Mankiw on Obama

Greg Mankiw posted on Sunday about Barack Obama's plan for a windfall tax on oil companies. Not surprisingly, Mankiw seems to be opposed to this (as most reasonable economists would be, I would imagine). But for the sake of argument, let's look at some numbers. Mankiw quotes Obama:

"I think oil companies are amoral. They want to make as much money as they can for their shareholders, which is what corporations do," he says. "The difference is the nature of the kind of outsized profits they make that may have no relationship to their investments or their production. The fact, for example, the shortage of refinery capacity could actually increase their profits so the less they invest the more they make indicates that you are not dealing with someone making widgets out there."

First, I don't think that oil companies are making out-sized profits. Take the biggest "offender," Exxon Mobil, for instance. While I'm no fan of this company (or of fossil fuels in general) I don't think that Exxon Mobil has engaged in any immoral behavior (amoral, perhaps, but that's not the same thing). People are offended by the size of their $11.68 billion quarterly profit because it seems outrageous. But consider a couple of things:

• That was on sales of more than $138 billion, a profit margin of less than 8.5 percent
• Their pre-tax income was about $22.2 billion, and the taxes they paid for the quarter were about $10.5 billion, giving them a tax rate of more than 47 percent

Should Exxon Mobil be held to a different standard? People are obviously not unhappy with their profit margin, just their total profit. But that total profit is driven by their sales. If you don't want them to make that much money, stop buying what their selling. Supply and demand. But I don't think they should be penalized by having to pay a 75 percent income tax rate because they are providing a product that has such high demand.

Still, I'm looking forward to a time when the powers of Creative Destruction have made the fossil fuels industry obsolete.

Economic Projections for China

Next Big Future has information on economic projections for China. Some of the results are pretty surprising, but I'm not sure how long China can sustain the incredible growth rates.

Biofuels and the Food Supply

CNET News' Green Tech Blog reports on research by clean-energy research firm New Energy Finance that says that oil prices have a bigger impact on food prices than biofuels. And I believe it.

The report also states that changing food patterns around the world (i.e., rising middle classes consuming more meat and less grain), growin gpopulation, rising input costs are impacting food prices.

The report stated that

In grains, during the period from 2004 to April 2008, global dollar prices increased by an average of 168 percent. The rising price of oil accounts for an increase of 32.5 percent and other inputs--such as land and labor costs--contributed 7.4 percent. Dollar depreciation accounts for a further 17.9 percent. Supply and demand imbalances account for the remaining 57.7 percent, with biofuels responsible for up to an 8.1 percent increase in global average grain prices (the impact on U.S. corn was clearly above average). The biggest issues were the failure to improve yields to compensate for global population growth, along with the failure of the Australian harvest.

Biofuels may not be the main culprit in food prices, but given that they will have little or no effect on oil prices they appear to be a waste of resources that could be better spent on something with a greater likelihood of success.

Farmer Ditches Powered Tractor for Mules

The Associated Press reported yesterday on a farmer in Warren County, Tennessee, who had what some may consider an unusual reaction to higher fuel costs: he hitched his tractor rake to a pair of mules instead of using the tractor's engine. The mules cover the fields slower than a petroleum-powered tractor, but apparently the cost of the fuel for the tractor exceeds the cost of feeding and caring for the mules and the cost of the extra time.

Is this the shape of things to come? Are we destined, because of higher fuel costs, to slide back to the Middle Ages? I don't think so, but just the same it may be time to invest in mule- and donkey-futures. Besides, with the terms of the new Farm Bill, farmers in this country should never have to struggle again.

Politics and the Farm Bill

David Brooks of the New York Times posted an editorial online yesterday that talks about actions and power of groups, politics, and the Farm Bill. It's a pretty interesting read, especially in terms of how the current presidential candidates have responded.

America Should Increase Its Gas Tax

Gerard Baker of the UK's Times Online thinks that high oil prices are a good thing, and I couldn't agree more. Oil has been the main focus of U.S. foreign policy since the end of the Cold War, and has been a major element of foreign policy since the 1930s.

If we had no use for petroleum in this country, we would certainly have made dramatically different choices over the past two decades and our disastrous foreign policy moves might never have happened. Instead of cozying up to groups like the Saudi Royal Family, we would instead be criticizing their detestable human rights records.

But the fact is, here and now, we do need oil. And it costs a lot of money, too much many would say. So why do I (and Gerard Baker) disagree?

Markets power our society to adapt to changes. If the price of something is too high, market forces will work to lower it or to find alternatives. During the oil crisis of the 1970s, those market forces drove innovation in efficiency research resulting in dramatically more energy efficient technologies. In fact, if oil prices hadn't cratered in the 1980s and 1990s, our need for oil right now would be dramatically lower. But ease they did, and instead of driving ultra-efficient vehicles and powering our homes and businesses with solar, wind, and nuclear energy, we drive gas-guzzling SUVs and burn coal and even oil in our power plants.

Higher oil prices will hurt in the short term, but in the long term the country (and the world) will be better off. And if we can switch to using all-electric cars like the Tesla Roadster and powering them off of solar or wind energy, then maybe, just maybe, we'll reduce or eliminate our need to fund fascists and dictators in the Middle East and other parts of the world.

It's time for the U.S. to step up and be a world leader once more. What I would propose would be an increased tax on gasoline and diesel fuel. That's right, I said increased. Just as elimination of the Federal gas tax (the so-called "gas tax holiday") would have little or no effect on the price at the pump, so would a tax increase. Why?

Because prices are set by supply and demand. If the government throws another 17 cents onto the price of a gallon of gasoline, we'll start to drive less and carpool more. We're already doing that because of the high prices we're paying at the pump. The oil companies will be forced to reduce prices somewhat (such that a 17 cent per gallon tax would have about a 4-5 cent per gallon effect on prices). They can afford it, after all, given their massive profits.

And then the government could take that money and use it to fund programs in energy efficiency and alternative energy (and I don't mean biofuels, unless we're going to also eliminate sugar tariffs and start making ethanol from sugar instead of corn... but that's another blog post). The money could even be used for improved tax breaks for purchase of all-electric vehicles or hybrids. If we're willing to make minor sacrifices like these now, we can really make a difference for our future and begin to truly wean ourselves from foreign oil.

Ag Secretary Resists Changes to Biofuels Program

Secretary of Agriculture Ed Schafer doesn't think that ethanol is having a major impact on food prices, and sees no need to make changes to programs that promote its use as a fuel source. Meanwhile, prices of commodities like corn, wheat, rice, and soybeans are setting records and food riots are happening in many parts of the world.

Schafer is right that ethanol subsidies alone are not the cause of high food prices. Right now the market is suffering heavily from increased demand (due to growing middle classes in China and India, and increasing world population, and, yes, diversion of food crops to create ethanol) and decreased supply (due mainly to droughts), combined with increased costs for transportation and storage.

But, while the effect of ethanol on food prices may not be as substantial as some people have indicated, it is definitely a part of the problem. Even if it can reduce food prices by a small amount, that will help starving people around the world as well as budget-constrained consumers here in the U.S.

And if ethanol subsidies are not having a major impact on food prices, it's clear that they are having no impact whatsoever (or possibly a negative impact) on oil prices, which is their very purpose. So Secretary Schafer, you need to re-think your position and consider changes to the biofuels program.