While this research had been dismissed by many (including my Daughter’s petrogeology professor) the work continues.  In a recent article in Science Daily titled “Fossils From Animals And Plants Are Not Necessary For Crude Oil And Natural Gas, Swedish Researchers Find” the argument is once again made.  Reading from the article:

According to Vladimir Kutcherov, the findings are a clear indication that the oil supply is not about to end, which researchers and experts in the field have long feared.

He adds that there is no way that fossil oil, with the help of gravity or other forces, could have seeped down to a depth of 10.5 kilometers in the state of Texas, for example, which is rich in oil deposits. As Vladimir Kutcherov sees it, this is further proof, alongside his own research findings, of the genesis of these energy sources – that they can be created in other ways than via fossils. This has long been a matter of lively discussion among scientists.

“There is no doubt that our research proves that crude oil and natural gas are generated without the involvement of fossils. All types of bedrock can serve as reservoirs of oil,” says Vladimir Kutcherov, who adds that this is true of land areas that have not yet been prospected for these energy sources.

Some of this is rather disconcerting.  For those that abhor the ICE (Internal Combustion Engine) the thought that we might someday run out of petroleum was at least some small solace. Alas, we apparently now won’t.

One of the more interesting points about their research is that they believe they can now more precisely pinpoint where to find petroleum deposits based not on where they believe dinosaurs and other prehistoric life existed but rather based on the geologic fissures.  Using this approach they believe they can improve the accuracy of drilling from 20 to 70%.

I do  have one small gripe: I don’t think they can say (as they do in the article) that the findings are revolutionary.  The findings support theories that have been around for quite a while.  Perhaps these finding will have the effect of moving abiogenesis from being the “Rodney Dangerfield” of geologic science, and start to get real “Respect.”

A “Tipping Point” perhaps?

nb: I find this arena to be quite interesting from a “philosophy of science” perspective, as the “conventional” science has long dismissed this alternative view as “crack-pot” science.  Much of our understanding of energy consumption has been based on this being a “non-renewable” resource.  Perhaps that assumption is mistaken? Thomas Kuhn’s paradigm shift “in the wild?”

Many callers talked about how we need to raise the gas taxes, not only to provide funds to repair the highways, but to get people to learn to conserve, and to support alternative fuels. In fact several callers felt we needed a tax “floor” implemented immediately.  A “tax floor” would mean that if the price of gas dropped below a threshold (most said $3/gallon) then the price would stay at $3, and the government would scarf up the difference.  In that way, the government would reap the “windfall profits” of low prices (instead of the consumer).  (see my past discussions regarding windfall profits here.)

Interestingly, if the price rises and falls in part due to fluctuations in demand (and demand changes relative to price) would the price charged ever get much below three, if the gas stations knew they would have to just “give” that to the government?

So I want to know, what is YOUR opinion about gas taxes?  Are you in favor of a higher gas tax?

Look forward to your answers.

Take the GE commercials, for instance.  They have laid out clearly, in several commercials, how they are actively engaged in alternative energy projects.  GM touting their lower consumption and hybrid and electric vehicles.  Boeing and their lighter and less fuel consuming aircraft.  The list goes on.

As I see it, they are telling us the things that are already going on. Steps that are being done today, based on research and development conducted for at least the past 8 years (and more likely 20-30 years.)  Clearly, we are seeing today the fruits of labor and investments made in the past decades.

On the other hand, we have Obama’s commercial.  In his commercial (hey, he approved it!) he points out that the hands that do many every day things can also things to put in place alternative energy programs.  Like wind power. Alternative fuel cars.  Solar power. All noble thoughts.  And he is right, our hands can do those things.  In fact, as evidenced by not just the other ads, but our own experience (and the fact that the video used shows locations already doing these things).

So just what will Obama bring to the table? How will he enable our hands? Hmmm?

It seems to me that the Democrats are the ones playing off the fears of the American public.  Not the fear of terrorists, but fear of energy failures.  And they are promising…. um… wait, I had the memo right here…

Oh, yeah. Change.

Now, if we could just hear what that change is, and how it will be different.

I’m still waiting.

