Congressman Barton Calls BP Fund Extortion

There's been plenty of speechifying and grandstanding at the hearing with BP CEO Tony Hayward on both sides but this comment by Congressman Joe Barton of Texas is sure to be the headliner.



Already, Democrats and liberals are seizing on the comment.

Rep. Joe "Smokey" Barton (R-TX). Said it was a "shakedown". Like I said, I want to see someone conduct a polling question and ask this:

Do you agree with Rep. Joe Barton's (R-TX) characterization that the agreement between Obama and BP executives for a $20 billion escrow fund to pay for the damage they caused was a "shakedown"?

The White house was quick with a statement of its own.

What is shameful is that Joe Barton seems to have more concern for big corporations that caused this disaster than the fishermen, small business owners and communities whose lives have been devastated by the destruction. Congressman Barton may think that a fund to compensate these Americans is a ‘tragedy’, but most Americans know that the real tragedy is what the men and women of the Gulf Coast are going through right now. Members from both parties should repudiate his comments

Yesterday, I was worried about the legality of the administration's actions but politicians should always be careful when they use explosive language. There's been a lot of politics on both sides over this disaster. Democrats have been eager to tie Republicans to BP, and now Congressman Barton has handed them a gift.

That soundbite will be played in a loop for days and Democrats will show moral outrage over the Republicans' lack of compassion for the folks in the gulf. The word "extortion" has give Democrats an opening. They will take it.

Obama from the Oval Office on the Spill

President Obama just finished a speech that lasted just less than 20 minutes speaking about the spill, its effects, the recovery, and legislation on energy independence.

It's still not really all that clear exactly what the administration will do to stop the spill. He did say that in the next two weeks 90% of the oil will be clogged. That's a number to watch. He also said that his administration has been on top of it from the beginning. If that's the case, that's not much of a positive statement for the administration.

The president said that he will "force" BP to create a fund to pay out to the folks in the gulf. He can't force them legally. He can strong arm them, shame them, or encourage them, but legally, he can't force them. So, it's not clear what he's going to do.

He also singled out the Minerals and Mining Safety Commission as a specific regulatory body that failed. They did and most of us already knew that. President Obama correctly pointed out that the MMS got too cozy with the oil companies they were regulating. They infamously accepted gifts from oil companies prior to the spill. He incorrectly called this a lack of regulation. It wasn't. It was poor enforcement of regulation. So, if the president responds with even more regulation, he'll be solving the wrong problem.

Finally, and in a naked act of political opportunism, he called for energy independence legislation. He never said cap and trade by name. I think everyone would like to be energy independent, but no one knows how to make that happen. He compared energy independence to military building in WWII. That's not much of a comparison. During WWII, we had a command economy. Is that what he's suggesting?

I still believe that the fastest way toward energy independence is breaking up the oil companies. They are an oligopoly and they've decided that gasoline made from oil is their best path to money. They have no use for alternative energy sources. Without them, our cars will always be run mostly on gasoline from oil. There's no call to break them up. Instead, one may go out of business, making the others even more powerful.

More coverage here.

A Question for President Obama

In the wake of the Gulf oil disaster, President Obama has placed a minimum of six months moratorium on offshore drilling in the Gulf.

Escalating his administration's response to the disastrous Gulf oil spill, President Barack Obama announced Thursday a moratorium on new deepwater oil drilling permits will be continued for six months while a presidential commission investigates, a White House aide said.

Controversial lease sales off the coast of Alaska will be delayed pending the results of the commission's investigation, and lease sales planned in the Western Gulf and off the coast of Virginia are canceled, the President announced at a news conference.

Shell Oil was poised to begin exploratory drilling this summer on Arctic leases as far as 140 miles offshore.

The president says that he's doing this because he doesn't believe that offshore drilling is safe until we know why this spill happened. A good question for President Obama is how did oil companies drill safely for decades without creating a spill.

The president makes it seem as though offshore oil drilling is some sort of a rogue exercise not to be trusted. In fact, it's a multi billion dollar yearly industry that employs tens of thousands. Many of these folks are currently working in the very areas that are hit by the spill.

The spill will cause an untold ecological and economic disaster. Now, President Obama will compound that disaster by causing more economic havoc on top of it.

This is the typical script. A crisis hits, and politicians, looking to be seen as enough caring and concerned, over react. That over reaction winds up causing even more pain.

Obama Throws Conservatives a Bone on Drilling

President Obama announced he would expand offshore drilling yesterday.

President Barack Obama launched an ambitious plan on Wednesday to lift a decades-long moratorium on offshore oil drilling along the East Coast from Delaware to Florida, in the Gulf of Mexico and Alaska.


“This is not a decision that I’ve made lightly,” he said in remarks at Andrews Air Force Base in Maryland. “But the bottom line is this: given our energy needs, in order to sustain economic growth and produce jobs and keep our businesses competitive, we are going to need to harness traditional sources of fuel, even as we ramp up production of new sources of renewable, homegrown energy.”

The plans' backers include T. Boone Pickens, himself a proponent of natural gas.

Dallas billionaire T. Boone Pickens said this week he supports President Barack Obama’s efforts to promote offshore drilling on the East Coast.

Pickens is widely known as an advocate of growing America’s energy reserves through alternative energy sources and drilling.

Ironically, much of California's budget problems would be resolved if their coast was opened up as well however California is the hotbed of environmentalism and so that will never happen.

Building My Case to Break Up Big Oil

I have made no secret of my distaste for big oil. So, now, I will build a case why it would not only be beneficial for society to break them up, but, under Sherman Anti Trust it is perfectly legal. Here is the relevant portion.

The Sherman Antitrust Act (Sherman Act,[1] July 2, 1890, ch. 647, 26 Stat. 209, 15
U.S.C. § 1–7) was the first United States Federal statute to limit cartels and monopolies. It falls under antitrust law.

As such, if big oil is in fact a cartel then they must be broken up. Here is the definition of a cartel.

A cartel is a formal (explicit) agreement among firms. It is a formal organization of producers that agree to coordinate prices and production.[1] Cartels usually occur in an oligopolistic industry, where there is a small number of sellers and usually involve homogeneous products.

A homogeneous product, by the way, is a commodity much like gasoline. First, the biggest six oil companies in America account for about 60% of all the gasoline sales here. The rest is controlled by bit and regional players. One of the characteristics of a cartel is that it is in an oligopoly. A market controlled by a small group of players. Clearly, gasoline is controlled by six companies. More than that, there is a mammoth barrier to entry into this market. It takes billions of dollars to start a gasoline company. Furthermore, each of these six companies have already rooted themselves in every neighborhood in every city in every state. As such, any new competition is nearly impossible to create. Their enormous historical profits also mean that almost no one has the capability to take them on. You could combine the wealth of T. Boone Pickens, Donald Trump and Warren Buffet and they'd still get wiped out by the combined power of big oil.

