Wind fall profits tax & the energy consumer rebate = redistributive bandaid

I eagerly read a story about the windfall profit tax announced by Obama yesterday on the heals of Exxon Mobil's announcement on record profits. Skirting into the tax discourse is a potentially dangerous area for politicians, so I can perhaps justify his focus on the redistributive consumer rebate that will be funded by such a tax. But in the big picture this policy is very weak on substance, much to my disappointment.

If this political economic opportunity to pass a windfall profits tax is lost, and fails to correct some of the fundamental distortions in the carbon energy economy, it would be a terrible missed opportunity that may not reemerge anytime soon. It will have repercussions far beyond high energy costs, and postpone attempts to foster a low-carbon energy system.

Obama Remarks on the Economy are here on the nyt

Rising Oil Prices Swell Profits at Exxon and Shell

August 1, 2008 By CLIFFORD KRAUSS and JULIA WERDIGIER

HOUSTON — Exxon Mobil, the world’s largest publicly traded oil company, reported on Thursday its best quarterly profit in history, but investors sold off shares in morning trading after expecting even higher earnings because of soaring oil and natural gas prices.

Record earnings for the world’s largest publicly traded oil company have become almost as predictable as the surge of gasoline prices at the pump in recent years, and for the second quarter income rose 14 percent, to $11.68 billion.

It was the highest quarterly profit ever for any American company, as Exxon made nearly $90,000 a minute.

Such profits have made Exxon Mobil a target of politicians in recent years, propelling calls for windfall profits taxes to finance research and development for renewable fuels to replace oil.

continue to NYT

“The American auto industry has sold the cars people wanted”

This NYT article describes our famous addiction and many lost opportunities to stem the addiction. I would remind folks that the US is not alone in falling asleep at the wheel on energy policy. The EU took the US CAFE standards to the WTO arguing that the CAFE discriminated against European gas guzzlers, a ruling that was upheld by the dispute tribunal. In other words, even Europe has many of its policies dictated by its auto-industry.

FYI, Mccain has recently supported the CAFE standards, but voted against them 2002, 2003, and 2005.

American Energy Policy, Asleep at the Spigot

By NELSON D. SCHWARTZ

JUST three years ago, with oil trading at a seemingly frothy $66 a barrel, David J. O’Reilly made what many experts considered a risky bet. Outmaneuvering Chinese bidders and ignoring critics who said he overpaid, Mr. O’Reilly, the chief executive of Chevron, forked over $18 billion to buy Unocal, a giant whose riches date back to oil fields made famous in the film “There Will Be Blood.”

For Chevron, the deal proved to be a movie-worthy gusher, helping its profits to soar. And while he has warned about tightening energy supplies for years and looks prescient for buying Unocal, even Mr. O’Reilly says that he still can’t get his head around current oil prices, which closed above $145 a barrel on Thursday, a record.

“We can see how you can get to $100,” he says. “At $140, I just don’t know how to explain it. We’re surprised.”

For the rest of the country, the feeling is more like shock. As gasoline prices climb beyond $4 a gallon, Americans are rethinking what they drive and how and where they live. Entire industries are reeling — airlines and automakers most prominent among them — and gas prices have emerged as an important issue in the presidential campaign.

Ninety percent of Americans, meanwhile, expect the pain at the pump to pose a financial hardship in the next six months, according to a recent Associated Press-Yahoo News poll. Stocks now trade inversely to crude prices, and the Dow Jones industrials are in bear-market territory. Old icons have been written off, with Starbucks boasting nearly twice the market value of General Motors, which some on Wall Street say faces the possibility of bankruptcy.

Outside the thriving oil patch, it makes for a bleak economic picture. But it didn’t have to be this way.

Over the last 25 years, opportunities to head off the current crisis were ignored, missed or deliberately blocked, according to analysts, politicians and veterans of the oil and automobile industries. What’s more, for all the surprise at just how high oil prices have climbed, and fears for the future, this is one crisis we were warned about. Ever since the oil shortages of the 1970s, one report after another has cautioned against America’s oil addiction.

Even as politicians heatedly debate opening new regions to drilling, corralling energy speculators, or starting an Apollo-like effort to find renewable energy supplies, analysts say the real source of the problem is closer to home. In fact, it’s parked in our driveways.

Nearly 70 percent of the 21 million barrels of oil the United States consumes every day goes for transportation, with the bulk of that burned by individual drivers, according to the National Commission on Energy Policy, a bipartisan research group that advises Congress.

SO despite the fierce debate over what’s behind the recent spike in prices, no one differs on what’s really responsible for all that underlying demand here for black gold: the automobile, fueled not only by gasoline but also by Americans’ famous propensity for voracious consumption.

To be sure, the American appetite for crude oil is only one reason for the recent price surge. But the country’s dependence on imported oil has only kept growing in recent years, undermining the trade balance and putting an added strain on global supplies.

Although the road to $4 gasoline and increased oil dependence has been paved in places like Detroit, Houston and Riyadh, it runs through Washington as well, where policy makers have let the problem make lengthy pit stops.

“Much of what we’re seeing today could have been prevented or ameliorated had we chosen to act differently,” says Pete V. Domenici, the ranking Republican member of the Senate Energy and Natural Resources Committee and a 36-year veteran of the Senate. “It was a bipartisan failure to act.”

Mike Jackson, the chief executive of AutoNation, the country’s biggest automobile retailer, is even more blunt. “It was totally preventable,” he says, anger creeping into his affable car-salesman’s pitch.

