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Thursday, May 25, 2006

Politics of Envy and Deception: Part 1

The Politics of Envy and Deception is alive and well in the Democrat Party. Earlier this week, Senator Hillary Clinton demonstrated it when she proposed a windfall tax on Big Oil to fund a $50 billion Strategic Energy Fund. Let's examine the politics behind this tax scam strategy:

The Envy

Big Oil makes lots of money off the backs of the little guy at the pump. Their money is free for the taking. They don't need it and they must be punished for their greed.

The Deception

Big Oil is responsible for the high price of gas. They create artificial shortages just to raise prices and inflate their profits. Big Oil can afford to pay higher taxes. Forcing large corporations to pay higher taxes will ease the tax burden of the middle-class. (I know, Hillary may not have made these allegations during her speech, but it is this perception of the left that fuels her drive to tax Big Oil.)

The Facts

Like most large corporations, Big Oil is a collection of middle-class Americans who produce a product that America wants. Even the owners of Big Oil – the shareholders – are mostly from the middle-class. Nearly 50% of Big Oil shares are owned by pension funds that support middle-class retirees.

It may make good political rhetoric to castigate Big Oil as a faceless entity raking in billions to benefit a few greedy fat cats, but it just isn't so. In truth, most of the profits from the pump go to Big Government. Big Oil earns 7-9 cents per gallon of gasoline sold at the pump. The national average profit for the government is 62 cents per gallon – 18.4 cents for federal taxes and average of 43.6 cents for state and local taxes. (Minnesotans pay 40.4 cents per gallon for state and federal taxes.)

So, why are gas prices so high?

  • Nearly 60% of the pump price of gasoline goes directly to cover the costs of crude oil. When this price fluctuates, so does the price at the pump.
  • About 15% of the pump price covers the costs of refining. Thanks to varied state government regulations, there are over 30 different formulations of gasoline across the country. Again, thanks to government regulations, there are only 149 refineries. Most refineries can only produce a few different formulations and most are running at 95% of their capacity. If a disaster like Katrina strikes a single refinery a shortage will be felt for every formulation of gasoline that the stricken refinery produces. This shortage doesn't equate to a shortage of crude, but simply a shortage of our ability to refine it. There are two simple fixes to this refinery bottleneck – reduce the number of government mandated formulations and increase the number of refineries. In other words, move the government roadblocks to the side of the road.

And, why is Senator Clinton's tax hike proposal a deception?

  • Big Oil is not the biggest benefactor of gasoline profits, government is.
  • By suggesting that windfall taxes be paid from profits, Senator Clinton is actually supporting cuts in the pension funds of retirees all across the country. Note that this isn't limited to retirees of Big Oil. Most of these retirees never worked for Big Oil. Many state government employee pensions are supported in part through Big Oil stocks.
  • Corporations don't pay taxes, they pass on the costs to employees and customers. Raising taxes on Big Oil will mean less money for salary increases and new hires. Raising taxes on Big Oil will also mean higher prices at the pump.
  • Due to the instability of crude oil prices, a fair chunk of Big Oil's "windfall profits" are kept in reserve to cover potential future increases in crude oil prices. Raising taxes on "windfall profits" could reduce Big Oil's ability to respond to future demand.
Extra Credit – The Gas Pricing Model

Most people understand how retail sales work. Stores buy a product for $1.00 then sell it for $2.00. The price of the product is directly driven by the retailer's cost.

Gasoline pricing doesn't work this way. The price at the pump is not driven by what the station paid to fill its underground tanks. It is driven by what it will cost to refill them next week. In short, the gas station owner must raise enough money from the sales at the pump to cover the cost of the next tanker.

Assume that today's price per gallon is $2.75. If crude oil is expected to spike tomorrow and the station owner anticipates a 25 cent hike in his cost, he needs to raise his pump price today to $3.00. If he doesn't raise enough money from the pump before the next tanker arrives, the owner will not have enough cash on hand to refill his underground tanks.

Footnote

My intent with this post was to focus on the politics of envy that is often behind taxing the rich. But I must note that there are other deceptions in the Senator's proposal to reduce oil imports for it trips over itself to avoid the simple answers.

For example, a simple step toward reducing dependency on foreign oil is to get the oil in our own backyard. Castro will soon be drilling in waters that our government has restricted from domestic companies. There is a tiny – I repeat, tiny – parcel of frozen tundra in Alaska that could also be tapped for oil. This simple step needs no new government program to initiate. It only needs government to get out of the way.

Instead, Senator Clinton supports increasing, perhaps mandating more government programs – such as ethanol usage. Unfortunately, the benefits of these efforts have been greatly exaggerated. The production of ethanol, for example, is very resource intensive and requires a lot more real estate to make than it does to drill for oil. However, ethanol has become an attractive government subsidy for farmers.

Imagine. What if it turns out that oil itself is a renewable resource – and in great supply?

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