BrianShelledy.com » Economy

The Path to Socialism

Brian — Tue, 23 Sep 2008 22:39:00 +0000

All over the news lately we have heard about the crisis in the financial market and the need for government to act. There has been a massive amount of fear generated about the possibility of a global depression should some of these massive financial institutions fail. Fortunately, our government is on the job. Recently, there was an $85 billion, billion, bailout of AIG by the Fed. Now we’re looking at a firehouse passing of a $700 billion bailout of a number of these institutions that made poor business decisions. Of course, the media is casting a dire but rosy picture of this whole situation, and the line is that “we don’t want to do it, but we have to”. That’s all well and good, but there’s a few things that I think we are missing out of this picture.

First off, let’s take a look at this $85 billion bailout of AIG. The key here is that we spent $85 billion dollars of “taxpayer money” that… and here’s the kicker… nobody voted on. Chairman of the Fed Ben Bernanke and his group basically signed this money over. And who oversees the Fed? Where are the checks and balances for them? There are none. In fact, we don’t even vote on the person who is arguably the most powerful economic figure in the United States, if not the world. Each of the candidates made their point about whether bailing out AIG was the right thing to do, but in reality, even the real president didn’t have an official say in it. Even if Bush wanted to bail out AIG, he’d still have to push a bill through congress to do it. So where is the accountability for Ben Bernanke?

Second, in the bailout deal, the United States became an 80% stakeholder in a private company. Wait a second here… doesn’t that sound dangerously close to socialism? Some of the democrats want to trade help with bad morgages for shares in the company that uses the help. This is supposed to be used to pay back “the taxpayer” when the crisis is over. But what happens when a shareholder vote comes up? Will “the taxpayer” get a vote in what happens to the company? Who will be in charge of handling this sort of issue?

I use the phrase “the taxpayer” in quotes because, in reality, we aren’t really paying for this bill. In fact, all of the actual “taxpayer” dollars have already been spent. We were facing a budget deficit before all this came around. So where does all this money come from that we’re going to use to pay for this bill? The answer is the same that it has always been when the government needs money. They issue treasury bills. And with all of America’s financial institutions in a bind, do you know who is picking up the majority of these bills? China.

Thanks to Democratic party roadblocks, we’re already sending $700 billion dollars a year overseas to countries that don’t like us very much for our oil needs. Now, we’re going to borrow an extra $700 billion from one of the last bastions of communism to support the greatest socialist initiative that the United States has ever put forward. In fact, the Chinese are already financing a large portion of our country’s national debt, the cieling for which will be raised to over $11.3 trillion dollars as part of the proposed bill. If we wanted to foot the bill for this to the taxpayer, everyone would have to write a check for over $3000. So how exactly are we going to be saving our economy by bailing out these irresponsible companies? That’s right, we’re going to be shoring up investor confidence.

Wait a second. Investor confidence? The reason these companies are falling on wall street is because there is no confidence in their activities. Now, when our government steps in with a giant pile of money, we’re going to expect them to turn around and make good on it? Basically, the government is saying that it’s OK that you made these mistakes, we’re here to bail you out. Now, the democrats want to extend the bill to support people that are defaulting on their home loans so they are not foreclosed on. What? Is that not a slap in the face to every American who made the dream happen when the time was right? Who waited until they could actually afford the house and after they bought it, actually made all their payments? Basically, the government is again sending out positive reinforcement of a negative behavior. And in the name of “something must be done” we all have to pay for it. Maybe not now, but in the future we will pay dearly.

Gas Prices In America Round 2

Brian — Thu, 06 Mar 2008 19:27:51 +0000

OK, so recently, someone contacted me about an article I wrote a couple years ago called Gas Prices in America, which outlined some information about why gas prices are so high. I follow up today with this article to bring some of the thoughts I had up to date.

Many people in America, especially on the political left, will lash out at corporations when gas prices are high. People will use terms like price gouging and make corporations out to be evil profit mongers. In reality, there are 4 major factors that effect the price of gas. Let’s take a look at what major influences there are.

First, let’s look at where the money goes when you buy a gallon of gasoline.

