The Politics of Gas Prices: Comprehensive Energy Policy Needed

Includes: COP, CVX, IYE, XLE, XOM
by: Michael Fitzsimmons

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 (NYSE:XOM), ConocoPhillips (NYSE:COP), and Chevron (NYSE: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 (NYSE:BP), and Royal Dutch Shell (NYSE: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.