Oil's a Witch: Burn Her!

Sir Bedevere: There are ways of telling whether she is a witch.
Peasant 1: Are there? Oh well, tell us.
Sir Bedevere: Tell me. What do you do with witches?
Peasant 1: Burn them.
Sir Bedevere: And what do you burn, apart from witches?
Peasant 1: More witches.
Peasant 2: Wood.
Sir Bedevere: Good. Now, why do witches burn?
Peasant 3: ...because they're made of... wood?
Sir Bedevere: Good. So how do you tell whether she is made of wood?
Peasant 1: Build a bridge out of her.
Sir Bedevere: But can you not also build bridges out of stone?
Peasant 1: Oh yeah.
Sir Bedevere: Does wood sink in water?
Peasant 1: No, no, it floats!... It floats! Throw her into the pond!
Sir Bedevere: No, no. What else floats in water?
Peasant 1: Bread.
Peasant 2: Apples.
Peasant 3: Very small rocks.
Peasant 1: Cider.
Peasant 2: Gravy.
Peasant 3: Cherries.
Peasant 1: Mud.
Peasant 2: Churches.
Peasant 3: Lead! Lead!
King Arthur: A Duck.
Sir Bedevere: ...Exactly. So, logically...
Peasant 1: If she weighed the same as a duck... she's made of wood.
Sir Bedevere: And therefore...
Peasant 2: ...A witch!

Today's congressional witch hunt against "Big Oil" (framing issues 101: if you want a group to be hated name them "Big X", people hate anything "Big") once again proves that congressmen are either willfully ignorant, liars, or sheer idiots.  Following the same logic as Sir Bedevere, and the rest of the Monty Python crew, congress has determined that Big Oil is a witch...now they have to defend their logic ex post facto. 

Some of the highlights below:

Patrick Leahy, D-Vt., told the executives there's "a disconnect" between normal supply and demand and the skyrocketing price of oil — surpassing $130 a barrel even as the oil leaders testified — that the industry has yet to explain.

Well, Pat, why don't you then explain what the disconnect is...and remember, you need evidence from primary sources (wikipedia doesn't count) for this paper.  I would begin by looking at your own closure of almost all new sources of oil production in this country (continental shelf, ANWR, etc). 

J. Stephen Simon, executive vice president of Exxon Mobil Corp., said profits have been huge "in absolute terms" but must be viewed in the context of the massive scale of the industry." He also said high earnings are needed "in the current up cycle" to pay for investments in the long term when profits will be down.

"'Current up cycle,' that's a nice term," replied Leahy with sarcasm, "when people can't afford to go to work" because gasoline is costing close to $4 a gallon.

Pat, love the cynicism.  However, this actually is an "up cycle", and people can't not (hate double negatives) get to work because of oil prices alone.  People chose to live outside urban areas for what they believed were non-economic reasons ("honey, isn't it just breathtaking out here instead of in the city"), unfortunately now they must realize no choice is completely non-economic.  Just because you could afford to live 30 miles away from work when gas was $1.50/gl doesn't mean you should be subsidized when the price rises.  Whether you realize it or not, you made a decision to be short energy.  By this logic, congress should be yelling about how SUV owners are getting hosed by the oil companies, because it costs so much to fill up their tank (someone challenge me on this one...please!).

[Leahy] asked Simon what his total compensation was at Exxon, a company that made $40 billion last year. Simon replied it was $12.5 million annually.

He obviously went on to link the oil companies' record profits, and executive compensation, to the price of oil.  I hate to break it to Senator Leahy, but, short of anti-competitive tactics (none of which have been successfully pinned on the oil companies) commodity-based corporations are price takers, not setters (again with the econ 101).  You could mandate that all oil executives could be paid nothing and the price of oil wouldn't fall a dime...in fact it may rise because incompetent CEOs would make worse investment decisions for future production.

Sen. Arlen Specter, R-Pa., said Exxon's annual profits increased from $11.5 billion to $40.6 billion in the past five years and there was no explanation for "why profits have gone up so high when the consumer is suffering so much."

