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A bridge to the future, if collapsed, takes you no where… –kavips

This chapter looks at rebuilding our infrastructure. We have highway problems, energy problems, educational problems, as well as health problems, environmental problems, and social problems. Can rebuilding our infrastructure be a tool to begin the mending process?

Up to now very little has been spent on maintaining our highways. Most highway money was earmarked for new growth.. It was as if no one gave consideration of the fact that maintenance of what we already had up and running was a cost that needed budgeted in.. After all, what political points are ever given for repairing a road before it goes bad? (Damn it, why are they tearing up good highway, costing me twenty five minutes in each direction?) But with the August 1, 2007 collapse of the Interstate 35 Bridge in Minneapolis, we see what happens when highway infrastructure is ignored.

For example in the United States alone, 25% of our bridges are deficient. In Delaware, 15.4 % of our bridges are either functionally or structurally deficient, which is actually good when compared to our fellow small state Rhode Island with 52.9% of its bridges deficient. As one travels back and forth, one crosses an unknown number of tiny bridges; of these, one out of four is deficient. How would you like to be on the I 95 bridge across the Susquehanna… when its time came to fall?….. or perhaps driving across the Chesapeake Bay Bridge between Kent Island and Annapolis? Thinking “one out of four” may raise your apprehension rate the next time you find yourself traveling unknowingly across a potential deathtrap…

The need to improve our infrastructure is obviously there. So if we have the labor available, how will we pay for the construction and repairs with our treasury bottomed out?

That depends on whether bonds still had any worth, meaning whether or not anyone still had any interest in buying them… Normally bonds are sold at a low interest rate, and the money taken in is used for construction. The notes are paid back in regular payments. But if there is no demand for, or more money out there with which to buy the notes, who will fund the infrastructure investment?

Today the bottom line is that the money will have to come from the Treasury. Being broke, that also means the Treasury will no choice but to print more money in order to accommodate the economy’s need. As more money starts chasing fewer goods, inflation looks at us dead center down it’s barrel. Unfortunately we are in such dire straits, that we have no choice but risk the chance of inflation just to keep the next Great Depression at bay….

The same scenario applies to our efforts to revamp our educational system. Now estimated to require between 45 to 50 billion (how much was AIG’s bailout?) the infrastructure of our schools systems faces the same challenge of acquiring minimum funding, as does that of rebuilding our highway system.. Up until August of this year it could still have been done. Now due to insufficient funds, this accomplishment is unlikely. But if we choose to go forward, we will have to do so again funded by printed money with inflation drawing another bead upon the target on our own purchasing power..

Even today, there is enough work to employ every man, woman and child in America if we can find the resources to pay for them doing so… Work such as environmentally cleaning up Superfund Sites, energetically laying new transmission lines, socially integrating our square pegs into round holes, educationally teaching problem readers to become literate, or simply maintaining hospice care over those citizens who cannot survive long enough to see America turn its corner; yes, work can be found…

But the underlying question still remains as to how we will be able to fund the privilege of keeping America employed… and at whose expense? If we were unable to solve these problems during the past 8 years of plenty, how will we deal with them during a time of shortage?

Fortunately, we are not the first group of people in our lifetimes to rebuild our world around us… Three examples of what can be accomplished, are found in three post war states who after war’s end, found themselves under American influence. That would be Germany, Japan, and South Korea. These are the models we need to turn to. Someway and somehow they bounced back from complete devastation to becoming the the second, third, and fourteenth largest economies behind that of the United States…

At war’s end, there were very poor resources to spread around. Everything possible needed fixed at once. But with a small amount of seed money provided by the Marshall plan, a major currency adjustment, and a release from price controls, the German population pulled themselves up and today have roaring economies better than do any of our allies of that past conflict. (It doesn’t seem fair.)

