Archive for the ‘Oil & Energy’ Category

Flashback: ANWR in Pictures (and Words)

December 5, 2017

To win Alaskan Senator Lisa Murkowski’s vote on the tax reform bill, a provision was slipped in to open part of the Artic National Wildlife Refuge. Source

Though the provision hasn’t got much coverage, I suspect that it will eventually cause an uproar.

To prep HomaFiles readers, we thought it would be a good time time to reprise a HomaFiles blast-from-the-past …

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According to Jonah Goldberg, writing in the National Review Online:

Both the New York Times and Washington Post editorial boards enthusiastically supported drilling in ANWR in the late 1980s.

The Post noted that the area “is one of the bleakest, most remote places on this continent, and there is hardly any other where drilling would have less impact on surrounding life. . . . ”

ANWR is roughly the size of South Carolina …

However, the area where, according to Department of Interior estimates, some 5.7 billion to 16 billion barrels of recoverable oil reside is much smaller and …  would amount to the size of Dulles airport.

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Tempted to vacation there?  Keep reading …

(more…)

The economics of oil … continued.

April 1, 2016

A couple of week’s ago, I posted The economics of oil …  suggesting that countries such as Saudi Arabia were operating below breakeven with oil @ $40 per barrel.

 

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While technically correct, several loyal readers schooled me on the difference between “economic breakeven” and “fiscal breakeven”.

(more…)

The economics of oil …

March 10, 2016

In light of the oil glut, Exxon has announced that it’s moth-balling some rigs and cutting capital expenditures.

That fits a bigger trend … supply high, demand slow, prices down, production down.

 

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From a supply side, the economics of the business raise some interesting questions …

(more…)

What’s up (or down) with oil prices?

December 22, 2015

I’m sure you’ve noticed that gas prices have come down at the pump.

If you follow the economy or the stock market, you’ve certainly noticed that oil prices have come down … a couple of years ago it was selling for over $130 per barrel … now it’s selling for under $35.

Most pundits chalk it up to slowing economic growth in China.

But, that sounded too simple to me, so I started asking some questions … why’s it happening? who’s getting helped or hurt?

 

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Here’s my current theory of the case …

(more…)

Why is gas cheaper in New Jersey?

March 12, 2015

I’ve always wondered that … especially since NJ is the only place on Planet Earth that won’t let you self-pump your own gas.

Nope.

Gotta wait for the attendant to notice you’re there and do it for you.

 

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Of course, the attendants don’t look like the guy in the picture.

Nope.

They all look like folks who should be reported to Homeland Security.

My point: having attendants should push gas prices up, right?

A common hypothesis is that there are a lot of gas storage facilities along I-95.

Cheaper supply?

That doesn’t square since there isn’t much gas drilled in the local area.

OK, so what is it?

I may have stumbled on the answer …

(more…)

Flashback: ANWR in Pictures (and Words)

January 27, 2015

Since President Obama has returned ANWR to the front-burner, we thought it would be time to reprise a HomaFiles balst-from-the-past …

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According to Jonah Goldberg, writing in the National Review Online:

Both the New York Times and Washington Post editorial boards enthusiastically supported drilling in ANWR in the late 1980s.

The Post noted that the area “is one of the bleakest, most remote places on this continent, and there is hardly any other where drilling would have less impact on surrounding life. . . . ”

ANWR is roughly the size of South Carolina …

However, the area where, according to Department of Interior estimates, some 5.7 billion to 16 billion barrels of recoverable oil reside is much smaller and …  would amount to the size of Dulles airport.

clip_image002

 

Tempted to vacation there?  Keep reading …

(more…)

A celeb that walks the energy talk … no Gulfstream for this dude.

March 22, 2012

Apparently, President Obama’s recent energy speech gained at least one influential endorsement.

I usually don’t put much stock in celebrity endorsements.

But in marketing parlance — this one, from a star who was way ahead oh his time — might have “legs” …

* * * * *
Questions:

1. Wouldn’t it be faster for Fred to leave the car at home and just walk to work ?

2. Are rock hard wheels more energy efficient than fully inflated tires ?

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Flat-earthers vs. Obama’s pipe dreams …

March 19, 2012

OK, so anybody who wants to keep using fossil fuels, to drill for oil and gas in the U.S., and to buy gas for a couple of bucks per gallon is a member of the flat earth society, lacking the the President’s vision.

Why Obama wants to insult the vast majority of Americans is beyond me, but that’s his tactical choice.

So far, the GOP has simply thrown back softballs: Solyndra, the Volt and the many other alternative energy busts.

Given my lack of tact, if I were a Romney adviser, here’s the line I’d offer up to Mitt:

“President Obama and I both have pipe dreams … mine in the Keystone Pipeline bringing oil from Canada … his goes back to his college days, I guess.”

Two for the price of one.

Keeps focus on the money wasted and lack of results from the President’s alternative energy gambles … and dregs up some old stuff re: Obama’s drug use that got wiped under the carpet in 2008.

Not rumors… straight from the horse’s mouth.

Obama first told of his early drug use in his 1995 memoir, “Dreams from My Father: A Story of Race and Inheritance” … published audaciously just after he became president of the Harvard Law Review.

He wrote re: his personal experience:

“Pot had helped, and booze; maybe a little blow when you could afford it.”

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Picture source:  Coed Magazine,
“10 Most Influential Pot Smokers”

Hmmm.

I guess that I hadn’t thought of the full range of hardships inflicted by the bad economy …

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Whew! A Presidential task force to ponder high gas prices …

March 15, 2012

In a TV interview, President Obama responded boldly re: rising gas prices:

“The only way to stabilize gas prices is to reduce our dependency on foreign oil …  In the meantime, because I know people are hurting right now and it feels like a tax out of their paychecks, what we’re doing is looking at every single area that can affect gas prices …  we’ve set up a task force.”

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I assume it’ll be modeled after the Jeffrey Immelt-led Jobs Task Force.

That’ll let us all sleep a little easier, right?

>> Latest Posts

Flashback: Why do gas prices move up and down ?

March 13, 2012

Another piece from my oil & energy archives.  Chris Hairel — an MSB alum — recaps the the oil-to-gas value chain.

Good background reading as gas prices soar.

* * * * *
Originally posted Aug. 27, 2008

In an earlier post “Thinking about $4 per gallon gas”, I wondered why oil companies waited so long to push prices up to $4 — the apparent price that the market will bear — and why they don’t just let the price stick at $4 now that it has been tested.

Chris Hairel , MSB MBA alum, sent me a nice recap of the oil to gas value chain.

Bottom line: cost-plus pricing in a very competitive market.

Worth reading …

* * * * *

The downstream refined products value chain — from crude oil to retail gasoline and other oil-based products — has six segments, each with its own unique industry structure, pricing levers and regulation:

* * * * *

Refineries – the key asset in the business where the object is to maximize the economic value added of the refined products.

Refineries are basically price takers since their company trading group supplies them with crude oil and the projected prices for refined products.

Working with the trading group, the refinery is charged with turning that crude oil into the most profitable collection of products given the quality of the crude and the capabilities of the refinery.

* * * * *

Bulk Markets – The trading group assumes title of the product as it leaves the refinery and arranges transportation to the terminals based on projected demand in the rack (or wholesale market).

Along the way the traders seek to increase the realized price for their products, react to supply disruptions or unexpected demand.

Bulk is a relatively efficient market with good price transparency based on key trading hubs like New York Harbor, Houston and Chicago.

The NYMEX futures market provides a facility for hedging and for paper speculation. Trading parties include oil companies, major users of petroleum products, independent pipeline companies and speculators.

Pricing is market-based and profit-optimized by the traders.

* * * * *

Pipelines – Interstate pipelines with multiple customers are regulated by the Federal Energy Regulatory Commission .

Their tariffs (i.e. prices) are set based on a government sanctioned rate of return. So. pricing is essentially a cost-plus process.

Pipeline owners are not permitted to share information about who else is using the pipeline with their affiliated companies, nor can they give (or take) preferential treatment with respect to supply allocation or delivery scheduling.

* * * * *

Rack Markets and Terminals – Rack markets cover the wholesale market for a city.

Prices in rack markets are set daily for the next day. The marketing group for an oil company looks at demand by channel of trade (i.e. branded, unbranded, spot), recent price history in the area and the supply situation.

The pricing mechanism itself may be based on an index, a cost plus or other model, but there’s some leeway on the decision under certain circumstances. For example, pricing is actually used as a key demand management lever since companies can purposefully price themselves out of the spot or unbranded channel in order to save product for branded customers.

Despite what the pricers do, most transaction pricing is determined by long term contracts. These contracts usually allow customers to “swing” their volumes. A customer may commit to buying an average of 5,000 gal a day, but the contract management process will look at the monthly volume and divide by 30 – the customer can usually manage their buying pattern to buy more on days when gas is cheap and less when it’s more expensive. .

* * * * *

Secondary Transportation – These are the tanker trucks that move product from the terminal to the retail station. The logistics are typically handled by jobbers or independent marketers that almost always price on a cost-plus basis.

* * * * *

Retail – Retail gas stations typically price on a cost-plus basis with a slim retail margin added on.

The bulk oil stations’ profits isn’t from the gasoline ! Gas is simply the “leader” product that attracts traffic (literally) which often loads up with high margin coffee, soda, cigarettes, etc.

* * * * *

Retail gasoline prices

Retail gasoline prices tend to respond quickly to market forces for 3 reasons: (1) cost-plus pricing, (2) retail competition, and (3) fear of government intervention.

* * * * *

(1) Cost-plus pricing

Since cost-plus pricing is prevalent at all stages of the value chain, refined products’ prices and crude oil prices tend to move together.

Refiners’ margins are often forecasted using what’s called the 3-2-1 spread. Take the price difference between three WTI NYMEX contracts and the sum of two NYMEX gasoline contracts plus one heating oil contract – then trade accordingly.

When crude falls. the entire complex floats down with it since the bulk market is fairly efficient and the downstream segments all use a cost-plus pricing model.

If domestic bulk markets fail to react to lower crude prices, several large players can bring product in from Europe to capture the arbitrage.

Since the vast majority of transactions are priced on a cost-plus basis, companies compete on their ability to “buy right”, on the efficiency of their operations, and their opportunity for more profitable ancillary sales. .

* * * * *

(2) Retail CompetitionFew prices are signaled to potential customers more visibly than gasoline prices.

There are often 2 or 3 gas stations on a corner, so consumers are tempted to chose the cheapest one even if it’s only a cent or two cheaper per gallon. The conventional wisdom is that brand loyalty is low.

The same price pressures evident in the wholesale rack markets since unbranded retailers have the option of buying from multiple terminals. If Shell is less expensive than Exxon on a particular day, Shell gets the sale in the unbranded and spot channels of trade.

* * * * *

(3) Threat of Regulation

A third force is the threat of government action.Pricing through the entire oil value chain is very transparent. Timely price data available from multiple sources for every segment of the market (DOE data, NYMEX, bulletin board exchanges, broker quotes, daily PLATT and OPUS surveys, AAA retail surveys, etc.).Oil companies generate two-thirds of their profits from crude oil production and refining. The wholesale and retail marketing and distribution parts of the business is generally considered mote of a cost of going business (i.e. overhead) than a profits source. So, oil companies would rather play it safe (from government regulators) than try to eek out an extra half percentage point of profit at the wholesale or retail level.

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Flashback: Thinking about $4 per gallon gas …

March 6, 2012

Since gas prices are on many people’s minds these days, I pulled the following post out of the archives.  Originally posted August 22, 2008, it’s strikingly current today.

* * * * *.

Most folks wonder why the pump price of gas is surging this year.

I ask a different question: why didn’t the oil companies — branded by most folks as evil profit grubbers — push the price up into the $4 /gallon range a year or two ago?

In my pricing course, I harp on a basic point: marketers should be respectful of costs (i.e. never sell stuff below “fully-loaded cost” plus an acceptable profit), but they MUST price to the market. That is, they should determine the price that the market will bear, and then adjust accordingly to maximize profits — taking into account downward sloping demand curves and volume-related cost functions.

It’s starting to look like $4 per gallon gasoline is about what the market will bear. That’s the price point where folks started to cutback in gas consumption the past couple of months.

* * * * *

Question: Why did the oil companies wait for the cost of crude to push up gas prices? To me, it seems that the oil companies have actually showed restraint over the past couple of years.

* * * * *

Here’s a crude analysis (pun intended):

Simply divide the price of a barrel of crude over the past couple of years by 42 (since the are 42 gallons per barrel), and compare the result to the retail price of gasoline (which is usually expressed per gallon).

The difference — gasoline’s “back of the envelope” mark-up over crude prices — is plotted below.

Note that for the past 9 months, or so, the crude mark-up been about $1 per gallon — at the low end of the historical range.

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* * * * *

Since the cost of a barrel of crude has skyrocketed over the past couple of years, the percentage mark-up has trended down. Hmmm.