The speed at which gas prices are climbing is forcing a seismic change in long-held American habits, from car-buying to commuting. Last week, Ford Motor reported that S.U.V. sales were down 55 percent from a year ago, while demand for its full-size F-series pickup, a gas guzzler that was the country’s best-selling vehicle for 26 consecutive years, is off 40 percent. The only Ford model to show a sales increase was the midsized Fusion. A Ford spokeswoman says the market shift is “totally unprecedented and faster than anything we’ve ever seen.”

If the latest rise in oil prices isn’t just another spike — like those of the 1970s and 1980s — but is instead a fundamental repricing of the commodity responsible for much of modern American life, the impact of that change will affect everyone from home builders and homeowners in exurbs to corporate leaders, landlords and commuters in cities.

Although Asian consumers have begun emulating America’s love affair with the automobile, with the commercial booms of China and India playing pivotal roles in increased oil demand, the largest energy appetite in the world is still found in the United States. Home to only 4 percent of the world’s population, the nation slurps up about a quarter of the planet’s oil — and Americans’ daily use is nearly twice the combined consumption of the Chinese and Indians, according to an annual energy survey published by BP, the British oil giant.

Indeed, low-priced gasoline has long been part of the American social contract, according to Newt Gingrich, the former House speaker and Republican leader. While in office, Mr. Gingrich battled efforts to modulate demand through tools like increased gas taxes and tighter fuel standards, and he argues that voters won’t support such measures even now.

“They will work if you coerce the entire system and if you pretend the American people are Japanese and Europeans,” Mr. Gingrich says. “Our culture favors driving long distances in powerful vehicles and the car as a social expression.”

Perhaps, but on Capitol Hill, members of both parties now say they are furious with Detroit for fighting so hard, and for so long, against higher fuel-efficiency standards.

Though analysts say automakers who shoveled out highly profitable and highly inefficient road hogs like S.U.V.’s and pickups deserve much of the blame, they also criticize legislators who failed to provide an incentive for consumers to switch to fuel-sipping cars. Some politicians are quick to acknowledge the problem.

“We’ve got to fix it or our standard of living will change within a decade,” says Senator Domenici, who is retiring this year. “Oil was too damn cheap, it’s too high now and it’s going even higher. I hope I’m wrong, but the problem is, we can’t catch up soon enough.”

According to energy policy experts, it was in the late 1980s and early 1990s — during the administrations of President George H. W. Bush and Bill Clinton — that things began to go wrong.

Before that point, the country reaped the benefits of the first fuel-economy standards, passed in 1975, known as corporate average fuel economy, or CAFE. Between 1974 and 1989, the efficiency of a typical car sold in the United States almost doubled, to 27.5 miles per gallon from 13.8.

LARGELY as a result, oil consumption in 1990 totaled 16.9 million barrels, basically on a par with the 17 million barrels consumed in 1980, even as the economy grew substantially. Oil prices were in the middle of a long downward slide that would take them from well above $30 a barrel in 1980 to a low of just under $10 in late 1998 and early 1999, interrupted only by brief spike in 1990 after Iraq’s invasion of Kuwait.

In 1990, Richard H. Bryan, a Nevada Democrat, teamed up in the Senate with Slade Gorton, Republican of Washington, and proposed lifting fuel standards again over the next decade, with a goal of 40 m.p.g. for cars. Amid furious opposition from Detroit, liberal Democrats from automaking states, like Carl Levin of Michigan, joined conservative Republicans like Jesse Helms of North Carolina to block new CAFE standards. “It was one of the most frustrating issues in my Senate career,” says Mr. Gorton, who left the Senate in 2001.

Dan Becker, then a lobbyist for the Sierra Club, still remembers his shock when he saw Mr. Levin and Mr. Helms, diametrically opposed on most issues, walk amiably together onto the Senate floor to cast their votes. “This wasn’t East-West, right-left, or North-South,” he says. “But had we passed that bill, we’d be using three million barrels less oil a day now.”

That amount may not sound like much, given total global consumption of 85 million barrels a day, but it’s more than OPEC’s spare capacity now.

Mr. Levin didn’t return calls for comment. (Mr. Helms died on Friday.) But Representative John D. Dingell, the powerful Democrat from Detroit who chairs the House Energy and Commerce Committee, argues — as he did more than a decade ago — that tightening CAFE standards unfairly penalizes domestic automakers while rewarding foreign rivals who make more small cars.

Mr. Dingell, who has defended the automakers fiercely during his 52 years on Capitol Hill, decided to support the stronger CAFE standards last year. But he does not apologize for his longtime stance. “The American auto industry has sold the cars people wanted,” he says. “You’re going to blame the auto industry for that or the American consumer? He likes it sitting in his driveway, he likes it big, he likes it safe.”

A much more effective approach would be to simply raise taxes on gasoline, Mr. Dingell says, because higher prices are the easiest way to change buying habits. Some Europeans agree with this, noting that policy changes engineered through taxation can alter consumer choices without impeding economic growth.

Consumers overseas might not like higher taxes on gasoline, but they’ve adapted, says Jeroen van der Veer, chief executive of Royal Dutch Shell, the European energy giant. “A society can work, can function and can grow even at higher fuel prices,” he says. “It’s a way of life — you get used to it.”

In Mr. van der Veer’s native Holland, for example, gasoline sells for more than $10 a gallon, with $5.57 of that going to taxes. Even in Britain, which has substantial North Sea production, gasoline sells for $8.71 a gallon.

