Posts Tagged ‘Fuel’

Bill O’Reilly’s Economic Idiocy Almost as Bad as Obama’s

Friday, March 9th, 2012


I seldom watch Bill O’Reilly, because if I want to listen to somebody pontificate on subjects about which s/he knows little, I can simply re-run Joe Biden’s most recent speech…in any time-frame.  Thursday evening, O’Reilly was on when I came through the door, but since he seemed to be talking sensibly about the Fluke Fiasco, I listened briefly with interest, but in the very next segment, he went on to discuss the price of oil, demonstrating he’s at least as ignorant as Barack Obama pretends to be on the subject. Part of it is driven by the fact that O’Reilly is a panderer who tries to placate ‘the folks’ while serving his masters in the establishment.  His oft-mentioned Harvard degree clearly isn’t in economics.  As usual, O’Reilly failed to identify the actual causes of the high energy prices accurately.

Naturally, being a  panderer, he talked about “speculators,” but he failed to mention even one valid reason that makes up the bulk of the increased prices we’re experiencing at the pumps.  Since O’Reilly did such a masterfully incompetent job of explaining the issue, I feel duty-bound to correct the record, or at least explain it.  There are really five major factors controlling the prices you pay at the pump, and while speculation might be a distant sixth in importance, it really has little to do with what you pay most of the time. Rather than lead you in circles of pompous pandering, let me try to make it a good deal more clear.

By far, the biggest factor in the price of the fuel you buy at the pumps is the price of crude oil itself.  As the amount of oil being supplied to the market contracts, or the quantity of oil being demanded increases, you can expect a corresponding movement in the price you pay.  When producers get together as a cartel(OPEC) in an attempt to restrict production, this will necessarily constrain the supply, and you will generally see higher prices, unless you have some manner by which to throw a significant monkey-wrench in the mechanism, for instance being able to increase your own domestic production, or by augmenting the supply to the market from a reserve.  This should seem simple enough to most people who studied basic economics in High School, never mind earning a degree from that institution of fame we might call “Hahvaad.” The available supply versus the quantity demanded will always dominate the basic calculation.

Another factor that is nearly as important to consumers in a given country is the relative value of their currency in the world oil markets.  The US has enjoyed the distinction of possessing what had been (and still remains, barely) the world’s reserve currency and the currency in which oil trades are made.  Unfortunately, as our Federal Reserve has printed more dollars out of thin air in order to bail out the banks, and Europe, but also loan to our Federal Government to feed it’s insatiable hunger for dollars, we have seen the value of our dollar fall dramatically in the last few years.  This means that no matter what commodity you buy, it will take more dollars to buy one unit as compared to before.  In late 2010, when the Federal Reserve announced QE2(Quantitative Easing, Round2 – a.k.a printing vast sums of cash,)  Sarah Palin, the former Alaska Governor, took to the podium to warn Americans that all of this money-printing by the Fed would result in higher food and energy prices.

Some people, mostly jerks like Paul Krugman of the New York Times actually mocked the Governor for that prediction, and even Fed Chairman Ben Bernanke got in on the act.  After all, what would a former governor of Alaska know about it?  As you probably know by now, she was right on every count.  Everything she said came to pass with respect to the inflationary effects of “Quantitative Easing.”  Score another one for the lady who knows how to take down an elk, but also a pompous commentator.  She understands the energy markets, meaning she knew how the monetary policy of the Federal Reserve and the unrestrained borrowing of the Federal government would wind up effecting the general economy, but particularly the energy sector.

The next thing that affects the price of oil is the availability of substitutes.  For instance, a fair amount of the electricity generated in the US comes from petroleum distillates and residual products from the refining process.  There are just a few commercial alternatives, and apart from nuclear power, the vast bulk are fossil fuels, including oil, but also natural gas and coal.  The grand total of wind and solar energy production nationwide doesn’t provide what one nuclear plant does, so let’s call that source negligible in any commercial sense.  Coal accounted for more than half of all electric generation in the US prior to Obama’s arrival in Washington, but due to regulations being slapped on the energy producers, coal-fired plants are rapidly going extinct.  As this happens, plants that use other fuels are necessarily being forced to pick up the slack, running at closer to 100% capability, and some of those plants use…oil and its byproducts.  So you see, as you reduce the use of substitutes, it necessarily will cause an increase in the price of oil.  Like in any market where substitutes are available, the reduction of the availability(or use) of one will cause a corresponding increase in reliance upon another.  If beef prices go up, before long, people will shift to pork and chicken, and then the prices of these substitutes will move up also.

