Boom2Bust.com

Why Ethanol Sucks

“So ethanol is bad for taxpayers, bad for consumers, bad for the environment, and bad for the world poor. Does anyone benefit from ethanol?”

Wall Street Journal Online Video Link

Source:

“Ethanol: Silly Senator, Corn Is for Food!”
reason.tv
Wall Street Journal Online, August 14, 2008

Windfall Profits Tax? Where’s The Windfall?

Driving back and forth between Chicago and Burlington, Wisconsin, last week, I listened to the news on the radio quite a bit. There was a lot of chatter about Exxon Mobil reporting its highest quarterly profit ever ($11.7 billion) on Thursday. Not surprisingly, politicians were quick to criticize the announcement. The New York Times’ Clifford Krauss wrote Friday:

Democrats in Congress were quick to criticize Exxon’s profit, hoping that the resentment felt by many drivers over high gasoline and diesel prices could help them in an election year.

“Inside the boardrooms at the major oil companies, it’s Christmas in July,” said Senator Charles E. Schumer, Democrat of New York.

Does anyone still pay attention to this guy? IndyMac. Lest we forget!

Anyway, one politician decided to take on the issue of oil company profits directly. On Friday, Senator Barack Obama (D-IL) announced a new proposal where oil companies enjoying record profits would face a “windfall profits” tax, where the cash would be passed on to consumers in the form of a rebate.

Hmm. A “windfall-profits” tax. I seem to recall that a windfall-profits tax was previously imposed on oil companies back in 1980, but was eliminated in 1988 after oil exploration and gasoline prices both fell. I’ve also heard that the tax raised only $79 billion, well below its proponents’ estimates. As a matter of fact, oil industry economists blamed the tax for contributing to a decline in exploration and drilling, helping set the stage for the energy crisis we currently face.

A reduction in oil exploration and drilling. Great. That’s exactly what our country needs right now. Which leads me to ask, which rocket scientist came up with this idea?

Earlier today, ABC News’ Jake Tapper asked the Obama campaign about the specifics behind the tax proposal. From their exchange:

TAPPER: What is a “windfall profit”?
OBAMA CAMPAIGN: Senator Obama believes that while oil companies and shareholders need incentives to run well managed businesses that invest in efficiency and innovation, a significant share of the record profits the big oil companies have been making have nothing to do with their management skill or investment decisions. Instead, it is the result of changes in the price of oil because of factors like supplies in the Middle East, demand in Asia, and disruptions and distortions in the oil market.

Therefore, a well designed mechanism can impose a fee on a small share of these windfall profits without affecting incentives for oil companies and without affecting the price of oil. Indeed, as the Congressional Research Service recently concluded: “[T]o the extent that a surtax on the corporate income of crude oil producers on their upstream operations could approximate such a [pure corporate profits] tax, this would not raise crude oil prices and would not increase petroleum imports in the short run. While the current corporate income tax is not a pure corporate profits tax, a surtax for oil companies would arguably be an administratively simple and economically effective way to capture estimated oil windfalls in the short run.” [Emphasis added, “The Crude Oil Windfall Profits Tax of the 1980s: Implications for Current Energy Policy,” Congressional Research Service, 3/9/06, p. 32.]
TAPPER: Should such a tax only be applied to oil/gas industries?
OBAMA CAMPAIGN: Yes.

Okay. Enough of this foolishness.

…a significant share of the record profits the big oil companies have been making have nothing to do with their management skill or investment decisions. Instead, it is the result of changes in the price of oil because of factors like supplies in the Middle East, demand in Asia, and disruptions and distortions in the oil market.

Geez, is that the best they can come up with? In which parallel universe is any business or industry NOT affected by external factors such as supply-and-demand fluctuations, disruptions, and distortions? As such, is it fair to impose additional taxes on a business or industry just because these factors (which had “nothing to do with their management skill or investment decisions”) played out the way they did?

Yet, the most disturbing aspect of this ill-contrived proposal is the fact that profit margins in the oil and gas industry aren’t exactly at windfall levels. The evidence? From the July 27 issue of Parade Magazine (based on U.S. Department of Energy data):

Although Exxon Mobil netted $40 billion in 2007, the average profit margin for oil companies is just 7.6%, compared with 9.2% for most manufacturers.

Adding to growing speculation that the proposal is purely for political pandering, the Wall Street Journal wrote yesterday:

Maybe they have in mind profit margins as a percentage of sales. Yet by that standard Exxon’s profits don’t seem so large. Exxon’s profit margin stood at 10% for 2007, which is hardly out of line with the oil and gas industry average of 8.3%, or the 8.9% for U.S. manufacturing (excluding the sputtering auto makers).

