Supply and Demands

Some of us remember how Congresswoman Maxine Waters threatened to socialize the American oil industry last month at a congressional hearing on high oil prices. She blurted out;

“…And guess what this liberal will be all about. This liberal will be all about Socializing… ahhhh ummm… (pause) will be about (pause) basically taking over and government running all of your companies.”

The idea of the takeover of the oil industry by an incompetent congresswoman is bad enough, but other Democratic Party hacks are playing hardball to hinder the ability of our Iraqi allies to sell oil. Democratic senator Charles E. Schumer sent a letter to Secretary of State Condoleezza Rice threatening retaliation if the government of Iraq issues modest contracts to four foreign oil companies. One is from the U.S. (Exxon Mobil), one is from the Netherlands (Shell), one is from France (Total) and the last is from Great Britain (BP).

This bizarre letter claims that awarding modest no-bid oil contracts to foreign oil companies will result in some sort of Armageddon… stating, “It is our fear that this action by the Iraqi government could further deepen political tensions in Iraq and put our service members in even greater danger”. So what is Schumer’s solution?… Unless he and his comrades get their way they threaten to further deepen political tensions by cutting off financing for unnamed programs in Iraq that they claim are not directly in support of American troops.

There aren’t many U.S. government funded programs in Iraq that are not in direct support of American troops. This is a war against terrorist guerillas that attack civilian infrastructure. Part of the reason that Iraq is producing more oil these days is because the terrorists have suffered many major defeats and their ability to attack civilian utilities has been hampered. A crucial tactic of Counter Insurgency operations is the usage of humanitarian projects to win over the local populous (something referred to as winning the “hearts and minds” of the population). Other efforts to help the local government and security forces are important as well.

That leads me to believe that this latest threat is just a projection of the Democratic Party’s desire to encourage instability in Iraq. Much like the Copperheads during the Civil War, the Democrats have done everything they can to hamper our ability to wage this war and instead focused on “bringing our troops home”... also known as “cutting and running”. These Copperheads even have the nerve to deride loyal American military officers as traitors and liars, while these soldiers put themselves at risk during a time of war.

The Democratic Party has focused its efforts on oil speculators as the cause of the recent upswing in oil prices. However, at this time there is no concrete evidence that the oil market is being manipulated by foul play. I have no problem with legislation that ensures the transparency of such speculating, but the Democratic Party is also proposing hostile legislation that will interfere with legitimate business practices. In effect they are legislating against a problem that they do not understand and may not even exist, because they have no evidence of such activity other than their own speculation.

Again, I agree that the possibility should be investigated and if the current high oil prices are proven to be the result of artificial price gauging by speculators, then we can legislate a solution. Yet the law of supply and demand shouldn’t be dismissed so lightly in favor of sentiment that has not progressed beyond the stage of conspiracy theories.

Rather than driving oil trading overseas to less regulated markets, we should enact legislation that will not exacerbate high oil prices. This means regulating intelligently by passing legislation aimed at a proven problem instead of using a shotgun to cure cancer.

Recent proposals to reduce fuel taxes make sense if we sincerely want to reduce gasoline prices. Europe is notorious for high fuel taxes and as a result many countries in the region pay twice the amount per gallon that Americans do. They have faced deadly riots and protests because of this. So even a small decrease in fuel taxes will help consumer confidence and will surely influence speculators if combined with the opening up of American oil drilling in restricted regions that are known to have huge untapped oil reserves.

Attacks by ruthless rebels on Nigerian oil installations recently drove up oil prices, as such attacks usually do. At its peak Nigeria had an output estimated at 2.5 million barrels per day (bpd). The country is Africa’s largest oil producer and is a founding member of OPEC. Here in the United States it is estimated that we have up to 2 million bpd that could be tapped from proposals to open up drilling in areas currently prohibited by legislation. Just like any trading market, psychological factors weigh in almost as strongly as the physical transactions that are being traded. So even though we will have to wait 10 years until oil production in these currently protected areas can begin, it will still have some effect on the market now (especially in combination with fuel tax breaks). Even more importantly, since it takes about 10 years to begin production, we’d better start now rather than waiting until the problem is worse.

Just in April an article from the Obama-worshipping blog, Daily Kos, was advocating the raising of gas taxes and attacking Hillary Clinton as an anti-progressive heretic for having a moderate idea (the summer tax holiday). This is a mainstream movement in the quasi-Socialist Democratic Party. A week after the failure of a recent climate tax bill, which over 20% of Democratic Party senators opposed, Obama and the Democratic Party leadership suffered another defeat when they pushed for a windfall profits tax on oil companies. Remember the deaths and riots happening in Europe? The Democratic Party wants that here.

No matter how high the price of gasoline gets, the Democratic Party continues its desire to increase taxes on the oil industry. Even last August the Democratic Party was pushing for $16 billion in taxes on the oil industry (this effort also thankfully failed). It is naïve to think that taxing the oil industry is going to result in lower prices yet Representative Tom Udall (D-NM) had the nerve to say, “This (bill) will save consumers money”. We have a working model for high oil industry taxation in Europe and that surely isn’t the case.

Instead of banning, taxing and penalizing the Democratic Party needs to learn good government practices. Oil industry profit margins are no larger than most industries and are actually modest compared to many. They, “average, at 8.3 cents for every dollar of sales, compared to the chemical industry’s 12.7 cents for every dollar of sales, the computer industry’s 13.7 cents and the pharmaceutical industry’s 18.4 cents for every dollar of sales”. It is the government that is the biggest profiteer from high oil prices. In 2005 the Tax Foundation reported that since 1980 oil companies “remitted more than $2.2 trillion in taxes, after adjusting for inflation, to federal and state governments”. You may recall that 1980 was the year that Congress was actually successful in slapping a windfall profit tax on the oil industry. This disaster forced “oil companies to reduce production of crude oil and increased our dependence on foreign oil by an estimated 8 to 16 percent”.

Offering more incentives and subsidies will be much more effective than heavy-handed tactics that do more harm than good. We cant afford such knee-jerk reactions which only results in restrictive legislation that does nothing but hamper business and creates the usual divisive politics that the Democratic Party is so good at.

The real problem lies in the developing world. China and India subsidize the sale of oil. This dramatically lowers the price of oil and gasoline in those countries and increases consumption at astronomical rates. Bob O’Brien, the online stocks editor at Barrons.com, stated;

“China is undergoing this economic boom and is effectively willing to pay any price. Just by the nature of the market, the product is going to seek out the end user that is willing to pay the most. And that dynamic is not going to change anytime soon.”

William Anderson hilariously characterizes the Democratic Party as “criminalizing higher oil and gasoline prices”.

He goes on to state, “When in doubt, Congress makes something a crime. Keep in mind that while they are first speaking of $5 million fines, ultimately they will be throwing people in prison for ‘economic crimes’, and ‘speculation’, which was the hallmark of the former Soviet Union.”

While his Libertarian tendency to exaggerate government abuse of power is a bit overboard, his conclusion is right on the money;

“…we have bluster, threats, and measure after measure that would further strangle and regulate production of oil and oil-related products. Congress always tells us that it knows best, but once again, we see nothing but economic ignorance from Washington’s finest. For now, they have been held back by a filibuster, but I fear that such a reprieve is only temporary - that Congress and the others in political power in this country will not be satisfied until they have fully destroyed the US economy and replaced it with something we thought would disappear when the Iron Curtain finally fell so many years ago.”