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* * * * *
Bottom Line:

It certainly looks like the oil companies price gasoline using some sort of “cost plus” formula.

I think the oil companies left a lot of profits on the table during the past couple of years — the retail gas market would probably have borne higher prices.

Now, I’m betting that retail gases will be “sticky” — there will be a “ratchet effect” and gas prices will come down proportionately slower than crude oil prices.

And, I predict that if the oil companies get hit with a windfall profits tax, they’ll just pass the tax along into retail gas prices. Just watch.

* * * * *

Analytical note:

The “real” calculations re: the economics of converting crude oil into gasoline are way more complicated than the above simple analysis (e.g. only about 1/2 of a barrel of crude is made into gasoline, there are refining and distribution costs, the 1/2 barrel that doesn’t go into gas earns other profits).

My bet: the conclusions drawn from a more precise analysis would be directionally the same, and probably pretty close to the $1 per gallon — which has a certain memorable ring to it.

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Obama says “Drill, baby, drill” … wanna bet?

May 16, 2011

Big week in oil …

On Tuesday, the  U.S. Interior Department issued a permit for Exxon Mobil to drill in the deep waters of the Gulf of Mexico.  That’s only the fourth deepwater permit issued since the BP oil spill.

On Thursday, the CEO’s were guests at a kangaroo court conducted by some press-preening Senators who seemed to think that raising taxes on oil companies would cut the price of gasoline at the pump. Apparently Econ 101 isn’t a prerequisite for the Senatorial junket.

Then, the best of the week came in Obama’s radio address when he reiterated his long-standing support for domestic oil drilling.

Say what?

To be more specific, the president, in his address, said he supported increased domestic oil and gas development, if done safely and responsibly.

English translation: not while he and rapster Common are hangin’ at the White House.

He further clarified his position: “(Let me be clear) … Under the plan, the coastline from New Jersey northward would remain closed to all oil and gas activity. So would the Pacific Coast, from Mexico to the Canadian border.  Further, The environmentally sensitive Bristol Bay in southwestern Alaska would be protected and no drilling would be allowed under the plan.“

As Mavis Johnson* would say: “Anything between the radio and the bicentennial mugs … not including the erasers or the Chiclets … everything in the 3” area right here.”

My bet: no noticeable change in the rate of deepwater licenses granted.

Even the mass media didn’t go for this head fake.  Coverage ranged from slim to none.

Which raises another question: why does the President give a Saturday morning radio address?

Does anybody ever listen to it?

* * * * *

*  Just in case you forgot, Mavis Johnson was Steve Martin’s character in “The Jerk”.

Section 199 – Domestic Production Activities Deduction … a loophole for big oil … huh?

May 12, 2011

An editorial by former Congressman Harold Ford aroused my curiosity …

The subject was President Obama’s opposition to domestic oil drilling.

The part that caught my eye had to do with the “tax loopholes” that Obama was repealed because oil company profits – and gas prices — are rising.

Ford says:

“Why, when gas prices are climbing, would any elected official call for new taxes on energy? And characterizing legitimate tax credits as “subsidies” or “loopholes” only distracts from substantive treatment of these issues.

Lawmakers misrepresent the facts when they call the manufacturing deduction known as Section 199—passed by Congress in 2004 to spur domestic job growth—a “subsidy” for oil and gas firms.

The truth is that all U.S. manufacturers, from software producers to filmmakers and coffee roasters, are eligible for this deduction.

WSJ, Washington vs. Energy Security, MAY 11, 2011

What’s the loophole”?

Sec. 199 is officially the Domestic Production Activities Deduction.

It says that a business engaged in a qualifying production activity is eligible to take a tax deduction of  9%.

What’s a qualifying production activity?

Qualified domestic production activities include: “the production of electricity, natural gas or potable water in the U.S. and the manufacture, production, growth or extraction of tangible personal property, computer software,, including the development of video games, or sound recordings or qualified films “

Hmmm.

Why isn’t the President talking about the tax loopholes for CDs, films and video games?

Take the tax advantage away from oil companies, but preserve it for video game makers.

You just can’t make this stuff up …

Highest level of domestic oil production in history … (just kidding)

May 11, 2011

The Campaigner-in-Chief has been at it again, claiming that (thanks to him) domestic oil production is at a historic high.

Au contraire, mon friere …

According to the Dept. of Energy, U.S. oil production is about half of what it was in the 1970’s.

Yes, there has been a turn upward in the past year or so, as wells approved by the Bush administration come on line.

Hmmm.

Is the President misinformed or misleading?

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Re: gas prices … President mocks (other) politicians and their 3-point plans … and offers up his 4-point plan

April 25, 2011

In his weekly radio address, speaking on fast rising gas prices, Obama said:

“Whenever gas prices shoot up, like clockwork, you see politicians racing to the cameras, waving three-point plans for two dollar gas.”

Literally in the next paragraph, he offered up his 4-point plan.

  • Safe and responsible production of oil at home
  • Rooting out cases of fraud or manipulation in the oil markets
  • Ending the subsidies given to oil and gas companies
  • Investing in tomorrow’s clean, renewable energy sources: hybrids and electric cars

Whew!

Finally a game-changing 4-point plan … albeit with a couple of holes:

  • Domestic production … Obama has capitalized on the BP blowout to stop practically all new US domestic oil production
  • Fraud & abuse … just like the fraud & abuse being rooted out of the healthcare system.  I’ll take the under bet.
  • Oil company subsidies … strip the oil companies of subsidies and they’ll lower prices at the pump …  hmmm, so that’s how business works
  • Electric cars … birth to date, about 1,000 Chevy Volts have been sold.  Not exactly the iPad adoption rate.

Ken’s Plan: Start drilling, release strategic reserves and, most important, stop devaluing the dollar.

U.S. boot on BP’s throat lifted … by Russia.

January 20, 2011

Remember when Obama’s crack Secretary of the Interior — Cowboy Ken Salazar – said he was putting his boot on BP’s throat and keeping it there “until” they paid up?  Then, he and Obama demanded that BP set up a $20 billion account to fund recovery efforts. 

  • Side track: whatever happened to the recovery?  Haven’t heard much about it lately, have you?

Well, I guess the boot can be lifted from BP’s throat now … thanks to the Russians.

The NY Times reports:

Russian companies are talking to BP about buying billions of dollars in oil fields and other assets to help it pay its gulf cleanup and compensation costs.

Along with a partner, BP is planning to explore the rich oil fields in Russia’s Arctic waters, a region that is off limits in the United States and Canada.

And BP’s chief executive, Tony Hayward, who is turning over the reins this Friday to Robert Dudley, is being welcomed onto the board of TNK-BP, the company’s 50-50 joint venture in Russia.

NY Times, In Russia, BP Sees a Second Act, September 29, 2010

Though BP seems doomed to years of hostile regulation and lawsuits in the United States, in Russia, the second-most important country for the company’s operations, BP’s fortunes are brighter than ever.

Guess we showed them.

Where to invest: United States, Russia, Venezuela ? … or, none of the above?

September 17, 2010

Punch line: Washington’s shakedown of BP may cause other multinationals to flee to a more hospitable haven: Canada.

Side note:  I’ve often said that the discarding of established bankruptcy / contract law to pay off the UAW before GM’s secured creditors was a defining moment for US commerce.  So, the BP action shouldn’t have surprised anyone.

* * * * *

Excerpted from The Globe: The great drain, August 26, 2010          

Assume you are a big-name international resource producer, maybe an oil company.

From the following selection, choose two countries where you would most want to operate:  Canada, United States, Russia, Venezuela, Bolivia and Ecuador.       

That’s easy.

You’d pick the first two, because the others have had scant regard for  the rule of law.

At one point or another, each has been accused of expropriation or other  acts of aggression toward foreign investors.

Since you are accountable to your shareholders,  you strike those countries off your list.                            

Today, however, you might want to strike the United States off the list, too.

The  response of the Obama White House and Congress to the BP oil leak in the Gulf of Mexico is  sure to have foreign investors trembling.

As the damage claims roll in like a hurricane, BP  has become the world’s biggest ATM.

BP never expected to pay the ultimate price for the sub-sea blowout.

That’s because of the 1990 Oil Pollution Act  placed a $75-million liability cap on monetary damages payable to public and private
parties (except where negligence was proven).                        

In BP’s case, that cap was quickly deemed null and void.

In short, the U.S. government dictated financial responsibility in a politically  driven way well before blame for the leak had been determined in a court of law.

BP’s now massive liability may downgrade the world’s view that the United States is  an investment haven.

America’s loss could be Canada’s gain.

Full article:
http://www.theglobeandmail.com/report-on-business/rob-magazine/the-great-drain/article1683458/

Thanks to JWC for feeding the lead

Back to the Future: BP distributors consider “retro-branding”

August 1, 2010

BP  bought Amoco in 1998 and many current BP distributors used to be Amoco distributors.

Those distributors began a campaign soon after the spill started, emphasizing that BP fuel stations are locally owned and operated.

Now, some BP gas station owners in the United States want to drop the BP name and return to the Amoco brand to recover business hit by public anger over the Gulf of Mexico oil spill disaster.

Note: there’s a major complication: the Amoco brand name is owned by BP, not by the distributors.

* * * * *

Source: Reuters, US BP distributors consider reverting to Amoco brand, Aug 1, 2010 
http://www.alertnet.org/thenews/newsdesk/N01235110.htm

Why are gas prices artificially high on the the East Coast ?

July 1, 2010

This was a reply to our post on the Super Skimmer that’s been kept out of the Gulf clean-up.

A different twist on the now famous Jones Act that I thought was pretty interesting.

The Jones Act also plays a part in higher gasoline and diesel prices on the East Coast.

The US East Coast doesn’t have enough refining capacity to meet in sitsu needs and must bring in fuel from the Gulf Coast or foreign markets. The pipelines from Texas and Louisiana are full and Jones Act ships are fairly small and carry higher per cargo unit operating costs compared to internationally flagged vessels.

Therefore ~25% of the gasoline sold along the East Coast is imported from Europe and the Caribbean.

Seems like changes in the Jones Act on this issue could create more jobs for refiners and longshoremen in the US, reduce the total carbon footprint of a gallon of gasoline and reduce fuel prices by a few cents per gallon.

Thanks to MSB MBA alum Chris H.

Alibi Ike … and other great lines from George Will.

June 24, 2010

Conservative columnist George Will offered up his review of Obama’s oval office oil spill speech.

The link is below … here are some of my favorite lines:

  • The news about his speech is that it is no longer news that he often gives bad speeches. This one, however, was almost magnificently awful.
  • There were trite war metaphors about “the battle” against oil “assaulting” our shores, for which “siege” he has a “battle plan.” (Our government declares war promiscuously — on drugs, poverty, cancer, environmental problems, etc. — but never when actually going to war.)
  • As usual, he attacked George W. Bush. (Chicagoan Obama resembles the fictional baseball player invented by Chicago’s Ring Lardner — Alibi Ike.)
  • He introduced a weird lament about a problem he has aggravated: “We’re running out of places to drill on land and in shallow water.” He and his party oppose drilling in the tundra of ANWR and in shallower coastal waters.
  • “The one answer I will not settle for is the idea that this challenge is somehow too big and too difficult to meet. You see, the same thing was said about our ability to produce enough planes and tanks in World War II.” Was it really? By whom? Most Americans then were too busy producing—and flying and driving—planes and tanks to entertain the thought Obama imagines was prevalent.
  • Advisers should explain to our Demosthenes that the correlation between the quantity of his speaking and the fortunes of the things for which he speaks is inverse.
  • Diminishing returns from his rhetoric may reflect the public’s recoil from wretched excess everywhere. The unceasing torrent of his ill-chosen words is analogous to the unstoppable oil spill, which itself resembles his and his party’s incontinent spending.

Newsweek, Word Spill – Our Demosthenes is also Alibi Ike, June 20, 2010
http://www.newsweek.com/2010/06/20/word-spill.html

‘Ridiculous finger-pointing’ or ‘systemic failure’ … it’s in the eye of the beholder, I guess.

May 18, 2010

Last week, President Obama lambasted BP, TransOcean and Halliburton for “ridiculous finger-pointing” that he “didn’t appreciate”.

Ridiculous finger-pointing ? 

Hmmm.

So, the President points his finger at, well, finger-pointers.  That in itself is funny, isn’t it ?

From a guy who then went to a fundraising event where he proceeded to point his finger (again) at Pres. Bush for everything except the Bubonic Plague.

From a guy whose department heads in State, Homeland Security, NSA, CIA, FBI all pointed their fingers at the others – to duck blame for the Xmas underwear bomber.

In that case, the finger pointing was legitimized as characterizing a “systemic failure”. 

Translation: it was nobody’s responsibility – certainly not the President’s.

