FT138: “High gas prices mean high food prices.” —Old Pithy

Posted by PITHOCRATES - October 5th, 2012

Fundamental Truth

We use Diesel Fuel in our Ships, Trains and Trucks to move Food from the Farm to the Grocery Store

People don’t like high gas prices.  When the price at the pump goes up more of our paycheck goes into the gas tank.  Or, more precisely, in everyone’s gas tanks.  For even if you don’t drive a car when gas prices go up you’re putting more of your paycheck into the gas tanks of others.  Thanks to oil being the lifeblood of our economy.  And unless you’re completely self-sufficient (growing your own food, making your own clothes, etc.) everything you buy consumed some petroleum oil somewhere before reaching you.

Gas prices go up for a variety of reasons.  The purely economic reason is the market forces of supply and demand.  When gas prices rise it’s because demand for gasoline is greater than the supply of gasoline.  Which means our refineries aren’t producing enough gasoline to meet demand.  And the purely economic reason for that is that they are not refining enough crude oil.  Meaning the low supply of gasoline is due to the low supply of crude oil.  Which brings us to how high gasoline prices consume more of our paychecks even if we don’t drive.  The reason being that we just don’t make gasoline out of crude oil.  We also make diesel fuel.

Diesel fuel is a remarkable refined product.  It just has so much energy in it.  And we can compress an air-fuel mixture of it to a very small volume.  Put the two together and you get a long and powerful power stroke.  Making the diesel engine the engine of choice for our heavy moving.  We use it in the ships that cross the ocean.  In the trains that cross our continents.  And in the trucks that bring everything to where we can buy them.  To the grocery stores.  The department stores.  To the restaurants.  Everything in the economy that we don’t make for ourselves travels on diesel fuel.  Which is why when gas prices go up diesel fuel prices go up.  Because of the low supply of oil going to our refineries to refine these products.

Oil is at a Disadvantage when it comes to Inflation because you just can’t Hide the Affects of Inflation in the Price of Oil

And there are other things that raise the price of gasoline.  That aren’t purely economical.  But more political.  Such as restrictions on domestic oil drilling.  Which reduces domestic supplies of crude oil.  Political opposition to new pipelines.  Which reduces Canadian supplies of crude oil.  Special ‘summer’ blends of gasoline to reduce emissions that tax a refinery’s production capacity.  As well as our pipeline distribution network.  Higher gasoline taxes.  To pay for roads and bridges.  And to battle emissions.  The ethanol mandate to use corn for fuel instead of food.  Again, to battle emissions.  All of which makes it more difficult to bring more crude oil to our refineries.  And more difficult for our refineries to make gasoline.  Which all go to adding costs into the system.  Raising the price at the pump.  Consuming more of our paychecks.  No matter who is buying it.

Then there is another factor increasing the price at the pump.  Inflation.  When the government tries to stimulate economic activity by lowering interest rates they do that by expanding the money supply.  So money is cheaper to borrow because there is so much more of it to borrow.  Hence the lower interest rates.  However, expanding the money supply also causes inflation.  And devalues the dollar.  As more dollars are now chasing the same amount of goods and services in the economy.  So it takes more of them to buy the same things they once did.  One of the harder hit commodities is oil.  Because we price oil on the world market in U.S. dollars.  So when you devalue the dollar it takes more of them to buy the same amount of oil they once bought.

Oil is at a particular disadvantage when it comes to inflation.  Because you just can’t hide the affects of inflation in the price of oil.  Or the gas we make from it.  Unlike you can with laundry detergent, potato chips, cereal, candy bars, toilet paper, etc.  Where the manufacturer can reduce the packaging or portion size.  Allowing them not to raise prices to reflect the full impact inflation.  They still increase the unit price to reflect the rise in the general price level.  But by selling smaller quantities and portions their prices still look affordable.  This is a privilege the oil industry just doesn’t have.  They price crude oil by a fixed quantity (barrel).  And sell gasoline by a fixed quantity (gallon).  So they have no choice but to reflect the full impact of inflation in these prices.  Which is why there is more anger about high gas prices than almost any other commodity.