If that’s what constitutes windfall profits, most of corporate America would qualify. Take aerospace or machinery — both 8.2% in 2007. Chemicals had an average margin of 12.7%. Computers: 13.7%. Electronics and appliances: 14.5%. Pharmaceuticals (18.4%) and beverages and tobacco (19.1%) round out the Census Bureau’s industry rankings. The latter two double the returns of Big Oil, though of course government has already became a tacit shareholder in Big Tobacco through the various legal settlements that guarantee a revenue stream for years to come…

The Journal summed it up best when it stated:

…a windfall is nothing more than a profit earned by a business that some politician dislikes. And a tax on that profit is merely a form of politically motivated expropriation.

It’s what politicians do in Venezuela, not in a free country.

Sources:

“Exxon’s Second-Quarter Earnings Set a Record”
Clifford Krauss
New York Times, August 1, 2008

“Obama’s Proposed ‘Windfall Profits Tax’”
Jake Tapper
ABC News, August 5, 2008

“With Gas at $4 a Gallon… Who Is Getting Your Money?”
Parade Magazine, July 27, 2008

“What Is a ‘Windfall’ Profit?”
Review & Outlook
Wall Street Journal, August 4, 2008

Say Goodbye To Your Pay Raise

Think you’re getting a raise in 2009? Think again. According to the Wall Street Journal’s Sarah Needleman last week:

Despite the weak U.S. economy, employers nationwide are expected to raise workers’ salaries next year at the same rate as they did this year, a new survey shows. But the increase may be offset by rising inflation rates and lower 2008 bonuses tied to company performance.

Rank-and-file workers can expect to see their base pay rise by an average of 3.5% in 2009 — the same amount they received this year, reports Watson Wyatt Worldwide Inc., a global human-resources consulting firm. High performers are projected to fare better, gaining an average of 4.4% in base pay, while mediocre performers are likely to see their paychecks increase by 2% or less…

But even with a 3.5% raise, most workers will likely find that extra cash consumed by rising costs for everything from food to gasoline. The latest report from the U.S. Labor Department showed inflation rising at a brisk 5% in June — more than the raise most employees will receive in 2009.

“Inflation has crept up to a pace where even your better-performing employees won’t make up the difference,” says Laury Sejen, global director of strategic rewards consulting at Watson Wyatt. “They’re going to be losing ground relative to inflation.”

Quicksand Scene, “Blazing Saddles” (1974)

The situation looks even worse if you’re like me and don’t buy the government’s inflation data. On May 22, MarketWatch’s Rex Nutting noted that PIMCO’s Bill Gross discussed the flawed data in his June “Investment Outlook” on the PIMCO website. Nutting wrote:

Gross argued that inflation rates in the rest of the world have averaged nearly 7% over the past decade, while the U.S. official inflation rate has averaged 2.6%. “Does it make any sense that we have a 3% to 4% lower rate of inflation than the rest of the world?” Gross wondered…

The consumer price index is being understated by at least 1% per year because of these factors, Gross said. And if inflation is understated by 1%, then gross domestic product has been overstated by that same 1%. Other critics have put the error much higher.

Other critics like John Williams, an economic consultant who publishes the monthly newsletter Shadow Government Statistics. Ted Rall noted in a Yahoo! News piece last week that Williams calculates inflation is actually running at an annualized rate of 9.95%, when you factor out all the tinkering that’s been done to the data over the years.

But what about bonuses? The news isn’t much better. Robert Trumble, professor of management at Virginia Commonwealth University and director of the Virginia Labor Studies Center in Richmond, told the Journal that bonuses tied to company performance will likely be significantly less this year than last. He said:

Bonuses are definitely going to be down. The economy as a whole is down and most [bonuses] are performance-related.

Sources:

“Inflation May Offset Pay Increases in ‘09”
Sarah E. Needleman
Wall Street Journal, July 25, 2008

“U.S. inflation understated, Pimco’s Gross says”
Rex Nutting
MarketWatch, May 22, 2008

“RECESSION, YEAR 8”
Ted Rall
Yahoo! News, July 24, 2008

The Next Great Depression

Taking it down a few notches today, I enjoyed a nice cigar from the Dominican Republic this afternoon out on my balcony here in the Windy City. Kind of bummed out that one of my suppliers raised their prices, though. Too bad. I almost pulled a JFK and ordered a stockpile of cigars last year after Washington Democrats were looking to increase the tax cap from a nickel per cigar to $10 a stick— or 20,413%. Unbelievable. By the way, never heard of the JFK cigar story? Well, if you have time, I highly recommend you watch the following video (a little over 3 minutes long) of Pierre Salinger, JFK’s secretary, telling the story (and other cigar-related ones)…

