Redstate

A nicely laid out summation on the increasing dopiness many in America - politicians, pundits, and people - are taking towards gas prices.

In a free market, the market bears what the market bears.

That said, I did have one question about one of your comments. My understanding of the current problem is that the issue of supply is a relatively minor one, long term. There's plenty of oil. And it's not even a question of America needing to tap into its own resources more.

The considerably bigger issue is one of refinery capacity. We are woefully underserved by refineries. As you indicate, we haven't built any new ones in decades.

And this is where, to an extent, the hypocrisy comes from average Americans. One of the main reasons more refineries haven't been built is the NIMBY effect - Not In My Backyard. Nobody wants ugly refineries in their neighborhood, district, or city. So there's seldom support for building new ones.

So the supply issue is fairly irrelevant here. In the US, we lack the refinery capacity to process oil into gasoline. Even if we had more oil flowing into our country, there'd still be a bottleneck in processing it.

While the larger issue is the lack of surplus refining capacity (caused in part by environmental restrictions and NIMBY), regionalized gasoline formulations (caused by disparate air quality regulation) prevent surpluses in one region of the country being used to fill shortages in others.  There needs to be a permanent fix to this.  Bush's post Katrina effort is temporary.

Also new refineries are essential.  If Specter and is Dem buddies succeed in implementing windfall profit taxes, don't expect any new refineries or existing refinery expansions.

Crude oil supply, while not the primary issue, is still an issue since increases in raw materials create upward pricing pressures by squeezing refinery margins.  These upward pricing pressures can only be realized if excess refining capacity isn't available to cause competitive downward pressure on prices, or such higher prices don't create a drop in demand thereby reducing price.

 

I wonder though, how much of this is posturing, and hype.

They(?) did this exact same thing last year, exact smae time in the the Spring.  Talk of $4, $5, gas by summers end.  Never happened.

I just wonder what other forces are at work

but it seems like every spring, gas, airlines, blah, blah, blah, prices going up...period.

there will always, I imagine, be something that will bring out the old casue/effect.....

even with Katrina last year, refining abilities were the subject of discussion.  Prices never got where they were predicted.

in the heat lst year, gas stayed above $3 for about 1 week, tops...in Chicago.  That was with Iraq, Iran, Katrina, and a host of other factors.

The industry-wide profit per gallon: 7.2 cents

The state and federal tax profit per gallon: 55 cents

THAT'S a stat needs its own commercial.

Dear "Redlightgrnlight":

Where did you get the statistic for "industry-wide profit per gallon"? Do you have a link to an official, respected website that published this? Maybe the American Petroleum Institute? I'd like to have some hard facts next time I'm in an argument over price gouging (or if I want to write to Bill O'Reilly to shut up about this subject...)

If this is accurate, who could reasonably claim that companies who make a 2.4% profit (7.2 cents / $3 per gallon) selling a product are price-gouging?

If your job moves from New Jersey to Texas, do you sell your New Jersey house for what you paid for it ten years ago, or for what it costs you to replace it in Texas? You gouger you!

Sorry, give me a little time for some research.

http://www.conocophillips.com/newsroom/other_resources/energyanswers/oil_pr
ofits.htm reports that Conoco Phillips profits 9 cents per gallon in the 3Q 2005.  That's the first one that I found.  I'd like others to find it, too.

Of course, the tax numbers are astonishing.  It's just that with an essentially value-added tax, people don't realize the ridiculous taxes they're paying.

The 18.4 cents per gallon the federal government taxes would be a great item to chop, if only we could rally a few congressmen to push it.  That would get massive immediate support, I'd hope, and could slip through as a new tax cut.

its the speculators and hedge funds that have added at least $15 per barrel to the price.  I seriously doubt that any gouging is going on other than by people in the market who are buying oil with no intention to ever use it other than to sell for a profit after driving the price up.  Perhaps a tax on undelivered oil contracts or a higher shorter term cap gains tax (penalize the daytraders, who are really just gambling anyways).

That could also be a winner.  Why not try to eliminate that as part of getting gas prices down?

I'm a liberal, so I get great satisfaction of sticking it to the gas companies every time I bike past the gas station. While I'm at it, I also get the satisfaction of sticking to Bin Laden. As an added bonus, I've lost a little weight, and I get a little smug feeling of virtue. Alas, today it is raining, so like other schmucks, I had to drive to work.

How much do gas prices hurt, and how much of the pain is a consequence of consumer choice? Some people, contractors and other small business owners probably are hit pretty hard by this. You've got no choice but to drive a large vehicle and you've got to go where the work is.