One more thing:  the last time this was done, under Carter, the expected revenues just didn’t materialize.  According to the report published in 2006 by the Congressional Research Service (CRS), “The $80 billion in gross revenues generated by the WPT between 1980 and 1988 was significantly less than the $393 billion projected. Due to the deductibility of the WPT against the income tax, cumulative net WPT revenues were about $38 billion, significantly less than the $175 billion projected.”

That got me thinking.  What people are really saying is not that they want to tax “windfall profits” (defined at the Financial Dictionary as “A sudden unexpected profit uncontrolled by the profiting party.”) but rather people are upset that the oil companies are making money by charging the consumer a higher price than they used to. Yup.  It apparently is unfair to charge a price that the market will bear.

Hillary Clinton, on May 1st is quoted as saying “The oil companies have made out like bandits, and there is no basis for them to have these huge profits.”

That said, I started to look around and see what other companies are earning these sort of “obscene” profits, during what has been described by Obama as “a recession, or worse.” So, first, I looked at the percentage profits earned by Exxon the most-oft used target of opportunity by the left.  For that past three years, Exxon has earned between 9 and 10 % profits (computed by dividing their “net income” into “total Revenue”–all data from http://finance.yahoo.com the hotlinks on the company names will take you to those pages)

Exxon
Net Income    Total Revenue    ”% Profit”
2005 36130              370680           9.75%
2006 39500              377635         10.46%
2007 40610              404552         10.04%

So, that doesn’t seem unreasonable to me, but perhaps I missed something.  Perhaps that 10% return in unmatched by any other company.  So, I decided to look at another company.  Yes, I had a biased selection.  I chose Apple, Inc, for two reasons.  First, Apple has had strong success making in-roads into several markets (computers, cell-phones, music), and secondly, because it seems Apple tends to be the computer platform of choice by those on the left. 

Well, it turns out Apple has performed comparably to Exxon in the first two years, while beginning to signficantly outperform Exxon in 2007.

Apple
Net Income    Total Revenue    “% Profit”
2005 1335                  13931           9.58%
2006 1989                   19315         10.30%
2007 3496                   24006         14.56%

Now, it was pointed out to me that people don’t need and iPhone, or an iPod, or even a Mac, so that comparison is flawed.  People apparently do need to consume gasoline however (I point to my previous discussion about the gas tax for why many do not need, or even consume, gasoline.)  I conceded this point.  I would, however, argue that computers have become ubiquitous, and no operating system is more prevalent than Microsoft’s Windows. So, it makes sense to look at Microsoft’s profits.

Microsoft
Net Income    Total Revenue    “% Profit”
2005 12254                39788           30.80%
2006 12599                44282           28.45%
2007 14065                51122           27.51%

Amazing.  If Exxon’s 10% profit is evil, I can only imagine what must be thought about Microsoft.

But, in all fairness, this doesn’t tell the most recent story. I can hear your critique now “but the oil prices only started really ramping up last fall, and didn’t really approach $4/gallon until the Spring 2008.”  Good point.  So what happens if we look at the quarterly numbers for these three companies, instead? (there will be some missing data, since not all companies report on the same dates.)

Exxon Apple Microsoft
6/30/2007 10.43%                          22.70%
9/30/2007 9.20%      14.54%         31.17%
12/31/2007 10.00%     16.46%         28.76%
3/31/2008 9.32%     13.91%         30.36%
6/28/2008 14.36%

So, even when Exxon was under attack from Senators Clinton and Obama, their quarterly earnings, though large, were still smaller than either Apple’s or Microsoft’s as a percent profit.  (And remember, if their total revenues were much larger than Apple’s so were there costs.)

The question then is:

Are we upset that oil, as Senator Clinton said ‘have made out like bandits, and … have these huge profits.”  Or are we upset at the price we must pay, and we lash out, without reason, at the oil companies because they are the most visible target?