YouTube Video Link

While puffing away, I got the chance to listen to a portion of last weekend’s “Financial Sense Newshour” broadcast. Jim Puplava and John Loeffler have been talking about a financial crisis window for a while now, which they expect to take place between 2009 and 2012. Puplava and Loeffler had this to say last weekend:

JOHN: So looking forward, say, 12 to 24 months, we would say, given where we’re going, we can probably look towards higher gold and metals prices; there will be another money crisis – another currency crisis – and all it would seem like they’re [Congress] doing right now is staving off the day of reckoning. Let’s face it, we said that 2008, that’s the ramp up to 2009 to 2012 – it’s accelerated a little more than I thought it would be and it’s a little more violent than I thought it would be, but nevertheless we’re still on that; and somewhere in that window, all of this stuff begins to fall apart and you can’t tell what’s going to trigger it, but it will go.

JIM: It’s going to trigger. And I think that the thing that’s scaring the heck out of them [Congress] is all of this is starting to unfold – whether it’s $4 gasoline at the pumps, headline inflation with foods, banks going under, stock market manipulation – all of this – and they’re desperately just trying to buy time to get elected because you’ve got 535 people in Congress who are worried about keeping their jobs. And what I think is going to happen is as this worsens the country is going to lurch very hard to the left in the November election (we’re going to get into this in the next segment) and then as a result of the policies that are going to put us in place, that is going to give us our great depression that I anticipate.

By 2010, the United States is going to be in a major depression.

And then, what is going to happen is we’re going to lurch – almost do a 180 degree turn – and lurch very hard to the right as one disaster after another unfolds upon the country.

Great cigar, not so great forecast…

Source:

Financial Sense Newshour
3rd Hour, Part 2
FinancialSense.com, July 19, 2008

Crash Prophet Gary Shilling Predicts Nosedive In Consumer Spending

Back on June 13, 2007, I wrote a post entitled “Crash Prophets” and spoke of economist/investment advisor Gary Shilling. Dr. Shilling, who was twice ranked as “Wall Street’s top economist” by polls conducted by Institutional Investor magazine, said last summer that the United States was fast approaching a financial storm. From that post:

He notes, “An unusual confluence of five forces in recent years created a virtual world of financial speculation that departed spectacularly from the real economic world, the ‘grand disconnect’ we’ve called it.” The five forces… are:

1. Global liquidity.
2. Investors’ misguided belief in “20% annual returns each and every year.”
3. Risk desensitization due to recent low volatility and the belief the Fed will “bail them out.”
4. Rampant, aggressive speculation.
5. American consumer spending, highlighted by instant gratification and the inability to save.

And what will trigger the meltdown? According to Farrell, Shilling still sees the subprime debacle as the catalyst.

A year later, and the “crash prophet” is providing his latest financial storm forecast. Yesterday, the president of A. Gary Shilling & Co was the subject of a Newsmax.com piece. According to the Internet news site:

The U.S. is already in a recession that’s unfolding in four stages — and it’s going to get a lot worse, investment advisor Gary Shilling says.

“We’re between the second and third stages right now,” Shilling told a Bloomberg interviewer.

“The first phase was the collapse in housing market, led by subprime slide last year; the second phase was Wall Street, where there was a tremendous amount of over-leverage and investment in assets of questionable if not unknown value and highly illiquid.”

Shilling believes the third phase — a big nosedive in consumer spending — is about to unfold.

Yesterday, Bloomberg reported that prices paid by U.S. consumers jumped in June by the most since 2005 on spiraling costs for fuel and food. The cost of living soared 1.1% after a 0.6% gain the prior month, the Labor Department said. Fed Chairman Ben Bernanke, testifying before Congress Wednesday as part of his semi-annual report on the U.S. economy, warned that consumer spending is “likely to be restrained over coming quarters,” and businesses are “likely to be cautious with their spending in the second half of the year.”

Dr. Shilling told Newsmax:

Once people work through their tax rebates, they’ve run out of borrowing power. Their home equity has disappeared. They’ve been relying on that and on income growth that isn’t happening. With high energy bills and maxed out credit cards, I think consumers are about to go off the cliff….

I look for the biggest decline in consumer spending since the 1930s.

Next up? Phase four, where recession spreads throughout the world.