A SUBSTANTIAL gas tax increase was considered during the administration of the first President Bush, recalls William K. Reilly, who ran the Environmental Protection Agency at the time. But it was whittled down in 1990 to just 5 cents after Mr. Gingrich and other conservatives in the Republican Party broke with the president.

“This was a stark lesson and people decided the gas tax was the third rail of public policy,” Mr. Reilly says.

Even as Congress idled when it came to tightening CAFE standards or substantially raising levies on gas, the Exxon Valdez oil spill in 1989 made offshore drilling yet another unpalatable option. “That caused a sea change and after that no one had any sympathy for the oil industry,” Mr. Becker says.

In 1990, three months before the effort to raise fuel-efficiency standards failed on Capitol Hill, President Bush issued an executive order making large swaths of the continental shelf off-limits to new exploration. That policy remains in effect today.

When Senators Charles E. Schumer, a New York Democrat, and Frank H. Murkowski, an Alaska Republican, attempted to put together a grand bargain of opening up more of Alaska in exchange for raising auto efficiency in 1998, the two couldn’t persuade enough members of either party to go along.

“It was a no-action policy,” says Lee R. Raymond, the former chief executive of Exxon Mobil, who has had a ringside seat for most of the energy policy debates of the last 25 years. “By the time there is panic, people need to realize this: There is no quick-fix on this. By the time you panic, it is way too late.”

Still, many analysts argue that increased drilling alone is no panacea. They note that many of the oil giants don’t drill in areas to which they already have access. Exxon, in particular, has been criticized as spending too much to buy back its own stock and not enough on exploration. Chris Welberry, a spokesman for Exxon Mobil, defends the company’s record, saying, “We are investing in our business at record levels — around $25 billion this year.”

In any event, added drilling is unlikely to generate sharply lower prices. A recent study by the federal government’s Energy Information Administration estimated that under the best-case scenario opening up the Arctic National Wildlife Refuge would reduce prices by $1.44 a barrel by 2027. Drilling in broader swaths off the continental United States wouldn’t affect prices until 2030.

On the taxation frontier, President Clinton did manage to get through a small tax increase on gasoline — 4.3 cents — in 1993, but with oil prices hovering between $10 and $20 a barrel for most of the 1990s, conservation ended up on the back burner.

Indeed, President Clinton did propose a broader tax on energy consumption in 1993, but it died quickly when Senate Democrats rebelled, much as House Republicans derailed President Bush’s gas tax in 1990. Still, environmentalists like Mr. Becker remain disappointed with Mr. Clinton for not doing more in his first term when oil prices were low and Detroit was enjoying a recovery in profits after the lean years of the early 1990s.

Congressional Republicans made matters worse in 1995, when they attached a rider to a huge appropriations bill forbidding the National Highway Traffic Safety Administration from spending any money to raise fuel standards. That law, in effect until 2001, made any change in CAFE standards impossible, says Representative Edward J. Markey, a Massachusetts Democrat who has pushed for better fuel efficiency.

As Paul Bledsoe, strategy director of the National Commission on Energy Policy, recalls it, “The 1990s were something of a lost decade for American fuel efficiency.” With oil prices low, consumers began snapping up pickup trucks and sport utility vehicles, which were governed by less stringent fuel economy standards, thanks to a loophole in the original 1975 law. These carried higher sticker prices and profit margins, and both Detroit and foreign automakers were happy to oblige.

Although oil prices remained low through the 1990s, consumption patterns were taking an ominous turn. By 2000, daily demand reached 19.7 million barrels a day — nearly three million more than in 1990, a 17 percent jump in 10 years that wiped out much of the fuel savings that followed the energy crises of the 1970s.

Since then, global consumption has taken off, rising to 85.2 million barrels a day last year from 76.3 million in 2000.

In recent years, Mr. Reilly says that both the White House and Congress have passed up opportunities to call for higher gas taxes and fuel standards in the name of national security, especially after the Sept. 11 attacks. “We could have, but we didn’t,” says Mr. Reilly, who describes himself as a moderate Republican. “It’s part of a long pattern in which Democrats and Republicans have not wanted to wade into this issue.”

BY 2001, oil prices were slowly creeping up, but few seemed to notice, perhaps because the march was slow and steady. By 2004, crude was at $37 a barrel and the next year it hit $50. With higher prices for oil, an increase in gas taxes was political poison, but Mr. Markey says support for new fuel standards was reawakening.

Nevertheless, his efforts to pass new fuel economy legislation in 2001, 2003, and 2005 went nowhere amid continued opposition by supporters of the auto industry on both sides of the aisle as well as many conservative Republicans. Although the United States had long ceased to be energy-independent — that era ended just after World War II — Mr. Markey says he believes the memory of plentiful domestic supplies created a different mind-set here than in Europe, where oil was generally scarce.

Other veterans of those battles cite lobbying by the domestic automakers as a main factor in the failure of Mr. Markey’s legislation. “The auto companies didn’t see the handwriting on the wall,” Mr. Schumer says. “The auto companies would go to people and say, ‘If you vote for CAFE standards, the auto plant in your district could shut down.’ They got the message.”

Representative Mike Castle, a Delaware Republican whose district includes plants owned by G.M. and Chrysler, adds that “nothing was ever said directly but it would go through the minds of members that Detroit might respond.”

“Sometimes, things don’t have to be said,” he added.

Susan M. Cischke, group vice president for sustainability, environment and safety engineering at Ford, says the recollections of Mr. Schumer and Mr. Castle are “way over the top — you don’t just pull up or put down auto plants.” Instead, she says, when lobbying on CAFE, “we talked with our friends and indicated what it did with jobs. You want support.”