The next piece we need is price manipulation. Everyone agrees that gasoline is derived from oil. So, we should all assume that gasoline and oil should move up and down in tandem. Furthermore, we should expect that if one company tries to overcharge the rest will undercut if we are truly dealing with a fair and free market.

This is the historical chart for oil. (to the left)

This is the price of gasoline. (above)

Now, oil and gasoline track each other up and down but they certainly don't track each other up and down in any uniform percentage. For instance, oil bottomed out at $46 a barrell in November. By April 1, it was just over $50. That's only a 10% increase. Yet, in that exact same time frame, the price of gasoline went from $1.56 to $1.86. Why would gasoline need to increase 20% when oil only increased by ten percent?

This only gets more insidious when you see that gasoline prices are set to be exactly the same regionally and locally. In other words, the oil companies would argue that there are other factors besides strictly the price of oil that determine the price of gasoline. If that's the case, then why do they all arrive at the exact same price in the end? Has anyone ever seen a difference in price between different companies? The only time there is a difference in price is when the location of a gas station allows for more traffic. So, I must ask a question. If there are a variety of factors that determine the final price of gasoline, why do all of the companies always arrive at the exact same final price? Isn't this the definition of price collusion?

Then, there is the issue of innovation. When General Electric was started, it was started as a vehicle for the light bulb. Now, that company is a conglomerate. Motorola was originally created as a company that sold car radios. Now, it is a technology firm. Yet, big oil sells the exact same product in the exact same form as it did nearly a century ago. Where's the market innovation and evolution?

Now, we all want to be energy independent. We all want to stop relying on the Saudis for most of our energy needs. How can that happen when the companies providing our fuel for our automobiles refuse to innovate so that the fuel comes in some form, any form, besides the one derived from oil?

Here's the summary. We have six very powerful companies. All of these companies manage to make obscene amounts of money, all at the same time, in almost every environment. Even though their product is derived from a market traded commodity, the final price doesn't necessarily correspond to that commodity. Even so, the final price ALWAYS corresponds to each other. Furthermore, all of these companies have managed to continue to sell the exact same product they did nearly a century ago even though all other markets evolve much more than that in every other industry. That, to me, sounds like a cartel. It needs to be broken up.

Both Parties Clueless on Energy

Yesterday, the Republicans unveiled their plan for energy independence. Here are some highlights.

Among the highlights: Nuclear power would be the battle horse, with a call to build 100 new reactors. The GOP plan takes aim at all the industry’s hurdles. Long lead times and pricey components? Streamline nuclear licensing and slash import tariffs on nuclear components. Iffy economics? Give nuclear power tax credits like wind and solar power. Questions about waste storage? Revive and expand Yucca Mountain, and start reprocessing spent nuclear fuel.

The Republican plan would also heavily support clean energy, something that never seemed to happen when the GOP did have the votes. It would make clean-energy tax credits permanent. It would also create a clean-energy trust fund financed by selling off all the new oil and gas leases meant to promote domestic oil production. It would also cut environmental red tape surrounding new renewable-energy projects. The plan would also extend and expand tax-credit programs for hybrid and electric cars, and for energy-efficiency measures.

The plan would also support dirty energy, repealing federal prohibitions on using oil from Canada’s oil sands, and ramping up support for coal-to-liquids technology.

On the Democratic side, we have cap and trade, huge increases in emissions standards, more tax breaks for energy efficiency, as well as massive increases in the budget of the Energy Department.

From my perspective, we have two parties equally as clueless, and you are merely choosing your poison over which plan would fail worse. Neither plan will make us very much more energy independent, and the Democrat's plan will likely cost a lot more. Though, even that is debateable.

For instance, the Republicans call for building one hundred new nuclear power plants. That sounds like a good idea only it costs $5 billion just to build one nuclear power plant. Since no private company would ever invest those kind of dollars, I can only assume the Republicans want the Federal government to pick up the tab. Given that our deficit is already almost $2 trillion, I don't think that it is very fiscally responsible to add another half a trillion dollars to an already ballooning deficit. Whatever the potential benefits of nuclear power, they are years if not decades away. Meanwhile, the cost for all of these nuclear power plants must be paid now. Now may not be the time to add to our deficit.

Furthermore, the Republicans are now behind this "all of the above" approach as though this is a new concept. All of these technologies: nuclear, wind, solar, biothermal, etc. have long been around. Both public and private entities have studied, researched, and attempted to market them for years. So far, most have been totally unsuccessful in gaining anything more than a marginal foothold in the market. We've tried tax breaks and credits. It doesn't work because most are far too expensive with very little mass reach. Making a renewed effort to all of these frankly identifies the wrong problem.

Meanwhile, the Democrats think the road to energy independence lies in willing a revolution in our economy. Our cars aren't energy efficient enough for them so they will mandate more energy efficiency. We have far too much CO2 burning energy, so we will cap it and force companies to come up with alternatives even if those alternatives aren't ready for any mass scale. On top of this, they'll just increase the budget of the Energy department. Keep in mind that the energy department has been working on alternatives for half a century and more. So far, the success has been nearly non existent. Throwing more money at the problem appears to be a bad use of our tax dollars.

Both parties, however, miss the point. Our energy dependence centers around one main problem, our dependence on oil. That dependence centers around one main problem. Almost all our cars run on gasoline derived from oil. The problem there is that to fill up our cars we are almost exclusively resigned to using one of six companies: BP Amoco, Mobile, etc. These companies have absolutely no motivation to ever create any other fuel that can be an alternative to the one derived from oil to act as an alternative at any of their several million gas stations in our country. If we can't fill up with an alternative fuel, no alternative fuel will ever exist on anything more than a marginal level.

Neither party addresses the main problem. The oil companies are making all sorts of dollars giving us gasoline derived from oil. They control this market. This market has massive barriers to entry. Their collasus size means that they can demolish any competition. At the same time, they have no intention of ever providing anything but gasoline derived from oil. Until this problem is resolved, all energy indepence plans will be bound for failure.

Here are my proposals to make us energy independent.

Magic Bullet Still Missing in Energy Independence

The president made clear that energy independence will be one of his priorities. He laid out a world in which our country was free of our dependence on foreign oil.

It begins with energy.

We know the country that harnesses the power of clean, renewable energy will lead the 21st century. And yet, it is China that has launched the largest effort in history to make their economy energy efficient. We invented solar technology, but we've fallen behind countries like Germany and Japan in producing it. New plug-in hybrids roll off our assembly lines, but they will run on batteries made in Korea.

Well I do not accept a future where the jobs and industries of tomorrow take root beyond our borders - and I know you don't either. It is time for America to lead again.Thanks to our recovery plan, we will double this nation's supply of renewable energy in the next three years. We have also made the largest investment in basic research funding in American history - an investment that will spur not only new discoveries in energy, but breakthroughs in medicine, science, and technology.

We will soon lay down thousands of miles of power lines that can carry new energy to cities and towns across this country. And we will put Americans to work making our homes and buildings more efficient so that we can save billions of dollars on our energy bills.

