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Thursday, June 19, 2008

The Politics of Gasoline

With prices going above $4 a gallon, it appears that this will likely emerge as the most important issue for voters in November. If prices are anywhere near where they are now, that will likely be the case. At this point, it remains unclear which candidate the issue will favor and that's because neither has seized on it yet and taken a clear advantage. Here is how Bill O'Reilly finished his talking points last night.

Both Obama and McCain have deficits when it comes to solving the oil mess, but the first one to get on the side of the folks in this issue will win the election.

This is right on the money and the reason that this issue remains a toss up is two fold. The first reason is that there simply is no magic bullet. No amount of happy or tough talk will lower the price of gasoline and frankly the forces behind its rise are more powerful than even the President of the United States. (Here is my plan to bring down the price of oil to $20 a barrel) The second reason is that neither candidate has created anything near a cogent and logical plan to provide relief. Here is how Dick Morris analyzed it.

Democrats call for windfall profits taxes. Bad idea. How can you get oil companies to explore and drill if you tax away their profits? Republicans focus on a gas tax “holiday,” an 18-cent palliative to gas prices that now top $4.50.

Here is how Karl Rove editorialized.

In Raleigh, N.C., last week, Sen. Obama promised, "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."

Set aside for a minute that Jimmy Carter passed a "windfall profits tax" to devastating effect, putting American oil companies at a competitive disadvantage to foreign competitors, virtually ending domestic energy exploration, and making the U.S. more dependent on foreign sources of oil and gas.


Sen. McCain doesn't support the windfall profits tax, but he can be as hostile to profits as Mr. Obama. "[W]e should look at any incentives that we are giving," Mr. McCain said in May, even as he talked up a gas tax "holiday" that would give drivers incentives to burn more gasoline.This past Thursday, Mr. McCain came close to advocating a form of industrial policy, saying,

"I'm very angry, frankly, at the oil companies not only because of the obscene profits they've made, but their failure to invest in alternate energy."

Clearly, both have an opening because neither really understands it yet.

The public is engaged on this issue like few others. What this means is that this will NOT be an issue that is easy to demonize. Barack Obama's standard issue "it's all Bush's fault" won't work on this issue. The public is engaged, and they have a very good handle on the matter. In order to win on this issue, one candidate must provide a real, comprehensive plan that deals with each part of this issue.

Any plan must deal with three parts, in my opinion. The first part is market dynamics. The second part is the speculators. The third part is long term energy independence.

1) Market dynamics. There are many reasons why gas prices are where they are, but one of the main ones is simple market dynamics. That means supply and demand. In order to bring down oil prices you either increase supply or decrease demand (or better yet a combination of both).

On this issue, the two candidates have taken divergent paths. John McCain has come out in favor of increasing supply. John McCain recently came out in favor of lifting a ban on offshore drilling. This is a rather stark reversal for McCain who has always been a committed environmentalist. In fact, the entire Republican party is angling to be the party of drilling, and paint the Democrats as the party against drilling. Drilling receives nearly overwhelming support in most any poll (Newt's drill here drill now petition is over one million signees) and this issue maybe a gift for the Republicans in November. Here is how Charles Krauthammer recently put it.

Obama is a stumbling on this issue as all Democrats. When you get a Democratic
member of Congress proposing nationalizing refineries when that is the solution
that Hugo Chavez has instituted in Venezuela, you know the Democrats are in
trouble on this issue.

Now, Obama and the Democrats want to attack demand. They want to back conservation methods that slow down Americans and mandate better gas mileage.

The problem with conservation, in my opinion, is that it dictates behavior to people. Regulating conservation infringes on freedom. Imagine if the speed limit were lowered by ten MPH everywhere in order to force conservation. Folks don't mind regulations as long as someone else is regulated, but once that regulation affects them, then their thoughts change. Pushing conservation is, as Dick Morris aptly put it, the current equivalent of Jimmy Carter's wear you sweaters mantra.

I am all for conservation and I think most Americans are as long as it is voluntary. Voluntary conservation will do little to decrease the price of gas though. Even forced conservation will have an undetermined effect. Will police strictly enforce new speed limit laws? Will folks be now pulled over for going a few miles over the speed limit or will the continue to be given a fairly sizealbe cushion?

2)The speculators.

I have never seen a group so universally despised as the oil speculators. Conservatives and liberals alike can't stand them and they want the government to do something, and frankly, the more draconian the better. There are two obvious and simple ways to curb the speculators. The first is to raise the margin necessary to buy oil futures. Right now it is 10%. That means a contract that needs $1,000,000 only requires a $100,000 payment. This allows a lot more small time players to get into the market. Raising that margin to 50% would weed out the majority of the speculators.

Second, we could force delivery of any oil futures. That means that someone that buys a futures contract must actually hold onto the oil. Most of the speculators have no intention of actually taking the oil in the future. The only reason they are buying these contracts is to make a quick buck. They could care less where the quick buck is. If they are force to actually take custody of the oil they are buying, they will simply move onto speculating in another market.

It continues to boggle my mind why neither candidate has proposed one or either of these steps. This is simple and it is non partisan. Again, speculators are universally despised. Any draconian measure against them will be cheered by a cross section of America. McCain has made overtures about investigating these folks, and I have heard nothing from Barack Obama. The first one that makes taking on these speculators central to their platform will win a huge issue.

3) Long term energy independence.

This is ultimately the most important part of this policy debate. Ultimately, our country needs to find alternative energy sources because the crux of the problem is that oil is controlled by really bad actors. Brazil is nearly energy independent, and so there is no reason the U.S. can't be either.

Both candidates have made vague boiler plate political campaign promises, and I frankly find both very lacking. Barack Obama has promised to make a ten year commitment to invest $150 billion dollars in alternative energy sources. John McCain has made a goal of 45 new nuclear reactors by 2030. The problem, in my opinion, is that alternative energy sources have never been short on investment. In fact, there is a plethora of alternative energy sources out there. They have been out there for decades, and yet, they can never be mass marketed. I remember ten years ago I followed a stock of a company that was producing a hydrogen powered fuel cell for the car. The technology was amazing. They said a cell phone could be powered for up to 100 hours on such a battery. A car could run up to 100 miles per gallon on hydrogen. In fact, there are a few hydrogen powered cars on the market now.

The problem is that there are few hyrdogen fuel stations. The oil companies don't seem to want to create a hydrogen fuel pump even though they are flush with cash and could invest nothing more than several million for regional test marketing. If there is nowhere to fill up on hydrogen, people aren't going to buy a hydrogen powered car. I am of the opinion that oil companies want no part of hyrdogen powered fuel because they make far too much in oil powered fuel. That said, unless the government wants to build a bunch of alternative powered fuel stations and try and compete with all the fuel stations we have now, all the investment in alternative fuels in the world is going to do nothing.

Right now, both ideas are pie in the sky and I think the general majority of the public sees it this way. The government has gone along for more than thirty years and done next to nothing to move our country from its dependence on foreign oil. The sort of proposals that each has com up with are repackaged versions of prior proposals that amounted to next to nothing. This issue is there for the taking for either candidate if either can come up with a real solution, so far I see none. (Here is my plan for aggressive energy independence)

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