Oil industry insiders say they remained on the sidelines during Congressional debates over CAFE standards, although legislators from oil states tended to vote against more rigorous rules.

In 2007, with oil at $82 and gas nearing $3, Congress finally approved the first big increase in fuel-efficiency standards in 32 years, requiring the fleet average to reach 35 m.p.g. by 2020. That will save one million barrels a day by 2020, but onetime CAFE opponents like Mr. Castle now say they wish that Congress had acted sooner. Since the 1980s, fuel efficiency has flatlined at 24 m.p.g., while vehicle weight has jumped more than 25 percent and horsepower has nearly doubled. In Europe, on the other hand, fuel efficiency currently stands at 44 m.p.g. and is slated to hit 48 m.p.g. by 2012.

“It’s a shame we’re doing this now instead of 10 or 20 years ago,” says Mr. Castle, who supported the legislation last year. “It was always my hope they would just do it without a mandate.” He adds that while he still opposes drilling in Alaska, “Republicans aren’t all wrong when they talk about increasing supplies of oil. There are opportunities in the Gulf of Mexico.”

Senator Domenici, the senior New Mexico Republican, agrees that it’s time to look at new supplies but is even more critical of Detroit. “They all said to us: ‘Don’t change CAFE. It’ll come when it’s supposed to.’ That’s baloney,” he said.

UNTIL last year’s vote, Mr. Domenici was an opponent of new fuel-efficiency standards, a stance he now regards as a mistake. “We were like everybody else,” he says. “We should have been more active on CAFE sooner.”

With Detroit again seeing profits collapse as sales of big cars plunge, Mr. Domenici says he is worried about the survival of the domestic automakers.

“They talked a good research game,” he says. “But let’s face it, little was being done. They are suffering the consequences and could go broke just like the airlines.”

What Congress didn’t or couldn’t do, the free market is now doing in the form of higher gas prices: forcing Americans into more fuel-efficient cars. Ms. Cischke of Ford says that in the last two months, “We have seen more of a shift in the market than in 20 years of CAFE. People are buying what they need.”

Unfortunately, the shift is happening too fast for a company of Ford’s size. That is among the reasons Wall Street expects Ford to lose more than $2 billion this year.

Congress, meanwhile, in its bid to explain the run-up in fuel prices, is examining the role of speculation and the increased flow of investor money into commodities. Most energy economists emphasize the fundamental issue of supply and demand, rather than market manipulation, but financial factors like the weak dollar are also exacerbating the situation. Stephen P. A. Brown, director of energy economics and microeconomic policy analysis at the Federal Reserve Bank of Dallas, estimates that a little more than 20 percent of the price of oil today can be attributed to the dollar’s fall against the euro and other currencies.

Another financial factor behind the price rise that hasn’t been talked about much on Capitol Hill or elsewhere is reduced hedging by oil companies on futures markets, says Larry Goldstein, a longtime energy analyst. In the past, crude producers would offer buyers a portion of their energy output in future years in order to protect themselves if prices pulled back. But energy companies got burned as prices kept rising during the last two years and have since cut back on selling untapped production — forcing prices for energy futures even higher.

Now, the prospect of a perpetual climb in oil prices has become part of market psychology, which is notoriously hard to change. William H. Brown III, a former Wall Street energy analyst who now consults for hedge funds and financial institutions, says investors have become convinced that the White House and Congress are unlikely to do anything dramatic to bring down prices.

For example, a release of supplies from the Strategic Petroleum Reserve after disruptions in Nigeria or Venezuela might have persuaded the market that Washington was on the case and shaken some complacency out of the market. “I’ve been a little surprised at what has not been done or what has not been talked about to get a handle on the consumer situation,” Mr. Brown says.

Others say that although the push to blame market speculators rather than discuss economic realities is likely to intensify on Capitol Hill as the presidential election draws near, they believe that what the world is confronting is a momentous shift in energy supply and demand.

“Speculation and manipulation are two different things,” says Mr. O’Reilly of Chevron. “Most of where we are is because of fundamentals and concern about the future.”

Jad Mouawad contributed reporting.

$200 a-barrel oil?

posted by Dustin

Its too bad we were not able to properly invest in public sector research when oil prices were low and the Btu tax was first floated. But I cannot help but see the upside of high price oil when I read the LA Times article below. Think about the habits that high priced oil have change.

One less RV driving around in a national park or forest? Fine by me.

The price would go up for cosmetics? insecticide? shaving cream? food preservatives? I see this as a boon to public health.

A woman will have to reconsider her 170-mile round trip commute? Again, given the poor economy and the burst housing bubble where people are stuck in their houses and can't afford fuel, I am very sympathetic to the importance of maintaining good jobs wherever you can find them. Yet, no one should have to be subjected to that terrible drive everyday. Her lungs, back, family, and a whole lot more will improve if she can get rid of that commute.

Now if Harris Interactive said that 1/3 of people surveyed are "avoiding driving" because of high gas prices... How about the other 2/3?

Turns out that at $7 a gallon about 10 million cars would come off the road according to Jeff Rubin, chief economist at CIBC World Markets.

The article also makes me think about the inequality of it all. Surburban slums may come to fruition when "proximity" becomes more appealing, and gas prices keep people at bay.

