That 70's Show

Straight from the 1970's, the US's golden era of bumbling government intervention in the economy, come the same proposals that worked oh-so-well the first time around.  Democracts blame big oil for gas prices, and propose channeling solutions from Hugo Chavez:   (via Q&O)

Congressional Democrats are taking aim at big oil companies as U.S. gasoline prices near a record average $3.05 a gallon.

Although
industry experts doubt it will have any effect, half a dozen senators
gathered in front of a Washington service station to push their own
remedies to the situation, the Washington Post said.

The latest average price for a gallon of unleaded regular gas was $3.042, according to the AAA Fuel Gauge report.

Sen.
Charles Schumer, D-N.Y., called on Congress to consider breaking up the
giant companies. Sen. Bernard Sanders, I-Vt., pushed for a windfall
profits bill.

Sen. Maria Cantwell, D-Wash., promoted her
anti-price-gouging bill, which the Senate Commerce Committee adopted
earlier this week.

Gee, since every transaction in a free market requires a willing buyer and a willing seller, wouldn't it be just as correct to blame profligate consumers for the increase?  And why is it I don't remember any of these actors in Congress rushing to clamp down on greedy sellers when home resale prices skyrocketed far more than gas prices have?  Does anyone remember Maria Cantwell imposing windfall profits taxes on home-sellers?  Or, for that matter, on sellers of Internet stocks who financed their campaigns selling stock above $80 that would soon trade only in the single digits?  And by the way, how can any party who elected Maria Cantwell to the Senate seriously call members of the other party "stupid."

Let's do a thought experiment.  Let's assume that through a series of government actions, Congress is able to return oil profits "to the people."  Oil company profits are now reduced to zero.  That should make a huge difference in gas prices, right?  Well, out of a $3.00 gas price, taxes and the retailers margin are probably 75 cents or so (46 cents tax, 10% or 30 cent retail margin).  This leaves $2.25 for the greedy oil companies.  It turns out large oil companies like Exxon make about 6% of revenues in the bad times, and 10% in the good times, like now.  So, this leaves a profit of  14-22 cents per gallon.  The "people" are saved!  Gas prices can come down by a whole 15-20 cents.  Of course, in return for saving a buck or two on fill-ups, we've nuked the whole incentive system for investment and finding new oil and improving efficiency.  Gas prices over time will rise much higher than they are now, and lines will start reappearing at gas stations, but that probably won't show up until after the next election, so why should anyone in Congress care?

  • CRC

    Funny thing is that local, state and federal governments make more "profit" off of a gallon of gasoline than the oil companies do. If Congress wants to do something about gas prices, they could repeal their 18.4 cent per gallon tax. With a correspnding cut in spending of course! States could repeal their average 23.6 cent per gallon tax too. That's 42 cents a gallon right there!

  • Dan

    I agree with your posting today on the idiocy of politicians when it comes to gas prices. The best way to get prices to go down is to reduce consumption. U.S. consumption of gasoline is at all-time highs. It is beyond me how consumers could be so ignorant of the law of supply and demand that they can't understand that high demand leads to higher prices. And it's irresponsible of the Democratic politicians to use this ignorance to make political points, as they are doing by staging rallies at gas stations, calling for a windfall profits tax, etc. Makes me ashamed to be a Democrat.

    At some price (we have yet to see it), consumption will fall. Not sure if it's going to be at $4 a gallon or above that. But we are going there, if not this year, then sometime soon. U.S. oil production is down 50% since 1971, and signs are that Saudi Arabian production has peaked and will now begin to fall. Production already is long past its peak in the North Sea and Russia, and political complexities in Africa and Mexico make those regions less than reliable. That leaves Canada, where some say tar sands will lead to a steady supply. But refining oil from tar sands is an expensive proposition, so even if that becomes a reliable and abundant source of oil, it will come at a price. Ethanol is not a realistic solution to replacing foreign oil for various reasons. Drilling in the Alaska Wildlife Refuge is not going to provide enough oil to change the current supply/demand picture that much, even if it ever gets approved. For environmental and "NIMBY" issues, I don't believe we'll ever see serious exploration/drilling along the Atlantic and Pacific coasts of the U.S.

    The time has come for Americans to re-assess their driving-centered lifestyles. Blaming the oil companies helps absoultely no one.

  • Dan

    As for the poster who thinks ending the gas tax is the solution, I can only say, what planet are you living on? All that will do is raise consumption, which in turn will raise prices.

    Now raising taxes on gas, though unpalatable for politicians, might actually keep people from driving so much, and lead to less dependence on foreign oil (and fewer wars over it), as well as a better environment.

    And just recall, please, that after Clinton raised the gas tax in 1993 (without a single Republican vote), gas prices fell to historic lows. These low prices, of course, were a consequence of supply and demand issues beyond simply the raising of the tax, but it's worth noting.

  • Mesa EconoGuy

    Absolutely correct again, Coyote.

    1) the gas tax must go;
    2) MTBE, 10% ethanol and other mistakes and blends must go;
    3) More refineries must be built;
    4) The 1970s sucked

    Plus, under your above scenario, Hugo Chavez gets to make out like a bandit.

  • RDH

    Dan,

    First, you state that US gasoline consumption is at an all-time high, evidently unresponsive record current prices.

    Then you state that reducing the (artificially inflated) price of gas will increase the price of gas by causing more consumption -- above those very same all-time record highs that are unresponsive to price.

    Aside from sounding like a Zen koan, your statement is interesting. How is it that market forces don't work in the first case, but work contrary to every other commodity on the planet in the second? And, assuming you're somehow correct on the latter, wouldn't even higher gas prices lead to the desiderata of lowered consumption, decreased dependence on foreign oil and less environmental degradation?