Why didn’t BP, TransOcean and Halliburton just claim the oil well blast & leak was simply a systemic failure ?  Then, maybe, the President wouldn’t have pointed his finger at them for finger pointing !

BP’s brand equity … it’s leaking, too.

May 5, 2010

Some Homa family members avoided Exxon stations like the plague after the Valdez accident.  My bet: they weren’t alone.

Same fate for BP (nee British Petroleum} ?

Early data says yes — BP has gone from being No. 1 in its category in a brand-loyalty index maintained by research company Brand Keys — to dead last.

Next question for BP: how to restore its brand equity ?

Good news for BP: no signifcant retail competitors except , well, Exxon.

Excerpted from BrandChannel: BP’s Brand: Is the Damage Done?, May 3, 2010

BP’s brand equity has exploded almost as quickly as its faulty well mechanism at the bottom of the Gulf. Reportedly, BP has gone from being No. 1 in its category in the brand-loyalty index maintained by Brand Keys — to dead last.

Part of BP’s long-term problem will be that the company has gone so far out of its way over the last several years to position itself as the “green” oil company, with a sunny new logo composed of green and yellow; a new slogan, “Beyond Petroleum,” and the playing up of the BP acronym instead of its name; and its boasts about alternative-energy initiatives such as wind farms.

All of that seems laughably hollow now as BP is unmasked as – gasp! – basically an oil company — drilling the world’s deepest wells in the Gulf of Mexico, scouring for oil in the Arctic, squeezing natural gas from the rocks of Oman.

British Petroleum must fight to not join the ranks of all-time corporate villains, a list that includes fellow oil giant Exxon Mobil, which achieved infamy for Alaska’s Valdez disaster in 1989.

While BP is adamant that it will clean up this spill — the bigger challenge may very well be cleaning up and restoring the BP brand.

Full article:
http://www.brandchannel.com/home/post/2010/05/03/BP-Brand-Damage.aspx

The "spill" will be a problem for Obama … here’s why.

May 4, 2010

Lots of chatter on the right-leaning talk shows along two points:

(1) Obama was slow to respond to the crisis … no better than Bush on Katrina.

(2) There goes off-shore drilling as a source of oil for the U.S.

I can’t take the slow response criticism seriously.  I didn’t think Bush deserved it (should he have declared the LA Governor and N.O. Mayor to be grossly inept and Federalized the state ?)  … so I can’t criticize Obama on this one.

Interestingly, Obama got boxed by some bad timing.  Just a couple of weeks ago he announced expansion of off-shore drilling. While the announcement had no substance to it (actually cut back on authorized areas), it did provide some pro-drilling sound bites.  If he hadn’t said it, he would be in the catbird seat now: “See, I told you offshore drilling was bad.”  But, now he’s rhetorically in the offshore canoe.  We’ll see on that one.

My take: There will be a ‘discontinuity’ in offshore production.  This well is gone, and others will be shut or slowed by government inspections and reviews.

So what? 

I expect gas prices to be over $4 by the end of the summer … and maybe as high as $5 … due to curtailed supply and the oil companies costs of clean-up and mandatory rig upgrading.

The impact? Uh-oh for the economy. Oil is a major cost component of many products.  So, if oil prices spike, a broad range of prices to go up, demand will falter, and the expected recovery will sputter.

That means that unemployment stays high going into the November elections.

That’s a problem for the President.

High-speed trains: Faster than a car … and just about as profitable.

April 27, 2009

Business Week says:

“By committing $13 billion to high-speed train travel, the Obama Administration is giving long-dormant projects a boost

A priority is a line that would whiz passengers 520 miles from Anaheim to San Francisco in less than three hours and upgrades of Amtrak service in New England and the Midwest to reach speeds of up to 150 mph.”

* * * * * 

The article also notes:

(1) U.S. government analysts concede that it’s impossible to run these hugely expensive networks profitably.

(2) Among the interested investors: Japan Railway, Bombardier, Kawasaki, and Siemens. (Notice anything “interesting” about the list?)

The article glosses over our national success running Amtrak.

That sucking sound you hear is more of money leaving your wallet (assuming that you’re in the half of Americans who pay income taxes)

* * * * *

Full article: Business Week, “U.S. High-Speed Train Projects Get a Push”, April 23, 2009
http://www.businessweek.com/print/magazine/content/09_18/b4129029604145.htm

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Japan Jumps Ahead: The Honda/Toyota Hybrid War Leaves Detroit Playing Catch-Up

April 7, 2009

Excerpted from BusinessWeek, “Toyota, Honda Heat Up the Hybrid War”, by Ian Rowley, March 27, 2009

* * * * *

Honda and Toyota are launching hybrid cars in quick succession—and neither one is skimping when it comes to generating hype. The Honda Insight boasts a sub-$20,000 sticker price, fuel economy of 40 miles per gallon in the city and 43 mpg on the highway, and is arguably more fun to drive. The latest Toyota Prius is larger than its Honda rival, gets better mileage, and (unlike the Insight) has an EV mode, where the driver instructs the car via the touch of a button to run solely on battery power. However, the soon-to-be-released Prius is expected to be more expensive, with a U.S. sticker price starting at around $23,000.

Toyota is also planning a smaller, cheaper hybrid based on its Yaris platform to take on the Insight. “We are going to compete by expanding our hybrid vehicle lineup to smaller hybrids.”

Toyota is also taking the unusual step of selling a cheaper version of the current Prius alongside the new one. “There will be demand for the two to co-exist,” Toyota said at the unveiling of the new car for the Japanese market. This cheaper Prius, like the Insight, will go on sale in Japan for less than $20,000.

* * * * *

Analysts question, however, the impact of launching a cheap version of the old Prius alongside the new one. They worry the older Prius may eat into sales of the new Prius and similar-sized models such as the Corolla, or that it might force Toyota to cut prices of nonhybrid models.

The new Prius may go on sale in Japan for as little as $20,900, which would be $3,000 cheaper than the current model—even though the new Prius has a larger engine and is more luxurious.

* * * * *

It is feasible, though, that both companies can win the hybrid war. For one thing, the rivalry is helping to bring the “hybrid premium”—the incremental cost of making hybrids compared with regular vehicles—down to levels where owning is as much about economic sense as sending an “I’m green” message.

Improved production efficiency is just as important. Honda can now make 250,000 hybrid cars a year at its Suzuka plant. Increased scale is making it easier to bring down costs. The company increased the number of workers assembling battery modules from 20 to 54. But by increasing automation, Honda now has the capacity to produce 1,000 packs a day, vs. about 250 before the Insight went into production.

At Toyota, engineers didn’t quite manage to reduce the size and cost of the Prius’ new-generation hybrid system by half, but both have been reduced by 25% to 35%, compared with the current second-generation model.

* * * * *

In a deep recession, meeting sales targets will be tough for both companies. Still, even if sales disappoint, the new models will help the two Japanese companies maintain their dominant market share in hybrids. Although rivals are launching more gas-electric vehicles, no other automaker is yet close to producing hybrids in the hundreds of thousands.

Edit by DAF

* * * * *

Full article:
http://www.businessweek.com/print/globalbiz/content/mar2009/gb20090327_626019.htm

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Cap & Trade … and you think mortgage-backed derivatives were risky

April 6, 2009

Excerpted from WSJ, “The Carbon Cap Dilemma”, March 28, 2009

The essence of cap and trade:

Congress puts a ceiling on emissions, and then allows businesses to sell any of its extra allowances that stand for the right to emit, it is essentially creating the world’s largest commodity market — in carbon-backed securities. These will be extremely valuable, and everything comes down to how the government chooses to distribute them. ”

Full article:
http://online.wsj.com/article/SB123819777143661833.html#articleTabs%3Darticle

* * * * *

Ken’s Take: Think about it … a financial derivative tied to the amount of carbon that an energy generating facility doesn’t emit.  At least mortgage backed securities were, well, backed by mortgages — albeit risky ones.  These derivatives would be backed by, well, nothing, except a Congressional definition that could change at Barney Frank’s whim.  You’d think that Enron and the current financial mess would have soured folks on those sorts of financial instruments.

* * * * *
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Cap & Trade … if it smells like a tax …

April 3, 2009

Excerpted from WSJ, “The Carbon Cap Dilemma”, March 28, 2009 

Ken’s Take: The Bushers were clever rebranding the estate tax as the more pejorative sounding “death tax”.  Team Obama is similarly clever calling their energy tax “cap and trade”.  Doesn’t change the essence — it’s a tax.

* * * * *

On pure economic grounds, a straight carbon tax, would be simpler and more efficient than cap and trade.

But “the political will to go the tax route . . . is just not there. Nonexistent” — namely because the use of the word “tax.”

The cap & trade approach is to design a  program that will “simulate the same thing a tax would do.”

That is, to achieve the increased energy prices essential to the success of cap and trade.

* * * * *
Full article:
http://online.wsj.com/article/SB123819777143661833.html#articleTabs%3Darticle

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Cap & Trade … the Chinese dilemma

April 2, 2009

Excerpted from WSJ, “The Carbon Cap Dilemma”, March 28, 2009

With breakneck construction of conventional coal plants, China has already surpassed U.S. coal capacity and is on pace to double it sometime in the middle of the next decade.

The U.S.,could close down every single coal plant immediately … but that wouldn’t do much good in the scheme of things,” because atmospheric CO2 concentrations would continue to rise as China continues to expand.

“We go to zero emissions in this country, and if China doesn’t follow us, we’re nowhere. . . . We’ve just ruined our economy, and we’re nowhere,”

China’s not going to follow us because we’re the United States. . . . You say, ‘Shut down your plants’ — well, that’s going to be a short conversation. China has $2 trillion invested in their plants.” 

Full article:
http://online.wsj.com/article/SB123819777143661833.html#articleTabs%3Darticle

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Cap & Trade … the Nuclear Dilemma

April 1, 2009

Factoid: 79% of France’s electricity is nuclear generated.

* * * * *
Excerpted from WSJ, “The Carbon Cap Dilemma”, March 28, 2009

On the one hand, environmentalists claim that climate change is a “planetary emergency,” perhaps the greatest threat ever to face humanity. On the other, nuclear energy is still verboten in the green catechism — despite the fact that it provides roughly one-fifth of U.S. electricity, all of it free of carbon emissions. Without more nuclear power, it is nearly impossible to see even the glimmers of any low-emission future.

* * * * *
A lot of companies stand to make a bundle off cap and trade.

Ironically, the nuclear industry stands to benefit as much as any “green” business from a carbon crackdown.

So, if Congress does create cap and trade, expect the next populist outcry to be for a windfall profits tax on nuclear.

* * * * *
Ken’s Take: … and don’t expect any more nuclear power plants to be brought on line.

* * * * *
Full article:
http://online.wsj.com/article/SB123819777143661833.html#articleTabs%3Darticle

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California Dreamin’ … Weed, yes … Oil, no.

March 5, 2009

Recent press reports say Golden Staters are considering the legalization of maijuana as a means of increasing state revenues to offset CA’s huge budget deficit.

But, no reported consideration for off-shore oil drilling.  Hmmmm.

According to  a recent study by the American Energy Alliance, an industry research group, developing our offshore energy resources would create in the coming years:

$8.2 trillion in additional GDP.

$2.2 trillion in total new state and federal tax revenues.

1.2 million new jobs at high wages.

$70 billion in added wages (all taxable) to the economy each year.

The much maligned Gov Palin proved that eco-sensitive drilling can bulge state coffers … and cut citizens tax bills.

Pro-weed, anti-oil … that says it all, doesn’t it …

* * * * *
Source of AEA info:
http://www.ibdeditorials.com/IBDArticles.aspx?id=320544753372991

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Is lithium the oil of the future? … If so, one foreign dependency gets replaced by another.

December 23, 2008

Electric hybrid cars are the secret sauce that will save the planet and free the U.S. from its dependency on foreign oil, right?

Well, the environmental benefits are apparent, but we’ve got a problem.  Batteries are the major cost component of hybrid electric cars (running from $3,000 to $5,000 each).  Right now, industrial strength rechargeable batteries are made mostly in Japan and China — not in the U.S.  A consortium of U.S. companies is soliciting government money to develop and build batteries here.  That’s good.  But, there’s another problem: Lithium — the major element that goes into the current battery of choice — is only minimally available in the U.S.  Uh oh.

* * * * *

Excerpted from “The Trouble with Lithium”, Meridian International Research, Dec. 2006

The world is embracing the Lithium Ion battery as its answer to mobile electrical energy storage needs (translation:  for use in cars).

All other technologies are being more or less swept aside by the attraction of the potentially high energy density of Lithium based batteries.

The most well known alternative to LiIon is the NiMH battery. It is rugged, proven, has high cycle life and has many years development behind it. However, it is heavier than LiIon, very Nickel intensive. (and poses an environmental disposal challenge).

Analysis of Lithium’s geological resource base shows that there is insufficient Lithium available in the Earth’s crust to sustain Electric Vehicle manufacture in the volumes required, based solely on LiIon batteries.