Oh joy…

Sources:

“Gary Schilling: U.S. In Recession Now”
Newsmax.com, July 16, 2008

“U.S. Consumer Prices Climb by the Most Since 2005 (Update1)”
Shobhana Chandra
Bloomberg, July 16, 2008

House Speaker Pelosi Announces Second Stimulus Package

Looks like another stimulus check may soon be on its way to American households. According to Reuters today, House Speaker Nancy Pelosi met with several economists Tuesday and announced afterwards:

We will be proceeding with another stimulus package.

Reuters’ Andrew Taylor wrote:

Pelosi said that recently issued tax rebate payments of $600 to individuals and $1,200 for married couples have helped the economy but that more is necessary to offset the drag of higher gasoline prices and other costs…

The Democratic effort is still in its formative stages, but most of the proposals mentioned by Democrats were rejected by Bush during negotiations that produced the earlier stimulus measure. A new package probably won’t be acted on before Congress returns in September from its annual summer vacation.

According to Taylor, this second stimulus package could consist of additional tax rebates, heating and air conditioning subsidies for the poor, infrastructure projects, higher food stamp payments, and aid to the states.

Speaking of seconds, back on April 29 I talked about humor columnist Dave Barry, who published the following in the Miami Herald on April 13 in response to the first stimulus package:

…this year, filing taxpayers will receive an Economic Stimulus Payment. This is a very exciting new program that I will explain using the Q and A format:

Q. What is an Economic Stimulus Payment?
A. It is money that the federal government will send to taxpayers.
Q. Where will the government get this money?
A. From taxpayers.
Q. So the government is giving me back my own money?
A. Only a smidgen.
Q. What is the purpose of this payment?
A. The plan is that you will use the money to purchase a high-definition TV set, thus stimulating the economy.
Q. But isn’t that stimulating the economy of China?
A. Shut up.

Source:

“Democrats plan second economic stimulus bill”
Andrew Taylor
Associated Press, July 15, 2008

Signs Of The Time, Part 16

Attention, all you restaurant and bar owners out there. Need some new ideas for promoting the business? How about some free publicity? Earlier today, CNN Money’s Christina Crapanzano talked about how one Phoenix restaurant/bar is capitalizing on the slowing economy. Crapanzano wrote:

Are some of your customers worried about losing their homes? Take a tip from Cole Durbin, owner of Padre’s Modern Mexican in Phoenix, and let them know that you’re on their side.

Like restaurants across the country - from Table 8 in Los Angeles to Liberty Bar in Hoboken, N.J. - Durbin is offering up a Recession Happy Hour. But he has added a twist: Anyone who arrives at Padre’s with a foreclosure notice can have any drink on the menu [for free].

Crapanzano said that nobody has taken Durbin up on his offer yet (although it’s only been a couple of weeks since the promotion began). But she also noted that Arizona ranks third on the list of leading foreclosure states, according to RealtyTrac, an online marketer of foreclosed properties. So it may be just a matter of time before there are takers.

Regardless, look at all the free publicity he’s getting from appearing on CNN Money’s website.

According to Durbin, Padre’s will be offering additional promotions this summer. Next up will be free rides to and from the restaurant on Saturday nights for those deterred by the high price of gasoline.

See You There

Source:

“Tequila and sympathy: Bars offer foreclosure special”
Christina Crapanzano
CNN Money, July 15, 2008

How Irish Tourists Saved The U.S. Economy

“There’s someone I want you to meet this weekend,” my girlfriend told me in June. Her relatives were coming in from Ireland for a family reunion in Chicago. “He’s travelling with his wife and her sisters. Maybe you guys could hang out and talk some football [soccer].” I met Connor that Friday night at the Water Tower Place in Chicago (from what I could understand, he wasn’t married, yet he did travel with a young lady and her sisters). While the conversation revolved mostly around the “beautiful game” and my plans for the “Great Escape” the next day to watch some of Euro 2008, he happened to mention that since he’d been in United States, he and the “Walsh girls,” as they came to be known by reunion participants, had shopped, shopped, and shopped some more. It seemed that every time I asked about Connor’s whereabouts, “he and the Walsh girls went shopping” was the response I got. On Sunday, the reunion shifted to Arlington Park Racetrack for thoroughbred racing. I saw the Irishman at the start of the day after he had just won a race, but didn’t see him later on. More shopping, perhaps? In the days that followed, my girlfriend joked to her sister that the Walsh girls single-handedly saved the U.S. economy. She also mentioned that she felt bad for Connor, as did I, as he was forced to endure the seemingly-endless spending sprees at the Chicagoland malls. However, this remorse was short-lived when her sister informed her that Connor bought just as much stuff as the Walsh girls did.

