The recent furor over rapidly escalating gasoline prices, which has been widely reported in stories such as
this one, has generated an interesting assortment of "solutions" none of which address the underlying problem and none of which will make a difference. Not surprisingly, the word "tax" pops up in many of these fanciful schemes.
The core problem is fairly simple. Gasoline is refined from crude oil. There is a finite supply of crude oil, and as the easiest-to-extract oil is rapidly exhausted, the remaining oil becomes more expensive to find and to extract. Many of the places on the globe where oil is abundant are beset by political and military unrest that interferes with the exploration, drilling, and extraction functions. There is a shortage of refinery capacity. Demand for oil and oil products is rising, in part because the economies of developing nations are shifting to oil-fueled activity and in part because the population of the planet is increasing.
None of this is or should be a surprise. I provided a
lengthy analysis back in October. I even predicted that gasoline prices and related issues would be factors in the 2006 and 2008 elections. Yes, I admit, that wasn't a difficult prediction, nor have I been alone in making it.
Before looking at the proposed solutions and explaining why they won't work, I want to ask a question. Why are people angry about rising gasoline prices? I can understand worried. I can understand anxious. I can understand puzzled. But anger? My only sensible guess is that people who think they are
entitled to cheap gasoline feel offended because someone, somewhere, somehow, is trampling on their entitlement right. The irony in all of this is the fact that gasoline prices in this country are cheaper than they are in most other countries, the gasoline tax is lower than it ought to be because it has not been adjusted for inflation, and the real-dollar inflation-adjusted price of gasoline is not at an all-time high. What we have here is further proof of what happens when people are spoiled and then reality crushes the pretensiveness of fantasyland.
So let's examine the "solutions" being tossed about. Do they work or are they simply soundbites with emotional appeal? These are in no particular order.
Solution number one is the
imposition of a windfall profits tax. This is a counter-productive measure and there is a track record to prove that assertion. Every dollar taken in a windfall profits tax gives energy companies an excuse to invest one less dollar in exploration, drilling, extraction, or development of alternative fuels. The tax would also mean lower investment returns for pension and profit-sharing funds holding energy stock, and for retirees living on the dividends paid by energy stocks. There was a windfall profits tax in the late 70s and it is one of the reasons that today there is insufficient refinery capacity, insufficient refining reserves, and less exploration and development than there could have been. Perhaps if "profits" were defined to include a reduction for these expenditures the perception that energy company profits are "too high" would shift to something more reflective of an understanding of basic accounting.
Solution number two is to
pressure Saudi Arabia to release more oil. Unless the proponents of this solution have information not available generally, Saudi Arabia not only is pumping oil at a maximum rate, it faces the prospect that one of its major fields is on the brink of "pumped almost empty" collapse. Take a look at the many discussions of this issue on
The Oil Drum, a peak oil site with one of the highest signal-to-noise ratios of any public forum website I've visited.
Solution number three is to
open up drilling in the Arctic National Wildlife Refuge. Even if environmental damage can be minimized, and it almost surely can be, this is the equivalent of putting a band-aid on a heavily bleeding gash. Who's to guarantee that opening up ANWR or drilling in the continental shelf areas presently closed by law will not trigger output reductions by Venezuela, Russia, Saudi Arabia or other producing countries?
Solution number four is to
boycott Exxon-Mobil. This is one of the most ridiculous ideas circulating on the Internet, unless the boycotters plan to reduce their gasoline purchases rather than buy at another supplier. What happens if no one goes to Exxon-Mobil stations? They go to other stations, those stations raise prices because demand at their sites has increased, they purchase the gasoline that Exxon-Mobil has available, and prices go up even more. When I read things such as the "boycott Exxon-Mobil" proposal it causes me to wonder not only about the widespread ignorance of economic theory prevalent among the citizenry, caused, of course, by deficiencies in high school and undergraduate education systems, as discussed in
this previous post, but also about the dangers inherent in a democracy that theoretically permits a population to vote for policies that constitute national suicide.
Solution number five is a proposal to
increase competition in the oil and gas industries. Legislation to this effect has already been introduced in the Congress. The end result, I suppose, would be the dismantling of large energy companies. We would be left with many small energy companies. Could these companies bring sufficient resources to explore and develop high-cost deep-sea fields, which are one of the last frontiers in the search for conventional oil sources? I don't know. Years ago, it was decided to break up AT&T. What happened? It has re-emerged.
