FUEL CONSUMPTION AND COST DOWN BUT AIRLINE FARES UP

A classic turn is here. Around the world, fuel usage is being cut by significant amounts by the adoption of mass transit in record numbers. Subways, buses, trains and yes, even large airlines in many markets are enjoying surges in ridership. In the USA, auto miles driven and jet fuel consumed have each fallen by 4+%. The reduction in miles driven and in jet fuel consumed does not necessarily mean that people are siting at home. Any temporary decline in travel will be an adjustment in method more than a decrease. People will still travel but they will gradually get out of the big SUV and off of the small passenger jet.

With 28 million barrels of oil sitting in super tankers off the coast of Iran, and with Iran's heavy oil fields jammed up, the world is still well supplied with oil. The big fear of an oil embargo in Iran is starting to fade because a partial embargo is having no effect on supply. When this embargo is over, countries such as Saudi Arabia will have to make voluntary cut backs to keep the price from free falling. When this embargo is over, the rich fields of Iran will be prime for rapid development.


Today, there are shortages being reported in various countries. Ironically, these shortages are the result of low prices. Stratfor reports that gas stations in China are routinely closing early. China is one of many countries where the price of gas is held artificially low. In effect, the government in these countries pay consumers to use gas. The costs of these subsidies have become too great. Supplies are being cut back, shortages are developing. The markets are being prepared for significant price increases. Government officials do not want riots to break out when fuel prices jump toward market prices. By cutting back supplies, the public outrage can be focused on curing the shortage; big jumps in prices will not be so painful to those who are happy to get fuel at any price.

Once again, we have been shown that market prices should prevail. Fuel wasted, due to subsidized prices in oil producing states and in developing countries is of the same real value as any other fuel. Should Wisconsin price milk to locals at 10 cents per gallon, a lot of kids might feed pets in Wisconsin while a poor child half way around the world might go without.

WOW!

This morning, British Airways raised fares on long haul flights by about $218 each! Talk about supply and demand all you want, but, if a firm can raise prices so dramatically, its services are in demand. An increase in cost is not a problem for a business that can pass the cost along to its customers.

This morning, my wife told me about three things that happened yesterday. It was all the sensational news. My wife is no different from anyone else. The analysts who get their name in print right now are the ones who report that airlines might lose 6 billion dollars this year. The analyst who notes that seat revenues, while behind, are now moving up as fast or faster than seat costs gets little attention.

PASSING IT ALONG TO THE CONSUMER

Yesterday, a news reporter said with a note of surprise that big businesses are supportive of cap and trade regulations. How dumb! Of course, big businesses are supportive of a program to give existing businesses tax credits while forcing new market entrants to pay out the nose. Regulated monopolies make money more easily than normal businesses. Talk about passing cost along to the consumer, a republican senator posted a chart showing 6 trillion dollars in cost that would ultimately be passed on to the American tax payer.

AN OPPORTUNITY IS HERE

If the congress really wants to limit the use of "dirty" fuels, an opportunity is here. The dramatic decline in consumption is ready to send prices lower, the congress could pass a variable tax to be assessed as the price of fuel goes down. The revenues could be offset with income tax reductions. The US economy would boom because the wasteful consumption of fuel would be cut back at the same time that making money would be encouraged. There would be no need for bureaucratic and wasteful cap and trade regulations.

WAL-MART BITES INFLATION AGAIN

Wal-Mart, Kroger, CVS, Wal-Greens and others have been taking a bit out of inflation by providing space for health clinics. Nurse Practitioners are doing a great job of taking care of blood pressure checks and runny noses for a tiny fraction of the costs charged at doctors offices. Last week a women reported that when she faced a 10 week wait to renew a prescription, she decided to check out the Wal-Mart clinic. She was seen as a walk in in about 15 minutes and had her prescription in hand in 20 minutes. Needless to say, she canceled her doctors appointment and she pocketed almost $100 in lower fees.

