OMT One Man's Trash...from Norman Leahy



Saturday, April 22, 2006 :::
 

The Economic Illiteracy of Congressmen

Scared out of what precious few wits they have left, congressional leaders have asked the President to investigate the rise in gasoline prices. Obviously, nefarious forces are at work if two self-described Republicans are angry enough to fire off a letter:

Hastert and Frist's letter comes amid charges by some consumer groups and Democrats that oil companies have manipulated refineries and oil inventories to drive up prices. Hastert also took aim at the rich pay package for Exxon Mobil Corp.'s retired chief executive, which he called "unconscionable."

Nothing makes a craven leader reach for a pen faster than the vague charges of "some consumer groups" and Democrats.

Rather than blame big oil, OPEC, the bogeyman and Lord knows what other parade of horribles lurk in their anxiety closets, perhaps Messers Hastert and Frist should take a long, hard look in the mirror. They may discover a few good reasons for the recent price rises staring back at them. Larry Kudlow has part of the answer...and a partial solution, proposed by the Wall Street Journal:

One eminently sensible short-term solution would be for the feds to drop the 54-cent-a-gallon tariff on imported ethanol, which would particularly help coastal areas. But eager to show the Bush Administration's own deference to the ethanol lobby, Energy Secretary Sam Bodman defended the tariff last week, saying it was necessary so that foreign producers "can have no advantage over American companies.

Recall that the ethanol switchover -- mandated by Congress -- does not begin until next month. Recall, too, that ethanol production is nowhere near the level needed to meet nationwide demand...or that it has to be trucked into areas like Virginia.

The Energy Secretary warned that the switchover would cause supply disruptions, but those warnings must not have reached Hastert or Frist. And no wonder they weren't paying attention:

The U.S. Energy Department in February predicted tight supplies and "volatile" prices in the East Coast and Texas because of the switch to ethanol.

The switch came after last year's energy bill removed the requirement that gasoline contain oxygenates, which aid combustion and reduce pollution. Some refineries said the oxygenate requirement shielded them from liability suits. That provision of the energy bill takes effect May 6.

And there's even more:

The problem is due to the switch this year to ethanol by most oil companies away from an additive known as MTBE that had been used in the past to meet environmental standards that go into effect every summer. But MTBE itself causes ground water pollution and last year Congress voted to eliminate its use over four years. But the oil industry, due to concerns about liability, is moving to drop MTBE immediately. Caruso said that rapid change could translate into higher pump prices starting later this spring.

"The rapid switch from MTBE to ethanol could have several impacts on the market that serve to increase the potential for supply dislocations and subsequent price volatility on a local basis," Caruso said in his prepared testimony to the Senate Environment and Public Works Committee.

"Both capacity and transportation issues imply a very tight ethanol market for at least the first part of the year," he added. He said about 130,000 additional gallons of ethanol a day are needed to meet the increased demand.

"Although planned ethanol capacity could fill the additional...requirement, these new facilities will not start soon enough to meet 2006 demand needs as companies are making changes during the first quarter 2006," he said in his prepared testimony.

So congressional haste makes waste...or at least, supply problems. And it's not like this possibility was a state secret:

The long-term equilibrium analysis of the EIA studies is based on an assumption of sufficient lead-time for investments and assumption of perfect foresight for investors.In reality, some market participants may respond to uncertainty by delaying investment decisions, creating the possibility of supply imbalance and price spikes during the MTBE phase-out.

And that is exactly what happened. Supplies are short as the changeover begins, and that is why prices have risen. Of course, the fact that not a single refinery has been built from scratch in the U.S. since the 1970s tightens supply even further -- you can only squeeze so much from so few facilities.

And in spite of all this, Congress and its leaders refuse to look inward, even for a moment, at how they have contributed to this problem. It's the sort of behavior I would have expected from a Democratically-led Congress...their familiarity with basic supply and demand issues is casual, at best. But for Republicans to do this speaks of two things: their fear (of the electoral consequences) and their ignorance (of their own role in the problem).

Absolutely astounding.



::: posted by Norman Leahy at 4/22/2006 2 comments





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