    Perhaps you're right. We must dramatically raise the tax on gas in order to decrease demand, reduce the chance of developing the deep fields in the Gulf of Mexico, shelve preliminary research into synthetic fuels (such as nuclear-derived methanol), promote scarcity and radically increase production and transportation costs of everything from wheat to toilet paper.

    Yes, that will be another fine example of how a centralized, coercive economy improved everyone's quality of life...

  • CRC

    Dan,

    As for the poster who thinks ending the gas tax is the solution, I can only say, what planet are you living on? All that will do is raise consumption, which in turn will raise prices.

    I understand the dynamics that might occur here. They might not also. The point I was making was directly in reference to politicians (a.k.a. tax collectors) harping on the oil companies about gas prices when they (the politicians) are directly responsible for a sizeable chunk of the end/retail prices. Their (stated) objective is lower prices. Eliminating the tax would do that immediately. Would demand rise because of lower prices? Probably Would it bid prices back to their current level? Maybe. But my key point was their unwillingness to look at their own contribution to current retail prices.

    P.S. Your "What planet are you living on?" rhetoric isn't really necessary. We can all be civilized and respectful here.

  • CRC

    I'd like to add one more comment/question. Are these the same people that want higher fuel efficiency standards from car companies by government fiat? Are they so dense as to not realize that the higher gas prices are going to encourage less consumption and greater fuel efficiency without demanding it from the government? Don't they also realize that, ultimately, if cars are key contributor to the unquestionable evil that is global warming, that higher gas prices will help there too?

  • CRC

    Regarding prices, demand, etc. I'd like to add the following thoughts:

    1. The highest retail gas price in recent history was around 1980/1981, and was about $3.10 in today's dollars.
    2. The current average around the country is about this level now.

    So this is a huge problem right? Well it doesn't appear to be, and I have a couple of suggestions as to why...

    1. In the past 27 years we have undoubtedly seen tremendous improvements in the overall efficiencies related to oil whether it be production, refinement, consumption or use. This being the case, the same price 27 years ago would have less effect today because we are using oil more efficiently (NOTE: This will probably be true 30 years from now as well, and will certainly be helped along by higher prices).

    2. In 1980 the average per-capita income for the U.S. was $9,500. In today's dollars that is about $25,500. But our actual per-capita income is now around $36,000. This means that in inflation adjusted terms, per-capita income has grown more than 40%, which would mean that gas consumption is likely a lower % of overall household expenses anyway. BTW...if you object to the use of per-capita income, even something like median household income (which get us closer to reflecting the impact on families) has grown in inflation-adjusted terms, by less (only about 17%) but it has still grown. This would suggest that retail gasoline prices would have to increase by 17-40% (from current levels...that's about $3.63 to $4.34 per gallon) to begin having the same effects/impacts as they did in 1980/1981.

    I think that these are possibly two key reasons why higher gas prices are not affecting people in anything more than a psychological way ("Arrgghh! These damn gas prices!")

    Finally, let's face it, when push comes to shove, you'll know gas prices are a real problem when people actually start giving up the lattes and lunches out and other various discretionary spending to accomodate for the higher prices of a less discretionary good (transportation fuel). Most people don't seem to be doing this yet.

  • rufus

    At present, ethanol production is about 6 Billion gallons/year (a little over 4% of gasoline usage.) Withing two years that amount Will Double.

    The need to travel is not as "elatic" as some models have predicted; but, the real world of economics did just what could be expected. It brought a substitute. There will be a large glut of ethanol within a year, and prices will plummet. It's going to work out. It'll just take a while.

  • TJIT

    Rufus,

    The only real world economics that apply to ethanol production is rent seeking behavior by politically connected special interests.

    Ethanol output is growing because ethanol use has been mandated. If ethanol made any sense from an engineering or economic standpoint it would not require mandates.

    The only thing ethanol does is transfer money from everybody else in the United States to ADM and Corn farmers.

    Ethanol will not fix the problem. Ethanol, and similar rent seeking energy mandates, are going to make the situation worse.

  • rufus

    The world is a rent-seeking place, T; but, that having been said, there's still a whole lot of bio-fuels coming online in the next couple of years (and a lot more, worldwide, in the coming decade.

    That, plus the entrance into the market of some more fuel-efficient autos, will help to mitigate oil prices in the near future (the next year, or two.)

  • Dan

    RDH: My apologies. You're absolutely right. I'll keep it civil from now on.

    Dan

  • TJIT

    Rufus,

    You ignore the fact that requiring rent seeking to get biofuels used shows that biofuels cost consumers more then the fuels they replace. The idea that requiring the use of more expensive biofuels will mitigate the price of crude oil is laughable on its face.

    Only a biofuel true believer could combine biofuel mandates + more expensive biofuel + lower fuel economy from biofuel and conclude that the result will be cheaper fuel or crude prices.

  • rufus

    No, T; I know what it costs to produce a gallon of ethanol (between $1.00 and $1.25 depending upon a multitude of things.) As a result, I know how low the price can fall when the shortage caused by aggressive implementation of mandates is abated.

  • rufus

    T, you need to take a look at This.

    Once you've taken co-products into consideration this refinery will be able to produce ethanol for a little less than a dollar a gallon (without subsidies.)

  • rufus

    You need to keep This in mind, also.

  • http://www.lewrockwell.com/paul/paul334.html The Inflation Tax

    Congressional Democrats (and big spending republicans) should know that printing money (diluting existing dollars) is another cause of Rising Gas Prices. This is a problem they could actually do something about. Taxes and borrowing from China don't bring in enough money to pay current expenditures, so the government has the Federal Reserve print
    more money.

    See The Inflation Tax
    by Ron Paul

    Steve