Halloween is not over. There
are some very spooky ideas floating around in the halls of
Congress and in some media offices. Two of those bad ideas
are a “windfall” profits tax on oil companies,
and the other is price controls. The oil business is largely
boom or bust. When oil was under $10 a barrel, the oil companies
were losing money. Now with oil hovering around $60 a barrel,
oil companies are reporting record profits. Many in Congress
want to slap an extra 50% tax on all profits earned above
$40 a barrel. When oil companies earn a profit, they have
money to re-invest in exploration and drilling for new sources
of oil. When they report losses, there is no money for new
development. Very simply put, take away the profits and you
have less oil coming to market and thus higher prices at the
gas pump. Increased industrial output in China and a series
of national disasters has pushed the price of oil temporarily
over $60 a barrel. We say temporarily because China’s
industrial output will slow, hopefully these natural disasters
will subside and consumers will conserve energy.
As we speak, sales of SUVs are dropping, thermostats will
be turned down this winter, and the sale of sweaters will
increase. In addition, corporations such as UPS and FedEx
are outlining more efficient route structures for their delivery
trucks to conserve gas. Near term - look for gas at the pumps
to drop. Longer term - prices will rise because oil is a finite
commodity. By that time we will have developed alternative
fuels. Those in Hollywood who are in favor of “windfall”
profits tax may want to consider a “windfall”
tax on blockbuster movies. Or, how about a profits tax on
those people “flipping” houses during the current
housing boom? The law of supply and demand can only be repealed
by the short sighted people in Congress. Free markets work
– let them.
Another culprit in high gasoline prices is the shortage
of refinery capacity. There has not been a new refinery built
in the US in thirty years. This is due to environmental and
other government restrictions that make the cost prohibitive.
Sometimes we end up shooting ourselves in the foot.
A couple in California is leasing a pure fuel cell auto from
Honda for $500 a month. It is an experimental, and so far
this couple is impressed. Unfortunately, the cost of this
vehicle is one million dollars. Fuel cell autos are not in
our near future although all the auto companies are working
on this innovation, and we expect to see results down the
road, so to speak.
Price controls have been tried in the past also with disastrous
results. Many of us remember sitting in line to buy gasoline
in the 1970s because the federal government allocated supplies
and restricted prices. It took new President Reagan to lift
price controls. Supplies jumped and prices fell-- another
example of the free market at work.
High oil prices do not cause inflation; they only make it
slightly worse. Money spent on higher gasoline prices cannot
be spent elsewhere in effect driving down prices of other
items, e.g., DVD players and big screen plasma TVs. The Federal
Reserve’s monetary policy causes inflation. When they
increase the supply of money, they cause prices to increase.
More money chasing fewer goods or services is inflation.
And speaking of the Fed, they raised the Fed Funds rate another
quarter of a point to 4% and promised more to come. Prime
rate is now at 7%. The rise in long rates will also cool off
the housing market, making for a gradual decline in housing
costs and not a disruptive crash. In addition, with Fed Funds
at 4% and core inflation at 2.2% (Greenspan’s favorite
yardstick), we have a positive spread. GDP grew at a 3.8%
rate in the third quarter, but we had strong economic growth
in the 80s and 90s and inflation declined through that period.
We have low interest rates, a strong economy, increasing personal
wealth, the highest standard of living in the world and low
core inflation. What’s not to like?
Once again the holiday season is upon us, and once again
the retailers are predicting low sales and once again they
will be wrong as the American consumer gets in gear. Thanksgiving
is probably the favorite holiday for most people. There is
less pressure, and it is just more relaxing. So Happy Thanksgiving
to all of you from all of us!
Random thought for November 2005:
Portion of land in the US owned by the government: 33%
|