The fourth big factor affecting the price of fuel at the pumps is government taxation.  If you live in a state like mine, where we pay a federal and state excise tax by the gallon, it’s bad enough when the Feds increase the taxes, but if you live in a state where the tax is a percentage, you really get blistered by any upward movement in fuel prices, because not only do you pay more in fuel, but you also pay a good deal more in taxes on it.

There is another factor that comes to mind, and it has to do with the distribution of the product, and how temporary displacements and shortages like we saw in 2005 with Hurricans Katrina and Rita caused trouble depending upon where you were and what the distribution chain that feeds it looks like, but those sorts of problems are a result of what happens when Just In Time inventory management tries to contend with the unexpected that Mother Nature throws our way.

We currently do not find ourselves under that sort of instability in the distribution chain, and this only goes somewhat further in explaining why the fuel price spikes we saw under George W. Bush bear little resemblance to the structural causes of the high prices we face today.  Four dollars for a gallon of gasoline may not be entirely new, but resulting from something other than an ongoing distribution chain problem as a result of natural disaster, it is most certainly unprecedented in the 21st century. Today’s  closest analog occurred under the administration of Jimmy Carter, if that tells you anything.

Together, these five factors have much more to do with the price of fuels than anything Bill O’Reilly mentioned. Speculators play a role, but by the time you add up the five factors I’ve mentioned, what you discover is that while speculators can drive things a little in one direction or the other, most who trade in commodity futures wind up losing, at least according to the statistics.  Besides, they are an important part of the market too, and to pretend they have no other function but to somehow cheat consumers is a laughable bit of Marxist theory often pushed by panderers in both parties. Realize that listening to economic analysis from Bill O’Reilly is roughly analogous to getting investment advice from a fortune cookie:  It contains only meaningless platitudes that will gain you little more than a moment’s amusement, but will reveal no cosmic truths.

Now, think of Joe Biden speaking.  See my point?



Will Inexpensive Gasoline Ever Return?

Friday, February 24th, 2012

Can Gingrich Deliver?

This is a question leftists are now asking in response to the fact that Barack Obama’s policies have resulted in the most expensive February gasoline prices we’ve ever known. Rather than treating it as an economic question, they tend to discuss it as a matter of politics, and mostly as a matter of damage control. Newt Gingrich is promising that if he is elected, he will work to reduce the price of gasoline to less than $2.50 per gallon, but what the liberals contend is that such a reduction isn’t possible, but more importantly, even if it were feasible, it’s not desirable. Let me make it perfectly clear for those of you who have questions about this issue, because it’s something we should examine in looking at the potential nominees: Newt Gingrich’s intention to reduce fuel prices to sustainably lower levels is an important national initiative in which government can play a role, and it offers a chance to boost the US economy in a way that nothing Obama has done will ever accomplish.

In previous articles, I’ve discussed with readers the important relationship between economic growth and the price of energy. By taking note of this fact, and addressing the issue in his campaign, Gingrich has signaled that he’s more in touch with the economic problem with which our nation is now confronted. Over the last dozen years, nothing has had a greater influence on economic prospects than the cost of fuels. Not financial market collapses. Not terrorist attacks. Not government spending. If you want to view the track of economic growth, all of those things have had short-run effects, but nothing undermines the economy more thoroughly than increases in the cost of energy. The reasons should be obvious under even superficial examination.

Everything humans do requires energy. Recognizing this fact is critical to economics, because as energy costs increase, there is a direct effect on the cost of all other commodities, and all other services.  There are no exceptions to this fundamental, structural fact of life.  More, since some items require much more energy to produce, and consume more energy along the entire chain from raw material to distribution, any increase in energy costs quickly ripples through the market.  As such, this creates a drag on production, but also consumption, since energy needs tend to come first in one’s priorities. If you’re an employee, you must travel to and from work.  This is something most employees share as an expense from which there are few option in relief.