Depletion rates would exceed current oil depletion rates and switch dependency from one diminishing resource to another.

Analysis shows that a world dependent on Lithium for its vehicles could soon face even tighter resource constraints than we face today with oil.

Concentration of supply would create new geopolitical tensions, not reduce them.

Exclusive dependency on Lithium Ion batteries, where the Lithium will overwhelmingly come from South America, would be like being dependent on South America for 100% of our oil supply.

image

Full technical article:
http://www.evworld.com/library/lithium_shortage.pdf

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High "Volt"-age? Can Their New Hybrid Jump Start GM?

December 2, 2008

Excerpted from the New York Times, “G.M.’s Latest Great Green Hope Is a Tall Order”, by Micheline Maynard, November 22, 2008

* * * * *

The Chevrolet Volt, a plug-in hybrid, will not arrive in showrooms until late 2010. But it is already straining under the weight of an entire company.

Executives at GM are using the Volt as the centerpiece of their case to a skeptical Congress that their business plan for a turnaround is strong, and that a federal bailout would be a good investment in G.M.’s future.

But whether the Volt can live up to its billing is already a matter of debate. And some industry analysts note that GM has a poor track record of introducing green technology to the market.

* * * * *

The Volt is a big long-term bet. New vehicles typically cost $1 billion to develop, and the Volt requires new technology that probably inflated that price tag even more.

G.M. says the car, which is scheduled to arrive in showrooms two years from now, will be able to travel 40 miles on a charge, but it will also have a small gas engine to extend the range to as much as 640 miles using both the battery and gasoline. It is expected to cost about $40,000.

To some, the Volt will remain a niche vehicle until its cost drops sharply and its range rises dramatically.

“If you’re the affluent individual who wants to make a statement, it’s one thing.”  “If you’re Joe the Commuter, you’re not going to spend $40,000 on an electric car. It’s insane.”

* * * * *

Once it arrives, GM believes, customers will adjust more rapidly to the Volt than they did to the Prius, Toyota’s hybrid gas-electric car. “I don’t think that’s going to be that big a deal for most people to get their heads around.”

“We’ve turned into a plug-in society. We’ve got cellphones, PDAs, you name it, that are all plugged in. To a certain extent, it’s not much more complicated conceptually than coming in and plugging in your cellphone.”

* * * * *

The Volt is not General Motors’ first electric vehicle. In 1996, G.M. started leasing the EV1, an electric car, to customers in California. Although its few hundred owners loved it, the EV1 was discontinued just three years later.

G.M. reportedly spent about $1 billion in the 1990s to develop the EV1, which it dropped after saying it could not make money on the cars. The EV1, which was available only in lease deals, sold for the equivalent of up to $44,000 but cost G.M. about $80,000 apiece to make.

Other efforts to earn green bragging rights have missed the mark, too. Only two years ago, G.M. promoted flexible fuel cars that run on E85, a blend of ethanol and gasoline, as the way to wean Americans off gasoline. But interest in ethanol has waned amid concerns about the environmental impact of using corn for fuel rather than food.

The company is building its largest sport utility vehicles with hybrid gas-electric power trains as well, but they have sold poorly.

Edit by DAF

* * * * *

Full article:
http://www.nytimes.com/2008/11/22/business/22volt.html?pagewanted=print

* * * * *

From Business Week, a compendium of articles re: Hybrid Cars
http://bx.businessweek.com/hybrid-cars/

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In the new political economy, smart lobbyists will be arriving in hybrids …

December 1, 2008

Excerpted from IBD, “Job One: Wean The Economy Off Of Politics”,  Krauthammer,  November 28, 2008

* * * * * 

We have gone from a market economy to a political economy.

In the old days, if you wanted to get rich, you did it the Warren Buffett way: You learned to read income statements and balance sheets. Today you learn to read political tea leaves.

Today’s extreme stock market volatility is largely a reaction to meta-economic events: political decisions that have vast economic effects. You don’t anticipate Intel’s third-quarter earnings; instead, you guess what side of the bed Henry Paulson will wake up on tomorrow.

We may one day go back to a market economy. Meanwhile,  the two most important implications of our newly politicized economy are the vastly increased importance of lobbying and the massive market inefficiencies that political directives will introduce.

Lobbying used to be about advantages at the margin — a regulatory break here, a subsidy there. Now lobbying is about life and death.

You used to go to New York for capital. Now Wall Street, broke, is coming to Washington. With unimaginably large sums of money being given out, Washington will be subject to the most intense, most frenzied lobbying in American history.

The other kind of economic distortion will come from the political directives issued by newly empowered politicians.

For example, bank presidents are gravely warned by one senator after another about “hoarding” their bailout money. But hoarding is another word for recapitalizing to shore up your balance sheet to ensure solvency. Isn’t pushing money out the window with too little capital precisely the lending laxity that produced this crisis in the first place?

Even more egregious will be the directives to a nationalized Detroit. Sen. Schumer, the noted automotive engineer, has declared “a business model based on gas” to be completely unacceptable. He says,  “We need a business model based on cars of the future: the plug-in hybrid electric car.”

The Chevy Volt, for example? It has huge remaining technological hurdles, gets 40 miles on a charge and will sell for about $40,000, necessitating a $7,500 outright government subsidy. Who but the rich and politically correct will choose that over a $12,000 gas-powered Hyundai?

The new Detroit churning out Schumer-mobiles will make the steel mills of the Soviet Union look the model of efficiency.

* * * * *

Full article:
http://www.ibdeditorials.com/IBDArticles.aspx?id=312760589983880 

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Auto Marketers See at Least One Shade of Green …

December 1, 2008

Excerpted from Brandweek, “Taking the Road Less Traveled” by Steve Miller, Superbrands 2008

* * * * *

In April, a revolution went down. New vehicle sales dipped 8%, cars began to outsell trucks, and sales of compacts and hybrids leaped, gratifying greenies everywhere and giving the auto industry a headache…

The momentum in the market has clearly shifted. A Kelley Blue Book survey in April found that 60% of new-vehicle buyers say gas prices have changed or influenced their purchase decision. Now, better-made small cars and gas prices have turned consumers on to cars like Toyota’s Yaris and Nissan’s Versa…

Marketing has tried to follow the bouncing ball that is consumer preferences…Meanwhile, hybrids…continue to play an emerging role in sales of small cars. Hybrids now account for 3.2% of all new car sales, up from 2.6% at the end of 2007…

But while environmentalists have embraced the vehicles, the price point difference (they are up to $5,000 more) and the fact that other gas-powered cars are now approaching hybrid-like fuel economy are challenging the technology. “The wallet always dominates in the car-buying decision…If [hybrid marketers] can conveniently make that case and make the economic equations easier, that will seal the deal”..

With all of the fuss about hybrids, alternative power trains and controversial fuels such as ethanol, most every automaker is now including something to draw attention to their own “enviromerits.”…Any campaign now has to, at least, give a nod to the green…But while green (as in environmentally conscious) is good, green (as in dough) is even better when it comes to marketing message…

Edit by SAC

* * * * *

While auto marketers focus their message on the green ($) is great theme consumers are beginning to realize that purchasing a hybrid may not be the smartest financial decision.  As the hybrid market evolves its consumers are also evolving, which means marketers must do even more to understand their preferences and likely, communicate to a new shade of green. 

* * * * *

Full Article:
http://www.brandweek.com/bw/superbrands/article_autos.html

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Vespanomics: Touting Green Exhilaration & Practicality

November 28, 2008

Excerpted from Adweek, “Vespa Touts Scooters for Americans” by Eleftheria Parpis, Nov 24, 2008

* * * * *

Convincing Americans to ditch their SUVs for scooters seems an impossible marketing task, but what about getting consumers to augment their gas-guzzlers with a snazzy new Vespa for short trips? That is a much more realistic goal for Vespa USA, which recently launched a Web site that positions the iconic brand as fun and functional.

The site…offers product info, reviews and tools to post and plot favorite routes and calculate fuel savings. The objective is to convince more Americans to consider scooters as alternative transportation.

So far, Americans have heard few stories about ways to cut down on carbon emissions: either downsizing vehicles or switching to electric hybrids…”If you combine the usage of a car or SUV with a motor scooter–which millions of Europeans do every day–then you can achieve the same results.”

The venue offers a “Vespa vs. Auto MPG” tool where consumers can compare the scooters’ mileage to the performance of cars. Users can then determine how many miles per gallon they would save by combining Vespa travel with trips in vehicles they already own…

While Vespa…has seen an increase in sales since gas prices began rising, the challenge is to convince consumers that Vespas offer serious riding options, not just trips around the neighborhood…the site’s Google map-based “Community Rides” tool allows scooter owners to share, rate and comment on riding routes.

“Hopefully, over time, people will…realize these are not toys and that people really do use this as a transportation vehicle”…

Edit by SAC

* * * * *

The new Vespa website introduces the term “Vespanomics”, which refers to the ecological and economic benefits that Vespa provides riders with the additional promise of “total exhilaration” that comes from riding a “stylish, high performance Vespa.” In the past Vespa has emphasized the brand’s the style and lifestyle more than its practicality and efficiency.  Online and at dealerships, Vespa sells everything a rider needs to live the brand from scooter accessories, to clothing and beach towels to mini-notepads and lanyards.  Vespanomics is the tool Vespa needs to bring new users to the brand and to extend the brand lifestyle to include eco-concern.

* * * * *

Full Article:
http://www.brandweek.com/bw/content_display/esearch/e3i550533f2636cdbd1a765ce9cdcca1936

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$2 gas dampens enthusiasm for hybrids … no kidding.

November 27, 2008

Excerpted from:WSJ,”Americans Drive Less, Creating a Problem”, NOVEMBER 24, 2008

* * * * *
  
When gasoline prices shot over $4 a gallon this summer, Americans … took action on their own by driving less and switching to more fuel-efficient cars.

The good news is that gasoline consumption has fallen … vehicle miles traveled — the wonky term for how much we drive — have dropped for 11 straight months, and fell 4.4% in September, according to the Department of Transportation.
http://www.fhwa.dot.gov/ohim/tvtw/08septvt/08septvt.pdf

In short, many Americans, by choice or by default, did what the people who worry about the climate and U.S. dependence on petroleum wanted them to do. They burned about 5% less gasoline than a year ago.

By jamming the brakes on driving, rediscovering mass transit and walking past Hummers to buy compact cars like the Honda Fit, American consumers caused big trouble for powerful interests.

The oil industry and oil-producing nations have an acute problem, because the combination of conservation and the worst world-wide economic slump in decades has once again made a mockery of recent projections that oil would remain expensive and scarce forever.

The short term looks like a re-run of the late 1970s and early 1980s, when … oil prices soared, interest in electric cars, windmills, solar heating panels and other petroleum alternatives accelerated. When conservation and new oil discoveries caused oil prices to collapse, the economic justification for expensive, immature oil replacement technology collapsed as well, and it was a skip and a jump to the age of the SUV.

The federal government is conflicted, too. Yes, policy makers want us to conserve oil. But now that we have, the funds that pay for roads, bridges, rail transit and other transportation infrastructure are falling right along with gasoline tax receipts … gasoline taxes paid into the highway trust fund fell by $3 billion in the 2008 fiscal year.

One approach (for funding infrastructure) would be to raise the federal gasoline tax from its current 18.4 cents a gallon. By comparison, the tax rate in the U.K. is about $2.85 a gallon. Higher gas taxes could finance improvements to roads and mass transit, encourage further conservation or offset the costs of the various federal bailouts.

The collapse of gasoline prices since the summer — a drop of more than $2 a gallon — is an economic stimulus worth more than $200 billion a year.

* * * * *

All of this puts the people who seized on the recent gas price shocks as the moment to push green vehicle strategies in a bind.

At current gasoline prices, however, consumers who buy expensive electric or plug-in hybrid cars would find it smarter financially to buy a reasonably efficient, conventional subcompact and work from home one day a week.

If gasoline prices stay low, demand for vehicles that use sophisticated technology to consume less gasoline per mile will depend on consumers making long-term decisions that aren’t in their short-term economic interests. Otherwise, these new high-mileage cars might not sell for high enough prices to cover their higher costs.

A lot depends on whether Americans keep doing what they’re doing, regardless of what the numbers are on the gas station signs.

General Motors Corp. has insisted that its plug-in hybrid Chevy Volt, due in 2010, will survive the cost-cutting as the auto giant struggles to survive.

Full article:
http://online.wsj.com/article/SB122728664289448183.html

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How much profit does Toyota makes on a Prius?

November 26, 2008

Excerpted from Washington Post, “The Car of the Future — but at What Cost?”, Steven Mufson, November 25, 2008

* * * * *

Hybrid Vehicles Are Popular, but Making Them Profitable Is a Challenge

Sen. Charles E. Schumer said last week. “We need a business model based on cars of the future, and we already know what that future is: the plug-in hybrid electric car.

