Crude Scapegoats

IBD ^ | May 21, 2008

[Kaslin]

Energy: It's now a cliche: fat-cat oilmen control our destiny by holding back supplies, letting prices soar, then pocketing the profits. But if any fat cats are to blame for the energy crisis, it's those on Capitol Hill.

---

Funny how so few, especially our friends in the mainstream media, seem to notice Congress is the culprit. When it's not stopping the development of the energy resources we need, it's busy demonizing the very entities — such as the oil companies — that can go get them.

We raise this issue because, once again, Congress has dragged oil company chiefs to Washington for Star Chamber hearings where the innocent are presumed guilty before they even take a seat.

Democrats like Sens. Patrick Leahy, Herb Kohl and Dick Durbin are very skilled at the blame game. On Wednesday, they called on oil bosses to account for high oil prices and ripped them for their profits and pay packages. Everything, in other words, but propose real solutions to our problems.

"Do market forces alone explain the skyrocketing price of oil and gas?" Kohl wondered. We'll take that one: No, senator, market forces alone don't explain it; congressional incompetence does.

Of the "solutions" Congress has pushed — including limits on CO2 output, windfall profit taxes, restrictions on drilling on public lands and, most recently and absurdly, suing OPEC — all lead to less oil and higher prices.

[AndyJackson]

But that decade would buy us some time to develop lower-cost alternative energy supplies.

Which we better get going on really quickly.

[HereInTheHeartland]

There should be white hot anger directed towards the “no drill ANWAR (and other places)” people in Congress and environmentalists.

People should think of these people every time they fill up with gasoline.

[balls]

Your main premise is completely wrong. Oil shale production failed when oil dropped back down below $35 a barrel and it was no longer economically feasible. New technology and production methods mean that oil shale production will be economically feasible even if the price of oil falls dramatically. Congressional blowhards are the only barrier to us producing all the oil we need in the next decade. (This is paraphrased from the testimony of Terry O’Connor, a Shell executive, to a Republican congressional panel last week.)

[Mike Darancette]

I think Bush will do something but we must feel a little more pain. It is quickly being made obvious that there is nothing that Congress can or will do.

The problem is that bursting the oil bubble is going to hurt some folks.

[C19fan]

When demand of things is controlled by a limited supply, and consequently prices rise substantially above cost of productions, the "windfall" profits constitute what is known as an economic rent, the theory of which dates back to Adam Smith. Said "rents" are certainly fair game for taxes, and, no, taxes on such rents do not pass to the consumer, despite what the wags around hear think. Any company facing a downward sloping demand curve earns "economic rents" because up until the unit produced where marginal revenue = marginal costs the company will get a price more than the marginal cost of production. So from your logic a "windfall profit" tax should be placed on every business in America. Also would you propose a "windfall profit" tax on a person who sells a home for a profit since the reproduciton cost of a home will be less than the price sold, a tax on professional athletes since they would most likely still play for a fraction of the salary, or a similiar tax on doctors and other professionals.

[Don W]

when someone accepts *common* as an equivalent to *come on* they have definitively proven their illiteracy, and their posts mean LESS than nothing.

I pity the poor electrons forced into carrying such painful misuses of English grammar.

[Don W]

If such “rents” do not come from those paying the *FULL MONTY* aka the bills, where does it come from?

[justa-hairyape]

This is an excerpt from an interesting article in The Market Oracle.

As detailed in an earlier article, a conservative calculation is that at least 60% of today's $128 per barrel price of crude oil comes from unregulated futures speculation by hedge funds, banks and financial groups using the London ICE Futures and New York NYMEX futures exchanges and uncontrolled inter-bank or Over-The-Counter trading to avoid scrutiny. US margin rules of the government's Commodity Futures Trading Commission allow speculators to buy a crude oil futures contract on the Nymex, by having to pay only 6% of the value of the contract. At today's price of $128 per barrel, that means a futures trader only has to put up about $8 for every barrel. He borrows the other $120. This extreme “leverage” of 16 to 1 helps drive prices to wildly unrealistic levels and offset bank losses in sub-prime and other disasters at the expense of the overall population.