Not even worth a comment.  Go back to torturing the NFL, Specter.

Senate Democrats recently announced an energy package that would tax "windfall" profits of the five companies. That might have public appeal, Lowe told the senators, but oil companies should not be viewed as "a scapegoat" for high prices.

That was not what many senators wanted to hear.

You have "just a litany of complaints that you're all just hapless victims of a system," Sen. Dianne Feinstein, D-Calif., told the executives. "Yet you rack up record profits ... quarter after quarter after quarter."

Ahh, Diane, I was wondering where you were hiding.  Apparently your net worth of between $60-90m doesn't qualify for "Big" status.  I would like to personally thank you for donating your money to the poor who can't support themselves.  As you and your cohorts love to tell us, "the rich don't need the money anyways".  Ok, back on topic.  This idea of a "windfall profits tax" is ludicrous on a multitude of planes.  Where to begin:

• 1) As Senator Leahy (sarcastically) noted, commodities are a cyclical business, and, perhaps more importantly, commodities are fungible goods.  Anyone who has taken Econ 101 knows that suppliers of fungible goods are price takers, not price setters.  I don't know if you've noticed, but the oil companies don't get to set their prices--the market does.  Their profits are a function of aggregate supply/demand, level and yield of prior investments (ie, firm-specific quantity), and substitution costs (ability for consumers to switch to another, similar good).  We are not talking about the finance department of a company picking their prices, the oil industry has to take what the market is giving them.
• 2) If you are going to tax "windfall" profits, then you will need to subsidize "windfall" losses.  Where was congress when oil was $10.76 in 1998?  Did they go and offer subsidies then?  Did they guarantee payments regardless of output/prices, like they do with farms (more on that in a later post)?  No.  Of course not. Obviously, though, if you go with a tax/subsidy system whenever the price hits a tail you create a massive disincentive to manage a company correctly--and production would fall precipitously--leading to, say it with me now, higher prices.
• 3) However, the biggest question mark is how do you define "windfall" profits.  Gross dollar value? Margins? Delta price over delta time?  Each of these metrics provides its own set of complications. 
  • Sure the dollar value of the profits is high, but not auspiciously so when you realize that oil may be the most important single commodity in the world.  In our current global set-up, without oil there would be no electricity, cars, plastics, etc.  Just like GE has exceptionally high revenues because it produces so much "stuff", oil companies produce a lot of the most vital "thing" in the global economy. 
  • So you want to define windfall profits by margins? Well XOM's operating margin was only 19% last quarter; far from "high".  And this is at the peak oil prices ever. If we chose to tax exorbitant margins we should probably impose even higher levies on GOOG (30%), MSFT (31%), POT (44%), etc.  Even at the highest prices ever oil is by no means a massively profitable business.  They don't make a lot on each barrel, but make up for it in volume...and the world has asked them to provide a lot of volume.
  • Delta P / Delta T (or price increases that seem too deviate too far too quickly from "normal"), well then why don't we haul in ADM, MON, et al (the farmers) for "making food so expense at the expense of the poor".  If we are looking for "equitable" profits (ie, whatever Leahy wants them to be) that "appear" to be from "fundamentals" and not "speculation", then we need look no further than our own grain belt for extortionist, profiteering, no gooders: farmers! 

In closing, Pat commented:

"The issue is simple," said Leahy. "People we represent are hurting, the companies you represent are profiting."

Ah, yes, I love the "companies aren't people" argument. Please, Pat, tell me what is the difference between a constituency and a company?  Both are aggregated populations aiming to maximize their own utility. 

But you're right Mr. Leahy, we should: defend people but hate those that employ them; encourage risk-taking, but penalize when it pays off; decrie corporate mismanagement, but confiscate any profits accumulated through wise decision-making; and push consumers to consume less oil, but not allow the very mechanism that would do so to work--that should put us right on track!

A closing thought: with all the rhetoric about "getting off of oil" these price increases should be the hallelujah moment for congress.  People are beginning to drive less, purchase more efficient vehicles, and investing in alternative energy sources because it now makes economic sense to do so.  While it would be nice to live in a world where we could just tell everyone to "drive less" and they would, they don't.  High oil prices are facilitating the move to energy efficiency.  I thought that was the whole point.

