The Politics of Gas Prices: Comprehensive Energy Policy Needed

Nothing sheds light on the state of US politics more so than do high gasoline prices. So far, McCain and Clinton both come out in favor of a "gas tax holiday", although one must give McCain his due as the originator of this brainstorm. Clinton goes further and wants to enact windfall profit taxes on big oil. Both are big big mistakes. Obama, to his credit, has so far not joined in the populist rhetoric that Americans seem to just eat up like apple pie. However, Obama has still not taken me up on my offer to fly (at my own expense) to any place of his choosing for an hour presentation on peak oil so he can craft a real energy policy.

But back to the windfall tax proposal. Is it logical to tax the producers of oil and gasoline like Exxon Mobil (XOM), ConocoPhillips (COP), and Chevron (CVX) because we are upset about current prices? These great companies have a responsibility to their share holders. If they get taxed for producing oil, they are merely going to cut back on the exploration and production budgets in order to guarantee a decent return on equity for their owners, who, by the way, are many Americans who own these stocks in their 401k plans and retirement accounts. Windfall profits taxes have been tried before and they don't work. It's merely populist rhetoric. McCain and Clinton have both shown, yet again, that they will say anything simply to get elected.

Now, if the three candidates were true patriots they would look at the high price of a barrel of gasoline and think, hmmm, why is oil over $110/barrel. They would do some investigation and realize that, wow, despite these high prices, production at the world's largest oil companies is flat. I mean, if the oil companies really wanted to maximize profits, wouldn't they be pumping all the oil they could at prices over $110/barrel? Well, truth is, they probably could pump more, but they are aware of peak oil, and why pump all you can today when you can wait a couple years and sell it for more than 2x? The other point the candidates are missing is that gasoline prices have not even kept up with the rising price of oil. Crack spreads have narrowed big-time, just look at refiner Valero's year over year comparisons. Ethanol has also helped to keep the price of gasoline down.

All presidential candidates need to do two things: 1) acknowledge peak oil 2) adopt an energy policy to address peak oil. This piece is a good start.

Of course, the current president and Congress should do likewise, but I have given up on them. Regardless, high energy prices are exactly what America needs because apparently they understand nothing but money out of their pocketbook. Perhaps if gasoline prices go high enough, the government and the media will finally come to grips with a the real solution to the problem: craft an energy policy to address the realities of peak oil. The longer the largest consumer and importer of oil (the US) is in denial over peak oil, the sooner energy prices will continue to spiral higher in the years to come.

The recent earnings reports from Conoco, BP (BP), and Royal Dutch Shell (RDS.A) are proof that big oil will continue to profit from the ill-advised energy policies of the current administration and Congress. Expect more of the same when Exxon reports on Thursday and Chevron reports on Friday. If the presidential candidates really wanted to hit back at the oil companies, they'd craft an energy policy that would transition the US away from oil dependency. Meantime, investors should load up on oil and gas stocks.

Disclosure: The author is long COP and owns the other oil stocks mentioned via mutual funds.

Comments

[bluesmoke]

Good article. Although you touch on a lot of good points, what you don't address are the solutions - incentives to get the public and corporations off oil altogether. An across the board energy policy that puts the correct fuel closest to the end user makes the most sense. (ie electric commuter cars, diesel for trucks & rail, ethanol for farm equipment, solar in high sun regions, nuclear in high density areas, wind in high wind areas, etc). In addition, as far as the big US oil companies, only tax the windfall if they don't invest it in alternative energy sources. In other words, if they don't do it, it is their loss.

[EnergyFinancier]

Interesting. While effective policies are obviously important, consistent policies (especially energy policies) are pretty rare. Though legislative effort is necessary, people must do what they can to promote alternative energy sources without relying too heavily on tax incentives or other policy tools. If renewable energy developers only invest because of the promise of tax incentives, this puts the industry in tremendous danger if the incentives are not extended. Thus, we must focus our attention on the market.

Numerous companies--even big oil companies--have begun to notice the vast potential for renewables, and renewable stocks have posted gains even while the rest of the stock market has shown losses. The time is now to capitalize on renewables, as sustained investment is perpaps the only way to ensure growth in the renewable energy sector.

If you'd like to learn more about renewable energy finance, I suggest you check out the Renewable Energy Finance Forum (REFF), held June 18-19, 2008 in New York City. REFF brings together financiers and renewable energy project developers to network and share ideas about the future of renewable energy finance. Speakers include over 40 high profile industry leaders.

For more information, visit www.REFFWallStreet.com

[The FItzman]

bluesmoke: actually, there was a link in the article pointing to my proposed energy policy, here it is again:

seekingalpha.com/artic...

i really should update it for the good feedback i got (omissions, suggestions). read the comments - and you can tell people really care and are "up for the challenge". if only the government and media were. i agree with local sustainability comment, although certainly some parts of the country would be better able to deal with this than others.

financier - thanks for the comments. i agree incentives shouldn't be everything, but surely you must agree that things like tax breaks for SUV's are the wrong way (this was the case a few years ago, hopefully that has stopped). i think tax incentives must be a big part of an energy policy, because americans don't seem to understand anything but the almighty dollar. there are still people in my town buying hummers. IMHO, they should be paying huge tax penalties for doing so. also, let's face it, solar and wind need a BIG jumpstart in this country - too bad we're spending $4 billion a week in iraq, cause i'd rather see it go to long term tax incentives. for example, it has been shown that tax incentives are very important in the wind sector. anyhow, i'll have to check out the REFF tomorrow...just got off the clinch river where i was busy bustin some rainbows ;) thanks for your comment.

[sopocistudio]

Fitzman,

Re: "tax breaks for SUV's". Comments like that give blogging a bad name. The "tax break" mentioned was actually was actually a credit for business cap ex. The MMM media jumped on it, pointing out that a general contractor, for example, could buy an Expedition, or Navigator for "business" and claim the credit, which is HARDLY the same thing as a "tax break for SUVs".

jan

[winslow]

Politicians are lame in fomenting energy policy. We are in an age of "thinkless" leaders. Bush has been a leader for all these years and his explanation of high oil prices is "it won't be an easy fix". Duh.

To begin, we have to weane off of low mpg vehicles. How about a huge tax incentive to buy an auto that gets over 30-35mph and an added tax on vehicles that perform below 20mph.

Second, we need to develop a mass transportation system other than autos. My idea is a high-speed rail system between major cities with "low cost to rent" Smart Cars available at the rail terminal

Third, we need massive funding for alternative energies, similiar to the "man on the moon" project

Fourth, we need to stengthen the dollar to bring down dollar-denominated oil. A formal commitment and plan to balance the budget.

Fifth, use experts (ie, scientists, not oil company execs) to help set energy policy. Ethanol was completely ill-concieved (and of course no one will own up to it) just as bad as the policy Bush promoted for hydrogen power. How can anyone without a scientific background promote such a program without understanding the rational feasibility.