American Republic Online

It’s normal to be shocked by companies enjoying quarterly profits to the tune of $9.9 billion. If you’re like me, you probably don’t deal with 9.9 billion of anything on a regular basis. At first blush, some might consider $9.9 billion in profits to be questionable or even unethical. After all, those same companies enjoy those profits while consumers struggle to purchase this mandatory good. Some commentators and politicians are quick to judgment and even play to the pocketbook. They try to convince us that those corporations purposefully inflated prices to artificially generate unreasonable profits. Like so many things in life, a real understanding of the situation requires much more than a brief glance and emotional response.

First, profits should be examined in the appropriate context; in a fashion that allows for fair comparison and analysis. With some simple research, I quickly discover that the $9.9 billion in profits was based on sales of $101 billion. With some simple division (I dropped all the zeros), I can devise the profit margin at around 10%. If 10% profit on gasoline infuriates people, I hope no one learns about the 97% profit margin on most fountain drinks! The fact is, historically oil companies have enjoyed a 7.6% profit margin, actually lower than the composite industry average of 7.9% (coyoteblog.com).

Second, before we go implementing price controls on oil companies, maybe we should dissect the cost and see where the cost actually comes from. This information is available online at the Energy Information Administration (htonto.eia.doe.gov) and breaks down the cost by crude oil, refinery costs, distribution/marketing and taxes. Imagine how shocked I was to find that taxes tied distribution/marketing for 13% of the total delivered cost. That means that without the added taxes, the cost of gas per gallon would be well below $3. According to The Tax Foundation (taxfoundation.org), since 1977 government has collected tax revenue in an amount almost twice that of domestic profits earned by major U.S. oil companies.

Third, lets look for history to provide some guidance on gasoline price regulations and controls. The last time the government used this practice was in response to the 1972 Arab Oil Embargo. The U.S. implemented controls remained in effect until 198, and during those 9 years fuel costs were defined by price volatility and production shortages. It wasn’t until the prices controls were removed that prices and the industry reached a point of stability that lasted until the 2001 terror attacks.

So we know that history teaches us that price controls don’t work in this situation. In addition, research shows that the profit margins of the oil industry aren’t as bad as we once thought and are actually lower than the composite industry average. While this information is valuable, it does little to actually lower those prices. Wait, I’ve got an idea– How about they government lowers the cost by cutting some of those taxes? One can wish.

I have three basic thoughts on the subject of gasoline and how it is affecting the American motorist. Americans are a mobile people so they are going to consume fuels in their cars. How can we meet the mobility standards that we have set for ourselves and lower prices and conserve, all at the same time.

First, we must consider mass transit. Congress needs to enact a Mass Transit Rail System that connects major cities, similar to the Japanese system of high speed trains. They should be built along the Interstate System and connecting major airports. A family of four could leave the Chattanooga airport via the train, travel through Atlanta, Ga and LakeCity Fla arriving at the Orlando International Airport. Where they could rent a vehicle for their vacation in Disney. They would return via the same route and save fuel. This would do several positive things. The reduction on fuel for vacation travel could cause there to be surpluses of gasoline, causing the prices to drop. The construction of the railway would provide much needed employment for individuals nation wide. Also, the reduction in exhaust couldn’t hurt the environment.

Second, we need to invest in renewable alternative fuels such as sugar cane and corn. Diversification is essential so that not one tragedy (crop failure, flood, drought, etc) would disrupt fuel availability. This would reduce our reliance on foreign oil that is being depleted at an alarming rate, while at the same time giving great economic boosts to agricultural areas of the Southeast and Midwest. Self reliance of fuel production is going to continue to be a national security prerequisite in our post Iraq world.

Lastly, we need to distribute our refineries throughout the nation to avoid the bottle neck situation that we encountered after Katrina and Rita. Local refineries that are located near the agricultural belts would reduce the disaster that only one hurricane can now impose on our nations fuel supply, while at the same time provide employment for thousands of Americans.

First, I applaud my colleague from the opposite end of the ideological bench for his proposed solutions. While I couldn’t disagree more fervently with the first and last recommendation, my colleague lands close to the target by suggesting alternative energy. Unfortunately, alternative energy is an industry that has historically experienced much hype, leaving many investors, entrepreneurs and corporate leaders wary of re-entering. Throughout the late ’70s and ’80s, alternative industry was riddled with inflated performance and under-estimated costs. Even today, alternative energy lacks the size and technical maturity to be competitive with petroleum. Without tax credits and research grants, bio-refineries just cannot compete. While this shouldn’t deter us from encouraging private enterprise and research institutions to pursue alternative energy solutions, we must be honest that bio-fuels are a few years from providing a noticeable benefit.