But to truly transform our economy, protect our security, and save our planet from the ravages of climate change, we need to ultimately make clean, renewable energy the profitable kind of energy. So I ask this Congress to send me legislation that places a market-based cap on carbon pollution and drives the production of more renewable energy in America. And to support that innovation, we will invest fifteen billion dollars a year to develop technologies like wind power and solar power; advanced biofuels, clean coal, and more fuel-efficient cars and trucks built right here in America.

The President believes that energy independence comes from the government spending tens of billions of Dollars on investment, infrastructure, and research. The President believes that all that is necessary for energy independence is a full commitment by the government. If only it were that simple.

The President, along with most that attempt to solve this problem, continue, in my opinion, to miss the big problem. The bulk of our dependence continues to be oil to fuel our automobiles. There are, and always have been, an abundance of alternatives to fuel derived from oil: hydrogen, biofuels, ethanol, battery, etc. The problem has never been research. It isn't even will. The problem is that there is a monopoly on the manner in which fuel is delivered.(the oil companies) Not only is there a monopoly but that monopoly has created a system in which competition has little chance for success.

In any given neighborhood, there is a gas station every four to eight blocks. Each of these gas stations delivers gas from oil. Every once in a while, there will be an alternative like ethanol but not often. As such, for any alternative fuel vehicle to have any hope of mass market success, fuel must be as readily available for that car as it is for a car fueled by oil. At this year's Chicago Auto Show, Saturn produced a concept car that was a hybrid, electric and bio fuels. This is a concept a long way from being real because there is absolutely no place to fill up on gas from bio fuels. As I have said before, the oil companies have no interest in bringing an alternative fuel to the market. The oil companies will continue to only have fuel made from oil readily available every four to eight blocks. Because of that convenience, it is nearly impossible for any alternative fuel to have any mass appeal. If it is nearly impossible to re fuel, that automobile will NOT have any mass appeal. The problem was in fact crystallized at a Pickens Plan townhall meeting.

This was illustrated by something that Rahm Emanuel said while introducing Mr. Pickens. He mentioned that in 2005, he and Senator Obama secured $1.8 million for the city of Chicago, and that money went to build four, YES FOUR, natural gas fuel stations. Furthermore, Congressman Emanuel seems to think that he actually did something worthwhile. In fact, Congressman Emanuel illustrated the problem as I see it in attempting to move this country from oil to alternative sources as it relates to automobiles. Those four natural gas fuel stations would compete with about ten thousand regular fuel stations that provide gas derived from oil.

How can alternative energy sources compete when oil is so readily available as a fueling option?

We can spend billions and even trillions on investment, infrastructure, and research however all of it will be useless, unless someone figures out a way to bring alternative fuels to the market in a way that is at least close to as convenient as gas from oil is now. Since the oil companies themselves refuse to engage in this, all the government money in the world will have little effect.

Wrap Up from the Chicago Auto Show

The Chicago Auto Show runs through the end of next weekend. I had a chance to attend today. The show seemed a bit scaled down this year, and I assume that this has to do with the weak economy. Though, most of the usual suspects of auto makers were exhibited. Two years ago, the buzz was around alternative energy vehicles that ran on hydrogen, ethanol, natural gas, as well as the hybrids. In this year's auto show, hybrids are still all the rage however the others have been mostly replaced by electric cars.

Most of these cars powered by electric engines are still in concept and so the current alternative energy options continue to focus on hybrids. The leader in hybrids continues to be Toyota and they rolled out their staple for hybrids the Prius. The new design makes the Prius look almost like a triangle in the front. This creates an aero dynamic style and contributes to a strong drag coefficient. This not only means that an automobile will go faster but it also contributes to great gas mileage. The photo on the left is the 2010 model.

Mitsubishi has a fully electric car. However, this model is only available in Japan.

The process for getting these cars approved to pass safety standards here in America, the folks at Mitsubishi tell me, are more stringent in America than in Japan. The car you are looking at has been available in Japan since 2005. One of the other problems for any all electric car is finding a place to plug it in. This car, like most electric plug ins, can plug into a regular outlet. If you live in a home, you can probably find an outlet in your garage. Yet, those living in an apartment have a much harder time.

In California, the electric company has taken to providing an electric fueling station for cars. This adds another source of income for the electric company and it allows for the automobile to reach a more mass market. The folks at Mitsubishi said that it costs an extra $1.60 on average to fill up the battery on this car. The battery runs for about 80 miles.

At the left is the hyped up GM Volt. The folks at GM said that this car should be on the market in the next year or year and a half. This also runs on a plug in battery.

There are two competing technologies in electric car batteries. The first is the one that charges up when the car is plugged in. The second, usually found in hybrids, is the one that charges up everytime the driver hits the brakes.

There are two competing types of batteries. The technology the Prius(up top) has is called Nickel-Metal Hydride. The technology in most of the other vehicles is called lithium ion. All things being equal lithium ion is the better battery. It is lighter and it lasts longer. However, the technology for Nickel-Metal has been far more researched and so that technology is more advanced.

The most interesting electric car is this one from Dodge. The folks at Dodge say that they have five models, including this one, in concept and only one that will be on market in the next year. That, they weren't sharing with me which of the five will be the one on the market.

This one is a sports car that run zero to sixty in less than five seconds, and it runs entirely on a lithium battery that plugs in.

Ethanol fell way out of favor at this year's auto show, though I was impressed with this Hummer that also runs on EA 85.

The strangest concept in alternative vehicles is this one from GM. It's called Gem Cars. This is a glorified golf cart. It runs for around $10,000. It can only be used on roads that have speed limits of 35 mph or less. That's because the vehicle on goes up to 25 mph. To say that this vehicle has a limited use is quite the understatement.

Finally, the most interesting concept in alternative vehicles comes from Saturn. This is a hybrid that runs on a lithium ion battery that plugs in. It also runs on bio diesel fuels. The reason this continues to be merely a concept car is that no one has figured out how to bring bio diesels to the market in any mass way.

For those not interested in alternative energy, you might be interested in this van from Explorer.

It runs just a little under $50k and it includes a flat screen television.

Finally, for those looking to spend, you may want to try this mobile office vehicle.

This massive truck is custom made and the one on display has several computers and televisions.

It seats double digits and it has just about everything you could ask for. It only requires a regular license, though this model runs for a cool $280,000 and unfortunately the photos don't do this justice. It includes HD TV, satellite, and high speed internet.

That's the wrap up....

The Economy's Silver Lining(s)

Every single day we hear about new reasons to be sour on the market. Unemployment numbers, retail sales numbers, and consumer confidence numbers all point to dire economic futures for all. In the gloom of a dire economic forecast, are there two reasons to be hopeful? In fact, there now maybe emerging two reasons to be hopeful for the economy.