History shows us that for two years after the war, while post war punitive policies were kept in place, all of the occupied countries’ economies decreased. The Soviet sector opted to maintain those policies and their economy continued to suffer accordingly until German Reunification in 1990. However in the western Allied sector, starting in 1948 with the abolition of price controls and most post war rationing, along with the devaluation of their currency designed to shrink the amount (by 93% contraction) of the money in circulation, their economy took off; lost days decreased by half, and industrial production climbed within six months by 50%. Both nations were blessed with the post war abundance of skilled cheap labor; therefore both nations were able to increase the flow of money into and around their country.

Rising to the challenge imposed upon them by history, all three countries had able leadership which was effective in communicating this to each countries’ populations: … that their time and effort were to be properly considered as an investment. Their rewards would not be reaped immediately, …but would someday be magnificent. Their leadership was also effective in communicating that timing was critical. If they did not begin immediately… their nation’s dreams would never materialize. It was their competent leadership that marshaled the populations of both WWII nations back to work “on the cheap” and that…. the bottom line, is how both counties bounced back. Not dictatorially, but economically. One should note that both of the two occupied economies fared much better than our Allies, who received far more Marshall Plan aid than did the conquered nations, and who did not have to pay for war repatriations as did both of the war-torn countries.

From here I pulled this little piece of history, showing the progressiveness that forced the German economy forward…..

Colonel:“How dare you relax our rationing system, when there is a widespread food shortage?”

Erhard:“But, Herr Oberst. I have not relaxed rationing; I have abolished it! Henceforth, the only rationing ticket the people will need will be the deutschemark. And they will work hard to get these deutschemarks, just wait and see.”

That they did.

Obviously sitting in our armchairs looking forward, we too understand that we will face the specter of inflation. It MUST come with the copious amounts of money we are currently and anticipated soon to be printing. However as does any nation in a war, our country does what is needed. Currently and just like it was after WWII, the US right now is the only global entity strong enough to expand its money supply fast enough to put most of its citizens back to work. As we begin earning extra spendable income, our demand increases; when that demand pushes up prices, more and more entrepreneurs race to fill in the vacuum of goods… bringing them back down. Greed is good.

As for actual rebuilding of infrastructure, postwar Japan offers a slightly different model. In Japan we meshed the government, banking system, and large industrial players to fund, construct, and grow their infrastructure during the sixties. The local banks, backed by the government of Japan, used a system of overloaning. This policy is one which the Bank of Japan guarantees all loans issued by city banks to their industrial conglomerates. Because there was a shortage of capital in Japan at the time, industrial conglomerates borrowed beyond their capacity to repay, often beyond their own net worth, thereby causing city banks in turn to over borrow from the Bank of Japan. This gave the national Bank of Japan complete control over all dependent local banks until the loans were repaid.

The primary difference between the Japan of then and America today, is that today, the money is still not being lent out by those banks receiving Federal assistance. Instead, today’s over loaning is being wasted on the buying up of other banks; today that mass infusion of capital is being used to consolidate the financial industry, instead of financing large projects that actually put citizens to work, and in turn funnel money back through the economy.

The question remains. Does rebuilding our infrastructure get us back on our feet?

Yes and no. The economic impact on the local level at the location where the federally funded project is being built, is huge. But it is a localized effect. For an economic turnaround to be effective, infrastructure building must occur simultaneously in almost every town or village across the United States. If funded solely by the federal government, that significant cost would appear prohibitive. But if instead of being funded solely by the Federal Government, it is done as did the Japanese during their infrastructural rebuild, (where all local banks simultaneously financed local projects close to their locations), much more capital becomes available. If we place our bets on the option that local banks WILL lend out the money, if we guarantee that they lose none of the amount lent out,…. then that outcome could start some infrastructure development in the very near future somewhere near every community’s small bank, no matter where it may be located.

So if as a nation, we choose this plan, and we attempt the Japanese-tried approach, the question next arises over which infrastructural improvements will return the largest investment? The consensus seems to be that Energy, Education, and Technological advancement lead the pack.

