RUSH: I cannot believe how difficult it is to teach adults economics. I also find it amazing on any other subject, you pretty much acknowledge that I know what I’m talking about. When it comes to this, all of a sudden, I’m the stupidest, most-blind, in-the-back-pocket-of-Big-Oil guy who has ever come down the pike. Greetings, it’s Rush Limbaugh. It’s Friday. Let’s just keep going.
ANNOUNCER: Live from the southern command in sunny south Florida, it’s Open Line Friday!
RUSH: Telephone number is 800-282-2882, and the e-mail address, Rush@eibnet.com. Here’s the one thing I don’t understand. Before I tell you that, let me tell you what I do understand. I understand the cost of gasoline and these massive increases and the fact that it’s such a large percentage, I know the effect it has on people’s lives. I’m not suggesting that I have no empathy or understanding about that, but at the same time, I just don’t complain about it. I mean, I’ve hardly ever complained about consumer issues. You know, one of the earliest philosophies of this program was, “If you’re going to call here complaining about the phone bill, take it somewhere else, because it’s always going to go up.” (Laughter) If you want to call and complain about the electric bill, don’t talk to me about it. Call some local host who thinks that’s a big issue because it’s only going to go up, but when it comes to gasoline — and I know why. It’s because all these years of pummeling Big Oil, there is a belief out there on the part, I’m sure, many of you, they think that you think they can just raise or lower the price at whim, whenever they want and I’m telling you they can’t. It’s not how it works. The thing I really don’t understand is: why do you look to those people in Washington to lower the price of gasoline when they’re the ones responsible for where it is? It’s not Big Oil. Anytime you have such a heavily regulated industry that’s taxed to the hilt like this one is, you tell me that you’re going to get satisfaction from people.
So we’re going to have a “windfall profits” tax. Okay. So we’re going to punish the oil companies, but you tell me how that’s going to help you. It’s the same thing as class envy when the Democrats start talking about raising taxes on the rich. The whole point of that is to punish, because the Democrats run around saying, “It’s just not fair these winners in life’s lottery have much, and the poor and the downtrodden and the middle class have so little,” so they don’t focus on how to increase the amount of things, the wealth of people at a lower and middle classes. No, they just say we’re going to tax the rich, and you people in the lower and middle class are going to go, “Wow, that makes me feel better,” but the price of gas is still what it is, and the price of bread is still what it is, the cost of living is still what it is and you’re supposed to be made happy by the fact that the rich are paying a higher tax rate? What good is that doing you? So the liberals, all this time, class envy, they’re just pedaling schadenfreude. They want you to be happy when you think somebody else is miserable but your misery hasn’t changed, right? Okay. So you’re looking to the guys, the people that are largely responsible for the cost of energy in this country, our dearly beloved politicians. You’re looking to them to do something. Just do something, okay? What are they going to do? Windfall profits tax on Big Oil.
“Yeah! Yeah! Yeah, stick it to them. Really let them have it.”
What’s the price of gasoline going to be tomorrow after they do that? You think it will be lower? Is it going to change what you pay for gasoline? No, and the politicians doing this know it and they also know that Big Oil can get around the windfall profits tax any number of ways because it’s an international commodity, and try as they might, our elected officials can’t set oil policy for Saudi Arabia or OPEC or anywhere else that Big Oil can go and get oil. So there’s a way around it. My friend in Seattle, the Hutch — the Reverend Hutch, Dr. Hutch — sends me this note:
“Great explanation on the oil company, pal, but I still don’t understand how they can charge the most for the cheapest gas made, diesel — and am I wrong that jet engines fly on kerosene, and that’s also cheap for the price of jet fuel. Get me informed, my man.”
Snerdley thinks this is a brilliant question. The answer to this is so simple. I go back to how difficult is it to teach adults economics? We’ve got our economist on the line here. When I get to him, I’m going to ask him how difficult it is to teach college kids economics. It’s got to be pretty difficult because a lot of people who go to college and take economics come out not knowing anything about it. I have not taken economics in college and I know a lot about it. Okay. Here’s the answer, Hutch. You got a barrel of oil, and out of each barrel of oil, the vast majority of refined product is gasoline, and I don’t know in what order this comes, but gasoline is, I think, the most — and then you get down to the diesels. He’s right, by the way. Jet fuel pretty much is kerosene. It says jet A on the trucks but he’s pretty much right, it’s kerosene, and of course if you go to the store and buy some kerosene, how much does that cost? Not much. Going to buy diesel? He says, “How come the cheapest gas made, they charge the most for?” because they make so little of it. All barrels of oil in this country, the vast majority, get refined as gasoline, but of each barrel, a small amount gets made into diesel, refined to diesel. Other gets refined into jet A or kerosene, and there are countless other derivatives, but they are in a very small quantity. So the smallest percentage of each barrel of oil gets refined into these cheaper, you would think, grades, but it’s a supply and demand problem. Since they make less of it, it’s obviously going to cost more — and, by the way, you can’t then say– can you imagine if I did this. Imagine if I came to this program and started complaining to you about the cost of jet fuel for my airplane. You think you would have any sympathy for me? What if I said, “I demand that Big Oil start refining more jet fuel so the cost comes down”? You know, what you’re going to see to say to me?
