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Thu Mar 22, 2012, 02:51 AM

Help me with my economics

If I understand the oil company subsidies we fund, we're giving them about $21 billion annually. That's a ton of money to be sure, and viscerally it feels odd to give a profitable industry anything, much less a huge sum of money. But apart from IRS income statements and shareholder reports, income is fairly fungible: The profitability number of a firm isn't affected by HOW it earned what it did, just that it did. True, it matters to US as liberals in terms of violative labor and environmental practices, but it doesn't matter to most shareholders and investment houses simply seeking to make a profitable investment.

My question, then, is if we take away $21 billion in whatever you want to call it, subsidies, profit, whatever, wouldn't they simply raise prices to offset that loss? It seems ECONOMICALLY irrational to simply forgo the $21 billion; words like patriotic or "the right thing to do" simply don't enter into many investment decisions, and because of that they're not often present in board rooms.

True enough, if we're paying that tab (and we are) then we're already paying for gas more expensive than what the sign at the pump says. But you can't get most Americans to see costs deeper than those which come DIRECTLY out of their pockets. So if we remove the $21 billion and if they raise prices, I fear the Democratic Party would be electorally screwed for generations. How am I wrong?

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Response to TeamsterDem (Original post)

Thu Mar 22, 2012, 04:23 AM

1. I think you are right. nt


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Response to TeamsterDem (Original post)

Thu Mar 22, 2012, 04:39 AM

2. I don't think you are wrong, but if they raise prices their demand will drop,


along with profits. So they raise the price again? Demand drops.

They probably won't be able to raise prices enough to offset the loss without driving themselves out of business.

And besides, if they are that strong they could just raise prices anyway to sway elections, and we shouldn't let our policies be determined by fear.

If you have to lick their boots, what power do you really have?

Besides, the president could take the podium and discuss the war they have started on the American people, maybe employ a million or so in energy research, a few other things, might mitigate that in whole or part.

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Response to jtuck004 (Reply #2)

Thu Mar 22, 2012, 03:59 PM

8. I'm not sure demand drops with this particular good

Unfortunately, right now oil is a necessary item. Demand may go down by a bit as people try to conserve, but people can't altogether forgo using oil - as much as all of us might want to. I'd normally agree with you that increased prices tend to cause a reduction in demand, but that "rule" is only as good as the good in question in terms of its necessity. Put another way, oil as a necessary good is price inelastic given the unavailability of (current) substitutes and the necessity of the good itself.

What my prescription would be is for the president and all of the liberal/moderate think tanks to start releasing studies showing the ACTUAL price of a gallon of gas to get people accustomed to the idea that $3.84 (or whatever) isn't the ACTUAL price. We might even be able to get some of the teabags on our side in that particular argument, the ones 100% focused on taxes and government spending. After some time perhaps that knowledge would permeate the "common wisdom" such that stripping the tax subsidy from oil wouldn't necessarily carry a political price.

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Response to TeamsterDem (Reply #8)

Thu Mar 22, 2012, 04:17 PM

10. Heart medicine is necessary too, but if one doesn't have the money, they


can't get as much. Well, you can get some with a little groveling, but likely not what the well-protected (insured or wealthy, for now) gets.

They can raise prices, but that doesn't raise the income of the person burning it to get to work. And with less money for that, they don't eat out, they don't buy the extra tv, they haven't got the money to buy fresh foods. And all the places they spent that money now have less, and buy less gas.

So here are ms and mr jones, and they can't afford a cheeseburger out, or they are shivering in the home because they are trying to keep the thermostat down because gas went up.

And you want to give them a piece of paper talking about prices, facts, and figures, saying that the eal price is higher? The radical right says if you elect me we will drill more AMERICAN gas, give you jobs, jobs, jobs, and bring that price down, because we CARE about you. WE bring you REAL HOPE, not what THEY have brought you TODAY. (Niote: That is the message they are bringing to school boards, other local and state elections, and national seats.

Might I suggest we keep brainstorming another approach? And maybe we need shift the whole discussion, (I'd have to think about it a little) because as stated it plays right into their talking points.

Maybe we start a big conversation about the need for a national, tution-free school for adults to learn about energy or medical research, and try to put 10 million Americans to work on the problem, that THAT is the real answer for the future, not continuing to pay big oil and lick their damn boots?

just brainstorming...

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Response to jtuck004 (Reply #10)

Thu Mar 22, 2012, 04:33 PM

12. I'm not sure we're actually disagreeing here. :)

What I'm saying is that I don't think oil is very elastic. Is it elastic AT ALL? Yes of course, I mean you can always modify behaviors to try and better accommodate your demand availability with the supply cost. But what I'm saying is neither you nor I could decide tonight that we will no longer use any oil. We just can't. Even if we decided that we'd ride bicycles to work (you do have to grease the bike's chain), we'd still be consuming other things made using oil - and trucked in on semis powered by oil. That's an extreme example, of course, because the vast majority of people won't be switching to bicycles; you and I both know that. Could they? Of course they could. But we're talking likelihood. The likelihood ain't great, at least not in significant numbers.