As we now all know, even during prosperous times our nation gives up a large percentage of its income to other overseas nations just for oil. By simply keeping that dollar amount in the United States we could provide our economy a substantial boost. Furthermore, manufacturing and exporting new technology which help frees the rest of the world from their dependence on oil, would certainly assist us in turning the trade balance back in our favor. Both of these lines of thought converge to point out this: the increase of our energy independency could become the primary viaduct which could bring America back into prominence.

As for increasing our energy independency, there are several options for doing so. One, is to create new sources. Here is one startling fact: there is enough potential wind power in North Dakota alone to cover 25% of America’s energy needs. The problem is getting it to where it needs to be used. Building transmission lines from America’s heartland out to its extremities, where its largest users are, should be a first priority. For one, it actually uses the free market plan and opens markets to a cheaper supplier of that required product. Two, transmission costs are a significant portion of the energy costs we pay for electrical energy today. Three, poorly outdated transmission grids eat up a lot of energy that could instead be used to power America.

Likewise building transmission lines from our local shores to major metropolitan areas, provides those city areas with cheaper electricity from off shore wind, thereby increasing the likelihood that more wind power generating companies will set up off-shore. The larger the wind farms are off shore, the better our economy will weather that upcoming Depression that appears to be looming off our horizon… And if hydrogen is one day destined to become our replacement fuel, then locating their manufacturing plants in close proximity to offshore wind farms, in order to capitalize on a wind farm’s free excess energy during non peak hours….. could certainly help build an industrial base to back up the tourist economies of rural shoreline counties.,.

Directly related to the new technology of wind power, would be the need to construct electrical storage facilities in areas that have no jobs. Western Pennsylvania and West Virginia would be ideal localities to build closed circuit water generators that use free excess wind power during non-peak times to pump water up a hill to reservoirs on top, from which water can then be released during peak times, flowing downhill turning a series of giant generators as it falls to the valley floor. These massive projects would put large numbers of Americans to work in those areas desperately needing new development.

But these three investment strategies are all dependent on the knowledge that wind driven energy will be a big player in the years to come. No one will make such an major investment in a climate of doubt. The Federal government over the next few years … has to make that clear.

For other hard hit areas, an investment in solar power out in America’s Southwest can do the same. A conglomerate of local banks issuing out loans, guaranteed by the Federal Banking System, should have sufficient resources necessary to begin the immediate construction of a series of large solar farms in that area. With such an investment to attract large numbers of employees to that area hardest hit by the housing crises, local banks could with the Federal bank’s support., begin paying workers who in turn would help out the local banks by buying back some of those foreclosed mortgages at market prices…

But unquestionably, the largest saving can be made by simply conserving more energy in our homes and businesses. Just re-insulating every home in America, can save the cost of its installation within a year. According to the Department of Energy, re-insulating a home can save between 5% and 22% of its energy costs per year. At their estimated energy cost of $1500 a year (seems low, doesn’t it), the range would be from $75 dollars to $300 dollars a year. So paying someone a bounty of $75 dollars for each house, just to infra-red, then re-caulk it’s leaky windows and insulate it’s doors, would see its return within one year on every dwelling visited. Paying someone to go through a city’s public housing could save that city government tremendous amounts of money which could be better spent putting its citizens back to work.

Educational infrastructure is likewise needed. Our nation’s schools for the most part, have not been updated on a grand scale since they were originally built for the influx of baby boomers … What is more important than structural additions to existing buildings, is a revamping of the educational process itself.

America needs to regain their technological prowess… Our educational system ranks behind most of Europe and civilized Asia. One Duke study concluded that 137,437 engineering graduated in the United States, compared to 112,000 for India and 351,537 for China. Of course the quality of those foreign engineers are open to debate. But still, with lopsided numbers like that, it is obvious that over time…. we lose the technological war. Today… whoever is driving the global need for technology… drives the global economy.