The first hopeful sign is that the dire economic outlook has sent oil pricing on a never ending downward spiral. Oil prices have crossed below $2 a gallon for the first time in year plus years. It appears that there is no end in sight for the drop and it's possible that gas prices could fall below $1.50 and maybe even lower. Low oil prices will lead to lower prices on all sorts of things from shipping good, transportation, airlines, and trucking. By decreasing a major cost for many industries, this will also mean more money for another labor cost in each of these industries, labor. Furthermore, consumers will spend significantly less on gasoline. This will leave more money for many other goods monthly.



Exploding gas prices had a significant effect in
(oil prices since 2007 above) perpetuating the economic downturn. Deflating oil prices will help soften the blow on the economic downturn to come. Beyond this, most other commodites grain, wheat, corn, etc. have also plummetted. This causes everyone's grocery bill to be less. It also causes another major expense for many companies to fall as well.


The economic downturn has also caused most short and long term rates to drop furiously. The ten year U.S. Treasury is now at levels not seen in decades. The U.S. Treasury is the pre cursor for most long term rates. The furious drop in the Treasuries has sent Mortgage rates lower and the 30 year fixed rate is now again below 6%. Another half a point drop in mortgage rates will likely set off another mini refinance boom.

Another mini refinance boom maybe just what the doctor ordered in getting the real estate market moving again. It was the refinance boom of 2001-2003 that held up the economy in its last down turn. If mortgage rates get to 5.5% on the traditional thirty year fixed, that should also spur at least a bit more buying in real estate. All of this is exactly not only what the real estate, banking, and mortgage markets all desperately need, but frankly it is needed by the economy as a whole.

Both the dropping price in oil and the dropping long term interest rates are two hopeful signs that there maybe two reasons to believe that the economy's downfall maybe softened.









(ten year U.S. treasury YTD above)

Barack Obama Will Complicate the Tax Code

When Barack Obama makes promises, he promises everything under the sun. He promises to cut taxes for 95% of the people. He promises to lower health care costs and provide health care to everyone. At the same time, he promises to close loopholes and simplify the tax code. Of course, doing all of these things at the same time.

For instance, Barack Obama won't cut any of the tax rates. The only thing that Obama will do is increase certain people's tax rates. He will also raise the payroll taxes for some folks. His so called tax cuts come in the form of tax credits. Here is how the Wall Street Journal described it.

A $500 tax credit ($1,000 a couple) to "make work pay" that phases out at income of $75,000 for individuals and $150,000 per couple.

- A $4,000 tax credit for college tuition.

- A 10% mortgage interest tax credit (on top of the existing mortgage interest deduction and other housing subsidies).

- A "savings" tax credit of 50% up to $1,000.

- An expansion of the earned-income tax credit that would allow single workers to receive as much as $555 a year, up from $175 now, and give these workers up to $1,110 if they are paying child support.

- A child care credit of 50% up to $6,000 of expenses a year.

- A "clean car" tax credit of up to $7,000 on the purchase of certain vehicles.

A "clean car" tax credit may cut the tax burden for many people but it isn't exactly going to make the "tax code simpler". One thing that can't be argued is that all of these new "tax credits" (and yes some of these aren't new but rather increases in old credits) will complicate not simplify the tax code.

There's more. Here is what he said about health insurance and small businesses.

Small businesses that provide healthcare insurance for employees would see a tax credit of as much as 50 percent under a plan proposed by Presidential candidate Senator Barack Obama.

The expense of health insurance makes it an obstacle for small businesses, but it's the one benefit employees tend to seek more than any other when job hunting. A business may find itself out of the running for a qualified employee if they can't offer this benefit.

Obama's plan, discussed with Latino advocacy group National Council of La Raza in Boston, called for offering a tax credit to businesses that give employees health insurance. The Boston Herald noted how Obama's political foe Hillary Clinton advocated a similar plan.

The problem is that he has never defined exactly what a "small business" is. As such, in order to qualify for this tax credit, so called small businesses will need to fit into a nebulous and undefined box. Now, whether or not that is a good idea is a debateable point, it is beyond debate that giving a tax credit for health insurance to an undefined entity WILL complicate the tax code.

Here is what he said about capital gains and small businesses.

To fuel the real engine of job creation in this country, I’ve also proposed
eliminating all capital gains taxes on investments in small businesses and
start-up companies, and I’ve proposed an additional tax incentive through next
year to encourage new small business investment.

Keep in mind that Senator Obama wants to raise the capital gains tax in general. As such, he will give a capital gains tax cut to a yet undefined entity of "small businesses". For both this capital gains tax cut and the health insurance tax credit, at some point there will be a definition of what a "small business" is compared to a "large business". Then each business will do everything they can to fit into the box of "small business". As such, whatever you say about the viability of these ideas, one thing is beyond debate and that is that such tax credits and targeted tax cuts will complicate not simplify the tax code.

Furthermore, Barack Obama will impose a brand new windfall profits tax. Now, he hasn't laid out exactly how that will look but any new tax means the tax code gets more complicated. Think about the man hours of accountants that oil companies will hire to make sure they avoid this windfall profits tax. Whatever the windfall profits tax may or may not do, it WON'T simplify the tax code.

Reporting from the Townhall Meeting of the Pickens Plan

This morning I had a chance to attend a townhall forum sponsored by the Pickens Plan at Navy Pier in Chicago. Here is a quick summary of our energy problems and their solutions as formulated by Mr. Pickens.

Here are the most important numbers as he sees them. Our country uses roughly 21 million barrels of oil daily. We produce about 9 million barrels of oil daily. As such, there is about 12 million barrels of oil daily that need to be imported. Our biggest importer is Canada and then followed by Mexico. However, the Middle East and Africa provide about 57% of our imported oil. For alternatives we have: coal, natural gas, geothermal, wind, nuclear, solar, and bio diesel. Bio diesel, through ethanol, can provide about the equivalent of half a million barrels of oil daily in alternative energy. As such, anyone that pushes bio diesel as the end all is a charlatan. Drilling, whether in ANWR or in the outer continental shelf, would provide an extra two million barrels of oil daily. As such, what we need is a plan to produce domestic energy sources that would replace about eight and a half million barrels of oil daily.

Mr. Pickens, as many know, believes in wind power for fueling our homes, businesses, and recreation, and he believes in natural gas as the alternative that could provide most if not all of the eight and a half million barrels of oil we are missing. In Mr. Pickens' estimation, natural gas is abundant enough domestically that all we need to do is go find it.

Yet, I walked away from the meeting seeing the same problem that I continue to see in creating alternative energy sources for our vehicles. This was illustrated by something that Rahm Emanuel said while introducing Mr. Pickens. He mentioned that in 2005, he and Senator Obama secured $1.8 million for the city of Chicago, and that money went to build four, YES FOUR, natural gas fuel stations. Furthermore, Congressman Emanuel seems to think that he actually did something worthwhile. In fact, Congressman Emanuel illustrated the problem as I see it in attempting to move this country from oil to alternative sources as it relates to automobiles. Those four natural gas fuel stations would compete with about ten thousand regular fuel stations that provide gas derived from oil.

