March 2012

President Barack Obama’s slide into daffy irrelevance continued this week. In yet another speech on what he’s doing to lower gas prices, the President proposed raising the federal subsidy for buying an electric vehicle from $7,500 to $10,000.  And instead of a tax credit, the President wants to give electric vehicle buyers the $10,000 up front at time of purchase.

This should get the cost-to-buyer of new Teslas and Fiskers below $100,000. Dozens or even scores of new electric cars will no doubt be zooming out of showrooms if the Congress enacts President Obama’s proposal.  And low-to-middle income Americans struggling to fill their tanks with $3.75 gas can take satisfaction knowing that their tax dollars are doing so much good.

Politics is, well, political, and as such, few battles in Washington are fought over principles as much as over power and image. That’s why in many political debates both sides are wrong because they fight for goals no American should want—namely, for the power to control society in their own way. That both parties share the same underlying myths about government and its role in the economy has been on elaborate display during the current bickering over whether the president should release oil from the Strategic Petroleum Reserve (SPR).

As I pointed out in a previous blog, the President shouldn’t just release some oil from the SPR, as Congressional Democrats want—he should release all the oil and close the SPR permanently. The reserve’s origins and purposes are entirely based on myth—that the 1973-74 OPEC oil embargo decreased imports so dramatically that a massive oil shortage resulted (read why this is wrong here). The political benefits of this myth are plentiful. It outsources blame for the energy crisis to foreigners—in particular, Arabs. It also creates a climate of fear that showers extraordinary powers on politicians and bureaucrats. Finally, it permits political saviors to rescue us from high gas prices.

Once the myth is accepted by both sides, however, facts can be jettisoned, and arguments can proceed on purely political grounds. Should the reserve be used or not?  Economic-sounding arguments are discussed, but in the end, the question isn’t economic—it’s political.

Economics explains how people will act in a market under the forces of supply and demand that are represented in prices. In a market, an action is worth taking if output exceeds input—that is, if the sales price of the finished good is sufficiently greater than the prices of the materials required to make it. In this way, we know that consumers valued the final good more highly than its inputs, producing profit or wealth for society. On the other hand, if consumers value the inputs more than the final good, the result is a loss signaling to the business that society demands those resources elsewhere in the economy.

That’s economics, but the decision to release oil from the SPR isn’t based on the forces of supply, demand, profits, nor prices. Rather, it’s pure politics, and in politics, you can’t be wrong.

[click to continue…]

Lately, President Obama has been bragging about the drop in America’s dependence on foreign oil—now less than fifty percent. Earlier this week, he introduced a new chart to show how oil imports have declined under his leadership. The chart does not show the drop in America’s oil consumption, due to the bad economy. Nor does it give any indication of the trend for the future based on his policies—which will likely lead to increased use of foreign oil.

President Obama’s energy policy is largely set by his environmental base that favors “alternatives” and eschews fossil fuels—especially drilling for oil. His policy mirrors that of California where the resistance to tapping the resources under the residents’ feet has resulted in increased imported oil from the Middle East. Once the largest oil producer in the world, California is now importing nearly 50% of its oil—with about 21% coming through the Strait of Hormuz. California’s gas prices are routinely the highest in the country. If Iran closes the Strait, as they’ve been threatening, California will be in dire straits.

While less dependent on Middle Eastern oil than California, the United States is like California, in that we have vast resources that are locked up due to regulation, blocked access, and delayed permitting. President Obama touts the reduction of imported oil, but his bragging rights may be short-lived, if he continues on the same anti-drilling track California has been on.

Gasoline prices are driven largely by the headlines. They are full of talk about Middle East unrest and devoid of American drilling announcements. Hence, fear over future supplies keeps bumping the price up and up.

[click to continue…]

The front page of this morning’s RealClearEnergy, a screenshot of which sits above, features an illuminating juxtaposition.

On the left column, there are six news stories about how the natural gas industry and other engines of capital investment are putting their own money into expanding the market for gas into the transportation sector. Thanks to the technolution in oil and gas drilling known as hydraulic fracturing, or fraking, gas production is booming, and prices are down. At the same time, geopolitical instability is pushing the price of gasoline to $5 a gallon. The upshot is that gas now makes for an attractive motor fuel. To that end, the industry is investing in infrastructure (natural gas powered engines for trucks and fueling stations), in order to grow and thereby seize market share from the oil industry. Whether the gas industry succeeds or fails in its competition with the oil industry, the consumer can only win.

On the right column, the first story is an oped by T. Boone Pickens, in favor of H.R. 1380, the New Alternative Transportation to Give Americans Solutions Act (a.k.a., the NAT GAS Act, a.k.a.,  the “T. Boone Pickens Earmark Bill,” a.k.a., the “Pickens-Your-Pocket Boondoggle Bill,” a.k.a. the “Billionaire’s Bailout,” a.k.a. the “Pickens Payout Plan”). As its many nicknames would suggest, this legislation was written by billionaire T. Boone Pickens, in order to makes himself even richer. Pickens purveys in natural gas, and the legislation would have taxpayers throw money at infrastructure (natural gas powered engines for trucks and fueling stations), in order to facilitate the gas industry’s growth into the transportation sector, at the expense of the oil industry. Pickens proposes these subsidies (to himself), DESPITE THE FACT THAT THE INDUSTRY IS ALREADY DOING SO WITH ITS OWN MONEY!!!!! Alas, Pickens already has won over the President. If he succeeds in per$uading enough Members of Congress to get his Billionaire’s Bailout passed, then the taxpayer will suffer an egregious loss.

Reps. Peter King (D-NY), Ed Markey (D-MA), and Rosa DeLauro (D-CT)  have written President Obama urging him to release oil from the U.S. government’s Strategic Petroleum Reserve (SPR) in order to help drive down high gas prices. Congressional Republicans are opposing the effort “to politicize” the SPR. Who’s right in this latest political squabble?

Well, Democrats are maybe 10 percent right. Congress should release oil from the SPR, but not just some—all of it! The SPR was created in 1975 after the OPEC oil embargo, which was instituted as retaliation for the U.S. intervention in the Yom Kippur War. President Nixon responded to the embargo with oil price controls. These controls created artificial scarcity as investors withdrew oil from the market to sell at higher prices later, causing massive shortages and gas lines.

In other words, the energy crisis was of Nixon’s own creation. Supposedly, the OPEC oil embargo so rapidly decreased oil imports that it was necessary for the U.S. to create a national reserve to hedge against another embargo. Except oil imports did not go down in 1973, or 1974, or 1975, they went up. All the embargo did was shift OPEC’s U.S. oil to other countries, and other oil normally intended for those countries to the U.S. Moreover, investors created private reserves as soon as they saw that Middle East oil was compromised, which means we exported less and imported more.

The SPR was created to solve an oil shortage, but since this was caused by Nixon’s controls, it seems that the reserve was actually created as a hedge against future politicians’ economic illiteracy—not future embargoes.

[click to continue…]

GM suspends Volt production until April.