Your heart medicine example is a very good one: If you need it owing to a heart condition, for you that heart medicine is very inelastic ... you'll buy it at almost any cost because you need it. Oil isn't quite AS necessary as certain medicines, but it is still necessary. It's not like choosing between Fruit Loops or Chex cereal: Fruit Loops couldn't one day up and double prices because we can all switch to something else, and they'd be all done in the market. But what if ALL cereal went up? True, you could still switch to something else, but the elasticity goes down SOMEWHAT. Oil being so integrated in our world it's difficult to say people will immediately find alternatives because as of yet those alternatives aren't perfectly ready, nor are they cost available to many.

Please don't exaggerate my point. I didn't say we should hand people a piece of paper. What I said was that studies should become part of the public dialogue in just the same way as the right-wing started in the late 60s to publish what were then counterintuitive ideas about supply side economics, and some 20 years later a considerable element of the American public bought into it - and still believes it. But make no mistake: Ronald Reagan alone didn't do that. It was the constant infiltration of academia and the American intelligentsia by those "studies" which made it seem legitimate, thus giving Reagan a platform on which to advocate for it. That is my recommendation. If we don't do that we'll wind up being the party who nearly doubled gas prices. Try winning an election like that.

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Response to TeamsterDem (Reply #12)

Fri Mar 23, 2012, 07:07 AM

18. I don't think we are disagreeing at all, and I didn't mean


to exaggerate your later point, even though I did.

One has only has so much money, and there will come a point when they price most people out of as much gas as they are using. (I see a lot of opportunity for a better life in that, but that's another subject). So there is a hard ceiling beyond which any producer can shoot themselves in the foot. They should be free to find it, because we are indebting ourself to prevent that now. I think it is an unwise investment of taxpayer dollars to chase a dying resource, and maybe would be better if we trained up a bunch of people and set them to work finding better solutions for our future.

Lakoff thinks liberals ought to mount a greater offense, pushing liberal moral values, take the conversation away from the radical right. (I wonder if he means the liberal morals of old, or the newer ones?) We could also do that by proposing a big job or training program on the scale of the WPA. Talk about how we invest in our country in a bigger way, instead of cuts to the Minority Business Development Agency (35% unemployment and they want to cut THAT? Ought to be ashamed, and ought to be ashamed of taking heating assistance from poor people while we insure tens of millions in bonuses at banks that screwed the entire country). New morals, phooey.

In any event, I do think studies and writing are important, but I don't think most voters read such things in depth. I'm not even sure they check out the bullet points they hear to make sure there is some basis for it. Today they watch the shiny box and do what it tells them, look for the person that seems to agree with their self-interest and vote, if they even bother. There were and are lots of people who read things related to that "trickle down economics" crap, selfish people who saw a way to take from others to enrich themselves. But I think that most people who voted for Reagan never read an economic philosopy paper on "trickle-down". They watched tv and listened to speeches, talked with their neighbors. They were offered a picture in their heads of a Carter presidency where they had to grow up and bite the bullet for the good of the nation, or the "city on the hill" clown who promised them a better life (and because they don't read the papers I think most voters didn't realize that it meant much of their money and jobs had to go to someone else before it could trickle down). Should be coming back any day now...

Because we have no greater program , we fight FOX and the addled limbaugh character, certainly not because they provide anything much of a factual basis, but because they are disrespectful and hurt people 24x7. If Lakoff is correct, however, they are part of a larger campaign that intends to take every office it can in this country, and what it can't take it will obstruct until it is dead or they are in charge.. The radical right are metaphorically chaining themselves to the doors of any elected office and stopping anything until they get power.

They would rather see the country in ruins and dead than live without the strong father figure model that encapsulates most of their beliefs and policies (see Lakoff on Santorum's Strategy - scary). They want men in control of women's reproduction, they want the government broken. It should scare the beejezus out of any rational person to think they will make the rules. But the ideas they live on are repeated over and over on the above two sources. I even heard high-school kids parroting that crap when I was teaching driving. Theirs is a campaign to keep those ideas at least warm in our brain circuits, for anyone who listens.

Studies and papers and information for liberal values need to get out there, but we need a way to constantly repeat the guts so they become and stay active in people's brains. Today that probably means our own news channel, viral youtube clips, getting a minute or the late night comedian talk circuit. Or we could try a program big enough to suck all the oxygen out of the opponent's gasbag spokespeople. Put them on the defensive for a while. Like those convoy bombs we used in Iraq, but without killing anyone. It would get real publicity, the free kind you get when you make such a big fuss that all the media (except "those people on the right" report on it, have interviews, specials, etc.