In order for automobiles running on alternative energy to have any sort of mass appeal, the consumer has to have the ability to fill up those cars with at least a relative amount of convenience compared to the convenience they now have filling up their current cars. In my opinion, big oil has no intention of expanding their fuel line to include anything but gas derived from oil. They make far too much money doing it the way they are now, and they aren't about to rock the boat. As such, alternative energy sources would have to find an alternative way of putting the energy in the car, and that source would need to be as readily available is the current form of gas is now.

There is technology available that allows a car owner to re fuel their cars right in their homes.

After a year-long delay, Honda and a partner have announced they will sell a $2,000 home fueling station for natural gas cars starting in the spring of 2005.

Initial sales, estimated at 500 a year, will be limited to California, but Honda could then expand to other states such as New York, where natural gas cars are used in the state fleet.

Honda said the unit offers a "personalized solution" to the fact that natural gas is not sold at gasoline stations. "The biggest obstacle to broader acceptance of natural gas vehicles is the limited availability of refueling stations," American Honda Vice President Tom Elliott, said in a statement.

This is a way to gain limited marketability, however this continues to have two problems. First, these converters cost thousands, and thus they increase the cost of such cars by thousands. Second of all, such a plug would be available if you live in a house, however it wouldn't be available to those that live in apartments. As such, the main problem that I continue to see with America being truly energy independent is that big oil has a monopoly on the fueling mechanism. That mechanism is available on a mass scale. They refuse to provide fueling mechanisms for any of these alternative energy sources. Yet, it is impossible for any competitor to provide such an alternative fuel station on the mass scale they provide it on.

As such, I continue to maintain my two part solution. First, break up big oil using the Sherman Anti Trust Act. Second, reduce capital gains, dividend, and income taxes to zero on any company to produces or procures domestic energy.

Big Oil and Taxes: Palin Vs. Obama

Several folks, most of them in the MSM, have pointed out that Sarah Palin did in Alaska what Barack Obama wants to do in all of America with regard to taxing the oil companies. Is this so? Let's examine the issue.

Obama's windfall profits tax. Barack Obama wants to set a windfall profits tax on oil companies.

Democratic presidential candidate Barack Obama said on Monday he would impose a windfall profits tax on U.S. oil companies as he sought political gain from Americans' pain over high gasoline prices.

Launching a two-week focus on the economy after clinching the Democratic presidential nomination, Obama drew a sharp contrast between his economic policies and those of John McCain, his Republican rival in the November election.

"I'll make oil companies like Exxon pay a tax on their windfall profits, and we'll use the money to help families pay for their skyrocketing energy costs and other bills," the Illinois senator said.

There are three things that are vital to understand about this so called "windfall profits" tax. First, this tax would only be imposed on oil companies. Second, it would only be imposed on profits are too high, and this number is not set yet. That means if oil companies, and oil companies ONLY, make more than a certain amount then they pay more in corporate taxes than any other company. Second, those taxes will be refuned only to folks that Barack Obama considers the middle class.

To me at least, Obama's windfall profit's tax is standard issue class warfare. He is punishing those that are doing well and rewarding those that aren't doing as well.

Palin's oil profits tax

With regard to the tax that Sarah Palin imposed on oil companies, in her case, she raised the tax on profits from 22.5% to 25%.

The basic elements of the Palin tax proposal, called Alaska's Clear and Equitable Share, are:

• 25 percent tax on net profits, or the value of the oil minus operating expenses and pipeline and tanker charges. That compares with the 22.5 percent Petroleum Profits Tax passed in 2006. The tax rate rises when oil prices are high.

• Protection when oil prices are low. The big fields of Kuparuk and Prudhoe Bay would pay at least a 10 percent gross tax on the oil's value. This tax on the gross -- before operating expenses are deducted -- would be instead of a tax on net profits, not in addition to it.

• Changes in allowable tax credits and deductions. Producers no longer could write off the cost of replacing deteriorating pipelines.

• Higher salaries for oil tax auditors.

In Alaska, the oil companies face a special tax that no other businesses face, but there is a reason for that. They are using the resources, the oil, of Alaska. Because they exploit resources of Alaska that no other companies exploit, they face a tax no other companies will pay. First, this is not a new tax. This tax has been in place for a long time. Palin looked at the manner in which the tax was negotiated and she felt that not only was it negotiated in secrecy but that it didn't give as good a deal to the people of Alaska as it should have. As such, she re negotiated the tax and raised on the oil companies. Let's remember that as Governor of Alaska, she is responsible for the best interest of the people of Alaska. (not the oil companies) Then, she sent a check of $1200 to every citizen of Alaska.

Here are the differences in the taxes. Firs, Palin's tax taxes all profits not only those that are too high as Barack Obama wants. Second, the revenue raised went to all the folks that Palin represents, as opposed to Obama's, which would only give money to people who didn't make enough money. Third, Sarah Palin didn't create a new tax. She simply re negotiated a tax she thought wasn't giving as good a deal to the people she represents. Barack Obama wants to create a whole new tax on a nebulous concept of "windfall profits".

The Idiocy of Energy Independence?

That is the way that John Stossel sees the issue of so called energy independence. Now, Stossel is at heart a Libertarian and he comes at this issue from that perspective.

It's amazing how ideas with no merit become popular merely because they sound good. Most every politician and pundit says "energy independence" is a great idea. Presidents have promised it for 35 years. Wouldn't it be wonderful if we were self-sufficient, protected from high prices, supply disruptions and political machinations?


The hitch is that even if the United States were energy independent, it would be protected from none of those things. To think otherwise is to misunderstand basic economics and the global marketplace.

To be for "energy independence" is to be against trade. But trade makes us as safe. Crop destruction from this summer's floods in the Midwest should remind us of the
folly of depending only on ourselves. Achieving "energy independence" would expose us to unnecessary risks -- such as storms that knock out oil refineries or droughts that create corn -- and ethanol -- shortages.

There is some truth to Stossel's point however in my opinion, it is fallacious for two very important reasons. First, he is right that if we force energy independence by using those resources that aren't plentiful we are in fact not following the principles of free trade. Of course, if Stossel is so demanding of following good economic principles, he should also realize that by being dependent on foreign oil, we are violating another important one, diversification. What would you say about someone that had a million dollars and put all of it into the stock of one company? I would say they aren't very well diversified. The same goes for a country nearly entirely dependent on one source for energy. Of course, it is a myth that will ever be entirely independent of foreign oil. Nor should we ever make a goal that we should be entirely independent of foreign oil. That is impossible and counter productive.



What most people agree is that it is long past time that our energy be more diversified. Oil meets about 40% of our energy needs. There are dozens of potential energy sources and so it is unacceptable that one accounts for 40%. To give our economy the stability that it needs none should be more than 20% tops, if that. We have seen with the recent hike in gas prices what the potential nightmarish economic consequences are of a lack of energy diversification.

Then there is the second point that Stossel ignores, geopolitics. I am all for free trade and if Brazil has lots of sugar then we should try and import sugar from there and export one of our plentiful resources to Brazil.