Lets not forget about all that cheap stuff that comes here and the cheap food we ship out. The increased cost of trans-oceanic shipping is long overdue. The fact that a simple commodity can be assebled in so many different parts of the world, and the increased profitability from exploiting the differences in the cost of labor, has long hidden the secret to its success in the form of cheap oil. But now, the plain waste in the process is being exposed. And, wow, is it expensive to fill one of those up at the pump: $3.8 million!

telecommuting, video-conferencing, carpooling; all these are great ideas.

Its funny that these are all portrayed as downsides. For upsides the author points to the record setting number of well drilled this year.

All told, high prices have taken an economic toll, and benefited those less derserving, but at the same time has gotten us to chage some of our most egregious behaviors. Its just too bad Exxon-Mobil is benefiting from the high prices, not a renewbale energy budget.

From the Los Angeles Times

Envisioning a world of $200-a-barrel oil

As forecasters take that possibility more seriously, they describe fundamental shifts in the way we work, where we live and how we spend our free time.

By Martin Zimmerman : times staff writer

June 28, 2008

The more expensive oil gets, the more Katherine Carver's life shrinks. She's given up RV trips. She stays home most weekends. She's scrapped her twice-a-month volunteer stint at a Malibu wildlife refuge -- the trek from her home in Palmdale just got too expensive.

How much higher would fuel prices have to go before she quit her job? Already, the 170-mile round-trip commute to her job with Los Angeles County Child Support Services in Commerce is costing her close to $1,000 a month -- a fifth of her salary. It's got the 55-year-old thinking about retirement.

"It's definitely pushing me to that point," Carver said.

The point could be closer than anyone thinks.

Three months ago, when oil was around $108 a barrel, a few Wall Street analysts began predicting that it could rise to $200. Many observers scoffed at the forecasts as sensational, or motivated by a desire among energy companies and investors to drive prices higher.

But with oil closing above $140 a barrel Friday, more experts are taking those predictions seriously -- and shuddering at the inflation-fueled chaos that $200-a-barrel crude could bring. They foresee fundamental shifts in the way we work, where we live and how we spend our free time.

"You'd have massive changes going on throughout the economy," said Robert Wescott, president of Keybridge Research, a Washington economic analysis firm. "Some activities are just plain going to be shut down."

Besides the obvious effect $7-a-gallon gasoline would have on commuters, automakers, airlines, truckers and shipping firms, $200 oil would drive up the price of a broad spectrum of products: Insecticides and hand lotions, cosmetics and food preservatives, shaving cream and rubber cement, plastic bottles and crayons -- all have ingredients derived from oil.

The pain would probably be particularly intense in Southern California, which is known for its long commutes and high cost of living.

"Throughout our history, we have grown on the assumption that energy costs would be low," said Michael Woo, a former Los Angeles city councilman and a current member of the city Planning Commission. "Now that those assumptions are shifting, it changes assumptions about housing, cars and how cities grow."

Push prices up fast enough, he said, and "it would be the urban-planning equivalent of an earthquake."

Consumers

With every penny hike in the price of gas costing American consumers about $1 billion a year, sharply higher pump prices would lead to "significant bankruptcies and store closings," said Scott Hoyt, director of consumer economics at Moody's Economy.com.

Consumer spending has held up surprisingly well in the face of skyrocketing pump prices -- bolstered in part, perhaps, by federal tax rebates. But the same day the government reported a 0.8% rise in May consumer spending, a research firm said consumer confidence had plunged to its lowest level since 1980 -- hinting at the catastrophic effect another big gas price surge could have on retailers and customers.

"The purchasing power of the American people would be kicked in the teeth so darned hard by $200-a-barrel oil that they won't have the ability to buy much of anything," said S. David Freeman, president of the L.A. Board of Harbor Commissioners and author of the 2007 book "Winning Our Energy Independence."

BIGresearch of Worthington, Ohio, said more than half of Californians in a recent survey said they were driving less because of high gas prices. Almost 42% said they had reduced vacation travel and 40% said they were dining out less.

If any retailers would benefit, it would be those on the Internet. In a recent survey by Harris Interactive, one-third of adults said high gas prices had made them more likely to shop online to avoid driving.

Restaurant operators such as Brinker International, which owns the Chili's and Romano's Macaroni Grill chains, are suffering and are likely to struggle even more as consumers look for ways to reduce spending. Fast-food chains wouldn't be immune, experts say, although they might fare better as families downscale their dining choices.

Vehicle sales, too, would probably continue to tank. Sales of new cars, sport utility vehicles and light trucks fell more than 18% in California in the first quarter compared with a year earlier. Although some consumers have been shopping for smaller, more fuel-efficient vehicles, many dealers are demanding premiums for gas-sipping hybrids, wiping out much of the financial advantage of buying one.

Nationwide, $200 oil and $7 gasoline would force Americans to take 10 million vehicles off the roads over the next four years, Jeff Rubin, chief economist at CIBC World Markets, wrote in a recent report.

As for the state's beleaguered housing market, prices are falling faster in areas requiring long commutes -- such as Lancaster and Palmdale -- than in neighborhoods closer to job centers.

Sky-high gas prices "would basically reorient society to where proximity would be more valuable," said Tom Gilligan, finance professor at USC.

Americans may also feel the effects of a rise in energy-related crime. Ads for locking gas caps are becoming more prevalent. Restaurant owners are complaining that thieves are helping themselves to used barrels of cooking oil, which can be home-brewed into biodiesel fuel.

Transportation

Workers stuck with long commutes and gas-guzzling cars would look increasingly to public transit, experts say.

Already Californians' mobility is being curbed. Traffic on the state's freeways fell almost 4% in April compared with a year earlier, and ridership on many subway and bus lines operated by the L.A. County Metropolitan Transportation Authority has risen in recent months.