“But the car company Schumer and other lawmakers envision for the future could turn out to be a money-losing operation, not part of a “sustainable U.S. auto industry.

“That’s because car manufacturers still haven’t figured out how to produce hybrid and plug-in vehicles cheaply enough to make money on them.

After a decade of relative success with its hybrid Prius, Toyota has sold about a million of the cars and is still widely believed by analysts to be losing money on each one sold.

U.S. lawmakers want the companies to produce automobiles of the future, using advanced technologies and featuring hybrid or plug-in vehicles.But there’s no guarantee that the new business model would be any more viable than the current one.

Automobile experts estimate that the battery in a plug-in vehicle could add at least $8,000 to the cost of a car, maybe considerably more.

Most Americans will be unwilling to pay the extra price, especially if gasoline prices languish around $2 a gallon.

One of the mysteries about GM’s plans to introduce the Volt in 2010 is how much it will cost to buy one.

“What’s the Volt going to cost? I would be happy to answer that if you can tell me the price of oil in 2010,” said Robert A. Kruse, GM’s executive director of global vehicle engineering for hybrids, electric vehicles and batteries.

“I can tell you to the penny what it will cost GM, but pricing is much more related to market conditions.”

“In 10 years are they [at GM] going to solve the technological problems with respect to the Volt? Sure,”

“But are they going to be able to stake their survival on it? I’d say they can’t. They have to stake their future on Malibus, the Chevy Cruze, and much more conventional technologies.”

“Do you bet on lighter, smaller, more fuel efficient but ultimately less profitable cars or do you hold back a little on technology development and look at new versions of existing cars.”

Many experts say that gas guzzlers will not fade away as long as Congress fails to impose higher taxes on gasoline to steer people toward fuel-efficient cars.

“I can easily imagine three years from now when public is focused on a new set of priorities . . . that this whole hubrid thing would go poof.”

Obama proposed a $7,500-a-vehicle tax credit for plug-in vehicles during his presidential campaign.

Roughly half of Americans don’t earn enough to take advantage of such a big tax credit.

Many others don’t have the cash to purchase an expensive vehicle then wait for a federal refund.

So,  GM and other car companies, while preparing plug-in vehicles, are more likely to live or die based on the sales of conventional cars that get better fuel efficiency through improved transmissions, reduced weight or hybrid technology.

GM says it will offer nine hybrids for sale by the middle of next year.

Reinert says that Toyota will eventually offer hybrid versions of all its car models.Auto industry experts say that the basic problem is that the U.S. industry geared up to make 18 million cars and light trucks a year and that it will be lucky to sell 11 million this year.

“There’s fluff and there’s reality,” Keller said.

 “The fluff is the Chevy Volt . . . That’s not going to save GM in the next five years. What will save GM is more small sedans and more crossovers. That’s what people are going to be buying.”Full article:

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Re: Energy … consumers in denial, blame government (and everybody else)

November 25, 2008

Excerpted from PR NewsWire, “Obama White House to Face Long-Held Consumer Denial and Awareness Hurdles in Realizing New Energy Solutions”, November 19,2008

* * * * *
Consumers Blame Government, Assume Little Self-Responsibility

There is  long-held U.S. consumer denial about personal responsibility in driving energy demand and resulting prices; consumers have a’ “tailpipe-driven” understanding of energy use and environmental impact.

Despite government reports documenting that consumers now use more electricity than five years ago, 61 percent of consumers deny using more.

But, 62 percent of Americans indicating they have experienced home utility cost increases of 10-30 percent or more. So, “For the first time in four years, we increasingly see economic concerns driving consumer interest in conserving energy.”

“However, most Americans don’t view their own consumption behaviors or energy-use demand as having much to do with energy costs,” less than one-fourth of consumers mention U.S. consumer demand as most to blame for rising energy prices.

While more consumers are becoming knowledgeable about renewable energy, one-third erroneously think cars and trucks are the No. 1 cause of global warming, while only four percent cite the actual primary culprit of greenhouse emissions: coal-fired electric plants, today’s most prominent source to heat, cool and power buildings – largely homes.

Also of note: most consumers either blamed kids in the home for increased electricity usage.

Oil companies were thought to be the primary culprits for rising gasoline costs (27 percent) — the U.S. government was the second most common answer, at 24 percent.

“What should the government be doing?” The top answers were “should invest more in research to find alternatives” (29 percent), “should be more proactive and develop a plan” (16 percent), and “should allow drilling in the Arctic National Wildlife Refuge and / or off the U.S. coast” (13 percent).

The primary reason to participate in energy conservation activities or purchases:

1.) To save money (ranked No. 3 in 2007)

2.) To protect our environment and save natural resources (remained No. 2 from 2007)

3.) To preserve the quality of life for future generations (ranked No. 1 in 2007)

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Full article
http://www.tickertech.com/cgi/?a=news&ticker=a&w=&story=200811200811190800PR_NEWS_USPR_____CLW024 

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Bankrupt the coal industry ?

November 3, 2008

Sourced from Newsbusters.com, Nov.2, 2008.  Well-traveled on right-leaning stations and sites this weekend.

* * * * *

Ken’s Take

McCain’s persistence in Pennsylvania has had me scratching my head.  I think the code was broken this weekend. In another post lthis morning, I recount data that seems to indicate a shift in Catholic voters towards McCain (Obama had been leading).  Perhaps even more significant is an audio clip of an interview that Obama gave saying that his energy policy will “bankrupt the coal industry”.  That may be the right answer environmentally, but the wrong answer politically in some swing states that rely on coal for jobs and energy.

Hearing the words is way more powerful than reading the transcript (which is below).
http://www.youtube.com/watch?v=Hdi4onAQBWQ

* * * * *

From Newsbusters

Barack Obama actually flat out told the San Francisco Chronicle (SF Gate) that he was willing to see the coal industry go bankrupt in a January 17, 2008 interview.

The result? Nothing. This audio interview has been hidden from the public…until now. Here is the transcript of Obama’s statement about bankrupting the coal industry:

Obama: ” Let me sort of describe my overall policy.

What I’ve said is that we would put a cap and trade system in place that is as aggressive, if not more aggressive, than anybody else’s out there.

I was the first to call for a 100% auction on the cap and trade system, which means that every unit of carbon or greenhouse gases emitted would be charged to the polluter. That will create a market in which whatever technologies are out there that are being presented, whatever power plants that are being built, that they would have to meet the rigors of that market and the ratcheted down caps that are being placed, imposed every year.

So if somebody wants to build a coal-powered plant, they can; it’s just that it will bankrupt them because they’re going to be charged a huge sum for all that greenhouse gas that’s being emitted.”

Article source:
http://newsbusters.org/node/25829?q=blogs/p-j-gladnick/2008/11/02/hidden-audio-obama-tells-sf-chronicle-he-will-bankrupt-coal-industry

Audio link:
http://www.youtube.com/watch?v=Hdi4onAQBWQ

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Where McCain & Obama stand on economic issues

November 3, 2008

Source: CNNMoney.com , Oct. 31, 2008
http://finance.yahoo.com/banking-budgeting/article/106069/Your-Money:-McCain-vs.-Obama#1

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The best recap I’ve found — gives Obama some ‘benefits of doubt’, but is generally a factual and balanced presentation of the candidates’ positions.  It’s long, but it’s required reading for responsible voters

* * * * *

Budget Deficit

Now that the government has committed over $1 trillion to stabilize the financial system and economic growth is expected to slow, the country’s growing deficits aren’t something the next president can ignore. Yet neither candidate has adequately addressed what changes he would make to accommodate the new fiscal reality. Both men speak of the need to restore fiscal responsibility while in the same breath promising more tax cuts and proposing spending cuts that are hard to achieve.

Obama

Enforce budget rules that would require that new spending be paid for by cuts to other programs or new revenue.
Reduce spending on earmarks to no greater than 2001 levels and require more transparency on such spending.
Help pay for new proposals by drawing down troops in Iraq war, raising taxes on high-income filers and cutting certain corporate loopholes.
“Once we get through this economic crisis … we’re not going to be able to go back to our profligate ways. We’re going to have to embrace a culture and an ethic of responsibility, all of us, corporations, the federal government, and individuals out there who may be living beyond their means.”

McCain

Originally pledged to balance budget by 2013. But McCain adviser now says it will take longer.
Slow growth in Social Security, Medicare and Medicaid spending.
Eliminate funds for pet projects, known as earmarks.
Help pay for tax cuts by creating new jobs in the clean energy sector and developing new automotive technologies, which in turn will boost economic growth.
“Government spending has gone completely out of control; $10 trillion dollar debt we’re giving to our kids, a half-a-trillion dollars we owe China. I know how to save billions of dollars in defense spending. I know how to eliminate programs.”

* * * * *

Economic Crisis Response

Both candidates have proposed measures to help Americans cope with the economic downturn and stock market collapse. McCain’s proposals focus on helping seniors and investors. Obama wants to let savers tap into the retirement plans without early-withdrawal penalties.

Obama

Temporarily allow penalty-free early withdrawals from IRAs and 401(k)s of up to 15% of the balance but not more than $10,000.
Temporarily suspend rule that seniors age 70 1/2 take required annual distribution from retirement account.
Give temporary tax credit of $3,000 in 2009 and 2010 to companies for each new full-time employee it hires in the United States.
Temporarily eliminate taxes on unemployment benefits.
Require financial institutions participating in bailout to put a 90-day moratorium on foreclosures for homeowners “acting in good faith.”
Let federal government lend to state and municipal governments to help counter the budget crunch faced by states due to the mortgage crisis.
“We must move forward, quickly and aggressively, with a middle-class rescue plan that will create jobs, provide relief to families, help homeowners and restore our financial system.”

McCain

Temporarily suspend rule that seniors age 70 1/2 take required annual distribution from retirement account.
Tax withdrawals of up to $50,000 from IRAs and 401(k)s at 10% in 2008 and 2009.
Reduce capital gains tax to 7.5% from 15% for two years.
Increase amount of capital losses that may be used to offset ordinary income to $15,000 from $3,000 for 2008 and 2009.
Temporarily eliminate taxes on unemployment benefits.
Buy bad mortgages and renegotiate loan terms based on current value of home.
Convert failing mortgages into low-interest, FHA-insured loans.
“…I will help to create jobs for Americans in the most effective way a president can do this — with tax cuts that are directed specifically to create jobs, and protect your life savings.”

* * * * *

Wall Street

In the wake of the credit crisis, both candidates have stressed the need for greater transparency and imposing capital requirements on financial institutions.

Obama

Impose liquidity and capital requirements on investment banks.
Streamline regulatory framework of the financial services sector.
Create an oversight commission that would advise the president, Congress and regulators on the health of and risks facing financial markets.
Give Federal Reserve supervisory power over any bank that borrows from it.
“Let me be clear: the American economy does not stand still, and neither should the rules that govern it. The evolution of industries often warrants regulatory reform…”

McCain

Increase capital requirements on financial institutions.
Remove some of the regulatory, accounting and tax impediments to raising capital.
Examine how banks and other firms value assets that exacerbated the credit crunch.
Increase transparency of complex financial instruments.
“Capital markets work best when there is both accountability and transparency. In the case of our current [credit] crisis, both were lacking.”

* * * * *

Mortgage Giant Rescue

Both candidates supported the federal government takeover of the mortgage insurance giants since they’re central to the housing market.

Obama

Wants to void any inappropriate windfall payments to outgoing CEOs and senior management.
Says shareholders should not benefit in takeover.
Had said companies should either operate as goverment agencies or as private businesses.
“I recognize that intervention is necessary to maintain liquidity for the housing market so that homeowners can continue to get affordable mortgages and homes can be bought and sold in neighborhoods across the country.”

McCain

Called for reform of corruption at Fannie Mae and Freddie Mac two years ago.
Wants to clarify and unify regulatory authority of financial institutions, including the mortgage insurers.
“These quasi-public corporations lead our housing system down a path where quick profit was placed before sound finance…And now, as ever, the American taxpayers are left to pay the price for Washington’s failure.

* * * * *

Mortgage Fraud

Both candidates say they want to go after predatory lenders. Obama introduced the STOP FRAUD Act in the Senate and now it’s a part of his platform. McCain called for creating a task force to investigate criminal wrongdoing in the mortgage lending and securitization industry.

Obama

Boost funding for law enforcement programs aimed at housing fraud by $40 million.
Establish new federal criminal penalties for mortgage professionals found guilty of fraud.
Require lending professionals to report suspicious or fraudulent activity.
Establish a database of censured or debarred mortgage professionals, so borrowers can easily check the credentials of lenders.
Establish a standardized estimate of the total annualized cost of a mortgage loan to make it easier for borrowers to compare different loans.
“We must establish stiff penalties to deter fraud and protect consumers against abusive lending practices.”