That's because, unlike oil, sugar is not absolutely vital to sustaining our way of life. If Brazil ever became an enemy, the U.S. could go without the sugar that they would import to us. The same can't be said of oil as an energy source. Our entire way of life is destroyed if countries like Venezuela and Iran ever stopped drilling for oil. We simply can't allow ourselves to be put in such a weak geopolitical position.

So, while Stossel makes some good points, that doesn't mean he makes a good argument. To ignore such vital things as diversification and geopolitics and focus exclusively on free trade is to make a fallacious argument.

T. Boone Pickens and Energy Independence

Over the last several weeks, I have watched conservatives snicker at T. Boone Pickens' plan for energy independence. They have called it such things as boondoggle. The one big difference between T. Boone Pickens and his critics is that of Pickens. He's already invested over $2 billion in wind farms and he will likely invest many billions more. Unlike Pickens' critics, he puts his money where his mouth is.

In my opinion, the best way to successful energy independence and domestic energy production is to reward entrepeneurs like Pickens as much as possible. I don't know much about wind power or frankly any other alternative energy source. Whether it is wind, solar, hydrogen, ethanol, natural gas, or even domestically produced oil, any energy that isn't outsourced is one we should all try and support. I know that the more folks like Pickens that invest in alternative energy sources, the faster our country will become truly energy independent. In other words, we need to motivate as many T. Boone Pickens to follow him and make the necessary investment into alternative energy sources and domestic energy as possible.

T. Boone Pickens is the practical applilcation of my theoretical plan toward energy independence. Ironically enough, there is little more incentive any could offer to Pickens himself to make any more of a commitment to alternative energy. Not only does he genuinely and firmly believe in the power of wind energy, but he sees energy independence as a matter of national security.

Still, there are plenty of entrepeneurs that need more encouragement than merely a heartfelt belief and a sense of duty. In my opinion, the best motivation is through taxes, or better yet the lack thereof.

In Pickens' case, he just invested $2 billion in new wind turbines. Now imagine if five years from now, those turbines turn a profit. Imagine if Pickens paid absolutely no taxes on that profit. Imagine instead, if Pickens invested in a company that already had wind turbines. Imagine if he could sell that company for a billion dollars more than he invested in it. Imagine if Pickens paid no capital gains tax on the sale.

The best way to encourage entrepeneurs to invest in alternative energy sources as well as other domestic energy is to reward their investment with tax rates that they wouldn't get in any other industry. If alternative energy and other domestic energy products had a ten year moratorium on all income, capital gains, and dividends tax, it would create the sort of investment necessary to make the United States truly energy independent. Rather than criticizing entrepeneurs like T. Boone Pickens we should be encouraging them to invest as much as possible in all things that make us independent from foreign oil. The best way to do that is to reward their investment with income and capital gains that face absolutely no taxes.

Russia Vs. Georgia: The Oil Angle

I am always annoyed by leftists and anti American types that attribute any U.S. geopolitical action to the phrase "it's all about oil". This view is so terribly simplistic that it would be laughable if the subject matter wasn't so important. Oil is the energy source that makes just about everything run. Of course, oil is considered in many geopolitical decisions. That said, assigning its importance to some nefarious consideration is not only wrong but slanderous.

It is rather ironic to watch the Russians force their way through their neighboring country of Georgia because the entire conflict is wrapped up in oil and most of the intentions are entirely nefarious. A couple days ago, I pointed out that in the view of Putin's main rival, Garry Kasparov, that Putin's entire geopolitical view is wrapped in the idea of constantly increasing the price of oil. In the last seven years, not only has Russia significantly increased their own exportation of oil but of course the price has exploded. As such, the country has seen an enormous increase in wealth. Here is how Powerline described Russia's potential nefarious motives in Georgia vis a vis oil.

News reports indicate that Russia may have tried to bomb the Baku-Tbilisi-Ceyhan pipeline, which runs through Georgia. If so, the bombs missed, and flow of oil through the pipeline was not interrupted. The BTC pipeline runs from the Caspian Sea to the Mediterranean coast of Turkey; note Russia to the north and Iran to the south:

The pipeline, in which British Petroleum is the lead partner, can carry up to one million barrels of oil per day. It is of considerable strategic significance, as it is the only means by which countries in the region like Azerbaijan can get their oil into the international market without relying on Russia. The Daily Mail writes:

It is crucial to the world’s volatile energy market and the only oil and gas route that bypasses Russia’s stranglehold on energy exports from the region.

As such, any disruption in this oil pipeline would have a tangible effect on the supply of oil and as such would satisfy Putin's motivation, as Kasparov sees it, in continuing to increase the price of oil.

Now, in my opinion, Europe is by nature not motivated to confront tyrants. Beyond that, oil gives them an extra motivation to capitulate to Russia. Here is how Investor's Business Daily explained it.

It's clear former President Vladimir Putin, not his handpicked successor Medvedev, is calling the shots. Putin's made no secret of the fact that he wants to depose Georgian President Mikheil Saakashvili and set up a pliant puppet regime, giving him de facto control of Georgia's oil pipeline — the main conduit to Europe from the oil-rich Caspian Sea that's not on Russian soil.

Why would Russia do this? As we note elsewhere on this page, roughly a quarter of Europe's energy comes from Russia. This tightens Putin's stranglehold on Europe's economy and gives him all the diplomatic leverage he needs.

If you don't believe this, look at the EU's weak response to the crisis in Georgia. It "brokered" a cease-fire that is essentially a total capitulation by Georgia to Russian demands. Appeasement is back.

In other words, Europe is now in the untennable position of being significantly reliant on a tyrant for a great deal of their energy sources. As such, this group that is feckle by nature becomes even more feckle for fear that their energy supplies will be cut off. There is even more though. The reality is that the entire Russian economy is nothing more than a house of cards built entirely on the back of oil prices that are artificially high due in large part to a significantly speculative oil market. As such, all of the power that Putin desperately is attempting to consolidate into his own hands will crumble once the bubble pops on the oil market.

What is playing out here, is the practical effect of allowing tyrants and despots to control a country's energy supply. Of course, on this matter, the U.S. is even worse. Here is how IBD put it.

Yet today, Americans get nearly 70% of their oil from overseas, making us vulnerable to blackmail by the likes of Saudi Arabia, Venezuela, Nigeria, Iran and now even Russia. Developing the full range of energy sources we have available may be the single most effective way of ensuring our nation's security.

It is absolutely amazing that we have as a nation been sleep walking through the last three plus decades and we have allowed ourselves to become totally dependent on a bunch of despots for nearly all of our energy supply. Above all else, the war between Georgia and Russia makes one thing clear above all else, domestic energy independence is the number one national security priority.

Every single day we allow Saudi Arabia, Venezuela, and Nigeria to supply us with most of our energy is another day that we continue to be in the same vulnerable position that Europe now finds itself in.