Robin Sparkles, “Let’s Go To The Mall”
YouTube Video Link

Anyway, I read a blog post by CNN’s Jack Cafferty earlier today that reminded me of our “economic rescue” by these visiting tourists from the Emerald Isle. Cafferty provides commentary and insight for CNN’s political program “The Situation Room.” He wrote:

The U.S. dollar just isn’t what it used to be. In fact, the dollar has been declining in value for 6 years now against other major currencies.

And, if you look around, it’s hard not to see the signs: hordes of vacationing Europeans are picking up bargains in the U.S., while Americans traveling overseas are hit hard with sticker shock. Canadians now flock here for shopping bargains, instead of the opposite. A Belgian company is attempting a hostile takeover of Anheuser-Busch, the largest brewer in the U.S. If the takeover goes through, it might be the first of many foreign takeovers of American companies.

While everything made in the U.S. is so much cheaper to foreigners, Americans are paying more for imported goods, while most are also grappling with rising food and energy costs. Since oil is bought and sold in dollars, the devalued dollar makes gasoline that much more expensive for Americans.

Some even suggest the continued decline of the dollar could one day lead to it being replaced by the Euro as the so-called “primary reserve” currency. There are stores right here in New York that now accept euros as payment.

Meanwhile, the message from Washington doesn’t seem to change much. President Bush has often talked about his support for a “strong dollar”, just last week saying “We’re strong-dollar people in this administration.” Really, Mr. President? You have presided over the most precipitous drop in the value of our currency in our nation’s history.

Source:

“Concern about sharp decline of dollar?”
Jack Cafferty
CNNPolitics.com, July 2, 2008

SUV Owners Remain Defiant Despite $4 Gasoline

Sounds like America’s love affair with the sport utility vehicle isn’t going away anytime soon. Back on June 5, the Chicago Tribune ran a piece about SUV owners who continue to drive on despite $4 gasoline at the pump. Robert Channick and Wailin Wong wrote:

But on the streets of suburban America, the gas-guzzling Suburbans, Durangos and pickup trucks roll on, sometimes driven apologetically, sometimes defiantly…

The U.S. is a country that has always been enamored with its cars, and the American love affair with the SUV has gone on strong for two decades, thanks to low gas prices and the consumers’ sense that the large trucks were the safest, roomiest way to transport suburban families without resorting to the totally unhip minivan. Car buyers also found they liked sitting up high, and SUVs allowed them to ride comfortably above other traffic.

Yet the SUVs hold on the American psyche remains too strong to be broken completely—even at more than $4 a gallon.

Interestingly, Channick and Wong wrote:

As for the dwindling group of unrepentant SUV owners, they might actually strengthen their resolve in response to high gas prices and the recent backlash “around the ostentatious consumption aspect, not only of gas, but metal and all the inputs of automobiles, and around the safety issues,” said S. Lochlann Jain, an assistant anthropology professor at Stanford University who’s taught a course on car culture.

“Once people get into a defensive posture, I think it can be harder to give that up.”

Jesse Toprak, an analyst with Edmunds.com, told the Tribune reporters:

You’re always going to have that subsegment that’s going to want their big, boxy, all-American tank.

Jim Hossack, vice president of auto sector consulting firm AutoPacific, elaborated:

SUV says America. It says John Wayne. It says freedom. It says outdoors.

With the price of gas at $4, this is what it says to me:

Source:

“Not all ready to ditch their SUVs”
Robert Channick, Wailin Wong
Chicago Tribune, June 5, 2008

Back To The Trenches

After an extended Memorial Day Weekend, it’s good to be blogging again. And guess what? Boom2Bust.com turned one this past weekend!

Altered Images, “Happy Birthday” (1981)
YouTube Video Link

Unfortunately, you won’t find my very first post from that 2007 holiday weekend, as my girlfriend left a comment that I later tried to remove, but instead ended up deleting the entire post. Thanks honey…

Regrettably, being so immersed in my financial research and other projects, it’s sometimes impossible to disconnect myself completely from the work at hand. With that in mind, here are some pertinent observations “from the ground” this past weekend:

Friday- To beat the holiday traffic from Chicago, I decided to leave for Wisconsin (a favorite vacation destination of Northern Illinois residents) a little after rush hour ended. In recent years, this wouldn’t have made too much of a difference, as the area roadways got pretty busy in the days leading up to the weekend. This year, however, traffic was DEAD. Even with all the construction and lane closures. Think this might have something to do with a slowing economy and high gas prices?

