Recently with the media coverage the energy sector is getting, I have been receiving a lot of questions on everything related to energy.
I am more than happy the energy sector is finally getting the exposure it deserves in the national media, but I am very frustrated that 99 times out of 100 the information and analysis the media gives to the public is either partially or entirely false.
This doesn't just occur on one or two news stations, it includes CNN, CNBC, MSNBC, ABC, CBS, FOX, and more than likely any other news source you could think of.
Hopefully I will be able to set the record straight on a few of the more important topics that are dominating today's media coverage, especially those that have to do with gasoline pricing and fundamentals.
Justin from Florida writes: "Recently, John McCain has called for a moratorium on the gasoline tax until Labor Day, as it would be 'an immediate economic stimulus.
' How would a suspension of the gasoline tax actually affect the economy if it was put into place?" John McCain's Gas Tax Holiday is a tricky question to answer because I can't find any other relevant examples of how a policy like this would affect a highly functioning free market economic system such as in the United States.
I can however answer this question from a purely theoretical economic perspective that should shed some light on what is most likely to happen if this policy were enacted.
The average fuel tax for gasoline in the United States is $0.
47 per gallon.
With today's national gasoline price average of $4.
11, that translates to a tax rate of just under 13% per gallon of gasoline.
Common logic would say that if this $0.
47 cents is removed, the price of gasoline should instantly go from $4.
11 to $3.
64 after the law is enacted.
Unfortunately this is not the entire story.
In highly efficient capital markets with very constrained supply and fairly inelastic demand, markets will adjust backwards to the old prices within a few days or a week at the most.
The only difference between now and before is the extra $0.
47 would now be going to oil producers, oil suppliers, refiners, and the owners of the gas stations.
Think about it this way; if people are already paying $4.
11 per gallon (up from around $2.
50 per gallon in 2006), wouldn't they be more inclined to buy gasoline if the price dropped to $3.
64? The last time gasoline prices were at $3.
64 we had more consumption that we do right now, not less.
If this gasoline tax became permanent the plan would be much better suited because it would help the refiners and gas station owners boost their profit margins.
As ridiculous as that may sound to you, that is exactly what needs to happen.
Contrary to popular believe, the refiners and gasoline station owners are actually getting killed because they are at the mercy of the commodity spot market prices (the prices at which physical goods trade on the open financial markets) since they do not actually produce the good.
They only act as the throughput and output, not the input.
In the oil business they call this middlestream and downstream.
Believe it or not, many gas stations are closing around America because they simply can't keep up with the pricing increases.
The price of a barrel of crude oil has gone up substantially more than gasoline during the last three years and it has come to a point wher many of the gas stations and refiners are actually losing money every time they sell you gasoline.
The reason for this is not because oil producers are charging them too much for oil, it is because they are trying to raise prices more gradually as to not completely shock the American consumer.
If gasoline margins went back to 2006 or 2007 levels, you would be seeing signs for 87 octane gasoline around $5.
50 to $5.
75 right now, if not higher.
Just because this policy wouldn't have any lasting effects on the price of gasoline doesn't mean it would be completely beneficial to the United States.
If this policy were put into place, it would actually save Americans money in the long run due to the effects it would have on oil producers and refiners.
Instead of this money being poorly allocated by the federal government, the money would go back to the entrepreneurs that actually took the financial risks to bring the product to the market.
Because of the new level of profitability, it would spur more exploration and production from these companies.
Of course this makes McCain look like a puppet for 'Big Oil' but if these companies had more money to spend through capital expenditures on finding and producing more oil and gasoline, we would be less reliant on foreign oil.
This would have a massive effect on the United States economy as we are currently sending $700B worth of Federal Reserve notes overseas each year for this commodity for which we have a horrible addiction.
We should not forget that after Canada we are importing more oil from Saudi Arabia than any other country in the world.
A few other countries are high up on this list such as Nigeria: The common theme here is many of these countries aren't exactly in love with the United States.
This policy may be more of a question of national security than a question of putting a few dollars back into the pocketbooks of Americans every fill up.
This isn't as good of a selling point as telling the general public that the price of gasoline will come down dramatically if this policy is enacted, so you won't hear it from McCain or anywhere in the media.