Imagine our geopolitical position if we didn't rely on Saudi Arabia so much for oil. Imagine what would happen to most of the despots of the world if the major democracies all made a serious effort to attain energy independence. T. Boone Pickens is right...energy independence is a matter of national security.

Democrats, Gas Prices, and My Pearl Jam Concert Experience

About ten years ago, I went to a Pearl Jam concert at Alpine Valley Music Theater. Alpine Valley has a massive lawn seating, first come first serve, on top and assigned stadium seating on the bottom. My group arrived at the concert rather late so we wound up way at the top of the lawn area. I came to the concert with one of my three true loves (if you have seen A Bronx Tale then you know everyone only gets three and thus...but I digress) along with a group of other friends. My companion then suggested that we all bum rush towards to front of the lawn area. I was enthusiastically in favor of such an idea, however I could tell my friends were only acting like they were excited. As such, we began bum rushing the stage and within ten seconds she and I lost the rest of our group, and only later I found out they gave up and went up top. Their collective hearts weren't really into this idea, but rather they only went through the motions. While they could hide it when we were merely talking about it, their intentions became clear once we were doing it.

That's how I see the Democrats during this debate over energy independence and specifically, finding ways to immediately reduce gas prices. The Democrats are wholeheartedly for long term energy independence, but as far as short term solutions, they are rather half hearted.

If a Democrat is speaking about alternative energy, they are ready to throw their money at most anything. (except often nuclear power for some reason) Yet, throwing billions at alternative energy sources does little if nothing to resolve the current state of our gas prices today.

Deep down in the hearts of most true blue Democrats, their main concern on this issue is global warming. That's why they wholeheartedly support alternative energy ideas. They aren't nearly as concerned about gas prices, per se. In fact, many of them see high gas prices as a good thing because it forces a change in habit. One great example of this was when Barack Obama said that the problem wasn't that gas prices were too high but that they rose too quickly. He then went on to say this.

"if we take some steps right now to help people make the adjustment than I think ultimately we can come out of this stronger and have a more energy efficient policy than we do right now

Does that sound like someone who makes lowering gas prices a priority? Then, Nancy Pelosi said this.

'I'm trying to save the planet'

That's why their policy proposals include mostly conservation ideas like lowering the speed limit and inflating tires. Sometimes, they include half hearted and dangerous ideas like releasing some of the strategic oil reserve. They have also carried on with their populist ideals and gone after the speculators.

Yet, on drilling, they are either totally opposed, or they say, before we drill everywhere, the Democrats want the oil companies to drill on leased land. The problem is that in order to really bring down oil prices substantiall, tangibly, and permanently, it takes an effective multi pronged approach.

The Democrats are offering half measures. Their hearts aren't really into bringing down gas prices significantly. That's why the Republican stunt of staying in the Capitol during the summer break even after the lights and cameras were turned off is so effective. It points out that one party is determined to do all it can to reduce gas prices while the other party is merely going through the motions. The thing about going through the motions on anything is that it is obvious. I knew my friends weren't really on board about bum rushing the lawn. The voters can tell the Democrats aren't really on board about reducing gas prices. Given that this will become the most important issue, a half hearted effort will have significant consequences.

Why Releasing the Strategic Oil Reserve is So Dangerous

As part of my plan to significantly reduce the price of oil, I was in favor of releasing a significant part of the strategic petroleum reserve. As such, I am not completely opposed to such an idea, however I firmly believe that any move to release the strategic oil reserve has to be part of an overall multi layered plan to reduce the price of oil. Releasing the strategic oil reserve carries with it all sorts of risks and thus it shouldn't be used unless you are certain that it will be part of something that will dramatically effect oil prices.

In Barack Obama's plan, he wants to release about ten percent of the strategic oil reserve. The problem is that there is little substantively in his plan that will immediately reduce the price of oil besides releasing the strategic oil reserve. The real problem is that oil is controlled by all sorts of folks that are shall we say loose cannons.

If Obama releases the strategic oil reserve, the Iranians might see this as an opportunity. They may attempt a scorched earth policy, and reply by cutting off all drilling in their country indefinitely. If they did that, not only would the price of oil go up, but we would also then be vulnerable to shortages with a depleted strategic oil reserve. Obama wants to release about one tenth of the strategic oil reserve. Remember this is there for emergencies only. High gas prices is not necessarily an emergency.

By releasing it though, he may create one. Iran could easily take this is a provocative move. They are loose cannons. We can't predict how they will respond to anything. The Iranians may not care what they do to their own economy and people and see an opportunity to crush America. The oil reserves would be released, prices would go up, and we would have shortages in the reserve at exactly the time when there is an emergency.

If anyone releases any part of the strategic oil reserve, they had better have a very good reason. To me, simply releasing it on its own to drop prices is not nearly a good enough reason. I hope Barack Obama thinks long and hard about these potential consequences before ever actually releasing any part of the reserve for it could create a wrath he doesn't expect.

Windfall Profits Tax: Bad Politics and Bad Policy

The reason that Ronald Reagan was such a believer in tax cuts actually went back to his time as an actor. When he was an actor, his colleagues told him to do everything he could to only make two movies per year. The reason was that if he made three he would wind up in the bigger tax bracket. Because taxes were so high in that bracket, he would wind up taking less home than if he only made two movies. Reagan was just stunned that anyone would encourage someone not to work. That's how Reagan became such a believer in tax cuts because he saw taxes as an incentive not to work.



That is what I thought of when I read analysis of Barack Obama's proposal for a windfall profits tax on oil companies. I have no use for the oil companies and I have stated my disgust toward them. That said, taxing a company more for being more successful only discourages companies for being successful. The reason everyone is in business is to maximize their profits. Now, Barack Obama is telling not just oil companies but all companies that if you are too successful you will be punished. Philosophically, that makes no sense. We want all companies to be as motivated as possible to make as much profit as possible. Imposing so called windfall profits tells companies that at some point they need to stop making money.



Beyond that, the Wall Street Journal raises an excellent point...what exactly is a windfall profit...

Mr. Obama didn't bother to define "reasonable," and neither did Dick Durbin, the second-ranking Senate Democrat, when he recently declared that "The oil companies need to know that there is a limit on how much profit they can take in this economy." Really? This extraordinary redefinition of free-market success could use some parsing.

Take Exxon Mobil, which on Thursday reported the highest quarterly profit ever and is the main target of any "windfall" tax surcharge. Yet if its profits are at record highs, its tax bills are already at record highs too. Between 2003 and 2007, Exxon paid $64.7 billion in U.S. taxes, exceeding its after-tax U.S. earnings by more than $19 billion. That sounds like a government windfall to us, but perhaps we're missing some Obama-Durbin business subtlety.

Maybe they have in mind profit margins as a percentage of sales. Yet by that standard Exxon's profits don't seem so large. Exxon's profit margin stood at 10% for 2007, which is hardly out of line with the oil and gas industry average of 8.3%, or the 8.9% for U.S. manufacturing (excluding the sputtering auto makers).