——————————————————————————

n.b.: While I started this analysis back in May, It turns out the Wall Street Journal has recently undertaken a similar analysis, and arrived at similar conclusions, at least with respect to Exxon’s obscene profits of 10%.  They compared industries:

If that’s what constitutes windfall profits, most of corporate America would qualify. Take aerospace or machinery — both 8.2% in 2007. Chemicals had an average margin of 12.7%. Computers: 13.7%. Electronics and appliances: 14.5%. Pharmaceuticals (18.4%) and beverages and tobacco (19.1%) round out the Census Bureau’s industry rankings. The latter two double the returns of Big Oil, though of course government has already became a tacit shareholder in Big Tobacco through the various legal settlements that guarantee a revenue stream for years to come.

1. Visit here regularly if you are from around Mechanicsburg to check the lowest prices
2. Visit the gasbuddy.com site and search for lowest prices in your area
3. Join their site and provide updates to the prices for the stations you pass every day
4. If you have a blog, add a listing for your local area

The way I see it, McCain has a strategy that when taken as a whole will hopefully remove “energy” from our worry list. (see my entries here, and here) But… that doesn’t mean we shouldn’t be doing things to help each other out in the meantime.  By updating the gasbuddy.com site as we see changing gas prices, we help our neighbors save a little, and hopefully reward those stations that have the lower prices, encouraging more downward pressure on prices (Of course, economics being what it is, the increased volume at those lower-priced stations may be seen as an increase in demand that should result in an increase in prices at the micro level.  Who knows…)

So, what are your thoughts on how we can help our neighbors lessen the impact of higher gasoline prices? (and might I suggest that telling them to drive less, or buy a new car, isn’t very helpful…)

In an appearance in the battleground state of Nevada yesterday, Sen. Barack Obama mocked Sen. John McCain’s energy policies, particularly his call for more nuclear plants. The AP reports that Obama said in Las Vegas “that he would not take nuclear power ‘off the table’ as a possible energy option, but blasted John McCain’s proposal to build dozens of new reactors in the U.S.” Obama “said he supports increased research into nuclear waste storage and recycling, but could not endorse construction of new reactors until those concerns are resolved.” The Las Vegas Review-Journal reports that an underlying theme of Obama’s attacks on McCain were the status of the federal government’s Yucca Mountain nuclear waste facility, which is opposed by Obama and most of Nevada’s leaders, but backed by McCain.

In addition, Obama’s attacks McCain’s proposal to offer a $300M prize for battery development

“to improve battery technology for full commercial development of plug-in hybrid and fully electric automobiles” to leapfrog currently available batteries and would have to build “more than one” advanced battery at 30 percent of current costs.

(In fact, in that same article Michigan Sen. Debbie Stabenow, D-Lansing, is quoted as saying “We don’t need a game show,” which, while making a great sound bite, seems to ignore the tremendous innovation currently seen through the use of prizes even at government expense, such as the X-Prize.  See here, here, here, and here.)

In several other stories we see the McCain has proposed immediate, near, mid and long term solutions.  Generally speaking, what Obama is calling gimmicks, we call a strategy.  He is working to alleviate (or at least reduce) the immediate pain at the pump, while seeking to ameliorate the overall energy situation through investing, and rewarding, innovation.

Obama’s plan?  Well, he really doesn’t seem to have a targeted one.  He supports a second round of stimulus tax rebates.  He also supports taxing “big oil” for making their record profits (which, by the way, are a far lower percentage of revenue than the much beloved Apple Inc.  If you don’t trust me, just challenge me.  I did the math…)  He also has called for higher fuel efficiency standards to double fuel economy by 2027!  (is that a near term solution?) And he supports alternative sources, such as solar, wind, and biofuels.

So does this add up to a coherent strategic plan that addresses the immediate needs, as well as the mid- to long-term needs?  What does Obama himself have to say about this:

Obama admitted that his own plan will not immediately affect gas prices but said his proposal for a second stimulus package will offer overall financial relief. “I wish I could wave a magic wand and make gas prices go down, but I can’t,” he said. “What I can do – and what I will do – is push for a second stimulus package that will send out another round of rebate checks to the American people.”

So, what is Obama’s plan for today?  He and McCain seem to agree on the long-term.  And the need for change.  But Senator Obama, do we really have 10 to 20 years to wait?

