I just love the sight of people getting exactly what they deserve. Over the past two months, the weathervanes up on Capitol Hill and in the White House have been in a dead panic over what to "do" about gasoline prices.
In a fine article in last week's Washington Post, Shailagh Murray and Jim VandeHei (am I dreaming, or does that name mean "from the shark?") detail the search that the Republican leadership in Washington has undertaken for the "problem" of high gasoline prices. To quote: "Republicans on Capitol Hill and at the White House are well aware that $3-per-gallon gas spells trouble."
The article is accompanied with a picture of four senators -- James Talent, Rick Santorum, Pete Domenici, and Bill Frist -- from their press conference last week announcing plans to give a $100 rebate to America's motorists to compensate us for gas prices.
My editors hate it when I call people idiots. But I mean it. Our elected officials are either stupid, or they think enough of us are stupid that they can say stupid things and we'll just thank 'em for it. I fear it's the latter. But for these purposes, I'm going with the former. So, idiot, idiot, idiot, idiot, idiot, idiot, idiot, idiot, idiot, idiot, idiot, idiot, idiot, idiot, idiot, idiot, idiot, idiot, idiot, idiot, idiot, idiot, idiot, idiot, idiot. Pay $100 from the federal Treasury to compensate Americans for high gas prices? Are you people completely, utterly devoid of brain matter?
There. I feel better.
Except I have this suspicion that there are scores of politicians still trying to "fix" the problem. They will fail. They'll probably make it worse.
Politicians take credit for things they have no hand in. Sadly, people believe them.
You see, gas prices of $3 a gallon are a political problem only in that for the past 50 years, every single one of our elected officials has tried to take credit for, or assign blame for, things that are actually realities of the free market that they had no control over. I'm not talking about the politicians from one party or another, I'm talking about both parties. They tax us to death, spend like teenagers with their parents' credit cards, and insinuate rather openly that anything that happens great on their watch happened because of their magnificent leadership, or when they're not in power, they blame anything that is bad or painful on the folks on the other side of the aisle.
We're at the point now where, as the quote from the Post article attests, the administration and the GOP are being harmed by the political fallout from high gas prices. Unfortunately, what no one seems to remember is that the price of anything is just information. You want to blame $3 gas on something? Fine, let's start with where blame should go -- on $0.95 gas.
The great "Gas is too cheap!" protests of 1999
Do you remember all of those gigantic protests that went on in Washington and in cities around the country when gasoline went under a buck in 1999? No? That's because there weren't any. But protests weren't the only things that didn't exist. Neither did exploration for new oil, or accelerated production schedules. And most of all, neither did profits for refining. People thought the folks at Valero (NYSE: VLO ) were suicidal to go out and aggressively buy refineries. No one took to the streets in 2002 chanting "Hey, hey, ho, ho, dayrates are way too low for Rowan (NYSE: RDC ) to make a profit on their cantilever jack-up rigs!" No one cared that Rowan or myriad other companies along the exploration and production value chain were losing 80% of their stock value as a result of having no financial incentive to explore, or to produce, because oil prices that low simply didn't cover the expense of doing so.
We had low oil prices for 20 years. And you know what happened in that time? Demand steadily rose, and supply did not, because companies had no financial incentive to invest in expanding business. So they didn't.
Yes, sure, there are components of the current price of gas that we can blame on Washington. For example, the borderline vegetative decision from last year's energy bill that ethanol should replace MBTE as a gas additive, and that the deadline for this switchover was for this month, May 2006, at the beginning -- rather than the end -- of peak driving season.
But that's just insult to injury -- more than three-quarters of the cost of a gallon of gasoline goes to the cost of oil plus refining. For the big refiners, the profit on a barrel of oil these days sometimes exceeds the price of an entire barrel four years ago. Know why? Because there are no new refineries, and because that same energy bill didn't include any provisions that might attract localities to build more. There's not a single large-scale refinery in the entire state of Florida. Does this not strike anyone else as being a problem? And does no one remember the storms that hit the Gulf Coast last fall? Think those had an impact on the national gas infrastructure? How could they not have? Think that the whole thing has been put back together yet? How could it?
That's why gasoline is at $3 per gallon. It's the market's own way of saying, "If it hurts, then figure out a way to use less!" Unfortunately, those two decades of underinvestment, and the continuing underinvestment in refining, can't be undone with a few short months of heavy catch-up work. The infrastructure simply doesn't exist. But if you note just how hot the drilling companies have been, like Chesapeake (NYSE: CHK ) , Apache (NYSE: APA ) , and Cimarex (NYSE: XEC ) , you'll know that drilling is under way nearly everyplace where it is not expressly prohibited by our let's-do-something-meaningful-about-the-price-of-gas legislators.