My wife and daughters enjoy searching Craig's lists to find used goods at low prices. They have another option, Wal-Mart's free classified listings. Here again, we have a free service that 10 times as good. When people fuss about inflation today, it means they have not stopped to smell the roses. Yes, gasoline prices are temporarily sky high, but classified ad rates have fallen to zero. Better still, one can do so much more with on-line classifieds. One can sort by zip code, by category or by zip code and category. One can click on a "notify-me button" and receive and email when a desired item is posted. I have known people who are willing to drive 10 miles and back to recycle a garbage bag of aluminum cans. Think of the relative savings when someone buys a used swing set for half the retail price and that swing set is saved from the landfill. If the cost of recycling is more than the value of the recycled, don't do it!

TIME TO TURN

With 78% of the farmers in North Dakota and 70% of all farmers in Iowa being subsidized by the average taxpayer, it is time for a turn. Alfred, one of my regular readers, sent me a quote from the President of Czechoslovakia which I saw repeated in an editorial by Charles Krauthammer yesterday. He said, "The largest threat to freedom, democracy, the market economy and prosperity....is ambitious, arrogant, unscrupulous, ideology of environmentalism." The farm lobby says that the corn subsidies are about a lot more than the environment. Of course they do, why should a multi-millionaire farmer turn down a subsidy to help the poor?!

The senate is currently debating a cap and trade bill, just after one of the coldest of winters. Iran, which sits on 15% (26 trillion cubic metric feet) of all the known natural gas in the world, suffered enough to cut supplies to its neighbors. The world has proven reserves of 172 trillion cubic metric feet of natural gas! Let me say that again, the world has proven reserves or 172 trillion cubic metric feet of natural gas. The USA has proven reserves of 5.5 trillion metric cubic feet of natural gas. Yes, enough to say it again, the USA has proven reserves of 5.5 trillion metric cubic feet of natural gas. This 5.5 trillion does not count any of the natural gas off the coast of North Carolina, Virginia, and other states from Maine to Florida.

We have 5.5 trillion metric cubic feet of know reserves of this clean burning fuel even though the congress of the USA will not allow drilling on 85% of our territory. If politicians goal was to save the environment, this gas would be used in preference to coal. Politicians are standing in the way of drilling because they want to give cap and trade tax credits to their "buddies". Just the threat of cap and trade is an arm twisting game to get campaign contributions.

In response to a letter from me, Elizabeth Dole wrote to me a letter about the farm bill. She noted that the bill passed 81-15. She said that the bill "is very important to ...and consumers." I say baloney. This bill increased the net cost of food and fuel to consumers. She said that the bill "is good for (NC) farmers" and "it will provide the safety net they need to provide all Americans with a safe and affordable food supply". This bill diverts good food crop land into ethanol land and provides a safety net to lawyers and representatives. She says, the bill includes a "provision establishing the Southeast Crescent Regional Commission, which will spur economic and infrastructure development in distressed areas in North Carolina and six other Southeastern states." She notes that she introduced this legislation and that it authorizes $150 million over five years. She mentioned several other government programs that were expanded by this legislation. It is pretty amazing how quickly "conservatives" begin to feed at the public trough. The worst of the worst is that the bill included textile payment provisions which defeat free trade policies and drives up clothing costs to consumers.

GUILTY AS CHARGED

I plead guilty of lambasting a "do nothing congress". The old saw that a politician who complains about the media is like an old sea captain who complains about the waves contains truth. We are all interested in sharp points of view. For the record, I would rather have a "do nothing congress" than one that spends all its time and all of our money subsidizing rich farmers and political campaigns. On the other hand, it is sad to see a do nothing congress when the price of oil has moved from $10 per barrel to $125 per barrel and while we sit on tremendous reserves.

CHANGE CONGRESS OR MAKE MONEY?

My chances of changing congress are pretty slim but the opportunity to make money is real. Despite the restrictions of congress, oil and gas are being found. Qatar sits on about as much natural gas as does Iran (part of the current frustration of Iran is that Qatar is pumping gas from fields that might be pulling from Iranian fields). In Boston, Qatar just unloaded the first delivery from a monster LNG tanker. America lets trillions of metric feet of gas sit underground while ships from the Middle East cross over the top to deliver high dollar supplies. Supplies are going up. Demand is being destructed.

Demand to ride the "big airline bus" is rising, fares have probably gone up in percentage terms more in the past 6 months than at any other time in history. Fares will go up enough to "save" the most efficient of the airlines. Air travel is expected to grow at 4.5% compounded for the next 20 years. This turn has been a tough one but it is here.