For that employee, his or her pay is not likely to react to his or her costs.  This fact means that at energy prices increase, the people who will feel it hardest are those who must engage in commerce, but whose compensation is least elastic with respect to the costs they must absorb.  Most businesses can react by adjusting prices, although the competition they face places pressure on them to  delay passing along costs to customers as long as possible.  This was evident in the trucking industry and more broadly throughout the transportation sector when fuel prices first exceeded the three dollar mark a few years ago.  This gave rise to a new phenomenon called the “fuel surcharge,” and it was intended to show that they weren’t simply jacking up prices without justification, but instead that their costs had dramatically increased. The point of all this is that there is no way to avoid the fact that for most people, and most businesses, you can’t easily augment your income simply because your costs have risen.

This being the case, there will be choices to be made, and all of those involved will need to decide which of their ordinary expenditures may have to be curtailed.  New projects and investments are delayed, and necessary repairs or upgrades are put off indefinitely.  What this means is that economic activity is curtailed, and therefore, fewer jobs are created, and thus unemployment rises.  As this happens, it feeds back on itself because  when unemployment is high, the average employee’s negotiating power on wages diminishes, and this makes the average person even less able to spend money on all of those things that create increased economic growth.

After a time, if this continues, the quantity of fuels demanded will begin to contract, and this will lead to the prices falling again, but there is a lag until economic activity recovers.  Clearly, if this is the cycle, then what we should see is precisely what we have seen over the last few years: An economy that fails to launch because just as it begins to heat up, the corresponding increase in energy prices causes a clear diminution of the economic growth.  The only way to combat this is to increase our energy resources, and to make safe such resources as we already enjoy.

Back in the 1990s, one of the things from which the American economy benefited was the reliability of OPEC members to undercut one another on production quotas.  The quotas were intended to maintain a higher price point, but as prices went upward, one or more member nations would get greedy and cheat on the quotas.  This increased the supply in the market, and the prices would inevitably fall.  This was in an era when China’s demand in the market was relatively negligible, but since then, their bite out of the production pie has done nothing but increase proportionally to all others.  It was also an era when OPEC was more fractious, and most of their members couldn’t coordinate on much of anything for long.

What Gingrich recognizes is that our economy cannot function properly, and in a healthy way without the energy we need at a price we can afford while still building economic activity, buttressing the points made by former Alaska Governor Sarah Palin.  His stated goal of seeing a reduction in gasoline prices is the right thing to do, and he recognizes that it’s not just a matter of reducing the price to that point for a day or a week, but in making that the effective ceiling even as the economy roars back to health.  That will require that we develop new sources of energy, and not just empty promises of “green energy.”  President Obama can mock “Drill baby, drill” if he likes, but the truth is that developing domestic oil resources is critical to getting this economy moving in a sustained way.  In short, we can’t merely increase the temporary supply on a short term basis, but must increase it in a structural sense: We need more wells, we need more oil-fields in production, and we need to develop other alternatives simultaneously.

This flies in the face of what leftists want and believe.  They believe the ultimate goal should be to reduce consumption, but the only way to do this without eliminating people is to substantially reduce their standard of living.  In short, their plans demand we return to a pre-industrial state where most people do not consume much energy.  Wave goodbye to your electronics, your hobbies, and your lifestyles if these lunatics get their way.  There’s no way to have what they seem to promise, and they know it. There is no rational way to grow or even sustain an economy while cutting the use of energy in any dramatic fashion.  Can efficiencies be found?  Absolutely!  Can they be created by dictate or order?  Absolutely not!

This is the difference in the position between Barack Obama and somebody like Newt Gingrich who actually recognizes that wishes are not the same as facts, and that nature is not to be cheated.  You cannot build a modern, technologically advanced culture with prosperous people and a growth-based ethos when governmental policies are mandating a reduction of energy consumption.  Nature doesn’t respond to arbitrary wishes, and yet that is the stance of the leftist, who thinks a government mandate can overwhelm the forces of nature and the rules of physics.  The disparity in the two positions demonstrates their relative fitness to the presidency, and by no measure is Obama suitable to his office.  Whether Gingrich is qualified remains a question to be answered, but on the matter of his understanding of the critical importance of energy, it’s clear he passes the test. We can have inexpensive fuel again, but it will require a comprehensive effort by the President and Congress to remove obstructions to the growth of the energy sector that is so vital to our future.