But a huge influx of riders would strain aspects of the system, MTA says, noting that many buses are overcrowded at rush hour now.

Quickly adding capacity to meet demand from new riders wouldn't be easy, because new buses cost hundreds of thousands of dollars and take up to two years to deliver.

Transit advocate Kymberleigh Richards said new riders on popular routes such as Wilshire Boulevard, Vermont Avenue or Sherman Way in the San Fernando Valley "are going to have a bit of a culture shock. It's a different world to be using public transit when you're used to being in your own vehicle by yourself."

Just how many drivers would become public-transit riders if oil surges to $200 a barrel is hard to predict, but there's a big pool of potential customers. About 87% of Southern Californians commute by car, according to 2005 data from transportation expert Alan Pisarski. That compares with 63% in New York and its environs.

Travelers can also expect much fuller airplanes and much more expensive flights -- when they're available at all. Delta Air Lines Inc., for example, recently said it was cutting about 13% of its flights from Los Angeles International Airport to save fuel.

It also could mean shifting flights from outlying airports such as Ontario to LAX to cut overhead costs, said Jack Kyser, chief economist for the Los Angeles County Economic Development Corp. Carriers probably would also trim flights in highly competitive air corridors such as L.A. to the San Francisco Bay Area.

Even the cost of getting away from it all on Santa Catalina Island would go up. Greg Bombard, president of the Catalina Express ferry service, has trimmed schedules, raised fares and reduced hiring to make up for fuel costs that have risen sevenfold since 2002. Another big increase and he says he'll have to ask state regulators, who control his rates, to OK another fare hike.

Trade

The fee increases on the ferry would be nothing compared with the added cost of transoceanic shipping if oil goes to $200. Some experts say high energy costs are altering global trade and slowing the pace of globalization.

It takes about 7,000 tons of bunker-fuel to fill the tanks of a 5,000-container cargo ship for a trip from Shanghai to Los Angeles. Over the last year and half, the cost of that fuel has jumped 87% to $552 a ton, according to the World Shipping Council, boosting the cost of a fill-up to more than $3.8 million.

"To put things in perspective, today's extra shipping cost from East Asia is the equivalent of imposing a 9% tariff on East Asian goods entering North America," said Rubin of CIBC World Markets. "At $200 per barrel, the tariff equivalent rate will rise to 15%."

If oil continues to rise from current levels, officials at the Port of Los Angeles believe West Coast ports would gain business because they are 10 to 12 days' sailing time from Asia, versus the 18-to-20-day route from Asia to the East Coast through the Panama Canal.

But local ports could lose business if shipping costs get so out of hand that companies begin shifting production back to North America from Asia -- something that's happening in the steel industry, Rubin said.

Local distribution patterns could change too. Stephen Gaddis, chief executive of Pacific Cheese Co., a Hayward, Calif., cheese processing and packaging firm, thinks high fuel prices will push restaurants, retailers and food manufacturers to look for suppliers closer to their operations.

"Local sourcing is ideal. You won't pay as much for freight, and when you use less fuel it's better for the environment," Gaddis said.

Soaring diesel prices will make companies rethink whether they should have large, centralized plants or build smaller ones around the country.

That's what Pacific Cheese is doing. It's building a packaging plant in Texas to be closer to one of its larger suppliers and expects to serve its Southwestern clients from there.

In the near future, however, consumers can expect to pay for the higher cost of producing food and moving it around the country, say food executives, farmers and economists. Even having a deep-dish pizza with extra cheese brought to your door costs more now that chains such as Pizza Hut are charging for delivery.

The workplace

Dramatically higher transportation costs would usher in an era of virtual mobility, or zero mobility, for many workers.

"We're seeing companies go to four-day workweeks, place increased emphasis on working at home, show bigger interest in setting up satellite offices -- anything that gets commute times down and gets people off the road," said analyst Rob Enderle of Enderle Group in San Jose.

Videoconferencing, touted as "the next big thing" for years, would finally have its day, thanks to improved technology and a desperation to cut corporate travel budgets.

Telecommuting, or working from home, is easier than ever because of the spread of high-speed Internet access, said Jonathan Spira, chief analyst at Basex Inc., a business research firm in New York. In particular, workers in "knowledge" jobs that can be performed with computers and phones would benefit.

But Gilligan of USC noted that lower-income workers tend to be in jobs that don't favor telecommuting, such as retail and food service.

"These are the same people who are already being creamed by the mortgage crisis," he said. "The impacts of energy price increases are highly disparate."

Although white-collar workers may be able to telecommute, they could also take a serious financial hit because soaring energy prices tend to wreak havoc on the stock market. The explosion of 401(k) plans and similar retirement accounts in the last few decades -- and the decline of traditional pensions with guaranteed payouts -- have tied workers' financial futures more closely to stocks than they were during the 1970s oil shocks. A prolonged Wall Street downturn could mean a no-frills retirement, or none at all.

Upsides

It wouldn't all be bad, of course. Some industries could boom, providing jobs and tax dollars. California has seen a jump in drilling activity as oil companies try to extract more crude from the state's fields. Regulators expect a record 4,000 wells to be drilled in the state this year.

"Every rig and every crew that's available is working right now," said Hal Bopp, the state's oil and gas supervisor.

And as rising oil prices make alternative-fuel vehicles more cost-effective, California companies such as Tesla Motors Inc., which recently began production of a $100,000 all-electric sports car, could become important leaders in an emerging industry.