How will Barack Obama measure a so called windfall profit? Will he draw a line in the sand on a certain number? Wouldn't that merely discourage work like it did for Reagan and his colleagues? Barack Obama dismisses the number one rule of taxes. Taxes are a form of punishment. That which you want to punish you tax. By taxing windfall profits, what Barack Obama does is punish the maximization of profits. Now, I don't believe for one second that the oil companies are playing fair. Yet, the way to punish their behavior is not by taxing them.



Politically, this makes even less sense. That's because the folks want politicians to provide solutions that will lower the price of gasoline. They aren't looking for scapegoats or demons. They are looking for something, anything, that will tangibly decrease the price of gasoline. It is just that simple. In no way will taxing the oil companies even more lower the price of gasoline. In fact, it may lead to higher gas prices. This sort of demonization politics might work with other issues, but not on gas. The public is far too engaged to fall for the sort of class warfare that Barack Obama is practicing. The public is wholly unconcerned with what the oil companies make except as it relates to what they pay themselves. Unless Barack Obama can make the link between his windfall profits tax and lower gas prices, this is a failed political strategy. Giving a nebulous reference to alternative energy research, something we have been doing for decades, is not enough. The irony here is that Barack Obama is engaging in exactly the sort of political gimmicks that he accuses John McCain of engaging in. If Barack Obama insists on making windfall profits and forced conservation the centerpiece of his energy policy, he will hand that issue to McCain in the fall.

Off Shore Drilling: Obama's Reversal and the Opening

Barack Obama shifted his stance on off shore drilling a couple days ago.

Sen. Barack Obama on Saturday said a shift in his stance on offshore oil drilling is a necessary compromise with Republicans to gain their support for his broader goals of energy independence.

On Friday, Obama indicated a willingness to support an effort by five Democratic senators and five Republicans to break Congress's energy impasse with legislation that would allow expanded offshore oil exploration and embrace ambitious energy efficiency and efforts to develop alternative fuels.

...

Obama said on Saturday that it is time to compromise. The proposal by the Senate's "Gang of 10" has "some of the very aggressive elements that I've outlined in my plan," he said here, including a goal in 20 years of having 85 percent of cars no longer operating on petroleum-based fuels and to provide $7 billion to help the U.S. auto industry retool to build ultra-efficient vehicles.

"What I don't want is for the best to be the enemy of the good here, and if we can come up with a genuine, bipartisan compromise in which I have to accept some things I don't like, or the Democrats have to accept some things that they don't like, in exchange for moving us in the direction of energy independence, then that's something I'm open to," Obama said. "I wanted to send a strong signal that we can't allow partisan bickering or the desire to score political points to get in the way of providing some genuine relief to people who are struggling."

Now, this presents an opportunity for John McCain and the country. As most know by now, both Nancy Pelosi and Harry Reid have done their best to avoid any votes on drilling. They have rather looked to bring measures to the floor that: punished the oil companies, mandated conservation, spend more money on alternative energy sources, and legislated against speculation.


Ever since comprehensive immigration reform, I have been weary of any policy proposal with the word "comprehensive" in it. That said, energy independence is a complicated policy and it likely needs a comprehensive solution. Furthermore, Republicans aren't necessarily against a comprehensive solution. The problem with everything comprehensive but drilling is that most of those solutions won't be felt for decades. I for one am for anything that will in the short and long term mean less money going to OPEC. Whether that is wind, solar, hydrogen, or domestic drilling, I want to try anything and everything. Any solution that includes in it a way for the Saudis to make less money when we drive is something I favor. If the Congress can truly hammer out a comprehensive solution that includes all sorts of alternative solutions, I along with many Americans would applaud.

That's why Barack Obama's stance that he wants to compromise is an opportunity. John McCain should immediately challenge him to follow through. Both should demand that each party come back from vacation and begin legislating until a compromise is hammered out. There is already a bi partisan group of ten Senators ready to compromise. Imagine if the standard bearers of each party demand that their colleagues come back to the legislature until a real compromise is hammered out. If Barack Obama is serious, then it will mean real energy solutions including drilling. If he isn't, he will be exposed as the empty suit some of us think he is. Either way, his softening stance on drilling presents a real opportunity. I hope that John McCain takes it.

Big Oil's Profit Margin Canard

If you ever watch a defender of big oil on television, they will almost always point out something about the profit margin of most oil companies. That is that their profit margin is much smaller than most other industries. For instance, here is one such comment to another post where I attacked the oil companies.

BP made a net profit of $22.626 billion after tax. This is a net profit of 4.7%. You claim this is a result of oligopoly.

Citigroup made a net profit of $20.355 billion after tax. This is a net profit of 24.03%. Citigroup is one of 5,000 financial institutions - yet their
rate of return was more than 5 times that of BP. Seems to me that being in an oligopoly is really stupid...

People like you just wanna bash "Big Oil" because you are mad about gas prices. If you really understood economics, you would realize that having an oligopoly in an internationally traded, fungible commodity THAT YOU MUST BUY FROM A CARTEL is practically useless.

This argument is technically true and also totally misleading and nonsensical. Why in the world would anyone compare the profit margin of big oil to say computers. If I am buying a Dell, it is likely for specific reasons related only to a Dell. How many people does anyone know that buy their gasoline from one company only? I don't know anyone that is particular to Amoco over Mobile. Most folks wind up at the gas station that is closest to where they live or work or the one closest when they are running out of gasoline. That's because unlike computers gasoline is a commodity.

A commodity is anything for which there is demand, but which is supplied without qualitative differentiation across a market. In other words, copper is copper. Rice is rice. Stereos, on the other hand, come in many varieties of quality. And, the better a stereo is, the more it will cost. Whereas, the price of copper is universal, and fluctuates daily based on global supply and demand.

In other words, there is no substantive difference between the product you buy at Mobil and the one you buy at Amoco. Since there is no difference in product, the only potential difference is in price. Given that, how does the so called small profit margin look now? I have heard big oil's profit margin put somewhere between 4.5%-8.5% depending on the source and the time. Is that significantly less than Dell's which approach 20% at times? Of course, my Dell computer is unique and unlike any other computer anywhere. Dell can afford to charge because they can differentiate in their product.

Oil companies have no such luxury and yet they can still afford to make between 4.5 cents and 8.5 cents on every dollar of revenues. This argument that oil companies really don't have it so well becomes duplicitous in another way. If this business is so tough, why have the oil companies stuck out so long without trying to diversify their business? After all, profit margin on a commodity should be less, much less, than on any other product. That makes such a business not necessarily frutiful in the long term. Not so for big oil. They have been making breathtaking profits for nearly their entire existence, almost one hundred years, and never have they attempted to move into any other business that isn't strictly a commodity.

All those that proclaim that big oil has it tough because of their relatively razor thin margins should also ask, why flushed with cash, they made no attempt to move into any other business, EVER.

That brings me back to my original argument, big oil is an oligopoly or better yet a CARTEL. That's how an industry can make a commodity and continue to be profitable for such a long term, and never have to move from that industry.