“What do you mean! They’re going to make less gasoline; the price is going to go up.”
Aha. Exactly right. So there’s only so much of it that can be refined with the capacity that we have in this country. We haven’t built a refinery in 30 years. The vast majority of it goes to — and then folks, let’s then talk about of the gasoline that’s refined, good old EPA says that 42 different formulations have to be made for different geographical areas of the country because the environmentalist wackos think that it’s going to help with pollution problems, but notice in the face of national disaster, like Hurricane Katrina, notice how easy it was to just suspend those regulations — and did you notice how quickly the distribution problem repaired itself? When gasoline refined for Chicago only could be sent to Atlanta or New Jersey or St. Louis. Gasoline refined for southern California only could be sold in Florida. Do you realize how that fixed the distribution problem? Do you realize what that does to the cost of this product? Look to the guys in Washington if you want to find out why energy prices are so high. I guarantee you big old is like any other business. They wish they could get as much product as possible, and sell as much as possible, at the lowest price possible. They would love to be in the volume business. The problem is, the environmentalist wackos are trying to put them out of business because they’re being blamed for “global warming.”
RUSH: I had these numbers in front of me yesterday — and Brett, I think you sent them to me, and I don’t remember exactly what they were — the amount of money that Big Oil spends on environmental protection. It seems like it’s been — what’s the figure in the last nine years? Is it $54 billion? Eighty-seven billion dollars in the last 9 years on environmental protection, regulations demanded by the government, the EPA, thanks to your friendly environmentalist wackos. Let me ask you a question: Do you think Big Oil, like any other company, is just going to say, “Okay, we’ll spend $87 billion and not try to recoup it”?” Where do you think that $87 billion gets recouped? At the pump! Just like every other business. No corporation pays taxes, folks. You pay the taxes that they pay. It’s in the price of everything that you buy. So everybody, “We need corporations to pay taxes.” You’re just asking for higher prices. You’re just asking for it when you demand corporations pay an increased tax rate because you’re falling for this notion that they need to pay a bigger share of the tax bite since they’re wealthy. You’re going to pay it. It’s all these environmental regulations. They’re trying to put the oil companies out of business. I’m telling you, if Big Oil had their dreams, they would be able to drill anywhere. They’d drill as much as they could; they’d have as much to refine as possible and they’d sell it as cheaply as they could, because we’ve got tons of the stuff all over this planet. All right, here’s Herb in Lawrenceville, New Jersey. He is an economist. What’s the University you teach at, sir?
CALLER: Rider University.
RUSH: Yes, sir. Welcome to the program.
CALLER: Welcome. Thank you. What I called about is, I guess, from time to time this comes up on your program about gasoline prices. It was on yesterday, and, you know, I’m screaming at the radio at the same time because I try to get this across. If you look over the last 50 years, 55 years really, and adjust for the Consumer Price Index, gasoline was selling for around $2, $2.10 a gasoline back in 1949, around two dollars a gallon through the ’50s. It dropped through the ’60s down to around — again in constant prices down into the upper 1.50, 1.60’s, back up to around $2 a gallon, and during the ’70s, spiked in the early ’80s, up to around 2.75 a gallon, dropped back down again, hovered around a dollar fifty a gallon in real terms.
RUSH: Now you’re talking today’s dollars.
CALLER: In today’s dollars.
CALLER: And it’s back up and what we had, we had it hovering a little under $2 a gallon. You know, if you look at the CPI, it kind of almost reflects that long term — the Consumer Price Index — and it got up around a little under two dollars and then we had the expectation, well, we expected it to be higher in the summer and it did go up and then you had some of the shock effects which, you know, drive the commodity markets, and as we try to teach our students in economics, it’s the marginal cost that really drive the prices — and so when you have the commodity markets for speculative reasons bidding the prices up, that’s what’s going to happen, and, you know, to the degree that you can push prices up a little bit faster, perhaps then they’ll drop back down, there may be some “windfall profits.” The term isn’t a dirty word in my lexicon. Windfall profit just happens to mean you’re in the right place when the demand shifts and you can have windfall losses in the same way. You’re in the wrong place when the demand curve shifts.
RUSH: All right. Now, according to CPI, what would the current gasoline price in today’s dollars have to get up to be the highest ever?
CALLER: Oh, it was probably there. Highest ever, I don’t know, because I don’t — my data — you know, the stuff I’m looking at don’t go back that far.
RUSH: Because the media —
CALLER: It was around $3.50, $3.60 a gallon.
RUSH: All right. I had heard that.
CALLER: Yeah. You can understand why people screamed at those prices because it’s largely unexpected and they’ve made lifestyle choices based on roughly around $2 a gallon.