Tourist attractions may also see an upswing in local business as families look for less-expensive vacation alternatives close to home. A recent survey by travel insurer Access America found that 26% of Americans would cut back on recreational travel as a first response to higher gas prices.

In Southern California, with its many natural wonders, theme parks and other attractions, the prospect of a "staycation" may be less disappointing than for a resident of, say, Nebraska. And movies, a staple of the local economy, may prosper as Americans seek escapism and a (relatively) cheap night out.

And spending less time stuck in traffic on the 405? Priceless.

"More carpooling, fewer people on the freeways, more telecommuting -- in many ways, what would happen is what people have been trying to make happen for a long time," USC's Gilligan said.

Times staff writers Ken Bensinger, Leslie Earnest, Jerry Hirsch, Peter Pae and Ronald D. White contributed to this report.

McCain's great battery bakeoff

posted by Dustin

John McCain today said that he plans to offer $300 million dollars for a new auto battery that is more efficient than today's technology for electric and hybrid cars. While I like the idea of a competition toward some common technological goal (it really does sound like a fun science fair-like event), this is a very shallow response to the energy challenge.

In a remarkable fate of chance, it happens that Exxon Mobil recently made a technological breakthrough with Lithium Ion batteries. So rather then a bakeoff, where I can bring my best brownies, this energy policy is a selloff and a further subsidy Exxon Mobil, a firm that has posted records profits almost every quarter for several years now, and posted a record setting $11.7 billion dollar profit last quarter alone (about $1,300 per second).

EXXON DOES NOT NEED GOVERNMENT SUBSIDIES. It would be better if its profits were invested in CLEAN RENEWABLE ENERGY. Or, profits should be subject to a windfall profits tax that fund more competition for renewable technologies. This is a perspective that even many Rockefeller trustees are putting forward in internal discussions of the board at Exxon Mobil.

A meaningful energy policy needs to hold multiple technological contests, heavy investment at the national renewable energy laboratories and a more "Apollo-like" response, policies that stabilize renewable energy prices and incentives, conservation, and full cost accounting of fossil fuels. The dividends will be far greater the more we put upfront.

Of course, John McCain will not be able to raise the government revenues to pay for anything greater than this trifling battery bakeoff. McCain would rather spend greater than $400 billion dollars on military excursions in distant oil fields, and making the world a more dangerous place by breaking ground on 45 new nuclear power plants and "drive-by nation-building."

It sounds like they are also cynical over at Climate Progress...

Windfall profit tax on big oil should help pay for Iraq war costs

If you read the article below you will learn that what the big oil companies are doing is essentially decoupling the value of the dollar from the value of oil. Payments will not be in cash, but in oil. So it is even more apparent that strengthening the global power of big oil does not translate to better standards of living for Americans.

This appeared on the 11PM PST, Wed night edition. It was buried in the "World" section by the morning.


NEW YORK TIMES
June 19, 2008
Deals With Iraq Are Set to Bring Oil Giants Back
By ANDREW E. KRAMER

BAGHDAD — Four Western oil companies are in the final stages of negotiations this month on contracts that will return them to Iraq, 36 years after losing their oil concession to nationalization as Saddam Hussein rose to power.

Exxon Mobil, Shell, Total and BP — the original partners in the Iraq Petroleum Company — along with Chevron and a number of smaller oil companies, are in talks with Iraq’s Oil Ministry for no-bid contracts to service Iraq’s largest fields, according to ministry officials, oil company officials and an American diplomat.

The deals, expected to be announced on June 30, will lay the foundation for the first commercial work for the major companies in Iraq since the American invasion, and open a new and potentially lucrative country for their operations.

The no-bid contracts are unusual for the industry, and the offers prevailed over others by more than 40 companies, including companies in Russia, China and India. The contracts, which would run for one to two years and are relatively small by industry standards, would nonetheless give the companies an advantage in bidding on future contracts in a country that many experts consider to be the best hope for a large-scale increase in oil production.

There was suspicion among many in the Arab world and among parts of the American public that the United States had gone to war in Iraq precisely to secure the oil wealth these contracts seek to extract. The Bush administration has said that the war was necessary to combat terrorism. It is not clear what role the United States played in awarding the contracts; there are still American advisers to Iraq’s Oil Ministry.

Sensitive to the appearance that they were profiting from the war and already under pressure because of record high oil prices, senior officials of two of the companies, speaking only on the condition that they not be identified, said they were helping Iraq rebuild its decrepit oil industry.

For an industry being frozen out of new ventures in the world’s dominant oil-producing countries, from Russia to Venezuela, Iraq offers a rare and prized opportunity.

While enriched by $140 per barrel oil, the oil majors are also struggling to replace their reserves as ever more of the world’s oil patch becomes off limits. Governments in countries like Bolivia and Venezuela are nationalizing their oil industries or seeking a larger share of the record profits for their national budgets. Russia and Kazakhstan have forced the major companies to renegotiate contracts.

The Iraqi government’s stated goal in inviting back the major companies is to increase oil production by half a million barrels per day by attracting modern technology and expertise to oil fields now desperately short of both. The revenue would be used for reconstruction, although the Iraqi government has had trouble spending the oil revenues it now has, in part because of bureaucratic inefficiency.

For the American government, increasing output in Iraq, as elsewhere, serves the foreign policy goal of increasing oil production globally to alleviate the exceptionally tight supply that is a cause of soaring prices.

The Iraqi Oil Ministry, through a spokesman, said the no-bid contracts were a stop-gap measure to bring modern skills into the fields while the oil law was pending in Parliament.

