Fox News: Democratic presidential wannabe and future also-ran John Edwards unveiled his strategy to deal with rising energy costs. The executive summary could best be summed up as "make them go higher."

First Edwards wants to release oil from the Strategic Petroleum Reserve. Currently the SPR holds 694.9 million barrels of oil, and has the capacity to hold 727 million. Current US imports net out at 12 million barrels a day, however the maximum output from the reserve is 4.4 million barrels per day.

Here is the first problem with the Edwards plan. The SPR holds oil as crude. In order to do anyone any good, that oil will have to be refined. Currently the US has domestic refinery capacity to process 17.4 million barrels of crude per day of the 20 million we consume. The balance is imported as refined goods. Refining capacity is currently running at 95%. Releasing oil from the SPR will not increase the supply of refined petroleum products such as gasoline and and home heating oil. The only way to immediately increase the supply of refined products is to increase imports of refined products. This will not lead to lower prices. Of course oil released from the SPR would hit the market at a lower price than the current market price of just under $100 a barrel. But at a daily volume that is about one fifth of our daily consumption and a very small portion of the 85 million barrels per day produced worldwide, even if they were giving it away it would have minimal impact on global supply and price.

Of course Edwards doesn't take into account that the purpose of the SPR is not to manipulate the spot price of crude oil, but to provide a back-up source in the event that world oil supply, or its flow to the US is somehow disrupted. In order to have that reserve, we would need to replace all of the crude that Edwards would release at current world prices. This purchase of oil for the SPR would, naturally, have an impact on global supply and put an upward pressure on global crude prices.

The costs of Edwards price manipulation scheme would very quickly outweigh any minimal benefit.

Edwards, being a typical socialist Democrat, puts all of the blame for the cost of heating oil on the oil companies and wants to use the power of the federal government to take them down

His plan for longer-term relief from high home heating prices involves asking the Justice Department to investigate the massive mergers of oil companies in recent decades and modernizing antitrust laws to target oil and gas companies that take unilateral action to withhold supplies in order to raise prices. Under current law, companies can't be charged for those actions unless they are working with other companies, Edwards said.

He want's the justice department to investigate oil companies for doing something that is actually legal. Isn't the justice department supposed to spend it's time investigating things that are actually crimes?

It's worth a look at just how much of an impact an oil company acting on its own can have on home-heating prices. If one company, even the largest, Exxon Mobile, chose to cut it's distribution by half, who would be hurt the most? Domestic prices would go up a bit and people would conserve more, reducing demand. Other suppliers seeing unmet demand in the market would move to meet that demand. Further reducing the pressure on prices. And given that oil companies and refineries are working at or near capacity to meet current demand, it is in their best interest to increase production. If the U.S. oil industry could produce another 4 or 5 million barrels of refined product a day, they would have no problem selling it. And if they sold it at the same profit margin as they are currently, they would see increases in gross revenues and net profit.

The last portion of the Edwards plan is the old Democrat stand by of raising their taxes.

Edwards also proposes repealing tax breaks for the oil industry and reinvesting the savings in renewable energy projects.

Repealing tax breaks is Democrat code for increasing taxes. Breaking the code is simple if you are capable of basic logic. An entity pays a given amount or rate of taxes. You take action to increase that amount or rate. No matter what you call it, you are raising the taxes of that entity. Now in the case of a corporation, an oil company for instance, let's take a quick look at what the effect of that company would be.

The oil company wants to make a profit. Oil executives sit around and have lots of meetings about making more profit. One of their key metrics has to be, "How much profit do we make on a barrel of oil." To figure this out they or their accounting department sits down and figures out how much it costs them to deliver a barrel of crude as refined product to the end user. Then they tack on whatever percentage margin they want to make, say 10% for the sake of discussion, and that is the price they charge. Now lets say the government comes along and increases their taxes. Those taxes are part of that cost of goods delivered to the end user. So the cost number goes up, they add on their 10% margin and that's the new price. Who pays the tax? Then end user pays the tax through the price increase. And guess what else happens - the oil company makes more money!

Here's how in very simplified terms and round numbers in case someone from the Edwards campaign reads this. Lets say the cost of goods delivered to the customer is $100.00. With the 10% margin the company makes a $10 profit on that barrel of crude. Now the Democrats raise the oil company's taxes, and the cost of goods goes up to $105.00. The company ads in their 10% margin and makes a profit of $10.50 on that barrel of crude. The Democrats are happy because they have more money to spend, and they can claim to be fighting big oil on behalf of the little guy. The oil company is happy because their profits are higher at the same margin. The consumer? Well they just get higher prices. And the cycle starts again.

I haven't looked into what the rest of the Democrats are saying about energy and home heating oil and the SPR, but all of this is fairly standard Democratic Party thinking so I doubt either Obama or Clinton would find much to disagree with in the Edwards plan. In fact I believe we have already heard Hillary talk about how she wants to "take those (oil company) profits" and invest them in alternative energy.

Here's another little tidbit that seems to have been missed in the Edwards plan. One the main reasons for the recent spike in oil prices is the loss of value of the dollar in international markets. It takes more dollars to buy a barrel of oil on the world market because each dollar is worth less. What is driving that change? The recent rate cuts by the Federal Reserve aimed at stemming the housing market meltdown and easing the credit crunch caused by increasing foreclosures of sub-prime mortgages. You know the kind hedge funds invest in. Like the hedge fund that employed John Edwards.

Posted by: Stephen Macklin at 05:36 PM | Comments (2) | Add Comment

1 Most of those politicians go to law school and don't study economics. A lot of what they learn is in terms of existing laws, legal precedent and bending the law to use the coercive power of government to achieve what they want. IMHP, if you opened up the energy industry to real competition, private inventors would come out of the woodwork to solve the problem, and of course they would make a handsome profit... Maybe even get a ticker tape parade. Oh wait, making a profit is evil

Posted by: Wayne at November 25, 2007 08:54 PM (DbJ+u)

2 I think the same could be said for any industry/problem we face. Something like energy is too important to leave to the politicians - the same goes for health care.

Posted by: Stephen Macklin at November 25, 2007 09:25 PM (Z3kjO)

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