"We're spending too much! Take our profits!"
But while the C-note plan was dumb, two other legislative ideas are downright contemptible. The first is the "windfall tax" that some congressional leaders have suggested that the big oil companies should pay on their "obscene" profits. Sen. Arlen Specter -- who ought to know better -- seems to support this tax, forgetting that these are shareholder-owned companies. The one way we as individuals can participate in a meaningfully positive way in the oil-price story is if we are shareholders in these companies. So, to combat the "harm" to individuals that rising oil prices have caused (and please understand, I'm not belittling the pain of rising prices at the pump), Congress is going to take money from oil companies at the point where those profits can benefit some of us.
That makes sense.
The second horrible legislative idea comes from places like Beeville, Texas, which passed a statute calling on a boycott of ExxonMobil (NYSE: XOM ) -- and only ExxonMobil -- until it brings gas prices down to $1.30 per gallon. A judge in Beeville, the Hon. Jimmy Martinez, has been quoted as saying, "I understand free enterprise, but ..." and actually, you don't need to hear what comes after the "but" to figure out that he understands neither free enterprise nor the oil business, nor does he understand basic math. Basically, the folks in Beeville have come up with a way to destroy the livelihood of the local Exxon station owner, but that's about it.
- A barrel of West Texas Intermediate crude is $70 per barrel. A barrel is 42 gallons. So the stuff coming straight out of the ground is priced on the open market at $1.66 per gallon. Judge Martinez is welcome to put that directly into his car, but I don't think it will work out very well. Neither ExxonMobil nor Apache nor Kuwait determines how much a barrel of oil sells for. The open market does.
- ExxonMobil is a vertically integrated company. The alternative sources in Beeville may not be. Guess what company is a large wholesale seller of gasoline? Uh-huh. ExxonMobil.
- At no point along the chain does ExxonMobil set prices. I'm not saying that ExxonMobil is the perfect corporate citizen, but it's not an eleemosynary entity, either. If the market for refining generates $15 in revenues per barrel, then it makes no sense whatsoever for ExxonMobil to say, "Well, we're gonna just charge $6."
Prices are information, nothing more. Given the disruptions from last year's hurricanes, and given that our demand of oil products has pushed our supply to the breaking point, the information is being transmitted as: "You have to consume less." The folks in Beeville would have just as much luck demanding that ExxonMobil make the sky green.
But that's the signal for consumers. The signal for producers is very different. For them, it is: "Produce more, produce smarter, and look for alternatives." This is in contrast to most of the past two decades, when pricing told all of these companies to do nothing.
The market fixes things in a way that legislators cannot
Yes, high gas prices are horribly painful. But what that pain causes is the greatest outcome of the free market -- incentive. Incentive to conserve, incentive to develop, and incentive to come up with (and switch to) alternatives like fuel cells and nuclear power. It also has helped companies like Motley Fool Hidden Gems recommendation OYO Geospace (Nasdaq: OYOG ) attract a great deal of attention for its technology that helps oil production companies optimize their drilling at existing sites.
Instead of recognizing this basic economic reality, our elected representatives are doing what they tend to do -- pander to voters by misrepresenting their importance to the national economy through saying they're going to "do something" about oil prices ... or conversely, blaming the other side for not doing something. And let me be clear about this: The outcome would be nearly the same no matter who were in office. Democrat, Republican, Whig -- it wouldn't matter. Politicians say these things because no one has ever gotten elected by making certain that his or her comments hewed to economic reality. Taking credit for success you had no hand in causing is a tried and true staple in legislatures worldwide. Sadly, people believe it.
That's where sheer lunacy like the "windfall profit tax" come from. If the government really wanted to do something, it could get out of the way and take down past distortions, like the high tariffs on imported ethanol. It could offer huge, obscene tax credits to jurisdictions willing to have new refineries sited in their borders. It could go back and start charging market rent to companies drilling on government lands and open up other territories for drilling -- like the entire Atlantic Seaboard. But beyond that, all you're hearing is posturing that will lead to pork products that will each achieve something either (a) stupid or (b) more expensive than what the free market could come up with on its own.
That's just the way it is. Sadly, Congress doesn't get merit points for facing reality. The fantasy that it's in charge of things is much, much more lucrative.
Bill Mannowns none of the companies mentioned in this article. He is the co-advisor for theMotley Fool Hidden Gemssmall-cap newsletter, where OYO Geospace has been recommended. Come and see what else we have to offer! We invite you to a30-day guest passto Hidden Gems, with our compliments. The Motley Fool has a disclosure policy.