It said the companies had been chosen because they had been advising the ministry without charge for two years before being awarded the contracts, and because these companies had the needed technology.

A Shell spokeswoman hinted at the kind of work the companies might be engaged in. “We can confirm that we have submitted a conceptual proposal to the Iraqi authorities to minimize current and future gas flaring in the south through gas gathering and utilization,” said the spokeswoman, Marnie Funk. “The contents of the proposal are confidential.”

While small, the deals hold great promise for the companies.

“The bigger prize everybody is waiting for is development of the giant new fields,” Leila Benali, an authority on Middle East oil at Cambridge Energy Research Associates, said in a telephone interview from the firm’s Paris office. The current contracts, she said, are a “foothold” in Iraq for companies striving for these longer-term deals.

Any Western oil official who comes to Iraq would require heavy security, exposing the companies to all the same logistical nightmares that have hampered previous attempts, often undertaken at huge cost, to rebuild Iraq’s oil infrastructure.

And work in the deserts and swamps that contain much of Iraq’s oil reserves would be virtually impossible unless carried out solely by Iraqi subcontractors, who would likely be threatened by insurgents for cooperating with Western companies.

Yet at today’s oil prices, there is no shortage of companies coveting a contract in Iraq. It is not only one of the few countries where oil reserves are up for grabs, but also one of the few that is viewed within the industry as having considerable potential to rapidly increase production.

David Fyfe, a Middle East analyst at the International Energy Agency, a Paris-based group that monitors oil production for the developed countries, said he believed that Iraq’s output could increase to about 3 million barrels a day from its current 2.5 million, though it would probably take longer than the six months the Oil Ministry estimated.

Mr. Fyfe’s organization estimated that repair work on existing fields could bring Iraq’s output up to roughly four million barrels per day within several years. After new fields are tapped, Iraq is expected to reach a plateau of about six million barrels per day, Mr. Fyfe said, which could suppress current world oil prices.

The contracts, the two oil company officials said, are a continuation of work the companies had been conducting here to assist the Oil Ministry under two-year-old memorandums of understanding. The companies provided free advice and training to the Iraqis. This relationship with the ministry, said company officials and an American diplomat, was a reason the contracts were not opened to competitive bidding.

A total of 46 companies, including the leading oil companies of China, India and Russia, had memorandums of understanding with the Oil Ministry, yet were not awarded contracts.

The no-bid deals are structured as service contracts. The companies will be paid for their work, rather than offered a license to the oil deposits. As such, they do not require the passage of an oil law setting out terms for competitive bidding. The legislation has been stalled by disputes among Shiite, Sunni and Kurdish parties over revenue sharing and other conditions.

The first oil contracts for the majors in Iraq are exceptional for the oil industry.

They include a provision that could allow the companies to reap large profits at today’s prices: the ministry and companies are negotiating payment in oil rather than cash.

“These are not actually service contracts,” Ms. Benali said. “They were designed to circumvent the legislative stalemate” and bring Western companies with experience managing large projects into Iraq before the passage of the oil law.

A clause in the draft contracts would allow the companies to match bids from competing companies to retain the work once it is opened to bidding, according to the Iraq country manager for a major oil company who did not consent to be cited publicly discussing the terms.

Assem Jihad, the Oil Ministry spokesman, said the ministry chose companies it was comfortable working with under the charitable memorandum of understanding agreements, and for their technical prowess. “Because of that, they got the priority,” he said.

In all cases but one, the same company that had provided free advice to the ministry for work on a specific field was offered the technical support contract for that field, one of the companies’ officials said.

The exception is the West Qurna field in southern Iraq, outside Basra. There, the Russian company Lukoil, which claims a Hussein-era contract for the field, had been providing free training to Iraqi engineers, but a consortium of Chevron and Total, a French company, was offered the contract. A spokesman for Lukoil declined to comment.

Charles Ries, the chief economic official in the American Embassy in Baghdad, described the no-bid contracts as a bridging mechanism to bring modern technology into the fields before the oil law was passed, and as an extension of the earlier work without charge.

To be sure, these are not the first foreign oil contracts in Iraq, and all have proved contentious.

The Kurdistan regional government, which in many respects functions as an independent entity in northern Iraq, has concluded a number of deals. Hunt Oil Company of Dallas, for example, signed a production-sharing agreement with the regional government last fall, though its legality is questioned by the central Iraqi government. The technical support agreements, however, are the first commercial work by the major oil companies in Iraq.

The impact, experts say, could be remarkable increases in Iraqi oil output.

While the current contracts are unrelated to the companies’ previous work in Iraq, in a twist of corporate history for some of the world’s largest companies, all four oil majors that had lost their concessions in Iraq are now back.

But a spokesman for Exxon said the company’s approach to Iraq was no different from its work elsewhere.

“Consistent with our longstanding, global business strategy, ExxonMobil would pursue business opportunities as they arise in Iraq, just as we would in other countries in which we are permitted to operate,” the spokesman, Len D’Eramo, said in an e-mailed statement.

But the company is clearly aware of the history. In an interview with Newsweek last fall, the former chief executive of Exxon, Lee Raymond, praised Iraq’s potential as an oil-producing country and added that Exxon was in a position to know. “There is an enormous amount of oil in Iraq,” Mr. Raymond said. “We were part of the consortium, the four companies that were there when Saddam Hussein threw us out, and we basically had the whole country.”

James Glanz and Jad Mouawad contributed reporting from New York.