FACING REALITY: AN ENERGY PROPOSAL. My Dad forwarded me this recent letter than he sent to Alan Chartock, the chief political analyst for radio WAMC (an NPR outlet based in Albany). It's a fairly lengthy read but I thought I should share it with you.Dear Dr. Alan Chartock:I was listening to your discussion with Sen. Bernie Sanders earlier today as I drove from Northwest CT to Boston, and I was deeply disappointed that you did not bring out serious flaws in the Senator's proposals to (a) eliminate Federal and State gasoline taxes, (b) to make up the resulting shortfall in government receipts with an excess profits tax on the big oil companies, (c) to pressure OPEC to increase production, and (d) to somehow prohibit speculation in oil futures.Before I outline those flaws, by way of full disclosure I should say that I consider myself to be a "moderate," am registered as a Democrat, voted for JFK, LBJ, Jimmy Carter and Bill Clinton (but did not vote for anyone in the last three presidential elections); I think George Bush is a very poor President (but I am not sure he has been worse than Jimmy Carter as far as the economy or foreign policy is concerned, and do not believe that he is responsible for absolutely everything bad that is happening in or to America), and my only investments in oil are in drilling and drilling equipment companies that prosper due to the shortage of oil in relation to demand and not from the price at the pump.I. Elimination of Gas Taxes and an Excess Profits Tax on Oil Companies: As Sen. Obama has correctly pointed out, and as many economists from all sides of the spectrum have agreed, eliminating the taxes on gasoline at the pump are unlikely to significantly affect the price at the pump. That price reflects the realities of supply and demand and is unlikely to drop significantly as long as the supply of oil remains tight and the price charged to refiners remains high.Sen. Sanders' suggestion that the lost tax revenues and any increment of the tax reductions not passed on to consumers could be recover by an excess or windfall profits tax on oil companies raises the following question: What portion of the oil companies profits is "excessive?" A cursory review of big oil companies' financials statements show the following profit margins: Exxon 10.04%, Chevron 8.467%, and ConocoPhillips 6%. By way of comparison, Google's net profit margin is 24.89% and Microsoft's is 28.33%. So, on what basis are the oil companies' profits "excessive"? Just because they amount to billions of dollars? Well, so were Microsoft's ($16.42 billion, barely $2 billion less than Chevron and $4 billion more than ConocoPhillips) and Google's ($4.5 billion). I am sure if I looked I could find many more leading American companies with profits that equal or exceed many of the "big" oil companies.The suggestion that the lost gasoline tax revenues could be recovered from an excess profits tax on oil companies also ignores the fact that the companies may well be able to reduce their reported profits by a number of legitimate contracting and accounting techniques.Finally, how does Sen. Sanders proposed to have the Federal government distribute the funds recovered from the windfall profits tax among the States to make them whole for their lost gasoline taxes? I foresee a lot of backroom, unopaque horsetrading that will only end up benefiting electorally-important States with powerful senators and congressmen, and short-change the unimportant States with less powerful representatives in Congress.II. Pressuring OPEC and OPEC Countries: Sen. Sanders suggests that we should pressure OPEC, Saudi Arabia, Kuwait, et al., to increase oil production by challenging OPEC's legality because it is a cartel, by reminding the Saudis and Kuwaitis that we saved them from Saddam Hussein, and by threatening to cut off supplying the Saudis with military equipment (planes, etc.). Before addressing these specific proposals, I would point out that if I were a member of OPEC my first response to any attempt to pressure my country to increase production to help out the U.S. would be to point out that the U.S. should first increase its production of domestic oil-- something we have consistently refused to do in recent years in order to placate environmentalists. I would also add that, if the U.S. will do nothing to increase its supply of domestic oil, it should at least do something to reduce its wasteful usage of oil (how about excess gasoline use taxes on owners of Hummers, large gas-guzzling SUVs, and other cars and trucks that Detroit and Madison Avenue market based on their horsepower, ability to reach 60+mph in 6 seconds, etc.)As for a legal challenge to OPEC as a cartel, any such challenge would take years to wend its way through the international judicial system such as it is and would provide precisely no relief for our current problems.The suggestion that we remind the Saudis and Kuwaitis we saved them from Saddam is naïve in that it ignores the realities of international politics: a government acts in what it perceives to be its best interests, not the best interests of some other country that once upon a time did something for it (no doubt because whatever that