Looks like perhaps the bankers and feds have found a way to cover their sub prime losses. Demand has not dramatically risen and the Sauds are increasing production this year. Been scheduled long time ago. Everything you see on the boob tube is dog and pony (DINO and RINO).

[RochesterFan]

The hero in all this was Shell CEO John Hofmeister. If the pubbies were smart, this little snippet would be part of a campaingn against Democrat Congress Critters this fall.

HOFMEISTER: In the United States, access to our own oil and gas resources has been limited for the last 30 years, prohibiting companies such as Shell from exploring and developing resources for the benefit of the American people. It is not a free market. According to the Department of the Interior, 62% of all on-shore federal lands are off limits to oil and gas developments, with restrictions applying to 92% of all federal lands. The Argonne National Laboratory did a report in 2004 that identified 40 specific federal policy areas that halt, limit, delay, or restrict natural gas projects. The problem of access can be solved in this country by the same government that has prohibited it. Congress could have chose to lift some or all of the current restrictions on exploration and production of oil and gas. Congress could provide national policy to reverse the persistent decline of domestically secure natural resource development.

[AndyJackson]

If such “rents” do not come from those paying the *FULL MONTY* aka the bills, where does it come from?

The point about rents on a commodity whose supply is inelastic is that it's price is set not by the cost of production, but by the value to the next user. Therefore, the price is independent of any taxes, cost of production, etc. Therefore, any tax on such a rent are deducted from the gross profits of the guy with title to the income stream for that commodity. If it is a rent, he can squeel all he wants about the taxes he pays, but he cannot raise his prices to the consumer.

This is unlike other commodities, goods and services where supply is set by costs of production including capital and labor, and where taxes are therefore added on top of the other costs and born soley by the consumer.

[AndyJackson]

So from your logic a "windfall profit" tax should be placed on every business in America. Also would you propose a "windfall profit" tax on a person who sells a home for a profit since the reproduciton cost of a home will be less than the price sold, a tax on professional athletes since they would most likely still play for a fraction of the salary, or a similiar tax on doctors and other professionals.

You understand the point very well, and have properly understood the consequences. I am libertarian and rue every dollar in tax money the government collects because it mostly just adds to the collective bureaucracy rather than providing for the public good. However, there is a large body of economic work on tax theory that suggests just what you have proposed. What you argue is why those folks are wrong who argue that it is futile to tax corporations because all taxes are passed on to their customers, and so you should just tax the customers, or some such. Well, everyone who trades on a patent, trade secret or economic franchise is benefitting from economic rents, and such "windfall" as you put it is, under such theory, fair game.

[tillacum]

Congress makes problems for this country then complains till the next election about the problems they’ve made, but do absolutely nothing to solve the “problem”. They find a scapegoat and pile their waste divel on the scapegoat. Right now it’s the oil companies and their GREED. I wish there was a way to find out just how many of our elected royals receive oil money from the arab lands and venezuela. I know former defense chief, cohen is on the board of a few chinese companies, so he gets money from there, and there are a lot of others, I imagine.

[tillacum]

But, But cas, congress is already controlling the output of oil, by not allowing American drilled oil to the public.
Remember back, I think, 2000, a plan was put up whereby an oil company would drill ANWR, with the stipulation that a lot of union people would be used? Congress shot that down. So like all royalty, of old, our elected royals are controlling the output of our own American drilled oil. We cannot drill offshore because the sub-royals of the epa want to make sure the environment is not spoiled. We had a HUGE hurricane in the Gulf and not a drop of oil leaked...yet the sub-royals encourage The Royals to disallow drilling American Oil. Only the chinese, who don’t give a flip about the environment get to drill 60 miles off the coast of Florida. Wait till chinese oil and garbage float up on the pristeen shores of Florida...what will the sub-roayals and elected royals do then? Hmmm? I’m waiting.....

[Enterprise]

If there’s a problem, investigate Congress first.

[Enterprise]

And another thing. Pelosi wants Congress to apply anti-trust legislation to OPEC. Ok, here's an idea for Pelosi. Why doesn't she subpoena the heads of OPEC to Congress and grill them about their salaries and accuse them of greed?