

Very good commentary on this from the National Review.

12:15 PM  

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