Speaking of gas prices, after arriving in Burlington, Wisconsin, I watched the Chicago news while putting together a new gas grill. A TV reporter was broadcasting live from a gas station in downtown Chicago. Even though it was a holiday weekend, there was no one at the pumps. However, they did interview other drivers in the area. While everyone complained about the high price of gas, one individual in particular stood out. Angrily, this motorist claimed that the whole situation was due to rampant price gouging. If it were only than simple, I thought to myself.

Seeing that I didn’t have enough dishwashing liquid to perform a leak test on the new gas grill, I stopped by the local Menards, a home improvement retailer similar to Home Depot and Lowe’s. I’ll be honest, I haven’t been to this particular store that many times, but it sure seemed DEAD for a Friday before Memorial Day Weekend.

Saturday- With too much going on back in the Windy City, I hit the highways once again that morning. Even though I was driving in the opposite direction of holiday traffic, it still looked light in the opposite lanes. The lane closures were still in effect too. Where is everybody, I thought? Well, I was hoping they’d stay off the roads at least until I got back to my pad in the city. Thankfully, I got my wish.

Sunday- I dropped in at the local Barnes & Noble bookstore with my girlfriend. As it was located in the middle of a major mall, this place is usually hopping. Not today. As soon as we stepped inside the store, my girlfriend pointed out the small number of patrons inside. As a matter of fact, while browsing the bargain books section near the registers, I happened to overhear two store clerks talking to each other. One clerk remarked how the bookstore was so quiet today. The other one suggested that most people were probably at home working on their gardens, or at home improvement stores buying supplies. See Friday entry…

Monday- Spent my afternoon at a wake. No financial or economic observations here, although I did have an interesting experience. While downstairs in the guest lounge having some snacks and a coffee, I was looking at a nice-looking grandfather clock at the top of the stairs. About a minute after I started observing this timepiece, the glass cabinet door of the clock mysteriously came ajar and opened wide (with no human help, thank you). Surprised, and not the least bit curious, I put down my coffee, walked to the top of the stairs, and observed the clock. I noticed that the door opened and shut very easily— but I still wondered why it opened when it did.

Creepy. Which could also describe this past Memorial Day Weekend…

U.S. Energy Policy Is All Smoke And Mirrors

With the price of crude oil now well above $100, how has the U.S. government responded? Well, last week Congress voted to halt the shipment of 70,000 barrels that were being sent on a daily basis to our emergency reserve of crude oil known as the Strategic Petroleum Reserve, or SPR. Never mind that this number represents only 0.3% of the 20 million barrels consumed by Americans each and every day, and might only shave 4 to 5 cents off a gallon of gasoline according to the U.S. Energy Information Administration.

And this week? Have you ever heard anyone tell you to stick with what you’re good at? Well, of the 435 members of the U.S. House of Representatives, 158 come from the legal profession, or more than one-third of the legislative body. So, it’s not surprising that in a day where crude oil surpassed the $129 a barrel mark in trading, Congress decided to sue the Organization of Petroleum Exporting Countries. OPEC, which produces 40% of the world’s oil, is comprised of Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, Qatar, the United Arab Emirates, and Venezuela. And we wonder why the rest of the world loves us so? According to the Associated Press today, the U.S. House of Representatives voted to let the U.S. Department of Justice pursue energy antitrust and price fixing cases against members of the OPEC oil “cartel.” The bill, which was approved 324 to 84, would create a special Justice Department task force to investigate energy markets to root out manipulation and unwarranted speculation. Democratic House speaker Nancy Pelosi was quoted by the Agence France-Presse as saying:

The House today with a strong bipartisan and veto-proof margin voted to hold foreign oil cartels and Big Oil accountable… Instead of using a veto threat to shield cartels and Big Oil companies from accountability, the Bush Administration should work with the Congress to protect American consumers.

However, AP reporter H. Josef Hebert noted this afternoon:

Many energy experts and legal scholars doubt that such an enforcement action would be successful.

Earlier today Bob Tippee, editor of Oil & Gas Journal, told News Radio 590 KLBJ in Austin, Texas, that:

It will work against, rather than for the interest of oil consumers. It’s a wrong move. I think it’s more of the silly policy-making we see in Washington D.C. these days…

It shows a gross misunderstanding of the oil market and OPEC’s role in it. It sets up a false dragon display. The supposition is that OPEC is producing far less than it could be producing, and that is blatantly false.