Putting additional parents or motivators inside of class rooms, increasing allocations for science supplies (simply dropping sodium into water turns most students on to science as well as instantly explains the clarity of the periodic table), and increasing the social status of the “geeks” in teenage classrooms, are just some of the ways we can rebuild our educational infrastructural needs, without large investments of cash… Where we most often complain that the educational system is broken and in dire need of fixing, at the core of the problem is broken down people. Whether it is administrators, teachers, school board members, parents, or the students themselves, what we have throughout our education system is a group of talented, but leaderless individuals. All are spinning their wheels independently in their effort of trying to find some type of traction in improving education. Often within the same schools, different partners are spinning in opposite ways.

What American education needs is a grand goal, one that is set nationally and bought into by all of its people. Once again, America needs to be challenged. At its forefront it needs a leader capable and willing to stake his reputation on meeting and achieving that goal.. And most importantly, that challenge needs to me made without any financial strings attached. You know: the usual “we need to invest $$$ in …….”. Instead, what is needed by our incoming leadership is to voice a measurable goal such as this one for example: that says by 2015 we will as a nation, turn out as many engineers as does China….. (Goal reaching against a competitor worked for reaching the moon). Perhaps to achieve it, some additional funding may be necessary. But what is more important, is that is sends a real signal to students that fun and games as they have been portrayed on children’s TV, can no longer be tolerated within our high schools. Every young person now has the survivalist duty to apply themselves to the best of their ability, for the honor of their country in whatever the direction their talents lead them… (With proper leadership, this can be done fairly cheaply: it takes just one big speech.)

The long term return on this cheap investment is that by 2020, our engineers should be in the field working at top notch organizations, benefit them and us from their training and expertise…. The longer we wait… the further behind China and India we find ourselves… We are already talking twelve years from now before we can get any return on both ours, and our student’s investment….

Likewise, tying in with improvement of our educational output, is our need to advance ourselves further along the road of technological innovation, ie. creating new patients. For which ever nation builds the most savvy technical gadgets, that is the country from whom all others will want to buy…

But in today’s economical climate one must realize that a risky investment on some new technological device, untested in the market place, will have difficulty finding financiers. Once again, the Federal government, if it is spending its resources elsewhere, has the option of only printing more money to pay for this investment, assuming that private lenders are too scared to lend. Therefore as mentioned above, as in the post-WWII-Japanese model where the small city banks overloan to businesses and corporations allowing them to invest in research and development, if these loans are themselves guaranteed by the national bank, private lending can fulfill the need.

A very strong incentive to promote new research and development by corporations, would be to allow all such expenses devoted to the creation of new products, to become tax deductible under the newer higher rates that will be forthcoming shortly. Every bit of money spent on research and development, is our nation’s best investment. Innovative new products lead to the quickest economic turnaround as those new developed ideas soon become commercially viable…

Other areas where infrastructure can also be propped up by an infusion of small loans made by city banks which are then guaranteed by the Federal Reserve, are in the areas of environmental protection, health care, social services. Western forest fire fighting companies, environmental detoxification companies, and tree reforestation companies, could begin putting people to work.

It could work like this. A company such as Guardian, on call for disaster, receives a payroll loan from a small bank guaranteed by the Federal Government to keep itself afloat until money comes in from charging an oil tanking firm for the mess they made… Most of that loan money is used to buy necessary additional equipment, which puts someone to work in the manufacturing plant where that piece of equipment came ….. As work eventually comes in, the Federally guaranteed loan is paid back to banks… In this and most cases, no direct Federal investment is required. They just stand behind the guarantee.

In the health care industry, private companies providing hospice care, watching over psychiatric patients, creating new MRI’s, handling billing requests and follow up from insurance claims, can now receive a private loan from a small bank guaranteed by the Federal Government to carry them over until their money returns. Needing new equipment keeps a job at the plant where that piece was manufactured…

Companies specializing in assisting the poor, handicapped, impoverished, hungry, homeless, can also stay afloat by these private loans over lent by their banks, but guaranteed by the Federal Government. When the money returns from their clients, the loans are paid off.