To address the proposals for a mass transit system and controlled refinery distribution, I think my colleague underestimates the complexity of his suggestions. With a national mass transit system, the government would have to invest billions of dollars to create a transportation system that would never be solvent. The government already props up Amtrak, a multi-state mass transit system that is profitable in theory only. Amtrak’s own data even shows decreasing demand and shrinking revenue, causing the government to prop up a failing business. As for refinery distribution, locating refineries is not as easy as sticking a marker on a map. There is enormous cost and risk associated with opening a new refinery, not to mention supply-chain considerations like proximity to strategic partners, ports, and presence of feed source. Lets not forget that the introduction of alternative energy sources and congressional action increasing fuel efficiency will decrease long-term demand for petroleum-based fuel, saturating if not shrinking profits.

In closing, I reassert my previous position of lowering gasoline taxes with the addendum that we encourage alternative energy as a long-term solution. Instead of driving up the national deficit with enormous spending, relax the heavy taxes attached to petroleum-fuels and allow America’s innovative spirit to take action. Private enterprise and entrepreneurship has long been the heart of this country. By lowering taxes and supporting entrepreneurship, we encourage American citizens to do what they do best come up with solutions.

In response to Chris’ posting I have a few comments.

First, a one word response to his desire to drop the 18 cent tax on gas - Minneapolis. It amazes me that my Republican Friends will be the first to remind us that “Freedom isn’t Free” when it involves our young men and women in the Armed Forces. Yet when it comes to their pocket book they are unwilling to sacrifice for this great nation. To be sure none of us enjoy paying taxes, but many of us who are adults understand that you don’t get anything for free. If you like driving on good roads , if you like people to round up the criminals, if you like an army that keeps our nation safe, if you like people to put out the fires, then get used to paying taxes. If you don’t like paying taxes my recommendation is that you move to one of the Middle Eastern nations who run their countries off the oil revenues, they have no tax.

Secondly, let me address Chris’ complaints about my solutions. The idea of developing mass transit would be far less expensive than what our President is spending ($1,000,000,000,000) on a war that if we were successful would not be in our national interest, because it places Iraq with its Shia majority in league with our enemy in the Middle East, Iran.

Let me also address the idea that the infrastructure would be far to difficult to place refineries in the heart land. Long before Chris was a twinkle in his mothers eye, I remember refineries that dotted the landscape in the Midwest. Today there are over 170 refineries across the continental US. It is not that great of a task for a nation that is exploring the surface of Mars.

Let me conclude that if you are determined to cut the gas tax as the only way to bring down gas prices, I would vote for your local Democrat because that is exactly what they proposed in congress in May of 2006.

“Democrats are set to introduce a measure that would create a “federal gas tax holiday” by eliminating the federal tax on gas and diesel for sixty days. The measure, proposed by Sen. Bob Menendez (D-NJ), would reduce the cost of gas by $0.184 per gallon and the cost of diesel by $0.244 per gallon. The move, aides say, will provide $200 million dollars per day in relief. Democrats say the money will be made up by cutting six billion dollars in tax breaks to oil firms. Currently, the money from the federal gas tax goes to the Highway Trust fund.”

Time to throw a little ARO into the mix… First of all, I’m not quite sure how Iraq ending up allied with Iran could be defined by anyone as us being “successful” over there. What would failure look like?

Let me put success in simple terms: Afghanistan. They are not a little America. The country is stocked with neither “little eikmans” nor Prius-driving hippies. But it is not on news much. Why? Well it’s not really doing much to upset either side in this country - or more accurately - giving either side ammo to attack those across the aisle. THAT is success. Instead of ridiculous oppression and a terrorist haven we have a country regulated to the “back of the class”.

Another example would be Pakistan. Pakistan isn’t exactly our bosom buddy, BUT they have nukes and we’re not worried. They also let us fly over their country to take the fight to those that do worry us. Is Pakistan a carbon copy of the US? Far from it, but they don’t scare us and they’re not trying to scare us. The view that Iraq will fail because they won’t become this mall-loving, designer-jean-wearing, uber-democratic mecca in the Middle East has the wrong goal in mind.

As for Minneapolis, Minnesota has a budget SURPLUS of 1 Billion dollars for their 2006-2007 budget (they do two year budgets) that is projected to grow to 2 Billion dollars for the 2008-2009 budget. (minnesota.publicradio.org)

The problem is not lack of money, it’s money management. Politicians love to call for more money at every crisis, because people fall for it. And then once the money is blown somewhere else (like MN spending $1M on a virtual reality spray paint simulator system and training program), they can always go back ask for more money to meet the government “needs”.

The government is like a college kid that ask for tuition money from his parents. A noble need - right? And then after blowing it on beer, asks for more money for “education”. Or image going to your boss and asking for a raise to pay your house payment because you spent your check on a jetski… the government pulls this trick again and again.

Lastly refineries: we desperately need more refineries in this country and while costly and long term construction projects - they can be built. Last time I checked, we were importing 13% of the gas used in this country. Not oil, gasoline. Our refineries at max capacity can only cover about 90% of the demand here. And since many of US refineries are getting quite old, maintenance and downtime are further reducing capacity. Meanwhile the government keeps dreaming up additional blends of gas to “save the environment” but placing additional stress on the industry. If we can increase our refining capacity by 50% we could reduce gasoline prices by 50%… If we don’t the problem is only going to get worse…