Solution number five is a proposal to authorize an
FTC investigation to determine if there has been price gouging and price fixing. This is a recycled idea. None of the previous investigations turned up any evidence of price fixing. I doubt this one would. Gasoline stations operate on a narrow margin. The truck arrives, drops its load into the tanks, and gives the owner an invoice. The owner looks at the price, figures out the fixed costs of running the station, and increases the retail price. If asked why the price increased, the wholesaler points to the mandated use of more expensive ethanol, the costs of cleaning tanks and tankers so that the ethanol, which is highly prone to water and dirt absorption, is not fouled. And no matter the outcome, these investigations would do nothing to increase supply or reduce demand, or to generate production of alternative fuels. Nonetheless, the President
has ordered the investigation to proceed.
Solution number six is to
take oil out of the Strategic Reserve. Here's another absurd idea. There's a saying among farmers, probably lost in a post-modern world in which too many people think food is "made" at the grocery store: "don't eat the seed corn." What's the point of exhausting the reserve when doing so might reduce prices by a penny or two per gallon for a short period of time? Other than, of course, getting attention for the politicians who spout this nonsense. Perhaps this is why the President
has ordered a suspension in replenishment deposits to the Reserve, a move that does little to affect the supply, does nothing to reduce demand, and will do nothing to affect prices. Yes, it looks good. So does a painted-over rusty pipe.
Solution number seven is to
suspend the gasoline tax. Yes, yes, finally, it's a tax issue. I've explained the counter-productivity of this idea so many times that I will simply point to my previous posts on the subject:
September 2005,
March 2005, another one from
March 2005,
May 2004, and
March 2004.
Solution number eight is to
cap sales taxes on gasoline, a proposal already underway in New York. Yes,
another tax matter. This one is interesting. If gasoline prices rise 50 percent, the sales tax increases by 50%, creating windfall revenue for the state. Holding the sales tax at the amount payable on the lower, pre-increase, price would not deprive the state of tax revenue as would a suspension of a fixed gasoline tax. Of course, this solution only works in states that have a percentage-based sales tax on gasoline. My guess is that because it involves a few cents, it won't cool down the anger that many drivers are feeling about gasoline prices.
Solution number nine is to
require auto-makers to manufacture fuel-efficient vehicles and alternative fuels vehicles. This is a wonderful idea, ten years ago. It might make things easier ten years from now, when gasoline is at $23 per gallon. As a short-term solution, it is useless. As a long-term solution, better late than never. Of course, where are the almost-bankrupt American automobile manufacturers going to get the capital to invest in making these changes?
Solution number ten is to
repeal the recently-enacted tax breaks for energy companies. This is an appropriate thing to do because these companies don't need tax breaks. So it should be done. But let's not fool ourselves into thinking that it has any effect on supply, demand, or price.
Solution number eleven is to
temporarily set aside EPA requirements, presumably to mitigate the impact of the switchover to ethanol. This action, already ordered by the President, will alleviate the spot shortage problem, but won't do much to change the price. It's a stop-gap and a band-aid. And, of course, it means somewhat dirtier air.
If it seems as though there is no easy solution, that's because there isn't. I'm not alone in reaching this conclusion. Folks posting at
the Oil Drum have been pointing this out for quite some time. And at least one politician, Representative Bob Beauprez, even so
stated, a remarkably honest and courageous but politically risky comment.
Why is it risky? Americans don't want to hear bad news. Perhaps that's why Americans are angry. Deep down they
know that upheaval looms. It will not be life as usual. Gasoline prices, like oil prices, are not going to return to 1995 levels. Or 2002 levels. They are going up, up, and away. When one considers the changes that must be made, it's no wonder many Americans are distressed, frustrated, scared, and thus, yes, angry.
What are those changes? In other words, what are the near-term solutions? Forget about hydrogen cars available in 2012, or some alternative fuel developed for production in 2015. Forget about coal-to-liquids that might be feasible by 2014. Focus on 2006. On 2007.
Let's start with the easy ones. The ones many people don't do because they don't think of it, don't have time, are too lazy, or otherwise don't think it matters. Perhaps if people understand that the fewer easy steps that are done the sooner the more difficult steps will be compelled, they will pay attention to these things.
First, cut back on speed. I'm not talking the 40 mph on an Interstate nonsense or the people doing 50 in the left lane of a 65 mph highway. I'm talking speeds of 60, 65, 70. Yes, at 65 and 70 fuel economy generally is not the best for many vehicles. I'm talking about the clowns who go by at 80, 85, 90, not on wide open western highways but on urban freeways. Not only are they a safety menace, they are squandering a scarce resource. For what? To go 15 miles in 42 fewer seconds? And where are the highway troopers? Is there a shortage of police? A shortage of radar? Huh?
