Wednesday, April 26, 2006

What to do about the price of gasoline?

Leave it to one of the greats to tell us like it is. Larry Kudlow wrote on Tuesday that President Bush undid a few things by which government is making oil and gasoline more expensive. He added:
One action President Bush should have taken (and could still take) is to end the 54-cent-a-gallon tariff on imported ethanol (which basically means Brazilian ethanol.) Why the U.S. government should protect the already heavily subsidized ethanol industry at the expense of American consumers is hard to fathom.

Energy Secretary Sam Bodman actually defended the tariff earlier this month saying it was necessary so that foreign producers "can have no advantage over American companies." Holy smokes, this is the energy version of steel tariffs and it's just as bad an idea.

But all this talk of price gouging is nothing more than the usual political pabulum.
Update: one thing Larry didn't mention is that President Bush directed the EPA to wave "clean air" rules, by which the EPA requires certain states to use only specific blends of gasoline. Believe it or not, there are 42 different blends (maybe even more now!), so if gasoline supplies run low in a state that is heavily restricted by the EPA, it often can't just buy gasoline from an adjacent state. Sometimes it must come from two or more states away, which makes the gasoline unnecessarily expensive. Bush said "Every little bit helps" regarding the effect on gasoline prices, and even this good start had a little downward pressure.

However, Bush called for increasing tax breaks for hybrids cars, which I have exposed as "The bad way to cut taxes." As I explained, cutting taxes must be uniform, not just for specific industries or products. Otherwise, like in the case of hybrids or anything else we can get "tax credits" for, it's merely favoritism -- a subsidy. By nature, a subsidy is how the government skews the market in favor of special interests.

Larry had previously assailed the ridiculous ethanol subsidies here, concluding, "The administration is being hoisted on its own ethanol petard." And he is correct. The blame for gasoline prices is not just from the price of oil, but the pile of crap known as the 2005 energy bill. In a couple of decades, economists might just look back on the energy bill and its effects like we today look back on the 1970s wage and price controls: "Who were the schmucks that didn't think about ethanol's scarcity, or even that its price would go up from demand, yet mandated a sudden spike in its use?"

But in our midst are interventionists in the guise of free-marketers, who have a form of laissez-faire but deny the power thereof. As I explained several ways in that link, there is no, NO justification whatsoever for ethanol subsidies. Any subsidy takes money from some to give to others, and though the latter can then sell their goods for less, at best it's all the same for the consumer. If an item would normally sell for $2, but a $1 subsidy allows it to sell for $1, then the taxpayer still pays $2 total, for who else pays the subsidy? Then it gets worse, because an equivalent item that might sell for $1.50 will never come to market. The uncompetitive sellers stay in business, at the expense of the consumer and his lost 50 cents.

Now, I also oppose subsidies for oil companies. I'm the first to support the elimination of all subsidies for everyone, believing that that is the level playing field on which they compete for the consumer's business. But to be fair, "Big Oil" hardly receives the boost that ethanol producers and corn growers are. The energy bill boosted their subsidies, and the mandate to phase out MTBE was the hidden windfall for them. When I tried to tell rufus a dozen times that ethanol will rise in price as it becomes more popular, he didn't believe me, but I turned out to be right.

Sadly, President Bush, though I believe he knows better, has bowed to politics and has come out against price gouging, though such a thing is completely mythical. If he didn't, Democrats would score too many points with voters. Republicans have to display some populism, lest anger over gas prices (fueled by mainstream media) give them the same fate as George H.W. Bush. As this Detroit News op-ed says so well, "One thing you can always count on, as soon as the price of a gallon of gasoline nears $3, Democrats will start demagoguing." Link courtesy of our friend Josh Hendrickson. Josh has also noted the interesting correlation between gas prices and Bush's approval ratings, and that if the Republicans finally get smart, they'll bring up ANWR. Drilling in ANWR would immediately cause crude oil prices to drop (because current prices also reflect future supply), but Democrats consistently block all legislation. Especially now, I cannot fathom why Republicans don't drive this point home.