Many times on heated issues such as these it is best to step away from the media and attempt to do your own research.
I am more than happy the energy sector is finally getting the exposure it deserves in the national media, but I am very frustrated that 99 times out of 100 the information and analysis the media gives to the public is either partially or entirely false.
This doesn't just occur on one or two news stations, it includes CNN, CNBC, MSNBC, ABC, CBS, FOX, and more than likely any other news source you could think of.
Hopefully I will be able to set the record straight on a few of the more important topics that are dominating today's media coverage, especially those that have to do with gasoline pricing and fundamentals.
Justin from Florida writes: "Recently, John McCain has called for a moratorium on the gasoline tax until Labor Day, as it would be 'an immediate economic stimulus.
' How would a suspension of the gasoline tax actually affect the economy if it was put into place?" John McCain's Gas Tax Holiday is a tricky question to answer because I can't find any other relevant examples of how a policy like this would affect a highly functioning free market economic system such as in the United States.
I can however answer this question from a purely theoretical economic perspective that should shed some light on what is most likely to happen if this policy were enacted.
The average fuel tax for gasoline in the United States is $0.
47 per gallon.
With today's national gasoline price average of $4.
11, that translates to a tax rate of just under 13% per gallon of gasoline.
Common logic would say that if this $0.
47 cents is removed, the price of gasoline should instantly go from $4.
11 to $3.
64 after the law is enacted.
Unfortunately this is not the entire story.
In highly efficient capital markets with very constrained supply and fairly inelastic demand, markets will adjust backwards to the old prices within a few days or a week at the most.
The only difference between now and before is the extra $0.
47 would now be going to oil producers, oil suppliers, refiners, and the owners of the gas stations.
Think about it this way; if people are already paying $4.
11 per gallon (up from around $2.
50 per gallon in 2006), wouldn't they be more inclined to buy gasoline if the price dropped to $3.
64? The last time gasoline prices were at $3.
64 we had more consumption that we do right now, not less.
If this gasoline tax became permanent the plan would be much better suited because it would help the refiners and gas station owners boost their profit margins.
As ridiculous as that may sound to you, that is exactly what needs to happen.
Contrary to popular believe, the refiners and gasoline station owners are actually getting killed because they are at the mercy of the commodity spot market prices (the prices at which physical goods trade on the open financial markets) since they do not actually produce the good.
They only act as the throughput and output, not the input.
In the oil business they call this middlestream and downstream.
Believe it or not, many gas stations are closing around America because they simply can't keep up with the pricing increases.
The price of a barrel of crude oil has gone up substantially more than gasoline during the last three years and it has come to a point wher many of the gas stations and refiners are actually losing money every time they sell you gasoline.
The reason for this is not because oil producers are charging them too much for oil, it is because they are trying to raise prices more gradually as to not completely shock the American consumer.
If gasoline margins went back to 2006 or 2007 levels, you would be seeing signs for 87 octane gasoline around $5.
50 to $5.
75 right now, if not higher.
Just because this policy wouldn't have any lasting effects on the price of gasoline doesn't mean it would be completely beneficial to the United States.
If this policy were put into place, it would actually save Americans money in the long run due to the effects it would have on oil producers and refiners.
Instead of this money being poorly allocated by the federal government, the money would go back to the entrepreneurs that actually took the financial risks to bring the product to the market.
Because of the new level of profitability, it would spur more exploration and production from these companies.
Of course this makes McCain look like a puppet for 'Big Oil' but if these companies had more money to spend through capital expenditures on finding and producing more oil and gasoline, we would be less reliant on foreign oil.
This would have a massive effect on the United States economy as we are currently sending $700B worth of Federal Reserve notes overseas each year for this commodity for which we have a horrible addiction.
We should not forget that after Canada we are importing more oil from Saudi Arabia than any other country in the world.
A few other countries are high up on this list such as Nigeria: The common theme here is many of these countries aren't exactly in love with the United States.
This policy may be more of a question of national security than a question of putting a few dollars back into the pocketbooks of Americans every fill up.
This isn't as good of a selling point as telling the general public that the price of gasoline will come down dramatically if this policy is enacted, so you won't hear it from McCain or anywhere in the media.
Many times on heated issues such as these it is best to step away from the media and attempt to do your own research.
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