Image from the Energy Information Administration

As you can see, crude oil makes up a majority of the cost of gasoline. Therefore, we have to assume that the price of crude in the market will directly effect Gas prices… or do we? And what is causing crude oil prices to hit record highs? The reality is that the US has about 26 days worth of crude oil supply in storage. So, any short term spikes in prices should be weathered. So, current oil prices have only a muted effect on the current price of gasoline. Granted, extended periods of high oil prices will raise gas prices. So what causes oil prices to go up?

There are a number of factors that can change the price of oil. Much of the world’s oil supply is controlled by OPEC, which regulates the distribution of oil from it’s member countries. However, wars and natural disasters can adversely effect the price of oil as well. Demand for oil is increasing globally, as countries like China and India are beginning to grow economically and demand more resources. Also, another trend we can see is the value of the dollar.

As a highly traded and hot commodity, oil is one of the first products to be effected when the valueof the dollar falls. We often gauge the strength of the dollar against the price of gold, as gold has a relatively consistent value. Below, I have charted the monthly change in average price for oil and gold. As you can see, the trends are remarkably similar.

Oil Vs. Gold % Change – Past 36 Months

Source Source

In fact, there is not enough evidence to suggest they are statistically different. There are points where the prices fluctuate more then others based on their individual markets, but generally, the graphs are remarkably similar. Oil fluctuates a bit more, but it is a higher volume commodity.

Another major factor in the price of gasoline is the supply of gasoline. This has a huge effect on the price because right now, we are running near a shortage of gasoline. In basic economics, when quantity demanded goes up but supply is fixed, price will go up. This is exactly what is happening. There have been no new refineries built in the last 30 years because of environmental regulations and the NIMBY (Not In My Back Yard) factor. There have been refinery expansion projects, but demand for fuel is increasing faster then the rate of production. Refineries are running at near 100% capacity. This means that when there are any problems with a particular plant or group of plants (as during hurricane Katrina) we will see the effect of that in the price of gasoline. Below is a chart from the Gasoline Price Changes report from the Federal Trade Commision. It shows real price of gasoline against the consumption of gasoline.

Consumption vs. Gas Prices

Source

As you can see from this chart, we have had an ever-increasing demand for Gasoline. For now, supply is able to keep up with demand, but when we start to exceed the available supply, we are going to see some serious rises in gas prices.

So here we have our four factors that effect gas prices: The price of crude oil, the value of the dollar, the supply of gasoline, and the demand for gasoline. While you could claim that there are evil corporations at work, I have a simple argument against that. If there were companies that could offer a lower gas price, wouldn’t they do that and take all the business from their competitors? Of course they would. A small decrease in unit profit can increase total profit when you increase your volume at the same time. Of course, if you think that it would be possible to provide cheaper gasoline, then you can start your own oil company as I suggested in my previous article. But even if you don’t, then the great thing about America is that we have the freedom of to start businesses. Even if you don’t start a new oil company, someone will find a solution that will make gasoline for less, or create an entirely new form of fuel and transportation that is cheaper. People who are tired of paying too much for gas will switch to public transportation or bicycles. There are endless possibilities that don’t require government intervention or regulation that so many people call for (and arguably add to the problem with environmental regulations). Gas prices will not rise above what Americans are willing to pay; when Americans are tired of paying high prices for gasoline, we will see a shift towards alternatives or a push to assist companies in making cheaper gas by removing some of the barriers for entry and expansion. When that happens, we’ll see some relief from these prices.

Gas Prices in America

Brian — Wed, 03 May 2006 15:33:13 +0000

On the front page of USA Today was another story about how people are angry over gas prices. All over you see people posting blog articles and myspace bullitens and flikr photostreams about gas prices. So, here’s my weigh in on the whole topic.

