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Monday, February 27, 2012

$2.50 a gallon gas

The Republican contenders are promising $2.50 a gallon gasoline, often included with the statement “My first day in office I will sign…” This follows the playbook How to Win Elections, the first rule is promise everyone everything. Politicians Explain that this will be accomplished with “Drill baby, drill” following the second rule of How to Win Elections which is to surround yourself with rabid supporters. Using rabid supporters insures that no realistic questions will be tolerated. In current parlance this is called “giving red meat to the base”. In truth I would like gas at $2.50 a gallon. My first question is, if this is possible for politicians then why hasn’t it been done? The answer of “the socialist destroying America” is more of the rabid supporter rule. In reality any politician that could get credit for lower gasoline prices would have an easy walk to election, and winning election is every politician’s first priority, regardless of party or ideology.
Why are gasoline prices increasing? Currently there is a glut of unrefined oil and falling demand due to the general world economic conditions. Simple supply and demand would predict lower gasoline prices, not higher prices. The reason for the break in the laws of supply and demand is explained, by the oil companies, as a refining constraint. Further online research shows that there is more profit in exporting American oil than selling it domestically. In this explanation the price of a barrel of oil places a floor for the price of gasoline, crude oil supply is not the final determination of the cost of a gallon of gas. Additional internet reading allows for multiple conspiracy theories, there may be some market manipulation but the international fungible nature of the oil market makes conspiracy difficult. Claims of speculation by dark hearted investors are hard to support due to the size of the market and the relative insignificance of the speculators. The international market is in the trillions, having a few billion sloshing around due to speculation will not make that much difference.
The oil refining constraint is another political talking point. One side blaming the overreaching government and burdensome EPA regulations, this is countered by the environmentalist demanding clean water, clean air, or whatever. With rabid group against rabid group an excellent opportunity for a day of free entertainment becomes available. You could spend the first half of the day in one rabid group and then slip into the other rabid group for the second half. With clever wording for signs and reversible dress the same signage could be used dressed first as an angry racist redneck then as a dirty stoner hippy. The facts about oil refining are rather boring; the change in the mix of oil grades from light sweet oil to heavy crude oil requires redesign of the chemical cracking units. Economics not regulation makes this a nonstarter. If regulation was the only problem the international oil companies would just move refining to a country that has no regulation, maybe Nigeria.
I’m going with the price of a barrel of oil places a floor for the price of a gallon of gasoline. This of course is complicated by the type of oil. We will use the light sweet crude standard (also know as West Texas Intermediate or WTI), this is what most of the American refiners are designed to use as feed stock. For gasoline to have floor price of $2.50 per gallon, the WTI needs to be about $60 per barrel. With the “drill baby drill” approach we open deep water Gulf of Mexico tracts for exploration. The cost of a barrel of oil delivered to the refinery from deep water wells is about $80 per barrel or more. Shale oil deposits run about $95 per barrel. Using new technologies to recover additional oil from fields that no longer have free flowing oil wells exceed the $60 per barrel threshold. The problem is where do we find $60 per barrel oil in sufficient quantities?
I have to grade this Republican promise as “Promise them anything” and “just win baby, win” election campaigning in the finest classical mode. It would be nice to have an honest, well thought out energy policy, every President since Richard Nixon has promised one. Special interest groups and back room political deals have prevented any progress. Maybe after the drop of gasoline prices following summer we could all contribute 25 cents per gallon and buy our own lobbyist to create legislation that actually helps the middle class.

Fun reading for this blog topic.
How to Win an Election: An Ancient Guide for Modern Politicians by Quintus Tullius Cicero, written in Latin in 64 BC, currently available only in terrible translations.
The Prince by Niccolo Machiavelli, written about 1505 AD, excellent translations available.

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