Perhaps we can lay the Greatest Blame for the Current Economic Malaise on the Government’s Inflationary Monetary Policies

Current gas prices are hitting record highs.  And this during the worse economic recovery following the worst recession since the Great Depression.  Gas prices and the unemployment rate are typically inversely related to each other.  When there is high unemployment people are buying less gasoline.  This excess gasoline supply results in lower gas prices.  When there is low unemployment people are buying more gasoline.  This excess demand for gasoline results in higher gas prices.  These are the normal affects of supply and demand.  So the current high gas prices have little to do to with normal economic forces.  Which leaves government policies to explain why gas prices are so high.

Environmental concerns have greatly increased regulatory policy.  Increasing regulatory compliance costs.  Which has greatly discouraged the building of new refineries.  And making it very difficult to build new pipelines.  Which tax current pipeline and refinery capacities.  A problem mitigated only with their restriction on domestic oil production.  The current administration has pretty much shut down oil exploration and production on all federal lands.  Reducing crude oil supplies to refineries.  These environmental policies would send gas prices soaring if the economy was booming.  But the economy is not booming.  In fact the U-6 unemployment rate (which counts everyone who can’t find a full time job) held steady at 14.7% in September.  So an overheated economy is not the reason we have high gas prices.  But the high gas prices may be part of the reason we have such high unemployment.

Perhaps we can lay the greatest blame for the current economic malaise on the government’s inflationary monetary policies.  Inflation increases prices.  Especially those things sold in fixed quantities priced in dollars.  Like oil.  And gasoline.  The price inflation in refined oil products is like a virus that spreads throughout the economy.  Because everyone uses energy.  Especially the food industry.  From the farmers driving their tractor to work their fields.  To the trucks that take grain to rail terminals.  To the trains that transport this grain to food processing plants.  To the trucks that deliver these food products to our grocery stores.  From the moment farmers first turn over their soil in spring to the truck backing into to a grocery store’s loading dock to consumers bringing home groceries in their car to put food on the table fuel is consumed everywhere.  Which is why when gasoline prices go up food prices go up.  Because we refine gasoline from the same crude oil we refine diesel fuel from.  Oil.  Creating a direct link between our energy policy and the price of food.

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FT106: “You can’t have high paying jobs with generous benefits and low consumer prices.” -Old Pithy

Posted by PITHOCRATES - February 24th, 2012

Fundamental Truth

To give Workers High Wages and Generous Benefits a Business has to sell their Goods at High Prices 

The problem with politics is that voters don’t understand economics.  And they demonstrate this by demanding mutually exclusive things all of the time.  Where having one thing makes it impossible to have the other thing.  Like that old saying that goes like this.  You can’t have your cake and eat it, too.   You can have cake.  Or you can eat cake.  But you can’t have cake after eating it.  Because once you eat your cake it is gone.  And there is nothing to have.  These things, then, are mutually exclusive.  You can have one or the other.  But you can’t have both.

Now let’s transfer this train of thought to economics.  And to its most fundamental element.  The demand curve.  Which represents people in the economy.  Consumers.  And the stuff that they buy.  And at what prices they will buy the stuff that they buy.  Let’s take large flat-screen televisions.  The big ones.  Over 60 inches in size.  If they cost the price of a luxury car few consumers will buy them.  But if they only cost the price of a pack of gum consumers will buy them until they have one for every room in their house.  And consumers will buy various amounts at the prices in between.  But in general this one truth holds true.  People will buy more televisions as their prices fall.  And they will buy fewer televisions as their prices rise.  When we show this graphically by plotting how many televisions they sell at various prices we get a demand curve.

Well, you think, why can’t we just sell televisions at the price of a pack of gum?  More people will have televisions.  That’s good.  Because people just love watching television.  And television makers will make more televisions.  Creating more jobs.  And jobs are good.  Everyone says so.  So why not just sell televisions for the price of a pack of gum.  Well, I suppose if we pay the people who make these televisions a wage and benefit package closer to the price of a pack of gum, we could.  But who wants to work for a paycheck that can only buy a pack of gum?  Which brings us back to wanting mutually exclusive things.  To give workers high wages and generous benefits we have to sell goods at high prices.  Which is mutually exclusive to the low prices consumers demand.