CALLER: And so, you know, you get that expectation and people complain about it. If you look at the long-term growth in gasoline consumption, it’s been, you know, modest over the last several decades also. Primarily I guess because of fuel efficiency, people have downsized to some extent their cars. You have more cars on the road, but I wonder even — in fact, oil companies commit long term a lot of money toward building new refineries, getting past all the hurdles they have to get to. You have to figure that you got a 30-year plus investment out there, and, in the current climate is this going to be a valid investment to make. So you start taxing windfall profits or seriously erode the long-term potential profitability of a new refinery, you’re not going to get them getting built anyway.
RUSH: Well, not only that. It takes 10 years from start to finish.
CALLER: Yeah, that’s what I mean. So you have to, first of all, the period between which you finally decide you’re going to go ahead and get one online, and then you have the lifetime investment that presumably has to have some payback to the shareholders. So the gasoline prices, though, as they’re drifting back down towards two dollars and I tell my class, I would expect them to settle sometime, somewhere around two, two and a quarter. I don’t know for certain. I mean, you know, there can be other exogenous or outside forces that alter expectations and drive the thing back up again, but if you look over the long term, gasoline has been somewhere around a dollar fifty to two dollars a gallon. When I say “long term,” over the last 50 years.
RUSH: Right, as related to the Consumer Price Index against today’s dollars. Now, explain something to the audience, if you will, since they’re not believing me on this. Explain to me how a windfall profits tax on the oil companies is going to lower their gasoline price at the pump.
CALLER: Oh, I don’t think it would have any kind of an effect on the gasoline price at the pump.
CALLER: (Laughter) You know, (Laughter) It may have some effect on their share prices in the stock market, because right now they’ve been bid up a little bit because of these reported higher earnings. So stockholders may get the effect, but what happens is the price at the pump is determined by the good old supply and demand. If people could just understand it in an analytical sense. We hear the terms used a lot but I don’t think people really understand market forces.
RUSH: Okay. Let me ask you a question about that because I know this is something burning in people’s minds. Right after the Hurricane Katrina hit, when we were told that they lost all of their refining capacity out in the gulf — in Hurricane Katrina and Rita, lost their refining capacity — we had some supply interruptions because pipelines were down, and yet the price skyrocketed immediately, and that leads people to think that somebody is sitting somewhere and making a calculation, “Okay, we can get away with jacking the price up right now because everybody thinks there’s going to be a shortage and so we can do it.” How do you explain that to people who have that erroneous thinking and belief on this?
CALLER: Well, it’s actually, if you expect prices are going to be higher tomorrow, don’t you try buy today?
CALLER: I mean, in effect that’s what happens. If you expect prices are going to be lower tomorrow, it’s the way expectations drive financial markets, they drive commodity markets as well. And so, again, it’s what people expect. It’s going to be higher? They hear the news that there’s going to be a frost in the California oranges or Florida oranges and suddenly the price of orange juice goes up on the commodity market for frozen orange concentrate. Why?
RUSH: Like the Dukes in the movie Trading Places, you try to corner the orange juice market in that circumstance. Yeah.
CALLER: Sure. But you see these prices going up and you have to recognize that as the holder of that orange juice, after you sell it, you got to replace it at what that new spot price is going to be or what your contracts are going to be.
RUSH: It wipes out your windfall profit.
CALLER: Yeah. So the windfall profit goes to finance, in effect, potentially, unless it truly is a windfall profit and prices drop back down. So when you come to replenish your inventories, you can get them back at a lower price, but then —
RUSH: Professor, could you explain to me how a person, a woman, with no experience in the business at all could turn $10,000 in the cattle futures market into a hundred thousand dollars in one year?
CALLER: (Laughter) Very lucky.
CALLER: Very lucky. (Laughter) Good information or, you know… oh, well.
RUSH: Well, how much trouble do you have teaching this to your students?
CALLER: A fair amount of trouble. I think partially because academic economics really tries to approach issues very rigorously — if you want to say “scientifically,” that’s fine — and a lot of times, getting into it, we use language that’s familiar but we use it in a very, very specific way, a more precise way than people are used to hearing it — and for some students that aren’t, let’s say, motivated to make that initial up-front investment in time to really get into the analytical methodology of economics, they try to memorize everything in sight. What turned me on to economics when I was in college was I didn’t really have to memorize a whole heck of a lot. It’s a very deductively based discipline and so once you get some principles down, and there’s a lot of stuff in economics that, in a sense, it’s counter to what you think would be a logical conclusion. But when you examine it, in fact, it is the logical conclusion.
RUSH: You know, that’s the way it hit me.
RUSH: I was taught economics by people like you long after I left school, and I always thought economics was pretty logical too, but when it was explained to me by somebody who understood it, lights went off like they never had in my life before, like I had just learned some big secret. But it made so much sense I couldn’t figure out why I didn’t see it myself that way in the first place. I appreciate your time and your support, professor.