Second, properly inflate tires. Easily done, though I do know more than a few people who do not know how. Sad. Here's another "subject" that should be taught in high school. The 10-minute, no-credit course.
Third, keep the car engine properly tuned. Most vehicles have sufficient warning lights and other indicators to alert the driver that something is wrong or that it's time for maintenance. With gasoline prices at $3 a gallon and headed higher, the cost of the maintenance will pay for itself.
Fourth, fix traffic signals so that they are fuel-efficient. What's the point of stopping traffic when there is no cross-traffic? What's the point of stopping traffic when the vehicle that triggered the "turn the light" sensor has already made a right turn on red and is no longer in need of a turn in the light? What's the point of programming a light to stay green for at least 90 seconds when there is no traffic needing the green and there are cars sitting at red lights? Remember, most vehicles get 20 to 30 miles per gallon when they are moving. The reason many vehicles get overall mileage ratings of 16 or 18 or 22 is because EVERY VEHICLE GETS ZERO MILES PER GALLON when sitting at a red light.
Fifth, combine errands. Eliminate the impulse, one-item rush to the store trip.
Sixth, let the children ride bicycles to soccer practice, and to school. Walk where possible. This will require installation of sidewalks and bike paths in places that are dangerous for bikers and walkers, but let's get it done.
Seventh, use manual lawn mowers instead of gasoline-powered machines. Use brooms, not gasoline-powered leaf blowers, to clear leaves from driveways. Use snow shovels, not snow blowers. And welcome the beneficial side effects of exercise, weight loss, and the good feeling that comes from natural endorphins.
Eighth, turn up the thermostat when using air conditioning and turn it down when using heat. The savings in natural gas and electricity consumption will translate to lower oil prices.
Ninth, for those understandably upset with the huge amounts of compensation, pension, and severance payments made to energy company executives, write to Congress and urge it to pressure the IRS to enforce the "reasonable" part of the restriction on business expense deductions for compensation. I wonder if the amounts being paid will change if they are not fully deductible. Of course, this isn't going to make a difference in supply, demand or price, because the compensation of Exxon-Mobil's CEO, apportioned over the gallons of gasoline it sells, is a fraction of a penny.
So these are the things that can be done in the short-term, without the need for legislation, government investigations, or other "let someone else fix it" approaches to the problem. There's a
very good analysis of these and some not-so-short-term lifestyle changes (such as moving closer to work) that's well worth the read.
I conclude with a challenge toward those who think that windfall profits taxes on energy companies is the answer. Are you willing to apply the tax to all companies? Will the measure be profit percentage? In 2005, Exxon-Mobil earned a whopping 36.1 billion dollars of profits on 328.2 billion dollars of revenue, for a net profit margin of 11%, as reported by
MSN Money Central. By comparison, also according to MSN Money Central
reports, Microsoft earned a "mere" 13.1 billion dollars of profits on 41.4 billion dollars of revenue, for a, yes, 31.6% net profit margin. Folks are upset about a company earning 11 cents on the dollar, while another company earns 31 cents per dollar? The irony is that the gasoline supplied by Exxon-Mobil almost always works as promised. The stuff supplied by Microsoft is buggy, security-deficient, poorly planned, and poor in quality. Does Microsoft escape scrutiny because it "buries" the cost of its product in the cost of a computer? Maybe Exxon-Mobil ought to work out an arrangement with the car dealers: buy a car, gasoline comes with it. The cost? Oh, an additional $7,000. Clever, no? Note that Microsoft is not the only non-energy company hauling in profits at rates multiple the Exxon-Mobil rate. Microsoft, though, is a good counterpoint because it's big, it's intrusive, and its products are far from excellent. So why are people yelling about Exxon-Mobil and the other energy companies and saying so little about Microsoft? Are the folks who want to break up the half-dozen large oil companies that dominate the domestic gasoline market willing to break up the only large software company that dominates, no, totally controls, the domestic software market?
What a marvelous test of consistency, logic, and common sense. It will be interesting to watch this story develop. Trust me, it's still in the first chapter, and it's going to get much, much worse.
Oh, and just to add fuel to the fire (ha), let me propose another way to reduce demand. It's one of my favorites. Impose a user fee on energy users for the cost of using the energy. Translated, increase the gasoline tax to reflect inflation since the last time it was increased. Then let the market adjust. Otherwise, it won't be too long before there is rationing, empty gasoline stations, stranded motorists, and chaos to make the crisis of the late 70s look like a mere warm-up.