In each of these areas, existing goods and services are maintained. The businesses don’t fold. Here is a different way of looking at it. This Keynesian jolt of economic activity is metaphorically like starting a heart of a human being temporarily stopped in cardiac arrest. At that time, all the systems are in place to work…. the heart just needs pressed to get started….. Our economy is like that. Inattention to the core of our economic problem, which is money not flowing out of banks, will lead to the same result to us as it would to a patient who does not get his heart restarted….

So this chapter can be summed up this way. The Federal Reserve is given responsibility for making sure that all projects having a viable chance of success, receive funding from, and eventually pay back… the small local banks making those loans. The Fed just guarantees the loans won’t fail….

Those out going loans should be focused on projects giving us our biggest bang for our money. Those areas providing the best return on their investment, are in the areas of energy, education, and technological advancement……

Instead of direct investment, the use of Federal guarantees in these three areas, coupled with the Federal Reserve’s monitoring the effects of inflation, are one way our nation can capitalize on its current hardship, and pull itself out through our effort, grit, and tenacity….

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CNN is reporting that Sarah Palin will not be joining the Conservative Pathetic Acrimonious Complainers (CPAC) this year… The Alaska governor had been expected to serve as the headline attraction at the three day event.

One bets that she’s learned her lesson on having photo-shoots with other turkeys in the background.

In her place, other headline speakers will include Russ Limbaugh, Newt Gingrich, and Ann Coulter… Attendance is expected to be low.

Offshore Oil is Risky Business

Christine O’Donnell’s taking on Biden’s defense of “not drilling”, shows a flaw in the Republican’s armor.  David Anderson, Republican guru (lol), provided a link (albeit in her defense), which goes a long way to prove that their whole argument, drilling to lower gas prices, is nothing more than a bogus arrangement.  I’m afraid that after looking at all of the facts, one can only say that the Republican argument is being made by people who can’t think, for people who won’t think. And had I not been a student of energy over these past few months, even in all my wisdom (lol) I might have thought that dropping prices by drilling offshore, would make sense….

To be honest, it could make sense if the oil drilled today would be in my car tomorrow.  Even by next week, or in maybe two.  The silver bullet which kills dead the other side’s argument, is that if Congressional approval is given, the first oil rolls out in 2019……..

Yes 2019…..

But don’t take my word for it… Together lets find some facts to look at, shall we? Let’s go ahead and make the assumption that drilling reduces our cost of gas, and then let’s look at their proposals with unblemished eyes, and see how they might just work?

Republicans seem to think this is their best argument. David Anderson came to my assistance and sent a link which he said defended Christine’s position.   And so being the curious wonk that I am, I’m reading through it looking for any fact which could be used to show that  oil drilled offshore, would somehow deliver immediate relief. When none were forthcoming, I investigated who is writing this article and for whom was he writing it?  Bloomberg was the publisher, but the American Enterprise Institute was the financial backer… Sitting on that AEI board was the former Chairman of Exxon, Lee Raymond, and its current president Christopher DeMuth, formerly served as co-editor of The Neoconservative Imagination. More about AEI can be found here.

Ok, obviously this is a parallel view of that being spouted from the White House. More than twenty AEI alumni and current visiting scholars and fellows have served either in a Bush administration policy post or on one of the government’s many panels and commissions. Former United States Deputy Secretary of Defense Paul Wolfowitz is a visiting scholar, and Lynne Cheney, wife of Vice President Dick Cheney and former chairman of the National Endowment for the Humanities, is a senior fellow.