Not gonna hold my breath.. Too much corporate influence. You can't save slaves unless they know they are slaves, said H. Tubbman. So the job is consciousness raising in a country , or on partisan web sites, where the dollar has as important a voice as any American.

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Response to TeamsterDem (Original post)

Thu Mar 22, 2012, 04:42 AM

3. My answer:

So if we remove the $21 billion and if they raise prices, I fear the Democratic Party would be electorally screwed for generations.

Removing the subsidy to petroleum would make alternative energy sources like solar, wind and hydrogen economically, that is price-wise, more competitive. Abolishing those subsidies would make Americans more realistic about the true price of petroleum products.

In addition to improving the air we breathe, doing away with the subsidies might improve the health of many of us, especially those of us living near freeways or in houses heated by oil.

So, removing the subsidies would give us a more realistic idea of the cost of oil and help us move toward a diversity of energy sources.

We do a lot of really important things with petroleum besides burning it up, and we need to save the petroleum that we can obtain at relatively cheap prices for the other things we make with it like certain medicines and many, many other things.

We simply cannot afford cheap oil any more. It is becoming more costly and less economically efficient to subsidize oil -- in addition to the ever-rising prices we must pay for it -- and therefore economically speaking foolish.

The cost of petroleum products will rise regardless of whether politicians continue to subsidize them or not. It is just a matter of time.

The petroleum age is ending. We all have to get used to it. So that is why ending subsidies really won't hurt the Democratic Party. Keeping them will hurt not just our Party but our nation because oil is becoming more expensive and we need to develop the alternatives to it NOW.

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Response to JDPriestly (Reply #3)

Thu Mar 22, 2012, 04:05 PM

9. I don't disagree with what you've written, but

I think doing it that way DOES wind up costing the Dems (if they're the ones who do it) because I'm here to tell ya most people don't look beyond the end of their hood; e.g. whatever price is tacked up on the gas station board. I could write the ad: "Under Obama gas started at X and now it's Y ..." The bigger the difference between Y and X the more blame Democrats get.

Alternatives NEED to be developed. Totally agreed. But I think where some of us come to the debate is by saying yes, let's invest in renewables, let's invest in the infrastructure to deliver it, but let's also not starve CURRENT demand by saying "don't worry, renewables are on the way." Done properly many of us feel that renewables could be fully developed and, once market-ready, then replace oil. But not before then if for no other reason than, for example, my trucks run on gas, not some other fuel. And I need to get to work.

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Response to TeamsterDem (Reply #9)

Thu Mar 22, 2012, 10:22 PM

16. Clearly, we can't quit oil cold turkey.

But we need to start weaning ourselves. We need to experiment even more with alternatives to find what works.

And most important, we need to get realistic about the true cost of oil. It is much more expensive than the price we pay at the pump. Plus, we must, absolutely must reserve oil for industrial use and for use in the production of things like medications, etc.

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Response to TeamsterDem (Original post)

Thu Mar 22, 2012, 05:51 AM

4. So there's no free market?

We have to give them subsidies or else prices will go up? They have no competition keeping prices down?

Well I guess we'll have to break them up, being monopolies and all.

Adam Smith fanatically hated monopolies. They were antithetical to a free market.

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Response to Confusious (Reply #4)

Thu Mar 22, 2012, 04:19 PM

11. Well, there IS a free market

But our ridiculous policies have perverted it. Whenever you subsidize an industry you run that risk. In my view subsidies should only exist to assist struggling U.S. companies WHEN they need it, or to protect U.S. manufacturing from foreign imports.

What we've done in the U.S. with oil is to have made a decision that the price at the pump is more important than actual cost. We pay the taxes and we pay the price at the pump, both of which add up to a number higher than what we see when we park our cars there to fill up. But if you remove what the oil companies see as a revenue source (the subsidy) it's kind of naive to think they'll just forgo that profit. It turns out, it's also not rational - economically rational: Why would you as a company accept a lower revenue stream? You wouldn't. You'd simply acknowledge that Americans had already been paying the price at the pump PLUS the per capita tax incidence, so that's likely what you'd charge. Or at least you'd try.

They're not monopolies necessarily, largely because only one monopoly can exist in any given market if it's truly a monopoly. Better put, they're distributors of a rare good - a good decreasing in availability, at that. In this case their market share isn't really what's important. What's important is that we're subsidizing a good, and like any subsidized good, when the subsidy disappears the price goes up. I think we need to confront that problem realistically before snapping the subsidy off the good and letting oil float naturally in the U.S. market. It will float, but at a higher price. And whomever causes its pump price to increase is going to pay a price. I mean the ads write themselves, really. They'd be disingenuous, but that's never stopped a politician from doing it ... nor a teabag from believing it.

