Sunday, August 3, 2008

Energy Policy Actions

We have many well-known quite serious problems facing our country right now as well as the majority of individual American families. Of high importance among these are very high energy prices for such basic and vital products as gas for our cars, diesel for some cars and most of our trucks and buses, jet fuel for the plane fleets of our airlines, and heating oil and natural gas for our homes. Of course, the high energy costs are also serving to produce much higher food prices, due to their impact on manufacturing and distribution costs. All of these induce consumers to reduce spending, save less, and worry more being able to pay their bills, keep their homes, and adequately prepare for retirement.

At the same time the major oil companies are reporting huge, record earnings. The largest of all, Exxon, reported an incredible $11.68 billion for the recently concluded second quarter! That's after paying all their expenses, including taxes. BP earned $9.47 billion, Royal Dutch Shell earned $8.6 billion. Chevron, America's second largest oil firm, earned over $5 billion for their last fiscal quarter. Many find these profits "obscene," given what's going on.

What to do? As I said in my posting on energy policy back in December 2007, government, businesses and individual families all have an important role to play, and this is a critical issue to be given high priority by the next Administration. This is especially so when one also takes into account such related important issues as energy independence, national security, increasing world-wide pollution, and global warming.

The federal government needs to put together a well thought-out, comprehensive national strategic plan for energy that will get strong bipartisan support in the Congress. But that will probably take at least six to twelve months and will have insignificant impact in the short run. The federal government can also approve limited environmentally sensitive oil drilling in ANWR in northern Alaska and off our coasts, especially in the Gulf, the states permitting. The government can also try to induce the oil companies to drill more onshore under existing federal land leases. However, these steps, which I would support, are only likely to impact supply and prices over the intermediate or longer term.

The federal government could also try to get approval for a windfall profit tax on the oil companies, but it's not clear that would serve to lower energy prices. In fact, it might lead oil companies to increase prices. Senator McCain supports a one-time suspension of the 18.4% federal tax on gas sales. That likely would temporarily reduce retail gas and diesel prices, but it would only save average drivers no more than an estimated $10-15, and also reduce badly needing funding for our highways and bridges. Further, according to many leading economists, it would add to oil company profits, because many drivers would buy more gas.

In the short run, only individual families can realistically take steps to help lower gas prices and directly reduce the amounts they themselves are spending on gas and other energy products. And this is already happening. It's not rocket science. The laws of supply and demand many of us learned in Economics 101 generally work fairly well. More and more drivers are driving and flying less than they used to when prices for gas were much lower. They are car pooling more when commuting to and from work. They are not buying poor mileage SUV's and pick-up trucks, but choosing instead good mileage hybrids and economy sedans. Many people are also working with their electric power and gas utility firms to get tips on reducing expenses for heating and cooling their homes.

When demand is reduced and supply is unchanged, prices tend to fall. Of course, because there is a global market for oil, and demand in recent years has grown dramatically in large developing countries like China, India, and Brazil, falling domestic demand doesn't always reduce prices. Rising foreign demand can have more impact than falling domestic demand. This factor will likely be with us for the indefinite future. Nevertheless, even if prices do remain high or go higher, consumers can help themselves by buying lesser quantities.

I will readily acknowledge, however, that this will increasingly be very difficult for airlines, trucking firms, cab drivers and others like them for whom fuel is such a critical and large expense. Unfortunately, many of these will go out of business. Others in these industries, who are very well managed and innovative, will find ways to survive and even prosper. Southwest Airlines, who successfully hedged their projected fuel expenses, is a good example of this.

The above said, I think the oil companies could do a better job in communicating with the media and the public about this whole subject. Perhaps the media and the public could work together to try to convince them to give consumers a break for the next six months or so by lowering their prices voluntarily. However, such pressure would probably be more effective if it were supported by larger shareholder groups, like pension funds, mutual fund families, and major insurance companies.


Anonymous said...

Why not tell the oil companies to get busy drilling on the 68 MILLIION ACRES they control via government leases? A third of those leases are off shore. They could make a more immediate impact on supply. Instead, they never mention the leases they already have, yelling all the while for new leases off shore and in ANWR. sickening

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