Wednesday, June 11, 2008

From Boom to Bust

The Federal Trade Commission is asking the public for comments regarding what can be done to lower gas/fuel prices. To cut through the congressional and media spin and blaming other countries for our misdeeds, let's get to the heart of the matter: Gas/fuel prices are high because the value of the dollar has fallen and will continue to do so because Congress and the president continue to spend money they do not have. Furthermore, the Federal Reserve fails to address the integrity of the dollar and spends money it doesn't have to save Wall Street.Then there is the failure of government to drill for oil in Alaska and offshore so we remain very dependent on foreigners. The American people are also competing with their own government in getting more oil to market; meaning that government continues to purchase oil for reserves, not to mention oil going to fight our wars. And finally we come to speculators. Would we allow speculators to play their profit game if it involved military equipment? Well, oil is also a vital American commodity needed for our very survival; thus, speculators and what they are doing should be controlled/regulated. And then there is the oil industry itself. We have a shortage of oil refineries. Hm! And demand for gas has fallen, yet prices continue to increase. Hm! I will not even go into the ethanol farce and its negative impact here and abroad. And so, until our politicians obtain some intelligent economic knowledge and have the desire to attack the real problems (which they have caused) as described above, fuel prices can only go up and our recession and inflation will get worse. It would be refreshing if the FTC told politicians and the American people the truth and spoke plainly ... this may be the first step in solving this self-created problem.

Gas Prices Could Hit Six Dollars A Gallon By End Of Summer

Gas prices have hit four dollars a gallon and some experts say the worst is yet to come. Some analysts believe gas could hit six dollars a gallon by the end of this summer. Still, other experts believe that is a worst-case scenario that is unlikely to happen. The huge increase is cranking up prices in unexpected places well beyond filling your gasoline tank. For example, the cost of diapers has increased about eight percent, and even the cost of a cold pint of beer is bubbling higher because of the rising cost to transport beer. “If we pop to over five dollars, to six dollars for a gallon of gasoline, you're going to really see people changing their habits," said energy trader Steve Grasso. Also on the rise is the cost of oil-based cosmetics, detergent and plastic mobile phones.

Congress risks making gas price crisis worse

Absent any historical perspective, the windfall profits tax on oil companies that was blocked by Senate Republicans Tuesday might have some appeal.

Petroleum firms are reaping huge profits from the run-up in crude oil prices, and it's tempting to look at that massive pool of cash and declare it excessive.

But we've been here before, and not all that long ago. In 1980, President Jimmy Carter signed into law a windfall profits tax to curb the profits oil companies were piling up from the price spike caused by the Arab oil embargo.

Over the next eight years, the tax cost the oil industry $80 billion. That money came out of exploration, and resulted in a domestic production drop of 1.6 billion barrels by the time the tax was killed in 1988.

The fall-off in domestic supply increased oil imports and led to additional price hikes.

There's no reason to believe that a windfall profits tax would work any better this time around, particularly if Congress also rescinds $17 billion in tax breaks designed to encourage exploration.

Congress is also heading down a dangerous path in taking on the so-called oil speculators they blame for pushing up the price of oil futures. Most of these speculators are businesses like airlines and trucking firms that are trying to manage their future costs.

The legislation Republicans blocked would have increased the margin requirements for oil traders. The commodities industry warns that tightening the U.S. futures market will only drive investors to unregulated overseas markets and create more instability for future oil prices.

Congress could be helpful, if it really wanted to be.

It could open the Arctic National Wildlife Refuge, the Continental Shelf and other areas of the United States currently off-limits to exploration -- including the Great Lakes -- for environmentally responsible oil and gas drilling.

That's become a long-term fix, of course, thanks to President Bill Clinton's 1995 veto of legislation authorizing drilling in ANWR. Had the law been allowed to take effect, 1 million barrels of oil a day would be flowing from ANWR, or about 5 percent of the nation's demand.

But approving expanded domestic drilling would signal that the United States is willing to exploit its own resources to meet its future energy demands.

Advances in drilling technology have greatly reduced the environmental risk of oil and gas exploration. The impact on ANWR and other sensitive regions from drilling would be minimal, as experiences in other areas of Alaska that are open for drilling have shown.

Congressional Democrats pushing for the windfall profit tax applauded themselves for standing up to the oil industry. But they have far less courage when comes to standing up to environmental groups.