But for must of us, commuting distance is a matter of some choice, as is the vehicle we drive. Others can use public transportation. And there's carpooling. Other than public transportation (and here, solutions are years away anyway) none of this requires any government intervention.  

Do our 12 year olds really need to be chauffered to school? I've been walking with my daughter to her school. She's 5, and likes the walk. The market is three blocks away--can I use a bicycle? I've got two kids, do I need a seven passenger vehicle? Basically, it seems what Americans want is for Congress to help them avoid the consequences of their individual choices.

People who bought cares assuming gas would stay cheap forever are foolish, and don't deserve to keep their money.

When they can't get food from the countryside to your precious health food store down the road, it won't mean much if you get there on your bike in 5 minutes.  Or if it doubles in price.

The answer is not going back to 1895.  The answer is to drill for the vast amounts of oil available in this country!  To begin producing oil from shale rock.  To build new refineries.

Don't blame the american public that there have been no new refineries. Its the fault of our politicians!

In all fairness, it might be difficult to find hard numbers about profits specifically from sales of gasoline. A typical oil refinery produces many salable products, not only gasoline, but LPG, polymer plant feedstocks, jet fuel, diesel fuel, home-heating oil, coke, and asphalt, and profits would be reported as total revenue from all these products, less crude oil costs, less operating and transportation costs. Since money is fungible, how much of the profits come specifically from gasoline?

While it is possible for refineries to shift production somewhat between home-heating oil, diesel fuel, and gasoline in response to demand, there are physical limitatations to the amount that can be shifted (it is impossible to convert 100%, or even 40%, of a barrel of crude oil into gasoline). Gasoline production capacity is limited by the capacity of certain refinery units, especially catalytic cracking, hydrocracking, and aromatic reforming units.

In times of high gasoline demand, refiners will run these units at maximum capacity (to the detriment of diesel and home-heating oil production), but if demand outstrips capacity, oil companies are forced to import gasoline from foreign refineries, and neither the President nor Congress nor the oil companies have any control over the sales price of foreign gasoline.

One hidden factor that is driving up the price of fuel is the fact that American refining capacity is stretched to the limit, so that any disruption (such as Katrina) forces us to import foreign refined products. There is no real short-term solution to the necessity of importing foreign CRUDE OIL, but our government CAN facilitate the construction of new refining capacity by:

1. not requiring new environmental permits for expansion of capacity at existing refineries
   
2. allowing oil companies to locate new refineries on abandoned military bases, if adequate water is available
   
3. reducing the number of different grades of gasoline required as a function of season.

Despite these problems, the ban on MTBE in gasoline should still be retained. MTBE turned out to be a bad idea, because it is very soluble in water. There were many leaking underground storage tanks (LUST) out there, and the leaks were unnoticed as long as insoluble gasoline floated on top of ground water. But MTBE dissolved in water (up to 5% concentration), and drinking water was becoming contaminated.

one of these days, a smart politician will encourage businesses where a person sits at a computer most of the day to telework using laptops -- say 2-3 days out of the week. It can save on gas, pollution, etc. Of course it would require more demand that the worker focus, but I think we can swing it. It's a fairly short-term solution that we can adapt to quickly and can save on travel.

Of course, if airlines and trucks that deliver goods continue to use fuel and pass the charges on to the consumer, we'll suffer away from the pump, but I think its step. So, let's telework!

Volatility is one of the factors that impact the price of crude oil (or any other commodity). Like it or not, turmoil in Iran, Nigeria, and Venezuela all impact the price of crude and will continue to for quite some time.  We need to increase domestic production.

"A tax on undelivered oil contracts"? You sound like that nutcase who runs Overstock.com with his conspiracy theories about short selling etc.

Happy trading

You sell it for as much as you can get someone else to pay for it.

and exerts some manipulation on the price of crude, so gasoline price is not 100% controlled by free market forces.

That the American people don't, as a whole, Want the new refineries or the drilling.  For multiple reasons.  Mostly a lack of education on those issues.

$3 gas is here to stay. There isn't a politician on earth who can do a thing about it.

Politicians can appropriately stop letting the EPA and the Environmental Movement dictate policy and approve the building of refineries, nuclear power plants, and ease regulations. That would benefit everyone!

Any politician worth his salt can empathize, demagogue, and proceed to make matters worse.

but won't. The don't have the caj*ones to do it, they are in too deep to the enviros.