So, readers, I ask this.  If you were putting together a comprehensive strategy, what would be your:

• immediate term solution for lowering the price at the pumps today
• near/mid term solution for keeping costs down
• long term solution for weaning Americans off a dependence not just on foreign oil, but oil.

“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.

He of course hasn’t stated at what point profits become “windfall profits.” So off to the definer place I went (you know, a dictionary!) According to The Free Dictionary, windfall profits is: “profit that occurs unexpectedly as a consequence of some event not controlled by those who profit from it”

This has me wondering what (or who else) has profited unexpectedly and therefore should be taxed on th eir “windfall.” I have a few thoughts:

The federal government should be “punished” because of the “windfall profits” they have earned because of the failure to index the Alternative Minimum Tax. Of course, when this particular creeping tax is brought up the Democrats “won’t move unless Congress finds ways to replace lost revenues.” (Perhaps the oil companies should insist that Congress extend them the same courtesy? Only tax “windfall profits” if they provide another way to make up the lost profits?)

Auto Manufacturers of fuel efficient vehicles seem to be reaping “windfall profits” according to this definition. This one, directly related to higher oil prices, is interesting because it hits other manufacturers of the less efficient trucks and SUVs. Perhaps the former manufacturers should be taxed, and subsidies be given to the latter? After all, it’s not “fair” that they are able to earn so much money.

In fact, how about those oft-maligned farmers. We are seeing record prices in corn and rice, in part due to the increased demand for ethanol. Of course, now we are seeing additional upward pressure due to the flooding in the midwest, again forces outside the control of the farmers (the definition of windfall.) Should these farmers now face a “windfall profit” tax? After all, they are earning this money on the backs of everyone who eats.

Seriously though, the point of this post isn’t to defend “big oil” but to point out that “windfall profits” makes a good sound bite, but there needs to be some serious thought, and definitions applied, before we start punishing.

One more thing:  the last time this was done, under Carter, the expected revenues just didn’t materialize.  According to the report published in 2006 by the Congressional Research Service (CRS), “The $80 billion in gross revenues generated by the WPT between 1980 and 1988 was significantly less than the $393 billion projected. Due to the deductibility of the WPT against the income tax, cumulative net WPT revenues were about $38 billion, significantly less than the $175 billion projected.”

Perhaps even more importantly, the CRS report goes on to say that any return of a “windfall profits tax” would be ineffectual, at best

Reinstating the windfall profit tax would reduce recent oil industry windfalls due to high crude and petroleum prices but could have several adverse economic effects. If imposed as an excise tax, the WPT would increase marginal production costs and be expected to reduce domestic oil production and increase the level of oil imports, which today is at nearly 60% of demand. Crude prices would not tend to increase. Some have proposed an excise tax on both domestically produced and imported oil as a way of mitigating the negative effects on petroleum import dependence. Such a broad-based WPT would tend to reduce import dependence, but it would lead to higher crude oil prices and likely to oil industry profits, potentially undermining its original goals. Because the pure corporate profits tax is relatively neutral in the short run — few, if any, price and output effects occur because marginal production costs are unchanged in the short run — a possible option would be a corporate income surtax on the upstream operations of crude oil producers. Such a tax that would recoup any recent windfalls with less adverse economic effects; imports would not increase because domestic production would remain unchanged. In the long run, such a tax is a tax on capital; it reduces the rate of return, thus reducing the supply of capital to the oil industry.

Joseph Thorndike, director of the Tax History Project at TaxAnalysts.com, spoke with Joe Segal about the history of “windfall taxes” on NPR.  For further information, go check out his blog, as well.

Of course, the first is the diesel tax. Most Americans don’t drive diesel cars. But virtually all tractor-trailer rigs run on diesel. And the tax on diesel is higher than on gasoline. And, of course, trucks put more miles on the road than general use automobiles. This does mean a larger share of the $10 billion in tax revenue comes from trucking than from automobiles, both in miles driven and cost per gallon.

One could argue that since a disproportionate amount of the tax-revenue comes from commercial trucking, that this explains the lower savings per American. Perhaps. But one must remember that unlike the gasoline tax, the tax on diesel fuel ends up raising the cost to deliver goods–a cost that is passed through to the consumer.