McCain

Create a Justice Department task force that punishes individuals or firms that defrauded innocent homeowners or forged loan application documents.
Task force would also assist state attorneys general investigating abusive lending practices.
Improve transparency in the lending process so that borrowers know exactly what they are agreeing to.
“Lenders who initiate loans should be held accountable for the quality and performance of those loans and strict standards should be required in the lending process.”

* * * * *

Jobs and Wages

McCain’s plan for turning around the economy focuses on corporate tax policy, while Obama would take a more activist role that includes increasing wages and spending on public works.

Obama

Fund federal workforce training programs and direct these programs to incorporate “green” technologies training.
Raise minimum wage to $9.50 an hour by 2011 and tie future rises to inflation.
Double federal funding for basic research and make R&D tax credit permanent.
Set up $60 billion infrastructure investment bank to help fund public works. Also, create a $25 billion emergency Jobs and Growth Fund to fund other infrastructure projects.
Establish tax credit for companies that maintain or increase the number of full-time workers in America relative to those outside the U.S.
Give a temporary tax credit of $3,000 in 2009 and 2010 to companies for each new full-time employee it hires in the United States.
Temporarily eliminate taxes on unemployment benefits.
Advocate for stronger unionization.
“We will provide incentives to businesses and consumers to save energy and make buildings more efficient. That’s how we’re going to create jobs that pay well and can’t be outsourced.”

McCain

Spur economy and job growth by cutting corporate tax rate and temporarily lowering current rates on dividends and capital gains.
Leave minimum wage at $7.25 an hour, which is where current law will take it to by 2009. Opposed to tying future hikes to inflation rate.
Create tax credit equal to 10% of wages spent on R&D.
Consolidate federal unemployment programs and reform training programs for job seekers.
Temporarily eliminate taxes on unemployment benefits.
“We will build a new system, using the unemployment-insurance taxes to build for each worker a buffer account against a sudden loss of income — so that in times of need they’re not just told to fill out forms and take a number.”

* * * * *

Savings

Obama wants the government to augment low- and middle-income workers’ savings. McCain would help retirees keep their savings.

Obama

Require employers that don’t offer retirement plans to set up IRA-type accounts.
Require companies to automatically enroll their employees in 401(k)s or IRAs.
Provide a federally funded match on retirement savings for families earning below $75,000.
Temporarily suspend mandatory withdrawals from retirements accounts for senior citizens age 70 1/2 and older.
“Personal saving is at an all-time low. A part of the American dream is at risk.”

McCain

Require companies to automatically enroll their employees in retirement plans they offer.
Encourage saving by keeping investment taxes low.
Temporarily suspend mandatory withdrawals from retirements accounts for senior citizens age 70 1/2 and older.
“As president, I intend to act quickly and decisively to promote growth and opportunity. I intend to keep the current low income and investment tax rates.”

* * * * *

Driving

Both candidates want to make every gallon count. Government prizes are pivotal to McCain’s plan, while Obama wants to place more stringent requirements on automakers.

Obama

Double fuel economy standards within 18 years while maintaining current flexibility.
Offer $7,000 tax credit to buyers of plug-in hybrids.
Mandate all new cars be flex-fuel capable.
Provide $4 billion in retooling credits and loans to help domestic manufacturers switch to more fuel-efficient cars.
Aim to get 1 million 150 mile-per-gallon plug-in hybrids on the roads within six years.
Support creation of more transit-friendly communities and level employer commuting assistance for driving and public transit.
“I have a plan to raise the fuel standards in our cars and trucks with technology we have on the shelf today — technology that will make sure we get more miles to the gallon.”

McCain

Raise penalties car companies pay for violating Corporate Average Fuel Economy (CAFE) standards.
Offer $5,000 tax credit for every customer who buys a zero-emission car.
Speed introduction of “flex-fuel vehicles” that can run on ethanol blends and gasoline.
Remove or reduce tariffs on imported ethanol.
Award $300 million prize to the company that can produce a plug-in hybrid battery technology at 30% of current costs, allowing commercial development of plug-in hybrid cars.
“…Our government has thrown around enough money subsidizing special interests and excusing failure. From now on, we will encourage heroic efforts in engineering, and we will reward the greatest success.”

* * * * *

Gas Prices

The candidates agree that consumers need help with sky-high fuel bills, but they have different plans for offering relief.

Obama

Keep gas tax in place.
Keep ethanol tariff to protect domestic industry.
Tax oil profits and use the money to help fund $1,000 rebate checks for consumers hit by high energy costs.
Eliminate oil and gas loopholes.
“I realize that gimmicks like the gas tax holiday and offshore drilling might poll well these days. But I’m not running for president to do what polls well…”

McCain

Repeal the 54-cents-a-gallon tariff on imported ethanol.
Eliminate a current tax break for oil companies, but lower corporate taxes across the board.
“The effect [of a gas tax holiday] will be an immediate economic stimulus — taking a few dollars off the price of a tank of gas every time a family, a farmer, or trucker stops to fill up.”

* * * * *

Fighting Foreclosure

Obama wants the government to step in to help homeowners facing foreclosure. McCain unveiled rescue plan in October debate.

Obama

Allow troubled homeowners to refinance to a loan insured by the Federal Housing Administration.
Require any financial institution participating in Treasury’s Troubled Asset Relief Program to put a 90-day moratorium on foreclosures for homeowners “acting in good faith.”
Create a 10% tax credit for homeowners who do not itemize their taxes.
Create a $10 billion fund to help victims of predatory loans.
Create a separate $10 billion fund to help state and local governments maintain critical infrastructure.
Authorize bankruptcy judges to reduce mortgage principal.
“…If the government can bail out investment banks on Wall Street, then we can extend a hand to folks who are struggling on Main Street.”

McCain

Buy bad mortgages and renegotiate loan terms based on current value of home. Convert failing mortgages into low-interest, FHA-insured loans.
Offer of financial assistance to borrowers contingent upon lending reform.
Provide more funding for community development groups so they can expand their home rescue efforts.
“The United States government will support the refinancing of distressed mortgages for homeowners and replace them with manageable mortgages.”

* * * * *

Personal Taxes

Both candidates favor keeping some or all of the Bush tax cuts in place. Wealthy taxpayers win out under McCain’s plan, while lower-income earners benefit more under Obama’s proposals.

Obama

Leave all tax cuts in place for everyone except couples making more than $250,000 and single filers making more than $200,000. Those high-income groups would see their top two income tax rates revert to 36% and 39.6% from 33% and 35% respectively.
Provide $1,000 tax cut for working couples making less than $250,000.
Introduce other tax breaks for lower and middle-income households.
“We shouldn’t be distorting our tax code to benefit a few powerful interests — we should be insisting that everyone pays their fair share, and when I’m president, they will.”

McCain

Make 2001 and 2003 tax cuts permanent for everyone.
Permanently repeal the Alternative Minimum Tax, the so-called “wealth tax” that threatens the middle class.
“I will…propose…a middle-class tax cut — a phase-out of the Alternative Minimum Tax to save more than 25 million middle-class families as much as $2,000 in a single year.”

* * * * *

Taxing Wealth

McCain would apply a lighter hand to taxes paid by the wealthy than would Obama, who wants to make the tax code more progressive.

Obama

Tax carried interest as ordinary income rather than as an investment gain, thereby subjecting it to much higher tax rates than 15%.
Freeze the exemption amount of estates free from the estate tax at $3.5 million — where it will be in 2009.
Freeze top estate tax rate at 45%.
Raise capital gains and dividend tax rates to 20% from 15% for couples making more than $250,000 and singles making more than $200,000.
“We’ve lost the balance between work and wealth. I will close the carried interest loophole, and adjust the top dividends and capital gains rate…”

McCain

Preserve the 15% tax rate on carried interest – the cut that private equity and hedge fund managers take when the funds they manage make a profit.
Increase the amount of money exempt from the estate tax to $5 million.
Reduce the top estate tax rate to 15% from 55% – where it otherwise will be in 2011 under current law.
Reduce long-term capital gains rate to 7.5% for 2009 and 2010. Keep short-term capital gains and dividend tax rates where they are.
Increase the amount of capital losses which can be used in tax years 2008 and 2009 to offset ordinary income from $3,000 to $15,000.
“Sharply raising taxes on investment is a step in the wrong direction for the competitiveness of U.S. capital markets.”

* * * * *

Taxing Business

McCain is generally considered to be more friendly to Corporate America than is Obama, who wants to increase some companies’ tax bite in a few ways.

Obama

Consider reducing the corporate tax rate in conjunction with closing corporate tax loopholes.
Make R&D credit permanent.
Impose windfall profits tax on oil and gas companies.
Exempt investors from the capital gains tax on their investments in small businesses and startups if they made their investment when a small company was valued below a certain threshold. That threshold has yet to be defined.
Make renewable production credit permanent.
Require companies to verify transactions that have benefits other than their tax benefits.
“…We can’t just focus on preserving existing industries. We have to be in the business of encouraging new ones — and that means science, research and technology.”

McCain

Reduce corporate tax rate to 25% from 35%.
Make R&D credit permanent, but change formula.
Repeal several oil company tax breaks.
Accelerate business expense deductions.
Broaden corporate base.
“Serious reform is needed to help American companies compete in international markets. I have proposed a reduction in the corporate tax rate from the second highest in the world to one on par with our trading partners.”

* * * * *

Small Business

While both candidates promise to help entrepreneurs with friendly tax policies, they differ sharply on how much of the tab for employees’ health insurance and other benefits they expect fledgling businesses to pick up.

Obama

Expand the SBA’s direct-lending Disaster Loan Program to extend loans to companies affected by the economic downturn and credit crunch.
Temporarily eliminate fees and increase the amount guaranteed by the government through the SBA’s 7(a) and 504 programs, which insure lenders against defaults on small business loans.
Extend the stimulus act’s Section 179 tax deduction, which increased the amount businesses can write off on their taxes for capital investments in new equipment, through 2009.
Exempt investors from the capital gains tax on their investments in small businesses and startups if they made their investment when a small company was valued below a certain threshold. That threshold has yet to be defined.
Offer a 50% refundable credit for employee health insurance premiums paid by the employer.
Freeze estate tax rate at 45% and increase exemption to $3.5 million.
“We’ll work, at every juncture, to remove bureaucratic barriers for small and startup businesses.”

McCain

Allow small businesses first-year expensing of new equipment and technology purchases.
Establish a permanent tax credit equal to 10% of what a business spends on wages for research and development.
Issue tax credits to allow individuals to purchase personal, portable health insurance that can move with them from job to job.
Reduce the corporate income tax rate to 25% from 35%.
Cut estate tax rate to 15% and increase exemption to $5 million.
“…I will pursue tax reform that supports the wage-earners and job creators who make this economy run, and help them to succeed in a global economy.”

* * * * *

Free Trade

Both McCain and Obama say they are in favor of free trade. McCain has been a stronger defender of free trade agreements, while Obama has been a more vocal critic.

Obama

Work to renegotiate NAFTA, the free trade agreement with Canada and Mexico.
Opposes the free trade agreements with South Korea and Colombia.
Use trade agreements to spread good labor and environmental standards around the world.
Supports steep tariffs on imports from China if the Chinese keep their currency from rising.
Increase and expand assistance offered to workers who lose jobs due to trade and create flexible education accounts to help workers retrain.
“Allowing subsidized and unfairly traded products to flood our markets is not free trade and it’s not fair. We cannot let foreign regulatory policies exclude American products. We cannot let enforcement of existing trade agreements take a backseat to the negotiation of new ones.”

McCain

Back additional trade agreements and engage in multilateral, regional and bilateral efforts to reduce barriers to trade.
Supports the free trade agreements negotiated with South Korea and Colombia which are now awaiting Senate approval.
Would not threaten to impose tariffs on Chinese imports here if China does not allow the value of its currency, the yuan, to rise against the dollar.
Improve efforts to provide retraining for those who lose their jobs due to imports.
“If I am elected president, this country will honor its international agreements, including NAFTA, and we will expect the same of others. And in a time of uncertainty for American workers, we will not undo the gains of years in trade agreements now awaiting final approval.”

* * * **

Energy Security

The candidates agree on the need to reduce dependence on foreign oil and cut greenhouse gases. Both support a carbon “cap-and-trade” system where companies either pay to pollute or invest in cleaner technology.

Obama

Work to reduce carbon emissions 80% below 1990 levels by 2050.
Invest $150 billion in renewable energy over the next 10 years.
Allow limited amount of offshore drilling.
Require that 10% of nation’s energy comes from renewable sources by 2013.
Aim to reduce nation’s demand for electricity 15% by 2020.
“To bring about real change, we’re going to have to make long-term investments in clean energy and energy efficiency.”

