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June 26, 2008

Confused Americans for Truth - Pop Quiz: What's the Worst Thing You Can Do in an Oil Crisis?

by Ferdinand T Cat

In the past, I have discussed the phenomenon of Inventory Profits. In an environment where prices are increasing, a failure of the supply to meet the demand causes profits to increase by an unusually large percentage.

About a month ago, I discussed how this related to the recent furore over oil profits. During the first half of 2008, our gasoline inventories dropped by almost 50%. This drop in inventories caused a huge spike in oil company profits, even though the price charged at the pump has kept pace with the price of oil. In other words, the profits were not a result of price gouging, they were the result of accounting methods.

The thing you have to remember about inventory profits, however, is that they are not real. Consider, for example, a situation where a barrel of oil costs $100 on the current market and the net price of the gasoline from that barrel is $130. Because I'm unable to keep up with demand, I end up selling old barrels I originally purchased for $50 at the $130 price, giving me an incredible profit of $80. But, when it comes time to replace that barrel of oil, I'm paying $100, not $50. So the cash I have left at the end of the day is $30, even though my income statement shows a profit of $80. (If you're having trouble following all these numbers, check out the Flash video below the fold.)

The thing is, I have to have enough cash to pay the taxes on the $80. If I use my cash on hand to replace the oil so that I can keep up with customer demand, I'll end up tax-rich and cash-poor. So, I end up letting my inventories continue to drop, exacerbating the shortage.

Okay, so here's the pop quiz: what's the worst possible thing you can do in this environment? We have a shortage of marketable oil products, and oil companies can't replenish their inventories without unpleasant tax consequences.

If you answered windfall profits tax, then you win the prize. You have just demonstrated that you have a better understanding of economics than every single U.S. Senator listed in the table below. (Hat tip Human Events.)

Akaka (D-HI)
Baucus (D-MT)
Bayh (D-IN)
Biden (D-DE)
Bingaman (D-NM)
Boxer (D-CA)
Brown (D-OH)
Cantwell (D-WA)
Cardin (D-MD)
Carper (D-DE)
Casey (D-PA)
Conrad (D-ND)
Dodd (D-CT)
Dorgan (D-ND)
Durbin (D-IL)
Feingold (D-WI)
Feinstein (D-CA)
Harkin (D-IA)
Inouye (D-HI)
Johnson (D-SD)
Kerry (D-MA)
Klobuchar (D-MN)
Kohl (D-WI)
Landrieu (D-LA)
Lautenberg (D-NJ)
Leahy (D-VT)
Levin (D-MI)
Lieberman (ID-CT)
Lincoln (D-AR)
McCaskill (D-MO)
Menendez (D-NJ)
Mikulski (D-MD)
Murray (D-WA)
Nelson (D-FL)
Nelson (D-NE)
Pryor (D-AR)
Reed (D-RI)
Reid (D-NV)
Rockefeller (D-WV)
Salazar (D-CO)
Sanders (I-VT)
Schumer (D-NY)
Smith (R-OR)
Snowe (R-ME)
Stabenow (D-MI)
Tester (D-MT)
Webb (D-VA)
Whitehouse (D-RI)
Wyden (D-OR)

This list of Senators who don't understand economics was brought to you by the letter D. Remember that in November.

Respectfully submitted,

Ferdinand T. Cat

Trackposted to Outside the Beltway, Rosemary's Thoughts, Right Truth, Shadowscope, The Amboy Times, Cao's Blog, Democrat=Socialist, Allie is Wired, Faultline USA, third world county, The World According to Carl, The Pink Flamingo, , Right Voices, and Gone Hollywood, thanks to Linkfest Haven Deluxe.

# At Thu 3:36 AM | Permalink | Trackback URI | Comments (2) | More Confused Americans for Truth | Tags:

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Comments

As I once commented to Tom Eagleton, after a comment he made about political realities, political reality and the real world are separated by a vast chasm that is not bridgable by politicians' rhetoric.

The "political reality" is that Dhimmicrapps have so long talked themselves into envy politics that simple REAL reality no longer has any place whatsoever in their thinking.

Of course, as national leadership in the Repugnican't party demonstrates (perhaps I ought to type that "demon-states"), Repugnican't leadership is running as fast as it can to catch up with Dhimmicrappic leadership in playing the "my 'reality' is crazier than your 'reality'" game.


Posted by: David at June 26, 2008 7:34 AM

Hmm. An oil company simulator would definitely make an interesting video/computer game.


Posted by: Michael at June 26, 2008 11:31 AM

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