Those who cannot learn from history

What the heck is this guy smoking? Is he so wrapped up in his own wonderfulness that he can't see what this will do?

Sen. Barack Obama (D-Ill.) on Friday announced an “Emergency Economic Plan” that would give families a stimulus check of $1,000 each, funded in part by what his presidential campaign calls “windfall profits from Big Oil.”

Adding tax to a product makes the price of that product increase. This is Economics 101, Mr. Wonderfulness. Penalizing "Big Oil" with an added tax burden will force them to raise the price of their product. This increase in price will be seen at the pump, and felt by everyone. To reduce their new tax burden, Big Oil will have to reduce the quantity of product they put on the market. This, in turn, will reduce the supply of said product on the market even more. And we all know what happens when there isn't enough supply to meet demand. Prices rise even more, and we become even more dependent on foreign-sourced oil.

Brilliant idea, bonehead. At a time when supply cannot keep up with demand, let's reduce the supply.

Don't think this will happen? Guess again. The last time "Big Oil" was penalized with a windfall profit tax, it was 1980, and Jimmy Carter was in office. What were the results? According to Nick Shultz from American Enterprise Institute:

The U.S. tried such a non-emergency tax in the 1980s, after a similar period of energy price spikes. Indeed, then president Jimmy Carter faced his own personal political crisis as he was responding to concerns about gas shortages and gas lines at filling stations. The results of that tax were not pretty.

The non-partisan and highly respected Congressional Research Service studied its effects. For starters, the levy did not raise the money its supporters believed it would. Initial projections had the tax bringing in a quarter of a trillion dollars. In reality, it brought in $40 billion. The researchers also found that the tax slashed domestic oil production by as much as 6% and increased oil imports by as much as 15%.

The actual tax that was generated was only 16% of what they had expected, while production fell by at least 6% and imports increased by 15%. Why did this happen?

Energy exploration, development, refining and distribution is a risky and capital-intensive industry. If the institutional framework of doing business, including the tax structure, changes significantly, firms will change their behavior as well. The response of energy firms to the 1980s tax in the U.S. was sensible. They cut back.

So, faced with the added tax burden, oil and energy companies cut back production. They did it in the early 80's when their tax structure changed. What makes Mr. Wonderfulness so sure they wouldn't do it again?

Those who cannot learn from history are doomed to repeat it.

Drill Here. Drill Now.

I've been saying this for months...

Cheers to Larry Kudlow from National Review Online...

Tuesday, July 15, 2008

Bush Says Drill, Drill, Drill — and Oil Drops $9! [Larry Kudlow]

In a dramatic move yesterday President Bush removed the executive-branch moratorium on offshore drilling. Today, at a news conference, Bush repeated his new position, and slammed the Democratic Congress for not removing the congressional moratorium on the Outer Continental Shelf and elsewhere. Crude-oil futures for August delivery plunged $9.26, or 6.3 percent, almost immediately as Bush was speaking, bringing the barrel price down to $136.

Now isn’t this interesting?

Democrats keep saying that it will take 10 years or longer to produce oil from the offshore areas. And they say that oil prices won’t decline for at least that long. And they, along with Obama and McCain, bash so-called oil speculators. And today we had a real-world example as to why they are wrong. All of them. Reid, Pelosi, Obama, McCain — all of them.

Traders took a look at a feisty and aggressive George Bush and started selling the market well before a single new drop of oil has been lifted. What does this tell us? Well, if Congress moves to seal the deal, oil prices will probably keep on falling. That’s the way traders work. They discount the future. Psychology and expectations can turn on a dime.

The congressional ban on offshore drilling expires September 30, so that becomes a key date. A new report from Wall Street research house Sanford C. Bernstein says that California actually could start producing new oil within one year if the moratorium were lifted. The California oil is under shallow water and already has been explored. Drilling platforms have been in place since before the moratorium. They’re talking about 10 billion barrels worth off the coast of California.

There’s also a “gang of 10” in the Senate, five Republicans and five Democrats, that is trying to work a compromise deal on lifting the moratorium. So it’s possible a lot of action on this front could occur much sooner than people seem to think.

So I repeat: Drill, drill, drill. Deregulate, decontrol, and unleash the American energy industry. Those hated traders will then keep selling oil as the laws of supply and demand and free markets keep working.

Bravo for Bush. Bravo for the traders.

As soon as "the market" sees that the US is serious about finding more oil and supplementing the supply, the prices will go down. Traders and speculators ultimately set the market price of oil, not the oil companies. And they buy and sell oil as futures...meaning they speculate about the supply and demand of oil in the future. Currently they see more worldwide demand and less supply, so they buy oil contracts (x amount of barrels) now, expecting to be able to sell them at a higher cost in the future. One problem with this is they are only required to put up 7% of the price to buy these oil futures. Not much of a risk on their part, as they speculate the supply will not meet the demand in the future, so their 7% upfront cost is relatively safe. One way to reign this in is to require oil futures traders have to put up more than just 7%...say 50%. This way they have much more of their cash invested, and will be less likely to buy as many futures, which will keep the prices down. However, this would require Congress, and other countries, to make this happen.

If the US is seen as serious about doing more to meet the demand, the prices adjust accordingly. For crying out loud, I learned this simple supply and demand principle in my Associates degree program. It amazes me how many supposedly smart people don't grasp this concept. It's much simpler and more politically-correct to "blame Bush" rather than comprehend what is actually fueling the fire. They are so consumed by their hatred of the man that he gets blamed for anything and everything that goes wrong.

Granted he has had his share of missteps and screwups. However, there are 535 members of Congress, and he's only one man. Which group do you think has the most power to make regulations and policies to help stimulate and sustain our economy? Answer: the Democratically-controlled Congress, who, at this moment, hold an approval rating in the single digits...the lowest in American history.

Hmmmm....let's put all the blame on the Oilman in the Oval Office...this is obviously all his fault.




...OK, I'm getting off my soapbox now...