Short of calling this legislative body a “House Of Fools,” it appears this is yet another display of “smoke and mirrors” by Capitol Hill politicians. As with the SPR situation, the U.S. House of Representatives is only making it appear like they are doing something to deal with the energy crisis of 2008. The sad thing is, a number of Americans will probably buy into the farce. Earlier today on CNBC, legendary oil investor T. Boone Pickens, Jr., had this to say about Washington and our energy “policy”:

You’re talking about reducing taxes on gasoline for the summer? Is that an energy plan? Hell no, it’s not an energy plan. It’s no plan at all. And, you know, it’s just amazing to me what politicians focus on. They ought to step back and look at the $600 billion a year that it’s costing this country to buy oil…

Well, I still say politicians, I mean, what they think about, is getting re-elected, or getting elected, one or the other. They’re not thinking about how to solve the problems for energy in America.

Sources:

“House action targets OPEC”
H. Josef Hebert
Associated Press, May 20, 2008

“US House passes anti-OPEC bill”
Agence France-Presse, May 20, 2008

“Texas Oil Analyst Says OPEC Vote Flawed”
KLBJ News Radio, May 20, 2008

“Pickens: Oil Going to $150, So Move to Gas”
CNBC, May 20, 2008

Congress Approves National Colosseum

Not really. But Capitol Hill politicians might as well allocate funds to build one, complete with chariot races and gladiators to keep us happy, considering the way they’re pandering to the masses these days. When Congress only has a 20% approval rating (Gallup), what else would you expect? Something like what happened today. Hoping to sooth the economic pain (and gain the electoral support) of Joe Six-Pack and Suzy Soccer Mom, both the U.S. Senate and House of Representatives, in a direct challenge to President Bush, voted to temporarily halt the shipment of thousands of barrels of oil a day into the government’s emergency reserve. The Strategic Petroleum Reserve, a system of underground salt domes on the Gulf Coast, was created by the U.S. government in the seventies as a precaution against major interruptions of oil supplies. With 701 million barrels in storage, it is currently 97% full, yet the equivalent of only two months of oil imports.

The Senate voted 97 to 1 in favor of suspending the shipments, which average about 70,000 barrels a day, until the end of the 2008. Only Senator Wayne Allard of Colorado voted against the measure. Presidential hopefuls Barack Obama and Hillary Rodham Clinton also voted to halt the shipments as well. John McCain was not present for the vote. Mirroring the same bipartisan support as in the Senate, the House voted 385 to 25 in favor of halting the program.

For some time now, Congress has wanted to tinker with the SPR, jawboning on and on about how curbing deliveries to and/or drawing from the emergency reserve (by the way, what part of “emergency” don’t you get?) can ease tight oil supplies, curb market speculation, and possibly lower crude oil prices. Case in point. MSNBC’s John Schoen wrote back on May 19, 2004 (that’s right, 4 years ago):

With oil prices stuck above $40 a barrel, attention has turned to the U.S. Strategic Petroleum Reserve, a vast stockpile of oil stored underground that the U.S. continues to add to. While Democrats call for releasing some of those reserves to help ease oil prices, President Bush Wednesday repeated his long-standing position that the stockpile should only be used in the event of a critical cutoff of fuel needed to maintain the country’s national defense…

“Since the price of oil is so closely tied to inventory levels, filling the SPR under these market conditions both depletes private sector inventories and pushes up prices for America’s consumers,” said Sen. Carl Levin, D-Mich., in a floor speech in April defending an amendment to defer SPR purchases.

More recently, New York Democratic Sen. Charles Schumer has introduced an amendment to draw 1 million barrels a day from the reserve for the next 30 days.

“Joey, do you like movies about gladiators?”

And Congress’ assertions that curbing shipments to and/or drawing from the SPR could help with our supply problems, dampen speculation, and lower oil prices? Wrong, wrong, and wrong, according to the experts (or, at least, people who know what they’re talking about). Regarding the supply problem, the 70,000 barrels that are being sent to the reserve on a daily basis represents only 0.3% of the 20 million barrels consumed by Americans each and every day. 0.3%? Can anyone tell me how this could possibly help alleviate tight supplies? Regarding the perception that high oil prices are caused by speculators, legendary energy investor T. Boone Pickens told attendees at the Oklahoma State University’s Energy Conference on April 23:

Only 5 percent of oil is in the commodity pool. If you did run it up, it would be briefly. Speculators cannot move it that much.

He would know. Finally, a number of politicians believe (or want us to believe) that halting shipments and even drawing from the SPR will somehow lower oil prices. CNN Money’s Steve Hargreaves wrote today:

A statement from Speaker of the House Nancy Pelosi, D-Calif., said it could bring down gas prices by as much as 24 cents a gallon.