other country did also advanced its own interests). For how long did France remember that we saved them from the Germans? The Senator's suggestion that we withhold sales of military equipment to the Saudis to pressure compliance with our requests similarly ignores the fact that withholding such sales would probably hurt us more than the Saudis. He forgets that those sales means jobs for workers at General Dynamics, Lockheed Martin, the tool and die shops that serve as their subcontractors, the avionics manufacturers, and other members of the defense industry, who produce the equipment the Saudis seek to purchase. There is intense international competition for the contracts to supply countries with modern arms, and the French or European arms manufacturing consortiums would be delighted to offer the Saudis top-of-the-line equipment to take the place of whatever we refuse to supply. From more than a decade of experience in the international defense contracting arena I can tell you that once a country replaces another as the arms supplier for a third country, the original supplier will not recover its position for more than a decade or two (for the expected useful life of the relevant arms-- planes, avionics, etc.). So denying arms to the Saudis as a pressure tactic to "improve" our economic situation would most likely backfire and injure our economy (or certain sectors) for a long, long time.III. Prohibit Speculation in Oil Futures: Great idea, but impossible to accomplish because it assumes that the U.S. government has the power to control the world market for oil futures. But what is to stop traders from speculating on the London Market, the Hong Kong Market, or any other market that would spring up to take the place of the U.S. market for futures? And how would you stop U.S. entities from speculating through foreign affiliates? And what would be the implications for the realities of the way oil is moved and traded throughout the world?The reason I am writing this letter is that I believe you pandered to Sen. Sanders ("you're so much smarter than I am"), instead of asking him tough questions that would have forced him to address what others perceive to be flaws in his positions.* * * *Toward the end of your discussion with Sen. Sanders he mentioned the reality that we need a new and comprehensive energy policy to reduce our dependence on fossil fuels. That is about the only thing he said that I agree with. For perhaps 30 years (during both Democratic and Republican administrations) we have not had a coherent, thought-through energy policy. In my opinion that has been largely attributable to cowardice on the part of politicians in Washington (from both parties) who do not want to offend the various factions of our population that find something wrong with all of the existing possibilities. Because oil pollutes the atmosphere and oil refining companies are ugly and smelly, politicians have acted to prevent the construction of new, and in some cases even the upgrading of old, oil refineries. And because drilling oil wells in Alaska might harm the tundra and thus the caribou, no new oil wells in Alaska. Because they are unsightly and might pollute the waters, no wells near the coasts of Florida or California. Because coal pollutes, discourage development of coal resources. Because windmills may hamper the views from powerful Senators' vacation homes, or from vacation homes of big campaign contributors, or may upset some wildlife maybe, no development of windfarms. Because Three Mile Island was almost a disaster, no nuclear power, even though Japan and Russia, the only countries to suffer nuclear disasters, and France depend heavily on nuclear power. (I may be misremembering but, I do not think Sen. Sanders mentioned nuclear power in his list of alternative sources we should be considering as part of a comprehensive energy policy.)Instead, we have had legislation promoting ethanol which has encouraged misallocation of land, energy, and other resources, probably caused increases in the prices of certain foods, and shifted taxpayer funds to large agribusiness as well as some small farmers, without doing a damn thing to relieve the energy problem.In short, our present energy situation in general, and fuel shortage in particular, is do more to 30 years of unintelligent short-sighted politicians of both parties in Washington, than it is to Bush and Cheney and their connections to the oil industry. They have not been helpful, but Sanders (and you) are wrong to shift all the blame to them from all of the politicians who preceded them.What we need is not gimmicks that voters who know nothing about economics and markets might find attractive in the moment (so that politicians running for office this November can have jobs for another 2, 4 or 6 years), but proposals that take the realities of economics, international trade, the markets, and the state of technological development with respect to alternative energy sources.Hopefully, you will "grill" Sen. Sanders on these questions in your future conversations with Sen. Sanders (mentioned as forthcoming at the end of your show today).Posted by Deb on
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