I’m sure all of us are aware of the outrageous price of fuel lately. Everyone I’ve talked to has a different opinion about the huge increase in prices. Most of the good ideas seem to come from people who are well connected with reality, such as well drillers and other independent businessmen who deal with simple concepts like supply and demand on a daily basis. On the other end of the scale is the U.S. Senate, which seems to be as connected to reality as the average coma victim.
The other day, I watched a dog-and-pony show as the Senate mugged the chief
executives of the major oil companies, all for the purpose of pandering to the
unwashed masses that keep electing them decade after decade. Hey, some of these
guys are too old even to be Wal-Mart greeters.
The senators typically spent 15 minutes making inane statements, revealing
their abysmal lack of knowledge of economics, and then followed them with
rhetorical questions such as, “What are you going to do about
I got to thinking what would I say if I were one of those executives, and
(heaven forbid) they ever asked me what I thought about oil prices. It might go
something like this:
Senator Balderdash: “Mr. Nash, can you explain the high price of oil so I can
Mr. Nash (Overworked and underpaid CEO of Intergalactic Oil): “No, senator, I
don’t think I can explain it so you can understand it, but since you dragged
all those cameras in here, I can explain it to the American people who actually
are paying those prices.
“Oil is priced in U.S. dollars. This the currency used whether you are buying
it from yourself or the tinhorn dictator du jour. In order to keep prices down,
we need a stable dollar. The Federal Reserve controls the buying power of the
dollar. Let me explain how well they’ve done. In 1913, the year the Fed was
formed, a $20 gold piece would buy a hand-tailored, three-piece suit of the
finest materials. Today, a $20 gold piece still will buy the same thing –
except that it takes about $1,000 paper dollars to buy the $20 gold piece.
Neither the real money, nor the suit, has changed in value, but the paper
dollar has. What, with the occasional bailout of their friends who make cars,
airlines, steel mills, investment bankers, agri-biz and others in the same
exclusive club, they’ve had to run the presses night and day. This makes the
dollar’s buying power less and less. Maybe a word from your exalted position of
power would do some good.
“Oil sales are an auction, plain and simple. If more people want a product, and
are willing to pay more for it than the low bidder, they set the price. India
and China are the two fastest growing economies in the world. They recently
have discovered that livestock is not nearly as comfortable to transport as
Toyotas. They’ve got plenty of dollars with which to bid for oil, since we buy
an awful lot consumer good and electronics from them.
“Besides the Fed, there’s plenty of blame to go around. The unions have
contributed by pricing themselves out of the market. Agri-biz is plowing up
wheat to plant corn for the government-subsidized boondoggle called ethanol.
This has raised the prices of two of the major food groups – pizza and
“I’ve heard you say that we can’t drill our way out of this problem. Well, duh
… you finally got one right. But what we can do is take the pressure off the
futures market. An assured supply that is not subject to the ravings of some
weird-beard probably would lower the price by a dollar or a dollar-and-a-half.
In order to drill, you are going to have to get out of the way. Those who say
they don’t want any rigs anywhere near Florida ’cause it would ruin the tourism
industry should visit Padre Island, one of the most beautiful beaches in the
world, despite plenty of rigs on the horizon. Plus, Padre Island has Texas watching
“With the pressure off the futures market, we would have time to develop
practical, economical and workable alternatives without the need for government
subsidies. Most of the sources we look to save the children are impractical, uneconomical
or unworkable. For instance, solar power currently produces about 0.1 percent
of our energy. That’s one-tenth of 1 percent, and most of this goes for pool
heating. If we built 10 times as many pools, maybe we could get this up to 1
“Before you start braying about obscene profits as though it were one word,
consider where these profits go: 14 percent go to IRAs, 23 percent got to
individual investors, 27 percent go to pension funds, 29.5 percent go to mutual
funds, 5 percent go to other institutional investors and 1.5 percent goes to
corporate management. Most of us have IRAs or retirement funds or pensions.
Which of your friends and neighbors should we shortchange?
“A basic understanding of the difference between profit and profit margin would
enhance your credibility. As a whole, the oil industry produces a profit margin
of around 8.8 percent, depending on who you ask. My mother thinks oil is just
out there free for the taking, and any higher price is gouging the little guy.
Google posted a 30-percent profit recently, and Microsoft is around 40 percent,
but I don’t see much squallering about it. Profit is necessary to stay in
business. The Soviets tried the non-profit thing, and all they were able to
produce were bread lines and cement bicycles.
“Of all the various costs of producing a gallon of fuel, most are studied and
analyzed for maximum efficiency. The one exception is tax. The tax on a gallon
of fuel is 13 percent. This is about 150 percent greater than profit, but
that’s O.K. because it’s for our own good. The last good the government did for
me was when Richard Nixon invited me to the late unpleasantness in Southeast
“Senator, if you really want to do something about oil prices, lower the tax, and
quit spending money like a drunken sailor. You also could pass on to your
organic, tofu-eating, tree-hugging constituents, that we’ve got to have more
refineries. Thirty years is a bit long to neglect such an important part of our
infrastructure. You should let us drill where the oil is. If your buddies don’t
like it, let them walk to some pristine, worthless area and live however they
“I hope this explains some of what can and can’t be done about oil
Senator Balderdash: “Sergeant-at-arms, throw that man in chains while we
deliberate reinstituting burning at the stake!”
The World According to Wayne: U.S. Senate Mugs Oil Executives
July 1, 2008