McCain

Work to reduce carbon emissions 60% below 1990 levels by 2050.
Use mix of free market, government incentives and a lower corporate tax rate to foster renewable energy.
Lift ban on offshore drilling.
Commit $2 billion annually to advance clean coal technologies.
Construct 45 new reactors by 2030 as part of a push to expand nuclear power production.
“…When it comes to energy, what we really need is to produce more, use less, and find new sources of power.”

* * * * *

Health Care

McCain would rely most heavily on individuals and the free market to lower costs, while Obama would rely more on government and mandates to make coverage affordable.

Obama

Coverage would be mandatory for children.
Offer an income-based federal subsidy for people who don’t get insurance from an employer or qualify for government plans like Medicaid.
Create a national network of public and private plans for those without other access to insurance.
Require employers to either offer a plan, help pay for employee costs or pay into a national health care network.
“…We need to pass a plan that lowers every family’s premiums, and gives every uninsured American the same kind of coverage that members of Congress give themselves.”

McCain

Coverage would not be mandatory for anyone.
Change how health care subsidies are taxed.
Offer refundable tax credit for anyone who buys health insurance.
Create a federally subsidized state-administered program to offer coverage for low-income people.
“I’ve made it very clear that what I want is for families to make decisions about their health care, not government…”

* * * * *

Medicare

Rising health care costs are pushing Medicare toward an unsustainable long-term deficit nearly 5 times that of Social Security. Both candidates say their efforts to reduce health care costs will help stabilize Medicare. What few Medicare proposals they’ve made aren’t sufficient to address the shortfall, health care experts say.

Obama

Would let government negotiate for Part D drug prices.
Would increase use of generic drugs in Medicare.
Wants to close the coverage gap known as the “doughnut” hole in Part D for reimbursement of prescription drugs.
Favors eliminating subsidies paid to private Medicare Advantage plans.
Wants to legalize importation of some prescription drugs.
“As president, I will reduce costs in the Medicare program by enacting reforms to lower the price of prescription drugs, ending the subsidies for private insurers in the Medicare Advantage program and focusing resources on prevention and effective chronic disease management.”

McCain

Wants wealthy people who are enrolled in the Part D drug coverage program to pay more.
Wants to reform the payment system so health care providers don’t get paid when medical errors or mismanagement occurs.
Favors importing low-cost prescription drugs from Canada.
“People like Bill Gates and Warren Buffett don’t need their prescriptions underwritten by taxpayers. Those who can afford to buy their own prescription drugs should be expected to do so.”

* * * * *

Social Security

To help shore up the system, McCain favors individual accounts and reducing benefit growth. Obama prefers to raise taxes.

Obama

Opposes individual investment accounts.
Against raising retirement age.
Favors increasing the amount that workers making $250,000 or more pay into the system. Considering plan to tax income over $250,000 at between 2% and 4% – half of which would be paid for by the employee and half by the employer.
“We will not privatize Social Security, we will not raise the retirement age, and we will save Social Security for future generations by asking the wealthiest Americans to pay their fair share.”

McCain

Supplement Social Security benefits with individual investment accounts.
Prefers slowing the growth in benefits to raising taxes.
“…You have to go to the American people and say…we won’t raise your taxes. We need personal savings accounts, but we [have] got to fix this system.”

* * * * *

Bankruptcy

Obama wants to reform the bankruptcy process and has proposed changes to help those in financial distress. As a Senator, McCain voted in favor of legislation aimed at curbing the growing number of bankruptcy filings.

Obama

Fast-track bankruptcy process for military families.
Help seniors facing bankruptcy keep their home.
Put pension promises higher on list of debts a bankrupt employer must pay.
Amend bankruptcy laws to protect people trapped in predatory home loans.
“I fought against a bankruptcy reform bill in the Senate that did more to protect credit card companies and banks than to help working people. I’ll continue the fight for good bankruptcy laws as President.”

McCain

Backed 2005 legislation that imposed new costs on those seeking bankruptcy protection.
The law, which Obama opposed, passed the Senate with Democratic support in 2005.

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AMS: Prius Prices Jacked Up … Surprised?

October 30, 2008

Encore presentation: Originally posted July 31, 2008. 

* * * * *

Excerpted from the WSJ :”Patience Pays When Shopping for a Hybrid” July 30, 2008;

When gasoline prices hit $4 a gallon …  demand for smaller cars — hybrids and Priuses in particular — soared …  the wait for the popular hybrid has grown to roughly three months since May, and prices have climbed steeply, too.

The Prius’s gas mileage averages in the 45-miles-per-gallon range; that’s impressive, but the base price, following a $400 increase in May and a $500 jump that goes into effect Friday, is fairly steep …  if your main goal is to save money by buying less gasoline.

Next month, the basic Prius will start at $22,720. That’s more than … other reasonably fuel-efficient sedans, like the Toyota Camry, Honda Civic, Toyota Corolla, Nissan Altima or Ford Focus.

The (dealer) price has shot up, too … the average Prius now sells for $1,000 to $2,000 above the manufacturer’s suggested retail price.

It’s worth calculating your fuel savings to see how long it will take to make up the price difference.  [See earlier post Hybrid Cars – Tough Sell]

Toyota …  sold about 175,000 of the cars to the U.S. last year …  and expects to offer about the same number this year, largely because it can’t get enough batteries and other components to boost production.

For full article:
http://online.wsj.com/article/SB121738122995795557.html

* * * * *

Thanks to MSB MBA alum Justin Bates for the heads-up

* * * * *

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And, it will save gas …

October 3, 2008

Excerpted from Rasmussen Reports: “53% Think Driving Age Should be 18 or Older”.September 21, 2008

* * * * *
The National Highway Traffic Safety Administration reports that car crashes are the leading cause of death among those between the ages of 15 and 20.  

* * * * *

Just over a week ago, the Insurance Institute for Highway Safety issued a new report urging lawmakers to raise the legal driving age to 18 … 53% of adults nationwide think it’s a good idea … 49% of men like the idea, 67% of women do.

Surprisingly, younger adults seem to take the same opinion as their elders on this question.

* * * * *

When asked which age young adults should be allowed to get behind the wheel, 35% said 18 and 5% said 21.

* * * * *
http://www.rasmussenreports.com/public_content/lifestyle/general_lifestyle/53_think_driving_age_should_be_18_or_older

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Offshore drilling ban to lapse … (I’ll believe it when I see it)

September 30, 2008

Excerpted from CNN Money: “Democrats allow drilling ban to lapse”, September 23, 2008

* * * * *

The Interior Department estimates there are 18 billion barrels of recoverable oil beneath coastal waters now off-limits.

* * * * *

Democrats have decided to allow a quarter-century ban on drilling for oil off the Atlantic and Pacific coasts to expire next week, conceding defeat in a month-long battle with the White House and Republicans set off by $4 a gallon gasoline prices this summer.

Appropriations Committee Chairman David Obey told reporters that a provision continuing the moratorium will be dropped this year from a stopgap spending bill to keep the government running after Congress recesses for the election.

Republicans have made lifting the ban a key campaign after gasoline prices spiked this summer and public opinion turned in favor of more drilling. President Bush lifted an executive ban on offshore drilling in July.

* * * * *

Just last week, the House passed legislation to open waters off the Atlantic and Pacific coasts to oil and gas drilling but only 50 or more miles out to sea and only if a state agrees to energy development off its shore.

Republicans called that effort a sham that would have left almost 90% of offshore reserves effectively off-limits.

* * * * *

Full article:
http://money.cnn.com/2008/09/23/news/economy/offshore_drilling.ap/index.htm?cnn=yes

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The Fallacy of 'Green Jobs'

September 23, 2008

Excerpted fro”The Fallacy of ‘Green Jobs'”, by John Stossel,
September 10, 2008

Obama has a great twofer pitch: “green jobs.” …  In one fell swoop he can promise to end unemployment and fix and save the planet from climate change.

“I’ll invest $150 billion over the next decade in affordable, renewable sources of energy — wind power and solar power and the next generation of biofuels; an investment that will lead to new industries and five million new jobs that pay well and can’t ever be outsourced,” (http://tinyurl.com/64szf7).

Politicians always promise that their programs will create jobs. The fallacy is the same in every case: Even if the program creates jobs building bridges or windmills, it necessarily prevents other jobs from being created. This is because government spending merely diverts money from private projects to government projects.

Governments create no wealth. They only move it around while taking a cut for their trouble. Overlooking this fact is known as the broken-window fallacy (http://tinyurl.com/ydasa2). The French economist Frederic Bastiat pointed out that a broken shop window will create work for a glassmaker, but that work comes only at the expense of the cook or tailor the shopkeeper would have patronized if he didn’t have to replace the window.

Creating jobs is not difficult for government officials. Pharaohs created thousands of jobs by building pyramids. Our government could create jobs by paying people to dig holes and then fill them up. Would actual wealth be created? Of course not. It would be destroyed. It’s like arguing the hurricanes create jobs. After all, the destruction is followed by rebuilding. But does anyone seriously believe that replacing destroyed buildings creates wealth?

* * * * *

According to his web site:”Obama will strategically invest $150 billion over 10 years”

Note that word “strategically.” It is there to suggest that Obama knows how best to “invest” the $150 billion. (Of course it is not his money, and he’ll have none of his own at risk, so from his perspective, it won’t really be investment.) But how does he know that the things he names ought to get the money?

Politicians have a lousy record trying to make “strategic investments.” Jimmy Carter’s Synthetic Fuels Corporation cost taxpayers at least $19 billion but failed to give us alternative fuels (http://tinyurl.com/5ex7v5).

Investing is about predicting the future, and the future is always uncertain  … People who have their own money at risk — who face a profit-and-loss test and possible bankruptcy — are much better predictors than people who play with other people’s money. Just compare North and South Korea.

Mistakes are inevitable. Some investments will be errors. Mistakes in the competitive market tend to be on a comparatively small scale. If one company invests in plug-in hybrids and it goes bust, only a relatively few people suffer. The assets of the bankrupt firm pass into more capable hands.

When government makes a mistake, the bureaucracy can’t go bankrupt. Instead, failure twill justify increased appropriations.

If “green jobs” make so much sense, the market will create them. They will be created by private entrepreneurs and venture capitalists.  The best ideas will rise to the top, and green energy will gradually replace coal and oil.

If politicians were serious about creating jobs and cleaner technologies, they would step aside and let the free market go to work.

* * * * *

Full article:
http://www.realclearpolitics.com/articles/2008/09/green_jobs.html
Copyright 2008, Creators Syndicate Inc.

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Referenced web site worth browsing:
Foundation for Economic Educatiob
http://www.fee.org/

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Economics: The high cost of CAFE …

September 17, 2008

Excerpted from the WSJ: “How to Save Detroit … And $50 Billion”, by Holman Jenkins, September 10, 2008

* * * * *

The Detroit auto makers were all over the two conventions … with  a plea for $50 billion in federal loans. Congress practically owes us this money, Ford, GM and Chrysler argue — because Congress slammed us with new fuel mileage mandates that will cost us $100 billion to meet.

But before rushing to pass the legislation, there’s an easy way to save $50 billion or whatever part of these loans wouldn’t be paid back: Just repeal the fuel economy rules.

It must infuriate the auto makers how readily their critics attribute their problems to their own incompetence. Then how to explain that GM is thriving in Europe, selling small cars that get lots of miles per gallon? Buick is among the biggest selling brands in China. GM is running away with Latin America.

The Big Three’s problem, to be blunt, is North America. They should have pulled out long ago.

* * * * *

Not only did history saddle them with a UAW labor monopoly that their foreign competitors have managed to avoid. Even that might not have been fatal had Congress not enacted its “corporate average fuel economy” rules in the 1970s.

Look at gallons consumed, miles driven, barrels imported or emissions emitted: CAFE has had no significant impact on energy consumption. Its sole practical effect has been to inflict on Detroit the need to produce, with high-cost U.S. labor, millions of small cars designed to lose money.

* * * * *

CAFE has to be the most perverse exercise in product regulation in industrial history. It confronted the Big Three with the choice only of whether to lose a lot of money, by matching Toyota and Honda on quality and features; or somewhat less money, by scrimping on quality and features and discounting, discounting, discounting.

Rationally, they scrimped — and still live under a reputational cloud in the eyes of sedan buyers. Yet notice that their profitable product lines, in which they invest to be truly competitive — such as SUVs, pickups and minivans — hold their own against the Japanese and command real loyalty among U.S. consumers.

* * * * *

It flies in the face of human and business realities to imagine that, generation after generation, Detroit hired idiots while Toyota recruited geniuses — though that’s the usual explanation of Detroit’s troubles.

Had CAFE not existed, there is no reason the Big Three today could not be competitive. As businesses do, they would have allocated capital to products capable of recovering their costs. Investments in fuel efficiency would still have taken place — to the extent consumers valued those investments. That is, if they were profitable.

* * * * *

If Washington found this unsatisfactory, it could have done as the Europeans do and raised fuel taxes to coax the public to make different choices. Politically inexpedient? Well, yes, but that doesn’t mean CAFE is an effective substitute. It isn’t and never was.