No one can pretend that increasing domestic production is the ultimate solution to the nation's energy needs. But if done right, it could serve as a bridge to make the transition to alternative energy sources less painful for consumers.

Boosting supply is a proven method for lowering prices; adding taxes is proven to raise them.

In crafting future energy policy, Congress ought to at least be mindful of past mistakes.

Fears of gas shortages growing across America

A new poll released Tuesday shows an increasing number of Americans are worried they could soon be forced to wait in line to buy rationed gas. It's an even bigger worry for some than high prices at the pump.

The poll comes from CNN/Opinion Research, and it shows something unexpected: more Americans are more worried about gas shortages, long lines and rationing, than high prices.

55 percent of the 1,035 drivers surveyed by phone for the poll last week listed long lines at gas stations and gasoline rationing as their number one energy worry. 40 percent responded that high gas prices were their main concern.

The survey carries a margin of error of +/- 3 percentage points.

It's a reminder of a different era, when gas shortages were front page news.

In 1973, long lines, quota signs, and empty gas pumps were common sights. But Notre Dame Economics Professor Dr. Thomas Gresik says there was little other choice.

"That was a serious problem because there simply was not enough oil coming into the United States," he said. "There had to be rationing."

But the supply eventually grew.

So did prices.

By 1979, the jump at the pump was so bad, then President Jimmy Carter implored Congress to impose "price controls,"-- a sort of "artificial ration" aimed at lowering the price at the pump.

Decreased demand equals increased supply, and thus, lower prices.

And oil costs did drop, at least temporarily. But the drop came at another cost: those familiar long lines and inconveniences of gas available only a few days a week.

Now, it seems at least some drivers fear that happening again.

While neither Congress or President Bush have given any indication that rationing is even on their radar as a potential solution, Dr. Gresik isn't convinced it hasn't crossed minds in Washington, D.C.

"Given what I've seen in Congress, anything is on the table," he said.

The reason for the fear is convenience, he added.

Even at $60 or $70 per fill up, many drivers say they're willing to toe the line between easily accessible gasoline and higher prices. Simply put, they're willing to pay a little more to avoid being inconvenienced.

"I hope they don't do that," said South Bend driver Curtis Scott, Jr. "It worries me, because I don't want to have to wait and wait in line for it."

"I'd be against rationing," agreed driver Kevin Deneen. "I don't think it would solve the purpose they're trying to accomplish. It's a quick fix. I get scared of quick fixes."

"It's a band-aid to me," nodded driver Dan Kagarise. "I don't know that it would really be the best solution."

Dr. Gresik agrees.

"If we want to see some policy that's really going to mess up the availability of gasoline in this country, and create long lines, price controls would certainly be it," he said.

The problem, he says, is supply.

"Right now, at current prices, the quantity of oil demanded is equal to the quantity supplied. People want to see lower prices. But what they don't realize is that there's two important factors in any market: price, and quantity. Unless you can control both, there's always going to be unexpected consequences," Gresik said.

It's one reason why he doesn't believe Congress will move forward with any sort of rationing plan in the near future. But that could change if oil prices continue to rise.

Meanwhile, alternative plans to deal with the soaring price at the pump continue to hit gridlock.

On Tuesday, Democrats in the U.S. Senate pushed legislation to impose a "windfall profits tax" on the five largest U.S. oil companies. They claim it would address America's anger over prices, and "big oil" could afford it after reporting $36 billion in profits in just the first 3 months of this year alone.

But Senate Republicans say a new tax won't fix the Country's energy problems. They want to expand domestic oil production, and used a filibuster to block any action on the energy package on the Senate floor. Democrats couldn't muster the 60 votes needed to consider the motion, so it failed.

Dr. Gresik says it's a dangerous line to walk.

"We already have a record of how windfall profit taxes work," he said. "Congress implemented them on the oil companies in 1979, in reaction to exactly the same situation [we have now] and it made the problem worse. Windfall profit tax is a backward looking policy. It hurts the incentives for future investments in production, which is what we need to get lower prices."

The only solution, Gresik says, is an alteration in the equation: decrease demand or increase supply. Since it appears, so far, that Americans are unwilling to alter their energy consumption levels, he says lower prices will only come through increased supply from new drilling sites or expanded refinery capacity.

Until that happens, he predicts prices will remain steady or rise slightly. And a huge increase, he says, isn't out of the question.

"We could hit 5 [dollars] a gallon," he said. "It is possible. In fact, it will happen if we don't make some changes."


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