Instead of being dissuaded as you might expect from such a partisan compilation of dignitaries, I became excited. For at last my search for the facts behind Bush and McCain’s statement of how offshore drilling would lower prices, was hitting pay dirt. For surely the data necessary to provide proof, could be accessed by this stellar group of scholars, all paid with oil money.,… If there were facts…this group would have them…

So with renewed excitement, I finally began reading Kevin Hassett’s article titiled….Start Drilling Now to Lower Oil, Gasoline Prices

Kevin Hassett bases his argument on this premise:

If prices are high today and are expected to be much lower tomorrow, then you would rather open up the spigot now when profits will be higher.

Yeah, that certainly seems sensible….. but what if prices will be higher tomorrow. i mean they are, after all, higher today than they were last winter….Kevin provides the answer…..

If prices are low today, and you expect them to be much higher in the future, then you will hold off pumping a lot.

Yeow! I wonder why he includes that… With wind, during that controversy, we were told prices would go down this year making wind too costly. They didn’t. Instead they soared to record levels making wind much cheaper in comparison. So let’s see where Kevin is taking this argument…..

Surprisingly the author gives praise to Obama’s conciseness when he correctly stated that: `Offshore drilling would not lower gas prices today, it would not lower gas prices next year and it would not lower gas prices five years from now.”

If exploration (of continental shelf) can be expected to be successful and significantly increase oil production in the future, then it would cause producers to revise downward their estimates for future prices. This would increase the attractiveness of extracting more today. As producers respond with higher production, prices today would drop.

In plain speak what he is saying is that the continental shelf holds so much oil, that it will lower future prices quite heftily. Therefore because of today’s high price, oil companies will pump more immediately out of the fields they currently own…. More oil will drop our prices…..

Ok, some parts of this are a little hazy. For one, we have already slipped past peak oil. There is less and less oil to pump…every day, every minute, every second we have less oil then we did before…

So the real question is whether the continental shelf will replace and offer enough of a surplus, in excess of our current rate, or…. will it just be part of the declining supply as that supply drops off to zero?

The implication is important. For if there is no surplus created, or no future oil glut, then by the author’s own admission, those individual oil companies who were fortunate enough to grab the oil rights to the continental shelf, would sit on them until the price rose even higher before beginning to pump and sell it later at a higher price….. By this conservative author, Kevin Hassett’s own admission, Americans would see no lower prices if after the continental shelf is opened…. no international oil glut occurs…..

The author totally misses that point last stated. Instead he bases his counter-argument on these two premises: One, that no oil will be found, and two, the belief that oil companies won’t open their current sources to sell at today’s higher prices in order to maximize oil companies profits….

The first point is valid. Oil exists offshore… The second requires some investigation, for it goes against common sense.

To illustrate this case,I am going to make the assumption that most of us feel we can live with $3.00 a gallon. I will use yesterday’s $4.00 price to make the comparison….

So let’s get wonkish… If I sell 100 gallons at $4.00, and the gas is costing me $2.50, then $400 dollars minus $250 dollars gives me a profit of $150 dollars for every 100 gallons I sell… Cool… (Just for fun, with every four cars….ka ching…ka ching….I just profited an extra $150 dollars….) So…at $3.00 a gallon, and $2.50 cost, I make $0.50 or $50 dollars profit on every 100 gallons…. Ok, so I need three times as many cars to break even… So how is that going to happen? Are we suddenly going to have three times more cars come out of hiding in order to buy up all this cheap gas that is suddenly available?

We could manufacture them, but if we did, who would buy them? After 7 years of Bush, who do you know that can afford an extra car with what little money they have left after food, fuel, their ARM mortgage, higher insurance deductibles, higher utility bills, plunging 401k’s, 40% drop in their house’s value? Keep in mind, just trading your car in for a new one, won’t do the trick.. You would have to buy another car in addition to the one you already driving, and drive it regularly along with your current car, so that filling stations can make the same money they are making with today’s high prices….. Or for every person now driving a car, two more would have to come off public transportation, buy a car, and fill-up with gas.

