Tuesday, April 25, 2006


All Kinds of Stuff and a Rant About Oil Price Silliness

The dark side of e-paper: "Blackberry Squint"

Some comments about trade shows on industry blog Lornitropia, to which I posted a comment.

The economy is really bad, crushed by high gas prices. So therefore, consumer confidence is at a four year high! Yet another discontiuity that is little-reported by the press! If confidence is supposed to crash because of high prices, then when it does not, something is probably worth investigating as a news story. Instead, there are emotional outbursts and whining and polls but no analysis.
This gas thing is being blown way out of proportion. Congress bungled laws affecting the MTBE - ethanol conversion, and they have refused to repeal the 56-cent a gallon tariff on imported ethanol. We've seen how reduction of tariffs has lowered inflation worldwide, but how protectionist polices strangle supply and raise prices. But ethanol has a special place in Congress with various subsidies and trade protections that protect producers but not consumers. Consumers are helped by low prices, not hurt by high prices and low supplies.

Look at what VoIP is doing to telephone costs. VoIP is essentially unregulated, and prices are virtually zero to have phone service in this way. We buy milk at a nearby dairy and the price is $3.50 a gallon, yet they don't have to explore for milk, drill for milk, ship raw milk across an ocean, process milk in a multi-acre processing plant, send the milk through pipelines, store it in tanks, ship the milk in trucks, empty the trucks into underground tanks, and then operate dispensing equipment. Milk still has price supports, too. Oil doesn't have price supports, but it has high taxes and in return gets a large amount of corporate welfare payments to offset them. The convenience store now part of so many gas stations is usually more profitable than the gas pumps. The funniest part of all of this is the claims that there should be a windfall profits tax. In economics, there is no such thing as a "windfall profit," just as there is no such thing as a "fair" price. There are market prices, but there is nothing fair or unfair about them: they are what they are, the result of the interaction of supply and demand. Peter Drucker would explain that there are no such thing as profits, only costs, and the profits are always used for future costs. In any comparison, the robust times of the petroleum business are short and fleeting, and it has been an underperforming industry for most years. ExxonMobil is in the bottom half of profit performance for the Dow 30. How come there are no windfall profits taxes on Microsoft or Johnson & Johnson, or on Adobe to take an example closer to home. I think Pixar, which earned 60 cents on every dollar of revenue should refund its "windfall profits" to all those little kids who are addicted to Toy Story. All of these companies have far higher profits as a percentage of sales than ExxonMobil. There already is a windfall profits tax: the US corporate tax rate is far higher than other developed economies, and the US treasury gets approvimately 38 cents of ever dollar of profit of the petroleum industry already, which is about 3 or so percentage points higher than other industries.

Industry profits still are exceeded by taxes paid from the processing level to the consumer price. There are 43 different direct and indirect taxes on gasoline, from pumping from the ground until the customer puts it in their tank. Maybe stopping the tax shell game would lower the prices, ya think? Tax collections are so strong, especially in states where sales tax as a percentage of the sale is collected, that there is no incentive to lower or remove the taxes; there is only an incentive to have meaningless press conferences with much flailing about.

The real profits from oil are earned at the source: whomever owns what comes out of the ground. But in the long run, the prices that caused 1970s oil embargo pain are actually in 2005 dollars $5.80 a gallon of gas and $140 a barrel of oil, when you adjust for inflation and the productivity that those prior high prices inspired businesses and consumers to pursue. We're still not close to those prices. While gas prices, like all prices, affect those with lower incomes disproportionately (when you are poor, all prices are too high). these prices are already causing people to change habits, which supposedly many hand-wringers have wanted all along: greater use of public transportation, car pooling, and other frugal behaviors. These are the kinds of acts that some have wanted all along: prices are always better at creating desired behavior than guilt or jawboning.

In the end, gas and oil prices will collapse, though that is definitely not imminent (it was in the mid-90s that it was less than $20 a barrel in current dollars after a long time well above that). Still much of the developing world is generating electricity from on-site generators and not utilities, which is far less efficient than the utility systems in developed countries. China's oil consumption is already running about 25% more than last year's rate. Countries that have well-developed nuclear sources and hydropower clearly have an advantage.

In an economic boom, commodities prices rise. We have been in a worldwide economic expansion. Lose the sad face and join in the fun.

This link has a great chart comparing the processed cost of gasoline compared to other common liquids, like Gatorade, Scope, Pepto Bismal. Be glad cars don't run on Evian water.

Tax Freedom day is April 26, three days later than 2005. I still think they should move Election Day to April 16, the day after Federal taxes are due. It'll never happen.

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