Yes, gas prices are rising to previously unheardof and unimagined levels. Yes, oil companies are making millions more in revenue. But in reality, who is really to blame? 50% of Americans, according to the USA Today Gallup Poll, were angry the Gas and Oil companies. 26% are angry the President over gas prices! Sometimes I wonder what these people think the President has the capability to do. Maybe they think it’s as easy as a presidential mandate to lower gas prices. “Let’s completely ignore the checks and balances on Government (just like when we all got mad at FEMA after hurricane Katrina) and cast blame on people who have no power over the issue!” they probably say. In my opinion, only 4% of America are getting close, and getting angry at congress. On average, Government Gas taxes cost 45.9 cents per Gallon. In some states, such as California, gas taxes exceed 60 cents per gallon. Which brings me to the 1% of americans that in my opinion are right on the money: the 1% that is angry at environmentalist liberals.

See, many folks think that petrol companies are raising the prices of gasoline simply to make a greater profit at the expense of the american public. Realistically, though, who isn’t out to make a profit? Sure, there’s the folks that volunteer or work for NPO’s (who don’t make an economic profit, but still manage to pay their employees well enough), but the world just doesn’t work without profit-driven initiatives. Capitalism depends on it. So let’s take a look at rational human behavior when it comes to a couple of key economic concepts: Demands and Shortages.

Supply and Demand is the backbone of Economics. Basically, it says that the more consumers are willing to spend on something, the more suppliers are willing to spend to provide the good. Conversely, the less a product costs, the more people are likely to buy it. Capitalism works on the basis of competition. Companies enter the market and leave the market as it becomes respectively more and less economically profitable to be in the market. This means that if companies are not making an economic profit, they will not enter the market.

Shortages happen when the quantity supplied of a product is not enough to meet the quantity demanded. There are 2 real options to mitigate this. First, you can increase the amount of product supplied. Secondly, you can increase the price of the product to decrease the quantity demanded.

So applying this to the situation, let’s start with the shortage issue. The truth of this matter is that there is no shortage of oil. We have plenty of oil to last us for at least a century, and if not that, then pretty close. What we are lacking here in the US is refining capacity. Refining capacity in the United States has not changed for over 30 years. The reason for this is simple: environmental regulations. Because of environmental regulations, it is not feasible for companies to try and build new plants. Since environmentalists have stopped the creation of new sources of fuel, we end up with a shortage that is a root cause of these problems. So if environmental restrictions are too harsh here, why not import the finished gasoline from other countries? The answer for that is that congress has prohibited the importation of Gasoline to protect the american refinery workers.

So how do we know this is really a shortage and not oil companies raising their prices arbitrarily? Competition is the answer. Capitalism works to find the equilibrium point in markets: the point where the quantity supplied equals the quantity demanded. In the gas world, the quantity supplied is not enough to meet the quantity demanded on the market. And since the refining capacity hasn’t changed for 30 years, the option to make more gasoline is a non-option. So the only option they have left to mitigate the shortage is to raise the price to stifle the quantity demanded to something they can supply without taking heavy losses. And that’s what we are experiencing today.

About this time people are screaming “What about the price wars? Such and such gas station has the lowest prices in the country, why can’t they lower all gas prices that low?”. The answer to that is price wars are relatively short term, and there is always a loser. The way price wars work is that the two stations lower their prices as much as they are authorized to try and win business from their competitor. Eventually, the profit on one or the other is so low that they decide to close. Once they close, the price war is over, and the other company goes back to selling at the normal, if not a higher price. The point here is that short term flatlines or losses can be justified by future profits. They are taking economic losses in the short term to try and gain a long term economic profit.

So, here’s some action items for the USA if they want their gas prices to be lower. First, lower demand for gas. 70% of americans in that gallup poll said they were willing to change something to decrease their demand on gas. Second, kick an environmentalist in the shin and do your part in trying to loosen up some of the restrictions in place to make it easier to build new refineries. And if you don’t particularly care to be working in a refinery, then you ought to think about writing your congressman to get them to lift the international trade barriers on refinded fuel (and throw in a word about repealing those gas prices as well). If we are able to increase supply and decrease demand, then we’ll see an end to these high prices (provided the government doesn’t levy more gas taxes as the price goes down, as they have before). Until then, apathy and complacency will win the day and we’ll just deal with the higher gas prices. Alternatively, start your own oil company and steal all of their business with your incredibly low prices.