Kevin’s argument doesn’t seem to stand up in its real world application…

AEI, when they look at this, will say that my scenario does not take into account the drop that will occur in the cost of fuel. They will argue that cost of fuel will be lower than $2.50…. Ok, that is valid. Let’s look at scenario as well.

To maintain the $1.50 profit margin, at $3.00 a gallon, the cost will need to be at $1.50. So in other words, worldwide…. the price of refined gasoline, will need to come in under $1.50 a gallon…

I just don’t see it happening. To make as much money on $3.00 a gallon of gasoline…..a barrel of oil will need cost $39 dollars….tops….
That means China, India, Europe, and North America will all be able to buy oil for $39 dollars a barrel…..if Kevin’s statement is to hold true.

Now I’m not an oil man……But give me cards and I’m a betting man…. And with this data in hand, I am willing to bet that no oil executive is going to agree to drop his prices down from $4.00 to $3.00 a gallon……If one such executive worked for me…I’d fire him… at even just the pretension of a 25% drop in price.! And to do so, simply on the promise that in 11 years from now, we will have access to 86 billion barrels off Florida’s coasts, in the most fragile and sensitive marine environment existing in North America, doesn’t follow simple mathematics.

So what does Kevin say to defend his position? This.

the U.S. produced about 3 billion barrels of oil and consumed more than 7- 1/2 billion. The potential undiscovered haul is more than 10 times our annual consumption. It is inconceivable that extraction from such large reserves would have no effect on future prices.

Again: “It is inconceivable that extraction from such large reserves would have no effect on future prices”.

Like the dread pirate Roberts in the movie Princess Bride…. we have proved otherwise… of course the cost could go down a penny, or five cents, but that would offer us the relief we need now, would it?

But Kevin does not give up. He tells us that:

A vast body of academic literature finds that future prices and spot prices are intricately linked in a manner that could only occur if producers are constantly updating their plans based on expected prices. But no sources are cited.

A quick Google search points up only one article defending that notion. It’s author is Kevin Hassett. Still, I’m not persuaded…. As academic proof of his hypothesis, (which we previously debunked by a simple theoretical thought problem) he cites two economists at the world renowned center of academic excellence…..Monash University in Australia. A quick click on the links provides this….. and ….this….. I was sort of expecting a paper or something definitive which would finally show that drilling off-shore would lower oil prices today….. Instead of any study of financial calculations which I was rubbing my hands over in anticipation, all I get is a flat statement, with nothing backing it up, as if Kevin had just proved Guth’s Universal Inflation Theory….without any proof…..And pompously stated it as fact (it’s not)

Future prices and spot prices are inextricably linked.

They are? I don’t think so………For one, you and I together have just proved they weren’t. And two, Kevin has not proved they were….. As you can probably tell, by now, I’m starting to get somewhat disillusioned that perhaps offshore drilling will never lower our gasoline prices……..

In his new found confidence, Kevin loses me into the deep end… Read this and tell me if my interpretation is correct. Here is what I think he says…… “Drilling off-shore will drop prices because Newt Gingrich says so in his blog…..” And here is what he says……”

Newt Gingrich, has been a tireless advocate of a more rational energy policy that allows for more drilling. (The bold is my doing)….

In a recent post at his influential blog, Gingrich noted that the top academic energy journal, aptly named, “The Energy Journal,” recently rejected a study by economists Morris Coats and Gary Pecquet of Nicholls State University in Louisiana that found that higher production in the future would reduce prices today.

Rejected?…. Are you as confused as I am… Didn’t he just use this fact to contradict his own argument?

Reading on we find that it is not a misprint at least………

The study, Gingrich reported, wasn’t rejected because it lacked academic merit. It was rejected because the facts of the finding were so well known. James Smith, the impeccably credentialed editor of The Energy Journal described it this way to the unfortunate authors:

“Basically, your main result (the present impact of an anticipated future supply change) is already known to economists (although perhaps not to the Democratic Policy Committee). It is our policy to publish only original research that adds significantly to the body of received knowledge regarding energy markets and policy.”