The Washington Post article “A holiday from gas prices? – Fat Checker” points out that, when legislators in Illinois (including Obama) passed a similar tax holiday, the prices went down about 3%, and thus “only three fifths of the savings from reduced taxes was passed on to consumers.” The problem is, that sort of measure assumes that the price of gasoline would have remained steady throughout the period. Now, perhaps the analysis actually considered this reduction relative to the gas prices around the country, and what they meant was something like “relative to other prices without tax reductions” but that was not mentioned in the article. So–while we may not see a full 18, or 24 cent reduction at the pump, that does not mean that we aren’t saving that amount.

The Post article cites economists as pointing out that the increase in price could be due to an increase in demand. You know that pesky price/demand curve? And far be it for me to argue with the practitioners of the dismal science. Although I would point out (as I mentioned in the previous post) the demand for gas/diesel is generally thought to be relatively “inelastic” with regards to changes in price.

Just some points of clarification.

For discussion purposes, I would love you have you share here what your average weekly gasoline consumption is, and what you expect to consume over 12 weeks this summer. In my previous post I mentioned that I suspect most people fill up their tank at least once a week–so how much fuel do you use?

Leave a comment!

I was reading the blog over at “Imperfect Mommy” where I read, and at first accepted without questioning her comment “I read yesterday that suspending the gas tax would save the average American $30 over the course of the summer. $30.” Of course, then I felt rather guilty for not questioning the number. Not because I don’t trust her, but because it just seemed a bit “off.” At first I just figured “well, with almost 5 drivers in the family we are certainly not ‘average’” but then I realized–no one is.

My first thoughts, as a good researcher where:

• Who did the research that determined $30 per average American?
• How did the structure the demographic of the analysis?
• Did they consider that a significant percentage of “Americans” don’t drive? (And I don’t mean just those too young to drive.)
• What percent of the population lives in cities and doesn’t drive? Doesn’t even have a license?
• How many people would it take to have an every man woman and child each get “$30″?

So let’s look at some numbers.

• If the tax is $0.18 per gallon (for gasoline), then a $30 savings is the equivalent of purchasing 166.67 gallons of gas. In a typical 20 gal tank, that equates to 8.3 fill-ups. I know many people that fill up their tank at least once per week. The summer is 12 weeks long. If “most” people fill up only 12 times, that savings is really $45.
• According to the Washington Post, the revenue the government will lose will be $10 Billion dollars. That’s a hefty sum! If you divide 10 billion by 30, we can determine just how many Americans will be receiving this benefit. The answer? 333,333,333.3. Yup. 333 MILLION Americans each will save $30.
• According to the US Census Bureau, there are only 255,103,151 people in America.
• According to Senator Obama 78,230,182 more people will save $30 than are actually in the US. That’s right apparently we have 78 MILLION more people in the country than we think!

Now, these “quick and dirty” numbers are just that. I haven’t figured in the greater savings that the trucking industry would see, since they have a higher per gallon tax and a higher consumption rate. I also haven’t factored in the interplay between changes in gas prices, and changes in consumption. While it is argued that demand for gasoline is inelastic (that is, does not change much with changes in prices) there is some elasticity if people cancel longer driving vacations in the summer.¹

While the caveats I noted above could lessen the benefits of the tax “holiday” there are other issues to consider that would increase the impact for those that actually drive. To get to the $30 per average American, you have to ignore that most households are made up of more than 1 American (thus increasing the household savings), and that many Americans don’t drive, and most likely don’t even own a car. It would be interesting to figure how many people in large cities such as New York City rarely, if ever, drive.

The bottom line is this: The savings for people who actually drive in the summer is most likely larger, and potentially by a significant amount. Don’t just “repeat what you hear.”

Think about it.

Question it.

Challenge it!

¹ Interestingly, the demand for diesel fuel should be even more “inelastic” relative to fuel prices since that demand is driven more by demand for products delivered by truck. That demand is impacted perhaps only inasmuch as higher fuel prices leave less disposable income. A more “derived” demand elasticity.