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Response to TeamsterDem (Reply #11)

Thu Mar 22, 2012, 10:29 PM

17. Problem is, of course, that the price doesn't really go up when we drop the subsidy.

The price is the same but we pay all of the price at the moment of consumption -- when we pump the gas or buy the heating oil. Now, we pay it when we pay our taxes or, if we don't have much money, when we do without benefits we might otherwise receive from tax revenue.

We have to get people to use less oil.

In addition, the Republicans complain a lot about entitlements.

In fact, the oil subsidies are an entitlement for those who use a lot of oil -- for those who drive SUVs in which the driver is the sole passenger, for people who fly a lot, and yes, for truck companies.

People who ride bikes, people who live close to their jobs, people who walk and people who use public transportation pay or do without in order to subsidize the jobs, travel or SUV, gas-guzzler lifestyles of others.

That is the reality of the oil and gas subsidy.

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Response to TeamsterDem (Original post)

Thu Mar 22, 2012, 06:16 AM

5. It sounds like alot of money

But it is only a tiny portion of our budget and probably not all that large compared to the cash flow in the oil industry. Sure, they would probably raise prices a few cents to make up the difference. Since a very significant portion of the cost of each gallon of gas is excise taxes, we could adjust the taxes to offset any price increase making the net impact on both sides of the ledger zero.

Nothing will happen until after the election anyway, and whatever happens then will depend on who wins.

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Response to TeamsterDem (Original post)

Thu Mar 22, 2012, 06:19 AM

6. You have to ask yourself... what is the nature of the market?

The oil market is not the same as your corner liquor store (or, am I the only one who lived in a neighborhood with a corner liquor store?)

If you cut subsidies for the oil industry... the oil isn't a "single step" from the consumer... so it can't just be "passed along" to the consumer the way a tax on a pack of gum (or cigarettes) can be.

The oil, globally produced, goes to some limited number of markets/bourses. There, the crude is bought, (probably by speculator's working the market like the pork-belly market was being manipulated in the movie Trading Places), and then "flipped" and sold to the "producers" who turn it into a variety of products, from gasoline, to a fetid ooze slated to replace the hallowed gasoline of yesteryear.

Perhaps a bureaucratic position could be established that would shoehorn itself into the uncomfortably foreign markets that so confuse the modern would-be oil investor. How much are you interested in giving?

As for those original subsidies... the oil industries will be doing the research so they can make the money off the new ideas/products/et. al provided by government research which is meant to then be turned over.

As for those with foreign oil drilling schemes... I'm guessing you'll be busy for theim

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Response to TeamsterDem (Original post)

Thu Mar 22, 2012, 06:30 AM

7. You're Presuming Collusion

And you may be right, but merely "passing it on" would mean all those companies agreed that they would not compete for share as the subsidies evaporated.

Not saying that wouldn't happen, but i just think it would require essentially unlawful behavior on the part of the petrofirms.

Besides, their cost model is more dependent on crude prices than it is on subsidies. The initial pricing is based on a "cost-plus" model, where the "plus" is a proportion. So, higher prices mean a higher asking price. Now the market may or may not agree to pay those prices, but it almost always does.

As someone else on this thread said, raising prices to recover margin may reduce demand, and since this current pricing model values volume over margin, they may lose more than the gain.

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Response to ProfessorGAC (Reply #7)

Thu Mar 22, 2012, 04:46 PM

13. Not collusion, but instead rational economic behavior

Think about it: The firms right now are getting $21 billion divided between them in some way at current supply levels. If that $21 billion is suddenly removed from their books, it seems extremely naive to think that they'll just eat what was until recently a higher profit margin - especially given that American consumers don't have any readily-available alternatives with which they can substitute. Add that to the fact that increasing prices by the amount that subsidies are withdrawn is not illegal: It is simply rational from the standpoint of the company seeking to maximize profits.

This is precisely why these subsidies should have never been given to these oil companies. But without some careful work by the Democratic Party we might cut off our noses to spite our faces if we just strip the subsidies without at least considering what rational economic behavior is and what it might do to political behavior afterward. That's my fear.

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Response to TeamsterDem (Original post)

Thu Mar 22, 2012, 04:53 PM

14. Even if all the $21 billion were added to the price of gasoline, it would be less than $0.20 /gallon

$21,000,000,000 / (8,700,000 * 42 * 365) = $0.157455519

Of course there are a lot of other petroleum products like diesel fuel, jet fuel, heating oils, lubricants, petrochemicals, etc. so the impact on gasoline prices would be even less.

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Response to FarCenter (Reply #14)

Thu Mar 22, 2012, 05:10 PM

15. That's an excellent point

Thank you. I'd thought about all of the other moving parts except the one I should've focused on.

Thanks for setting me straight!!!!

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