Can someone explain just what makes an academic “impeccably credentialed” and how such an “impeccably credentialed” academic can invoke the Democratic Policy Committee in his statement as he turns down the publication of two economists, because their work is too commonly known to be of any news? And just who are these two economists? They are the publishers of this work: The effect of opening up ANWR to drilling on the current price of oil

In that paper’s synopsis, we see the same argument. The key word is the word “significantly”

Since future prices are expected to be lower, future profits are also lower, so the value of oil not produced now, but held for future sales, is lower, making it more profitable to go ahead and produce and sell now instead of waiting for future profits. Using oil now reduces the amount of oil available for the future, which involves the opportunity cost of forgone future profits, which are sometime called the marginal user costs or scarcity rents. In this paper, we use simple two-period models to show that if an amount of newly discovered oil is significant enough to reduce prices in the future, any drop in future prices reduces the future profitability of oil, reducing the marginal user costs of oil now. That reduction in the marginal user costs reduces the current price of oil just as if there were a reduction in the marginal costs of extracting oil now.

Found it: did you catch it? Here it is again.

any drop in future prices reduces the future profitability of oil, reducing the marginal user costs of oil now.

OK, I am beginning to see where it might make sense on a theoretical level; let’s see how it does on a practical one….

Ok, it is like this. Oil sells today for $4.00. We have 100 billion in reserves which we are carrying on our books at our current cost of $2.50 each or at $250 billion. As we use up that reserve, we write off the cost at $2.50 a gallon. Therefore, as before, we net $1.50 per gallon. Now, what these “experts” are saying, is that if we get another 100 billion in reserves added on, and if because of that (remember the word “if”) the cost of providing your gas twelve years from will drop down from $2.50 to $2.00 a gallon, we, the big oil company, being a non profit organization, will immediately use the $2.00 price (on our books), since that is what it will eventually cost us twelve years from now, and can therefore afford to charge you $3.50 a gallon and still make our $1.50 profit…….

That is the reasoning behind this concept of dropping prices by immediately leasing the off-shore drilling to the Big Oil companies. It’s all in their accounting……. They decide to charge themselves less for oil, and they then drop the price…..

OK, so can we apply this novel concept used for offshore drilling to various other parts of our lives…. Ok, lets see…. Ah, here we go……

Those of you who bought a house when prices were rising rapidly. Let us say you bought it for a paltry $200,000……. The price, due to the housing glut has now dropped 40% and will inevitably stay there for a long time…. At a forty percent loss, the most you will be able to sell it for will be $120,000….. But alas, you are making payments and paying interest on the $200,000 amount…..Why can’t you do what the oil companies do and tell the bank you will now start paying them 40% less with each payment….. it would certainly make sense for you to do so…. So why does your bank not agree? All they would have to do is adjust their books, and simply say that your loan was now worth only 60% of what it once was and they would still make the same profit…..

If it works for oil….why can’t it work for banks?

Because it just doesn’t work for banks…. and it won’t work for oil…… Think of it as if it is your money…..If oil is actually selling at $140 dollars a barrel, would you still drop your price downward to a cost of $112 a barrel based on what you think oil will be 12 years from now? I don’t think so.

Remember that word “if” spaced throughout Kevin’s argument? It stated that “if” the price dropped significantly, then this model would occur……”if”…..

All the practical knowledge says it won’t happen. Not even Kevin can prove that it will happen… So, much to my disappointment, at this point in time I have no other alternative but to call the lower-our-price- by-drilling, plain bunk, a sham, and probably just a silly attempt to scare us into letting them grab those environmentally sensitive areas, to keep under their lock and key……..

And I would have surely thought that Kevin and the AEI together, would be able to find some proof to the contrary. ..For based on their philosophy the old maxim holds true…… if they can’t find the connection: then nobody can……