* * * * *

Having squandered the domestic auto industry’s capital on millions and millions of cars that lost money, now Congress will squander the taxpayer’s capital. It will lend the auto makers $50 billion to invest in fuel efficiency innovations that, by definition, won’t command from car shoppers a price high enough to cover the cost of making them. Which makes it very unlikely we will get the $50 billion back.

Bottom line: Fifty billion won’t turn CAFE into effective policy. It will do just fine, though, as an indicator of Washington’s willingness to throw good money after bad rather than admit the folly of its own long-running handiwork.

* * * * *
Full article:
http://online.wsj.com/article/SB122100316976917063.html?mod=todays_columnists

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Small step forward on off-shore drilling …

September 12, 2008

Excerpted from WSJ: “Outer Continental Shuffle”, September 12, 2008

* * * * *

Background

In  recent letter to Congress on this specific  issue, one large oil company claimed that it had actively explored over 95 percent of their existing federal oil and natural gas leases.

Most the explored leases did not contain economically viable oil and natural gas resources. 

Based on known geological characteristics, the company anticipates a higher success rate and commercial viability from the off-shore acreage that is currently “off limits”. 

 

* * * * *

Article

The Senatorial Gang of 10 compromise … plan would allow drilling offshore of four states — Georgia, Virginia and the Carolinas — and in the eastern Gulf of Mexico.

It would also allow modern seismic surveillance (which has been banned for 26 years)

* * * * *

Today 85% of the Outer Continental Shelf is off limits for drilling. The Gang of 10 would only reduce that to 75%,

It also allows drilling only outside of 50 miles and only if the states allow it. That arbitrary 50-mile buffer zone is more than three times farther than necessary to be out of sight from shore.

It also walls off many of the most promising and least costly drilling sites, such as the Gulf of Mexico’s Destin Dome, which is some 25 miles offshore of Florida.

* * * * *

The gang proposal does nothing to open up more of Alaska, and nothing to remove the ban on exploring oil shale in states like Colorado and Utah.

* * * *

The gang would also impose about $86 billion in new taxes, in large part on oil and gas companies through higher royalty fees

Naturally, the Members propose to take that $86 billion . . . and ladle it out in subsidies for “clean coal,” electric cars, nuclear energy research, biofuels, cellulosic ethanol and solar and wind power.

The plan would provide …Detroit $7.5 billion to “retool” to make electric or alternative-fuel cars; $7.5 billion for research on battery-operated cars; and another $5 billion for a $7,500 tax credit for Americans who purchase these “green” cars.

Full article:
http://online.wsj.com/article_print/SB122117598127425809.html

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Note: A scientist friend of mine points out that lithium — the core of rechargeable batteries — is  a capacity constrained element.  There’s not enough of it in the world to support the aggressive hybrid plans being bandied about.  And, disposal of spent lithium-based batteries presents a significant an environmental  issue.  Nothing’s easy …

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Oil Economics: Windfall profits (for the gov’t)

September 12, 2008

Excerpted from WSJ: “Drilling for Dollars”, September 12, 2008

Congress … stands to collect a windfall if they drop their ban on offshore oil-and-gas development.

In fact, liberating publicly owned resources could net the Treasury as much as $2.6 trillion in lease payments, royalties and corporate taxes, according to one estimate currently knocking around Capitol Hill. That’s almost a full year of spending even for this spendthrift Congress.

* * * * *

Already, with the ban in place, offshore development is one of the federal government’s greatest sources of nontax revenue, amounting to $7 billion and change in 2007. Energy companies bid competitively to acquire leases upfront, then pay rents. The feds are also entitled to a royalty on the market value of oil and gas when sold. Corporate income taxes on producer profits add to the bank.

The total government take from leases in the Gulf of Mexico ranges from 37% to 51%, depending on the location of the lease. The take is somewhat higher is Alaska.

* * * * *

Opening up a small portion of the coastal plain of the Arctic National Wildlife Refuge would generate over $500  billion in government and state revenue.  (see article)

The $2.6 trillion estimate, is a back-of-the-envelope calculation from exploiting the 86 billion barrels of oil and 420 trillion cubic feet of natural gas that the Department of the Interior determines are undiscovered but “recoverable” on the Outer Continental Shelf.

We don’t know what’s actually out there because analysis with modern equipment has been forbidden by Congress in many areas for 26 years. 

* * * * *

Since fossil fuels are expected to provide nearly the same share of total energy supply in 2030 as they do today — even with major growth in alternative energy — Washington might as well make a few bucks.

* * * * *

Full article:
http://online.wsj.com/article/SB122117603688025815.html?mod=opinion_main_review_and_outlooks

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Oil: Those 68 million acres of "idle leases" …

September 10, 2008

The issue

Some in Congress have recently argued that oil companies are not doing enough to develop the 68 million acres of leases they already have. 

Oil companies respond that the the current leases represent a very small part of the total Federal land bank, that there is or has been substantial activity on virtually all of the leased acreage, and that a small percentage of the leased acres have economical commercial quantities of oil or natural gas.

* * * * *

Exploration status

In  recent letter to Congress on this specific  issue, one large oil company claimed that it had actively explored over 95 percent of their existing federal oil and natural gas leases.

Most the explored leases did not contain economically viable oil and natural gas resources. 

Based on known geological characteristics, the company anticipates a higher success rate and commercial viability from the off-shore acreage that is currently “off limits”. 

* * * * *

The economics

Oil and gas companies have a very strong financial incentive to develop their leases and ramp-up production as quickly as possible.

To obtain federal leases, oil companies bid on tracts that are made available. Winning bidders make significant payments to the federal government to acquire the leases and then pay annual rentals to “maintain” them. 

Millions of dollars in exploration costs are incurred in the hope of finding commercial quantities of oil and natural gas.

The Dept of the Interior indicates that success rates are approximately 10% for new on-shore areas, 20% in deepwater offshore areas, and 33% in shallow water offshore areas.

If the companies do discover and produce commercial quantities of oil and gas, they must pay royalties and other tax payments on production.  Currently, revenues from federal oil & natural gas leases provide the second largest revenue stream for the Federal government — second only to IRS receipts.

In addition, under current federal law, an energy company with an oil and natural gas lease must “use it or lose it.”  If energy is not produced within the lease term (generally ten years), the lease reverts back to the federal government and the company forfeits all the money it has invested in it (which, for large tracts, can be hundreds of millions of dollars).

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Big oil getting out of low-margin retail …

August 28, 2008

Excerpted from WSJ, “Conoco Plans To Sell Rest of Its Gas Stations”, August 27, 2008

This year, gasoline retailers experienced some of the worst profit margins on record.

Retail gasoline-sales are undergoing dramatic change. Giants such as ConocoPhillips and Exxon Mobil and BP have announced plans to sell or close their retail gasoline outlets.

Now, ConocoPhillips has announced that it will sell the remainder of its 600 company-owned gasoline stations . 

The sale is part of oil companies’ efforts to flee low-margin U.S. retail-gasoline sales and focus on finding new supplies of crude oil.

ConocoPhillips will continue to refine oil into gasoline and sell fuel on a wholesale basis to stations..

Few gas-station owners generate the majority of their income from selling gasoline. Profits come from getting drivers to buy other goods and services, such as food and car washes.

Seattle-based PetroSun West plans to add fresh sandwiches, financial services such as bill-paying, and even dry cleaning, Most of the stations it is buying are located in urban, high-traffic areas along the West Coast, from Seattle to Los Angeles.

Full article:
http://online.wsj.com/article/SB121978249439473837.html?mod=hps_us_whats_news

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Energy – Why do gas prices move up and down ?

August 27, 2008

In last week’s post “Thinking about $4 per gallon gas”, I wondered why oil companies waited so long to push prices up to $4 — the apparent price that the market will bear — and why they don’t just let the price stick at $4 now that it has been tested.

Chris Hairel , MSB MBA alum, emailed a nice recap of the oil to gas value chain.

Bottom line: cost-plus pricing in a very competitive market.

Worth reading …

* * * * *

The downstream refined products value chain — from crude oil to retail gasoline and other oil-based products — has six segments, each with its own unique industry structure, pricing levers and regulation:

* * * * *

Refineries – the key asset in the business where the object is to maximize the economic value added of the refined products.

Refineries are basically price takers since their company trading group supplies them with crude oil and the projected prices for refined products.

Working with the trading group, the refinery is charged with turning that crude oil into the most profitable collection of products given the quality of the crude and the capabilities of the refinery.

* * * * *

Bulk Markets – The trading group assumes title of the product as it leaves the refinery and arranges transportation to the terminals based on projected demand in the rack (or wholesale market).

Along the way the traders seek to increase the realized price for their products, react to supply disruptions or unexpected demand.

Bulk is a relatively efficient market with good price transparency based on key trading hubs like New York Harbor, Houston and Chicago.

The NYMEX futures market provides a facility for hedging and for paper speculation. Trading parties include oil companies, major users of petroleum products, independent pipeline companies and speculators.

Pricing is market-based and profit-optimized by the traders.

* * * * *

Pipelines – Interstate pipelines with multiple customers are regulated by the Federal Energy Regulatory Commission .

Their tariffs (i.e. prices) are set based on a government sanctioned rate of return. So. pricing is essentially a cost-plus process.

Pipeline owners are not permitted to share information about who else is using the pipeline with their affiliated companies, nor can they give (or take) preferential treatment with respect to supply allocation or delivery scheduling.

* * * * *

Rack Markets and Terminals – Rack markets cover the wholesale market for a city.

Prices in rack markets are set daily for the next day. The marketing group for an oil company looks at demand by channel of trade (i.e. branded, unbranded, spot), recent price history in the area and the supply situation.

The pricing mechanism itself may be based on an index, a cost plus or other model, but there’s some leeway on the decision under certain circumstances. For example, pricing is actually used as a key demand management lever since companies can purposefully price themselves out of the spot or unbranded channel in order to save product for branded customers.

Despite what the pricers do, most transaction pricing  is determined by long term contracts. These contracts usually allow customers to “swing” their volumes. A customer may commit to buying an average of 5,000 gal a day, but the contract management process will look at the monthly volume and divide by 30 – the customer can usually manage their buying pattern to buy more on days when gas is cheap and less when it’s more expensive. .

* * * * *

Secondary Transportation – These are the tanker trucks that move product from the terminal to the retail station. The logistics are typically handled by jobbers or independent marketers that almost always price on a cost-plus basis.

* * * * *

Retail – Retail gas stations typically price on a cost-plus basis with a slim retail margin added on.

The bulk oil stations’ profits isn’t from the gasoline !  Gas is simply the “leader” product that attracts traffic (literally) which often loads up with high margin coffee, soda, cigarettes, etc.

* * * * *

Retail gasoline prices

Retail gasoline prices tend to respond quickly to market forces for 3 reasons: (1) cost-plus pricing, (2) retail competition, and (3) fear of government intervention.

* * * * *

(1) Cost-plus pricing

Since cost-plus pricing is prevalent at all stages of the value chain, refined products’ prices and crude oil prices tend to move together.

Refiners’ margins are often forecasted using what’s called the 3-2-1 spread. Take the price difference between three WTI NYMEX contracts and the sum of two NYMEX gasoline contracts plus one heating oil contract – then trade accordingly.

When crude falls. the entire complex floats down with it since the bulk market is fairly efficient and the downstream segments all use a cost-plus pricing model.

If domestic bulk markets fail to react to lower crude prices, several large players can bring product in from Europe to capture the arbitrage.

Since the vast majority of transactions are priced on a cost-plus basis, companies compete on their ability to “buy right”,  on the efficiency of their operations, and their opportunity for more profitable ancillary sales. .

* * * * *

(2) Retail CompetitionFew prices are signaled to potential customers more visibly than gasoline prices.

There are often 2 or 3 gas stations on a corner,  so consumers are tempted to chose the cheapest one even if it’s only a cent or two cheaper per gallon. The conventional wisdom is that brand loyalty is low. 

The same price pressures evident in the wholesale rack markets since unbranded retailers have the option of buying from multiple terminals. If Shell is less expensive than Exxon on a particular day, Shell gets the sale in the unbranded and spot channels of trade.

* * * * *

(3) Threat of Regulation

A third force is the threat of government action.Pricing through the entire oil value chain is very transparent.  Timely price data available from multiple sources for every segment of the market (DOE data, NYMEX, bulletin board exchanges, broker quotes, daily PLATT and OPUS surveys, AAA retail surveys, etc.).Oil companies generate two-thirds of their profits from crude oil production and refining. The wholesale and retail marketing and distribution parts of the business is generally considered mote of a cost of going business (i.e. overhead) than a profits source.  So, oil companies would rather play it safe (from government regulators) than try to eek out an extra half percentage point of profit at the wholesale or retail level.

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