Politicians, Profits, and Inventories

Can You Believe This Guy?

I am aware that from time to time a politician has stopped by to read some of my essays. I have even had contact with some of you. I do believe that political service is a very noble profession. But I also believe that many are wasting an opportunity to best serve their constituents. Far too many tell their constituents what they want to hear, instead of what they need to hear. I implore you to stop the political posturing, and start taking steps to address the real issues. Don’t follow the example of Pennsylvania Governor Ed Rendell, as documented below.

I have read with a bit of amusement over the past couple of days stories of Governor Ed Rendell’s rhetoric. First, let me make it clear that I don’t even know which political party this guy belongs to. When I criticize a politician, their political affiliation is of no concern to me. Shallow, pandering remarks come from both parties.

On Monday the Philadelphia Inquirer reported:

Gov. Rendell yesterday urged President Bush to impose a windfall profits tax on oil companies to curb “profiteering” that he said is driving the recent spike in gasoline prices.

“The profits are ungodly; there is no excuse for this,” Rendell said. “Oil companies should not be permitted to drain Americans’ bank accounts to collect record-breaking profits.”

However, Rendell’s office got it wrong when it said that U.S. oil refiners’ profits more than doubled to 99 cents a gallon from 2004 to 2005.

The refining industry’s gross profit last year was 47.7 cents per gallon, up from 40.8 cents per gallon in 2004, according to the federal Energy Information Administration. Those figures don’t include the cost of refining, which would make the per-gallon profit even lower. (1)

So, here we have them promoting a bit of false information. Did they retract when their misinformation was pointed out?

Bob Slaughter, president of the National Petrochemical & Refiners Association, said one of the industry’s problems is that people don’t understand its economics.

“They assume that any number they see is a profit,” which is often not the case, he said. “It sounds like that’s the kind of mistake Rendell has made.”

Rendell spokeswoman Kate Philips acknowledged that the 99-cent figure was not profit — but said the governor’s overarching point that oil companies are making excessive profits should not be lost.

“We’re saying the free market is a little bit out of control right now,” said Donna Cooper, Rendell’s secretary of policy. “The fundamental premise of today is to say that profits are rising at a faster rate than the cost.”

They just glossed over the mistake, suggesting that the actual numbers aren’t that important. I guess the end justifies the means for them.

But this story gets so much better. The Pittsburgh Post-Gazette reports that Governor Rendell held a press conference 2 blocks from the capitol to complain about skyrocketing gas prices, and he drove to the event!

Gov. Ed Rendell yesterday called on President Bush to slap a windfall profits tax on oil companies as a way to offset skyrocketing gasoline prices for consumers.

“It is simply bad economic policy to let profiteering continue unabated,” he said at a news conference held at an Exxon/Mobil gasoline station two blocks from the Capitol.

Mr. Rendell drove to the news conference even though the gas station was close to the Capitol. He said he was running behind schedule on a busy day and didn’t have time to walk. (2)

That is the epitome of the problem we have in the U.S. He didn’t have time to walk? How long does it take to walk 2 blocks? The fact is that people do not wish to be inconvenienced by walking or biking, which would actually help bring gasoline prices down, so they demand the government do something about it. Take some personal responsibility, Mr. Rendell! Don’t use gas unnecessarily and then cry that the price is too high. Millions of people with this mentality are the reason the price is too high. Set an example. But it gets even better:

Mr. Rendell didn’t spell out how his proposed windfall profits tax would work, but later suggested something like U.S. Sen. Byron Dorgan, D-North Dakota, has proposed.

It would place a 50 percent tax on profits earned by oil companies on oil sold above $50 a barrel. Oil is now selling for about $75 a barrel.

Mr. Rendell put a different twist on his plan. Instead of putting the revenue raised by the windfall profits tax back into the U.S. treasury, as many politicians have suggested, Mr. Rendell would segregate the revenue into a special account and redistribute it to American drivers next year based on how many miles they can prove they’ve driven.

Why didn’t I think of that? Instead of encouraging conservation, let’s push a rebate based on how many miles you can prove you’ve driven. It’s brilliant. That should help stretch our oil supplies, shouldn’t it? I bet this will bring the long-term cost of gasoline down. I guess this is what I should expect from someone who drives 2 blocks to an event to decry the high cost of gasoline.

Haven’t we had enough of this silliness? Something tells me that we can expect more of the same. (Edited to add: The Oil Drum has also weighed in on political pandering with an excellent essay: The Politics of Oil: The Discourse Must Change.)

Weekly Inventories

Weekly inventory reports from the IEA showed another decline in oil and gasoline stocks, but an increase in distillate (diesel, for example) stocks. The falling gasoline stocks are understandable as MTBE is being phased out for ethanol, but low stocks will keep the pressure up on gasoline prices. The concern is that gasoline stocks have now gone below the lower limit of the average range for this time of year:

Source: This Week In Petroleum at http://www.eia.doe.gov/

This also fans worries that gasoline stocks won’t be able to keep up with demand as we head into summer driving season. But the good news was that the rate of the decline slowed down, due to refineries coming out of spring turnarounds, and ConocoPhillips’ Belle Chasse refinery coming back online at full rates (it had been down since Hurricane Katrina).

The report also noted that gasoline imports were up:

Total motor gasoline imports (including both finished gasoline and gasoline blending components) last week averaged over 1.3 million barrels per day, the fourth largest weekly volume ever.

This is not surprising given the high prices. One consequence of prices being up is that available supplies will come in to take advantage of them.

COP Reports Earnings

HOUSTON, April 26, 2006 — ConocoPhillips [NYSE:COP] today reported first-quarter net income of $3,291 million, or $2.34 per share, compared to $2,912 million, or $2.05 per share, for the same quarter in 2005. Total revenues were $47.9 billion, versus $38.9 billion a year ago. During the quarter, the company reinvested 141 percent of its net income into the development of oil and gas resources and its global refining business, excluding the acquisition of Burlington Resources.

Emphasis mine. I have been telling anyone who will listen that extracting and refining oil costs a lot of money. Big profits are required to justify big investments. COP invested significantly more into the business than was earned in the first quarter.

Conservation Tip

One more snippet from the Philadelphia Inquirer:

Q: Aside from buying a new car, what can I do to reduce my gasoline consumption?

A: Curb aggressive driving and speeding. Rapid takeoffs and slamming the brakes can reduce mileage by 33 percent on the highway and 5 percent around town. Each 5 m.p.h. over 60 m.p.h. is the equivalent of paying an additional 19 cents per gallon, according to the U.S. Department of Energy. Also, remove excessive weight and avoid unnecessary idling.

Proper maintenance also can help. Make sure your car is properly tuned, keep tires properly inflated and check your car’s air filter regularly to make sure it’s clean.

For more tips and to see how much money you can save, visit www.fueleconomy.gov. (3)

That is a significant improvement in gas mileage by merely slowing down.

References

1. “Rendell wants federal tax on windfall profits”, Philadelphia Inquirer, April 25, 2006.
2. “Rendell joins growing calls to tax oil firms’ windfalls”, Pittsburgh Post-Gazette, April 25, 2006.
3. “Why prices are sky high”, Philadelphia Inquirer, April 26, 2006.