UPDATE: In the latest example of congressional rocking-chair legislature (rocking chair=looks like you're doing something when you're not) the House passed a bill allowing government agencies to sue OPEC.

WASHINGTON (Reuters) - The House of Representatives overwhelmingly approved legislation on Tuesday allowing the Justice Department to sue OPEC members for limiting oil supplies and working together to set crude prices, but the White House threatened to veto the measure...

..."This bill guarantees that oil prices will reflect supply and demand economic rules, instead of wildly speculative and perhaps illegal activities," said Democratic Rep. Steve Kagen of Wisconsin, who sponsored the legislation.

Rep. Kagen, it would "guarantee supply and demand reflect economic rules" you clearly don't understand the difference between speculation, investment, and trans-national litigation.  First, prove that the price is not reflective of supply/deman.  Second, if we sue OPEC where does our oil come from (they're a cartel, remember)? Third, in what jurisdiction can you sue sovereign nations?  I've watched enough Law and Order to know that Briscoe and Green can't just go arresting people in Jersey...wish they could though.

Comments

[Anal_yst]

It is retardation like this that makes me want to leave this country, out of fear that I might be crushed to death by the massive weight of ignorance congress has thrust on our shoulders, sigh...

[Bulging Bracket]

Congress is currently in the process of hamstringing domestic and friendly sources of supply. No CO oil shale, no ANWAR, no continental shelf drilling, no Canadian Oil Sands. Time to hang the eco-nazis, as they truly want us all to die freezing in the dark so that the elect can live the ideal of a noble savage. Too bad the Chinese, Koreans, Indians... won't go along with the fevered dreams of NRDC and the Dems.

[Calgary Schmooze]

Anal,

I can still get you a job up north. All the 80's heavy metal and Hell's Angels you can handle. And in about 2 months, the horse flies are going to be MoFuggin huge too.

[Calgary Schmooze]

Anal,

I can still get you a job up north. All the 80's heavy metal and Hell's Angels you can handle. And in about 2 months, the horse flies are going to be MoFuggin huge too.

[Meena]

Wnat to see what a real Democrat rocking chair looks like? Check this out: www.democratsrockingchair.com
A rocking chair that rocks sideways- enough to make you nauseous!

[Meena]

Wnat to see what a real Democrat rocking chair looks like? Check this out: www.democratsrockingchair.com
A rocking chair that rocks sideways- enough to make you nauseous!

[Anal_yst]

Schmooze while that sounds like alot of fun, I'm deathly afraid of the pterydactyl-sized horse flies up there, although I wonder if you can defeat them with power chords, hmmm

[Calgary Schmooze]

"If a co-gen facility has to shed output in the forest, can anyone hear 100MW worth of amplifiers?"

I don't know, but let's find out.

I'm going to try to source a power amp system - preferably tube - that takes a 13.8kV line input so we can bypass the unit transformer and take it straight off the co-gen output bus. It's gonna be a lot (a metric shitload) of amperes.

What kind of speakers do you want to hook up to this? JBL studio monitors with Celestion 12s (footers, not inches)?

Take some nice photos of yourself for your mom first. If we short this contraption, there might be a tooth or two left for identification. Maybe. If we're lucky.

http://205.243.100.155/frames/longarc.htm

I say we push a selection of 80's favorites into the atmosphere, culminating with Priest's Another Thing Comin' and the South Park brown note.

Are you in? ARE. YOU. IN?

[Anal_yst]

Hmmmm, does mesa make tube amps with that kinda oomph?

I'm down, but don't you think that Ride the Lightning would be slightly more appropriate given the expected outcome?

[Calgary Schmooze]

Ah yes... the preferred amp of heavy metal shredders... courtesy of Mesa/Boogie.

Mesa is great at creating square waves that give you crunchy distortion and wailing harmonics, but I am looking at a man-made version of the Tunguska Event. Take that tv ad with speakers and ball bearing for 5 gum and scale exponentially.