Editorial
Some Thoughts on the Price of Oil
Some Thoughts on the Price of Oil
Ernest Hooker
| Symbol | Price | Change | % Chg |
|---|---|---|---|
| CVX | 106.20 | -0.02 | -0.02% |
| XOM | 86.08 | 0.01 | 0.01% |
| Quotes are by IDC Comstock and are delayed 20 minutes. Fund prices are from Morningstar. |
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There appears to be an over simplification on why the price of oil has risen so quickly. The favorites to blame are oil companies, OPEC, and lately, commodity traders. The tendency in thinking is that the high price of oil can be attributed to only one thing. I suggest we have been deceived by politicians and much of the news media.
Proposed Solutions
These are the proposed solutions; tax the oil companies, nationalize them, and a weak proposal to maybe drill for our own oil. Some of these solutions have been tried before and failed miserably. But politics, being what it is, keeps trying failed solutions over and over, and then resells the same idea with a convincing “this time it will work”.
What Isn’t Being Talked About
In politics, I believe what is not being talked about is often a significant part of the real issue. A few days ago I read an article that stated gas cost $9.30 a gallon in the UK and 75% of that was tax. When tax on our gas is discussed here it is usually stated to be about 15%. Is that true? The taxes paid on every step of the way of getting oil to your gas pump are paid by us, the consumer. So, essentially it is tax on tax, on and on, which doesn’t account for the other fees that end up being paid by us – the consumer.
Refineries
There are oil refineries right across the water from my home and periodically flames shoot out of the refinery, which means they are in violation of the law. They are always fined large sums of money for these occurrences. I have heard consumers who really think this is great, saying the refineries deserve it, and perhaps they do. However, what some of us have noticed is that very shortly afterwards the price goes up to compensate for the fine.
Embedded Taxes
If you are interested in finding out more details on the taxes involved in oil, do an internet search on embedded taxes and check the Cato Institute. I believe it is safe to say embedded taxes on gas are in excess of 50%. And, keep in mind that there is no shortage of politicians who have decided additional taxes either on oil, or oil companies is the answer.
The Ethanol Crowd
Then, we have the ethanol crowd who are sure they have the solution. Corn to ethanol hasn’t been all that efficient. It takes a lot of fuel to create a gallon of ethanol, and a gallon of ethanol is not equal to a gallon of gas. Plus, it develops about 30% less power and mileage. To be fair, there are new crops being planned that claim to produce eight times as much fuel per acre. But corn and grains have jumped to an all time high. Is there anyone who doesn’t believe it has contributed to dramatically higher food prices, and in some countries increased starvation? Also, engineers have had concerns about the possible damage to engines by using ethanol.
The Money Flow
Next, let’s review where the money goes. First OPEC. I am sure they are doing well, I don’t have a clue as to what their profits are, but I don’t think we need to subsidize them. Then, there are the commodity traders, many of whom are getting rich in trading by using decades of failed policies. We have set this up. Any commodity where a scarcity – real or artificial – is created is a bonanza for traders. All we need to do is increase our domestic supply and trading goes back to normal. Next are the oil companies, who the critics say is making an 8% profit. Where does the 8% go? A significant part of that goes to stockholders, many of whom are retired from the oil companies. I paid $4.389 at Costco for a gallon of gas, and if the oil company would agree to zero profits I would only have to pay about $4.039? That wouldn’t do it for me. It makes sense to me that on the short term the government could ease the taxes (including the embedded taxes) and create some significant short term advantages. For long term solutions allowing responsible drilling for oil, add oil refineries, and updating and increasing the efficiency of those we have would soon have a dramatic effect on the world market.
Half-Baked
Lastly, we need to introduce newer, cleaner energy sources. We need government policies that are serious about alternative energy instead of half-baked, overly complicated policies such as the ethanol fiasco. We have a federal government that does not have our best interest in mind. Nuclear energy has worked well in France, yet we fail to follow successful models. What about increased use of railroads for shipping goods? The railroad can transport goods at a fraction of the fuel costs for trucking.
Educate Ourselves
It is my belief we can only solve some of these problems by educating ourselves on the facts and not depending on the news media and politicians who have their own agendas. When we know the facts we then can hold the politicians feet to the fire with our votes and email campaigns. My suggestion is to not believe anything until you have checked it out and that includes my input. The price of laziness is just too high. If you don’t believe me go to your local Shell station.