Tuesday, June 10, 2008


Joseph Schumpeter promoted the notion that capitalism results in the destruction of "old businesses" by providing the incentives necessary for innovation. Mankind has greatly benefited by this "dog eat dog" system, in the long run. In the old days, the "cycles of the progress" took many years. The grandfather, father and grandson all earned a good living as steel mill workers before mini mills changed the business. On the other hand, AOL cornered the Internet market in just a few years only to lose out to a "new and improved" broad band system.

Bjorn Lomborg runs the Copenhagen Consensus Center. The center repeatedly asks the question, "if society had x dollars to spend, how should it spend those dollars". The market place of Schumpeter automatically repeatedly asks this question. In the realm of governments, trillions of dollars are spent without first discovering the relative merit of the projects funded; once funded, wasteful projects get new funding time and time again. Governments tend to choose projects by the "seniority system". The pet project of a senior legislator is funded because he has the power to help a less senior legislator with his pet project.

This year, the Bjorn list includes Global Warming as the 30th best use of public funds. This is up from prior years but, even so, the consensus of many learned persons is that there are at least 29 other better uses for public money. Second on the list was the successful conclusion of the Doha Free Trade Agreement. The estimates are that this agreement would produce 113 Trillion Dollars worth of benefits during the remainder of the 21st century. The estimated cost in destruction of "old business" is $420 Billion Dollars. If you were given the opportunity to invest $4.20 to earn $1,130, ($1 for $269), you should give the investment serious consideration! It is debatable if a dollar spent to curb CO2 would produce even a pennies worth of benefit. Indeed, it could do harm!

Contrast the Doha Trade investment to the one our "conservative Senator from NC", Liddy Dole just supported. In the farm bill, Liddy voted to require our government to buy sugar produced by US farmers and to sell it to US ethanol companies. The government will pay the phony US wholesale market rate which is about 20 cents per pound and resell it at the international wholesale market price of 10 cents per pound. Our government will purposefully buy sugar at 20 cents per pound to resell it for 10 cents per pound! Where has sanity gone? American farmers could produce much more sugar at a much lower price but sugar regulations, like oil regulations, have taken away freedom.

Like it or not, we are all conformist. Liddy simply joined a long line of Lemmings. She and 80 others voted for this travesty and only 15 voted against. The American people tend to assume our government puts our interest first. We only get excited when the government runs our economy into a ditch. The current state of the energy markets has driven our economy into a deep ditch.

Americans have allowed our legislators to have too much control over our resources. The contradictory statements and actions coming out of Washington today are mind boggling. The result is imported $4 per gallon gasoline, deadly pollutants from coal all while the legislators prohibit the exploration of US resources. The good news is that the public is finally awake. Kudlow and Company posted a Gallup poll last night showing public support for US drilling. The public is not willing to absorb trillions of dollars in costs in order to avoid drilling on a very small section of ANWAR. ANWAR will be a beautiful nature reserve long after the oil drills leave.

Yesterday, Obama blamed Exxon for high gasoline prices. His "solution" is to add a wind fall profits tax. It is only common sense that the addition of such a tax would do the same thing it did last time. During Carters term, a wind fall profits tax on US oil companies meant that the USA became all the more dependent on foreign oil. Common sense and economic law dictates that the more you tax something the higher the total price.

On TV, John McCain sometimes looks like death warmed over. Furthermore, he has been known to slaughtered a good speech. And finally, his support for the Cap and Trade corporate welfare Boondoggle is as strong as Obama's. He is certainly not the ideal presidential candidate but he is not naive in international affairs and he does not support tax and spend and spend.

Obama likes to suggest that a vote for McCain is a vote for a "third Bush term". Yesterday, after Obama's "tax the oil companies speech", McCain got in a great line when he said that Obama is running for the second Carter term. Carter's policies ranged from cutting up our credit cards for us, to wind fall taxes on oil companies, to encouraging us to wear sweaters to keep warm. During the Carter term, many a family, including mine, slept under three blankets with the heat turned down to 50. Those who could get credit paid 21% or more. Carter also demonstrated the futility of talking to terrorist versus real diplomacy. During his term, for recreation, people chopped wood. Burning wood in wood stoves and fireplaces is not environmentally friendly but restrictive policies will not prevent people from staying warm or from getting to where they want to go.

A major disaster could result from Obama's proposal to renegotiate NAFTA. His union employee supporters continue to spend billions to force prices up so that they can win back union jobs. If the Doha Free Trade Agreement mentioned above is successfully concluded, it is the consumer who would get 80% of the $113 Trillion of benefits. There are many more consumers than there are over paid union workers. The sad thing is that the pass through of the union dues has fallen the hardest on the poorest of consumers. The poor have paid a disproportionate share of the fees that have been paid to lobbyist to win restrictions to trade.


The politician who pretends that prosperity will be achieved by over taxing oil company profits puts Americans at risk. The USA cannot expect to over pay for foreign oil and still produce competitively priced products. We must lower the price of fuel to increase wages, profits and tax revenues. We will lower the price by using less and by increasing supply. We are in the process of doing both.

Last month, the ratio of total vehicle sales to car sales dropped. In 2005, this ratio stood at 2.5 to 1 and last month it was at 1.7 to 1. Big trucks are no longer the fad. As a result there will be a dramatic decline in gasoline consumption. In Vietnam, short term interest rates have been raised to 14.5% in an attempt to reduce prices. In China, bank reserve requirements are being raised 1 full percent to 17.5%! The situation for prices has become that of an unstoppable force running into a permanent object. The size and weight of the permanent object is growing daily. It will soon be proven that the unstoppable force can be stopped.

Supply is increasing. The vote to build a new refinery in South Dakota has encouraged Canadian producers to forge ahead with production. Yesterdays announcement of a pipeline from Kazakhstan to Turkey will bring large (formerly Soviet Union) reserves to the western world. The success of horizontal drilling in Montana, North Dakota, Texas, Pennsylvania and in other states is bringing new US supplies online. One hundred to two hundred million dollar wells are being drilled in the deep waters of the Gulf while Cuba and China are drilling 10 million dollar wells in the shallow Gulf coast waters 70 miles from Florida. The US consumer ultimately pays the extra 90 to 190 million dollars plus the extra development and lifting costs.

US producers are being treated like sharecroppers in Tennessee were treated 100 years ago. In Tennessee (and other states), wealthy farmers were known to use hired hands to farm the fertile "bottom lands" and to sharecrop the low yielding marginal hillsides. If the sharecropper worked all year to produce very little, the wealth farmer still got half. The big difference is that the environmental gestapo of today says that we cannot drill in the "rich bottom lands" at any price.

The market will find its way around the sequestered fields. Brazil will spend 100s of billions of dollars developing rich fields. The US consumer will pay dearly but he will buy oil. Some Americans will ride the bus to avoid paying so much but most of us will pay the price required. Eventually innovation, or Shumpeter Gales, will produce who knows what innovative solution. In the short run, it is time for the congress to release the supplies that have been held hostage.