Big Oil’s Exxon Mobil was not as profitable as GE and Apple in 2010

Yes, you can’t have low consumer prices and high pay and generous benefits.  Because, per the demand curve, higher prices mean fewer things sold.   And fewer things sold mean lower sales revenue.  And sales revenue pays for everything in a business.  Including wages and benefits.  Which means lower sales revenue means less money available to pay wages and benefits.  And any company that tries to pay high wages and provide generous benefits has to do one of two things.  Have a product they can sell a lot of at high prices.  Or go bankrupt.  Two of the Big Three Detroit automakers tried to do the former and failed.  So they went bankrupt.  And the government bailed them out.

So to pay employees well these companies need to be profitable.  Unlike the Big Three.  And to be profitable you have to have sales revenue large enough AND prices high enough to generate profits.  Profits so large that they can provide high wages and generous benefits.  Unlike the Big Three.  Because they couldn’t sell enough cars at high enough prices to pay those high union wages and generous union benefits.  But some companies have been profitable.  Including one corporation liberal Democrats love to hate.  Exxon Mobil (a member of a group liberal Democrats derisively call Big Oil).  One company that the current liberal Democrat administration loves and partners with in green energy technology.  General Electric.  And one corporation liberal Democrats just love period.  Until Steve Jobs died, at least.  Apple. 

In the fourth quarter of 2010, the profits for Exxon Mobil, GE and Apple were, respectively, $9.25 billion, $4.46 billion and $4.31 billion.  The first thing that jumps out at you is that Big Oil is making twice as much money as the corporations liberal Democrats love.  Which is why they hate them.  And why they love to bitch about high prices at the gas pump.  While at the same time they are rejoicing about those high prices.  Because those high gasoline prices help push their green energy agenda.  But these profit numbers are misleading.  Because they don’t factor in the cost of producing those profits.  And the most common way we do that is by dividing these profits by the sales revenue that generated them.  Giving us net profit margin.  When we do this for Exxon Mobil, GE and Apple we find their net profit margins on those profits were, respectively, 8.79%, 10.8% and 21.2%.  Of the three Big Oil is the least profitable.  And Apple is the most profitable.  In fact, nearly 2.5 times more profitable than Exxon Mobil.  But no one is demanding that the government step in and lower the price of Apple’s products.  Unlike they do with Big Oil.

The Government’s Regulatory and Compliance Costs increase the Price of Gasoline at the Pump

So why is Big Oil less profitable than those other businesses?  Well, for one, you can’t drill for American oil in China.  Like GE and Apple can build products in China.  And by working in the United States Big Oil is subject to massive regulatory and compliance costs.  And government regulates few things more than the oil industry.  The permitting process alone just to drill an exploratory well can take years for approval.  And millions of dollars.  It wasn’t like this when gas was cheap in America.  Before all of this regulation.  In the days when John D. Rockefeller was refining petroleum no one was complaining about high prices.  In fact, his competition complained about his low prices.  Prices they couldn’t match.  Asking for the government to investigate them for antitrust violations.  Which they did.  And busted up Standard Oil.  So they could sell their products at higher prices.  But when you can manufacture goods in China you can escape all of these regulatory and compliance costs.  And governmental insanity of protecting consumers by raising consumer prices.

Some may counter that the net profit percentage isn’t the important number.  But the dollar amount of their profits.  The same people who say we shouldn’t look at the dollar amount rich people pay in taxes.  But what they pay as a percentage of their income.  Which is an example of a double standard.  Determining how much profit is too much by one standard for Big Oil (dollars).  But determining by another standard how much rich people should pay in taxes (percentage).  It doesn’t make good sense.  But it makes good politics.  Especially when you have nothing but class warfare to rely on to win an election.

The attack on Big Oil is also irrational.  For Big Oil can do one thing that even GE and Apple can’t do.  Provide high wages and generous benefits to American workers.  Because American oil deposits can only be extracted in America.  By American workers.  If only government will cease their attack on Big Oil.  And allow people to drive gas guzzlers if they want to.  Let them fill up those tanks.  Increase the demand for gasoline.  If they did and we got rid of the anti-gasoline policies Big Oil will go after that oil and bring it to market to meet that demand.  Making it inexpensive and plentiful just like John D. Rockefeller did.  Before government stepped in to ‘protect’ consumers.  And added so many regulatory and compliance costs that has since jacked up the price at the pump so much that it is eating away an ever larger share of a family’s budget.  And ultimately reducing their standard of living.  Without even getting any high paying jobs with generous benefits in the bargain.  And if you ask me that’s a pretty sad job of protecting consumers.

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