Sen. Chuck Schumer (D) Peoples Republic of Brooklyn wants to "break up" the oil companies to encourage competition.  Since he has no experience in the private business sector, his comments and thoughts are irrelevant and should be treated as such.

Perhaps if we didn't have such a high percentage of lawyers in Congress, and had more businessmen and women, we would have recommendations that actually make business sense.

• Drill more domestic oil.
  
• Encourage investment in refineries.
  
• Relax regulatory control.
  
• Delay the requirement for ETOH.
  
• Suspend sales tax on gas.
  

by state governments is going on as we speak.  Collusion has been occurring here in Wisconsin with a 9% minimum price markup law on wholesale costs of gasoline.  I suspect Russ Feingold will speak of this price gauging along with Chuck Schumer right away.  

Not surprisingly this law has its origins in that wonderful New Deal era, whose initiatives are causing deficit spending in many formats (corporate farm subsidies, TVA, and Social Security to name a few).      

is that businessmen are too busy making money to run for a job that, honestly, doesn't make that much.

And Lawyers are the only ones with the knowledge of the law to make use of all the crookedness that makes being a politician so profitable...

Overall, of course.  There are always exceptions...

Isn't it interesting that when countries like Venezuela and Iran go raising political hell, the price of THEIR PRODUCT goes up? How many indutries do you know that can make more money just by threatening their customers? They must be laughing all the way to the bank.

needed to be added to the figures are the amount that increasingly stringent safety laws have added hundreds of pounds of mass to motivate at the same time much tighter emisions laws have reduced efficiencies by 25-33% (worse on smaller motors)

For those who do not remember, back in the late 80s, GEO had a model that got over 60MPG without the need for hybrid operations.

How many indutries do you know that can make more money just by threatening their customers?

Similar methods and much the same type of people involved!

Like the wonderfully cynical dialog delivered by Claude Rains in Casablanca, we're hearing all the same ideas, good and bad, each time energy prices start to pinch.  (I'm no better, being a multiple-blogging offender on this subject.)

Standing way back from the subject, a few transcendent points do come to mind:

1. Why is there such an either/or policy presumption?  ANWR/offshore exploration or alternative sources, for example.  I believe that our national energy requirements and projections are so immense that we will have to go forward with all the potentially feasible technologies and initiatives to have much chance of success.  Exploration, clean/gassified coal, oil sands and heavy oil, nuclear, wind, biomass, etc. -- we're going to need them all.
   
2. The oil company lynch mob is almost certainly demagoguery, but there is one corner of my memory that keeps me from unreservedly condemning this economic illiteracy.  The electricity shortages in California a few years ago were, in fact, at least exacerbated by Enron and other market manipulators, if subsequent guilty pleas in criminal prosecutions are credible.
   
3. Elected leaders who, when confronted with energy price spikes like we're currently experiencing, fail to mention their own policy choices as contributing to the problem are grievously disingenuous.  True, the EPA conjured the specifics of 17 regional boutique gasoline blends, for example, but it was Congress that gave them that authority.  Ethanol substitution -- for previously-mandated MBTE -- may make some environmental sense, but I think that was a lot less important in recent ethanol mandates than corn-state politics.  Buttressing that conclusion is the continued tariff on imported ethanol, even though domestic ethanol supply shortages have recently driven futures prices to nearly $3.00/gallon.
   
4. Not all parts of the US are pulling their weight in addressing energy supply problems, to the extent supply shortfalls are contributing to current price spikes.  NIMBY issues with refineries and LNG terminals are all too familiar.  Another example: the embarrassing AWOL behavior of Washington State limiting petroleum imports to Puget Sound refineries to what can be consumed in Washington (sometimes referred to as the Magnuson Amendment).  (Lest the rest of you get too perturbed with us Washingtonians, please note that Governor Christine Gregoire (D-King County) imposed an additional, incremental state gasoline tax in 2005 that will soon rise to 9 cents/gallon, and we have some of the highest gasoline pump prices in the nation.)
   

...but the Dims have come up with a plan that removes the federal gas tax ($.184 per gallon) from all purchased gas for 60 days, along with removal of tax breaks and, more importantly, federal entitlements to the oil companies.  Called the Menendez Federal Gas Tax Holiday Amendment (Bob Menendez, D-NJ), it is being touted as a short-term solution to lower pump prices.

Republicans need to step in and come up with something comprehensive that betters what the Democrats put together.  Removing the federal gas tax will show the American people that they are not going to be stuck, at the federal level, with a ridiculous tax that does nothing for anybody but give money and power to the government.  Removing subsidies will force the oil companies to earn ALL of their revenue from the consumer, meaning they need to find that competitive edge to get smart on oil and gasoline production and gives them a financial reason to develop alternative or better energy sources.