At the present time, our only option is for the lesser of two evils. I, for one, would rather have Republicans half-heartedly screwing up the economy than Democrats completely wrecking things with "windfall profits" taxes. That reminds me: when will Democrats start calling for "windfall profits" taxes on ethanol producers, who are now earning larger and larger margins? Or do they not want to risk that the American people will finally realize that it's absurd for government to support business, and that it's this absurdity that makes things more expensive than they ought to be? Unlike liberals' use of "ought," my use there means "if the blasted government didn't stick its nose in, whether it's trying to 'help' or simply redistribute money to supporters."

People want government to "do something" about gasoline prices, when in fact the federal government shoulders a good part of the blame. People also wanted government to "do something" about the Great Depression, too, though the Federal Reserve triggered it, and the federal government prolonged it. Why look for solutions from the people who created the problem in the first place?

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Anonymous Anonymous said...

Neal Boortz is going on and on about the fact that not only do we have mandated ethanol use, at the same time we have a huge tariff on foreign-produced ethanol. Maybe our Democratic friends, always champions of third-worlders, might advocate removing that tariff. Of course, that would be a tax cut, and Democrats always protect their revenues streams above things like free trade or individual rights.

Boortz has also been harping on profit margin. Oil companies making 8.5% on their investment, individual station owners making maybe 5 cents (or 5%?) on a gallon of gas. That's what they get for their investment. What does government get out of each gallon for their "investment"? Somewhere between 40-50 cents per gallon, when we add fed, state, and local taxes?

It's demagoguery on both sides of the political aisle. Government makes gas this expensive, then taxes the hell out of it (and some of its components), and then blames someone else for the problem. We've got the exact same problem in healthcare. If government got its nose out of both industries, costs would come way down.

Wednesday, April 26, 2006 10:50:00 AM  
Anonymous Anonymous said...

You know, California has been getting royally screwed by the government (both fed and state) and the environmentalists for two decades. Back in the 1990s, we were paying $1.50 or more a gallon of gas while the rest of the country paid less than $1.00. Why?

Well, there was this little (highly toxic and corrosive) additive called MTBE (which is a waste product of the oil refining process) that the environmentalists thought would be a great way to create cleaner burning fuel. (Of course, it was a total failure, with UC Berkeley finding no statistically significant benefit, but hey, it made the left feel good.)

Now, there were a couple of easily predictable side effects conveniently ignored in the name of environmental righteousness. First, tiny volumes of MTBE can pollute enormous volumes of water. Second, it had the nasty little habit of chewing through the underground fuel tanks used in gas stations. Thus was born another government acronym, the LUFT, or Leaking Underground Fuel Tank.

What was to be done about the LUFTs created by this government mandate? Well, of course, the gas stations would just have to shut down for months and spend hundreds of thousands of dollars (with no assistance from the government which caused the problem in the first place) to replace the LUFT with an MTBE-resistant fuel tank. Of course, since it was nearly impossible to tell which gas stations had LUFTs, EVERY underground fuel tank at EVERY gas station in the Golden State had to be replaced.

This led to the great independent station purge. Today, in California, the vast majority of gas stations, probably more than 90%, are owned by the big oil companies (Shell, Exxon-Mobil, BP, Valero, etc.). Of course, this has done great things for competition among CA's gas stations, like almost completely eliminating it. In the town I call home, there are six Shell stations, approximately one for every square mile of town. When I was kid, before all of this nonsense got going, 5 of those 6 stations were independent gas retailers.

Add to that the fact that CA can't import gas from anywhere in the country and has to switch formulas twice a year (again, with no provable benefit), and you have a place where prices will inevitable be far higher than they should be. (And by "should be", I mean without all the government interference.)

My policy presciption for Bush is a simple one: Firse, move the nation to a single blend of gasoline. Second, encourage the building of refineries to make sure they can meet demand spikes. Yes, it's that simple.

My political presciption for Bush is this: Get the truth out that this is a problem caused by left-wing economic and evironmental thinking meddling with the market. Don't let the left, especially the environmentalists, say I told you so. They are more to blame for this problem than every greed oil exec and gas station owner combines.

Thursday, April 27, 2006 3:40:00 AM  
Blogger TKC said...

Well, the Senate finally came out today with something in the right direction. They want to suspend the federal gas tax till September and make up revenue short falls by cutting oil subsidies.

Less taxes supported by less spending. You'd think somebody hadn't thought of this sooner.

Thursday, April 27, 2006 5:32:00 PM  

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