Or so she claims. The CNN Money staff writer also wrote:

The U.S. Energy Information Administration predicts oil prices would fall by only about $2 a barrel - or shave 4 to 5 cents a gallon off the price of gas - if the president suspended deliveries to the SPR.

“It’s a very small amount” of oil going into the reserve, said EIA oil market analyst Doug MacIntyre. “And it’s very transparent to the market.”

Should I believe House Speaker Pelosi or the EIA? Tough call, right?

Here’s something to think about. A possible explanation for the high price of crude oil is that global demand is running at 87 million barrels per day, while the global oil supply is at 85 million barrels per day. Furthermore, while older oil fields are starting to go dry, no suitable replacements are being found. Finally, even though the U.S. economy is slowing, for every 1 barrel of reduced American demand there are 14 barrels of increased demand from developing countries like China, India, and Brazil.

Oh, but this just in…

“Middle East Oil Cut Off By Coordinated Attacks Throughout Region” and “Gulf Oil Infrastructure Destroyed By Category 5 Hurricane”

Well done. Thanks for saving me that nickel.

Sources:

“Senate votes to halt oil reserve shipments”
H. Josef Hebert
Associated Press, May 13, 2008

“House votes to stop adding to oil stockpile”
Tom Doggett
Reuters (UK), May 13, 2008

“Debate flares over strategic oil stockpiles”
John W. Schoen
MSNBC, May 19, 2004

“Oil stockpile a drop in the bucket”
Steve Hargreaves
CNN Money, May 13, 2008

“Pickens: Oil to go to $150 a barrel”
Jerry Shottenkirk
Journal Record, April 24, 2008

Pain In The Gas

Back on November 20, 2007, I wrote a post about the rising price of gasoline. Back then, prices were making headlines because the national average for regular unleaded gasoline stood at $3.10 per gallon, or 10% higher than a month prior. I also wrote that day:

CNBC noted that for a number of drivers, the cost of filling up their vehicles is hitting $100 or more. Based on calculations by Bankrate.com, it costs $108.50 to fill the 31 gallon tanks on your base model Chevrolet Avalanche or Suburban. If you own a base model Ford Expedition, you’re in luck, as the 28 gallon tank costs only $98 to fill up.

Fast forward to April 29, 2008. The national average for regular unleaded gasoline is now $3.60 per gallon, and U.S. presidential candidates are calling for a suspension of federal gas and diesel taxes. And the cost of refueling those vehicles referenced in my November post?

• Chevy Avalanche (31 gallon tank)= $111.60
• Chevy Suburban (31 gallon tank)= $111.60
• Ford Expedition (28 gallon tank)= $100.80

Welcome to the $100 club, Expedition owners. It could be worse. If you owned a Chevy Suburban or GMC Yukon with the 39 gallon tanks, you’d be looking at $140.40 per fill-up.

“Honey, could you gas up the Yukon for tonight?”

Jumpin’ Jack Flash, There’s No Gas, Gas, Gas!

MarketWatch’s Moming Zhou reported Monday that U.S. refineries operated at only 81.4% of their capacity in the week ending April 11, according to the U.S. Department of Energy. The last time this number fell below 80% was in October 2005, in the wake of Hurricanes Katrina and Rita. This takes place at a time when the Energy Information Administration (EIA) predicts the price of gasoline could surpass $4 a gallon in the upcoming driving season in some areas.

The culprit, said Zhou, is the record run in oil prices, which is rising much faster than gasoline prices. The gap between the price of crude and the price of gasoline and other refined products has pressured profit margins at refiners, so much so that earnings from downstream operations including refining slumped 62% for a group of 10 major U.S. oil companies in the fourth quarter. The first quarter may be even worse. Earnings for the three dedicated refiners in the S&P 500 Index are anticipated to fall 94% to just under $67 million from $1.2 billion a year ago, according to Thomson Financial.

Since their bottom line is taking a huge hit, refiners have decided to take more of their production offline and retool their plants this spring. Which explains why refineries are operating at only 81.4% of capacity. According to economist James Williams of energy-research firm WTRG Economics:

This is a maintenance season. If you can’t make a lot of money, you do a little more repairs.

Zhou said that spring is typically when refiners idle parts of their plants to undertake maintenance. But, she noted, “they don’t always cut back so drastically.”

Source:

“Refiners slow fuel production as profits drop”
Moming Zhou
MarketWatch, April 21, 2008