Just my opinion.

Remember him?

Who is to blame for this?

Lockhart cited the people in Washington. Politicians, he said, value job security.

Among all else they want to be reelected. And partisanship is a safe haven.

He said the 1999 energy crisis was evidence of this problem.

[It] was declared a crisis by the press because the price of gasoline went over $2 a gallon.

This caused a great debate in Washington with both Republicans and Democrats offering their own versions of a solution.

Lockhart said the reason there was a crisis in the first place was because people have started driving sport utility vehicles, which use more gasoline.

But neither side was willing to take that on and say, Well, maybe the public needs to change their behavior, because that's too risky.

This is from a speech he gave at Pitt. Read the rest of his brilliance here
if you have insomnia.

Is that producers (ie OPEC) have greatly reduced, if not eliminated, their hedging programs.  They wised up over a year ago that speculators would remain in the market (in fact, they were and are coming in droves) and hence the largest natural sellers are no longer providing offsetting liquidity to these buyers.  If there were in fact shortages of crude or gasoline, the nearby futures contracts would trade at a significant premium to contracts even 6 months further out.  They are not, and in fact they trade below those contracts.  I'll leave it to you guys to look up explanations of backwardation and contango.

Why does everyone focus on refineries and production etc etc...

The quickest and easiest way to solve the energy crunch....efficiency efficiency efficiency...tax breaks for companies innovating with efficiency technologies.

The alternative fuels chiefly cited; corn ethanol, hydrogen, and others are a pipe dream for the near future.  The easiest and by faaaaar, the cheapest thing to do is increase efficiency.

I saw one of these electric cars ... it was about the size of an old Kharman Ghia.

"GM produced about 1,100 of the wedge-shaped two-seaters from 1996 to 1999 in what seemed to be the first wave of electric cars designed to meet tough air-quality rules. Because the EV1's technology was considered experimental, the company leased the cars to drivers instead of selling them.

But the California Air Resources Board relaxed automobile-emissions requirements. GM, claiming efforts to market the car were a dismal and costly failure, last fall pulled the plug on the EV1 and began reclaiming the cars.

Although drivers have remained enthusiastic about their electric cars, GM has refused to extend the $300-per-month leases or sell the vehicles"

http://ev1-club.power.net/

=

You can talk about supply and demand all you want, but it is hard to see how it makes sense to have a tax policy that promotes the Hummer but not the Prius.

It also doesn't make sense that mass transit doesn't get more of a boost.  Anyone living near a major metro area knows that real estate values go up the closer you get to a metro/subway/train station.  

Instead of building more highways to service outlying suburbs or traffic between burbs, we could be building light rail.  It's called "Transit Oriented Development" and would impact 1/4 of all new homes for the better.  Here's one comparison:

Transit oriented development ("TOD") is development that occurs in a compact area with well-defined boundaries, oriented around a major transit node, providing residents with access to many forms of transportation, employment opportunities, and retail, office, and service facilities.

Good TOD favors pedestrian movement and activities and reduces auto trips and miles driven compared to typical development within the defined areas.

Two Metro corridors in Arlington, Virginia, are the most successful new TOD areas in the country. Prior to the arrival of Metro, one area -the Rosslyn-Ballston (R-B) Corridor- was characterized by declining low density, suburban commercial development. By spending an additional $100 million of their own money, Arlington County shifted the Metro from the highway median to below ground through the middle of the redevelopment zone, and applied a "bulls-eye" plan to focus development at five stations.

Two of the stations also serve as bus hubs.  The R-B Corridor was the subject of a recent ntensive study. From 1970 to 2000, the R-B Corridor added nearly 30 million square feet of development to the five station areas with little or no increase in traffic congestion. The growth that occurred in a 2-square-mile corridor would have consumed 14 square miles at standard suburban densities.

Households nearly doubled and employment nearly tripled, yet trips through local intersections increased by an average of only 30 percent. Car trip generation in the evening peak is only 1 trip per 8 households, significantly lower than suburban jurisdictions.  Seventy-three percent of Metro riders walk to the station, while only 15 percent drive.

http://www.environmentaldefense.org/documents/4273_ICC-1b.pdf

Since supply and demand are unavoidable issues, why not work the demand side instead of only focusing on the supply side? It didn't work for monetary policy, it won't work for energy policy either.