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Location: Pantego, Texas, United States

Tuesday, June 17, 2008

Politicians are suddenly concerned about the current high price of gasoline. Republicans would like to do more drilling for oil. Obama and Democrat’s say “We Can’t Drill Our Way Out of It.” This implies that more drilling won’t help the current gasoline price at the pump. There is an argument that the intention to drill would dampen the speculation in oil futures prices. But, even more importantly, this implies that we won’t need more oil five to ten years from now, while it is obvious we will. So starting to drill now is a good idea; we should have started fifteen years ago. The Democrats plan is to institute a windfall profits tax on oil companies, and to invest the proceeds in unidentified transportation fuel “alternative energy sources.” This obviously will do even less to reduce the current price of gasoline than the Republican drilling plan for two reasons:

1) It will raise gasoline prices now because the tax will reduce the current oil supply (taxing something always results in there being less of it), and
2) It will take more than five to ten years for this magic “alternative energy source” to make a significant impact in the transportation fuel marketplace.

(Note: For those who haven’t heard, Obama’s windfall profit tax idea is a 20% tax on the price of oil above $80 per barrel. Exxon Mobil sells about 5 million barrels of oil per day. Of that they produce about 2 million barrels of oil per day, and they buy 3 million barrels per day from foreign sources at the market price. If they have to pay a tax of 20% on the differential between $80 and the market price, they will lose money on the 3 million barrels per day. Since they are not in business to lose money, they will simply stop importing 3 million barrels per day. Other companies will do likewise. The supply of oil in the USA will drop from the current 20 million barrels per day to 7 million barrels per day, since we will no longer be importing 13 million barrels per day. Actually the oil companies have long term contracts for some oil at lower prices, so the entire 13 million barrels won't disappear immediately, but a significant amount will. This clearly will not result in a reduction of gasoline prices in the USA.)

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