Wednesday, October 26, 2005

Iowa Republicans, Governor Tom Vilsack & Big Oil

An oil refinery in Iowa? It sounds crazy until you think about how dependent our economy, particularly agriculture, is on fuel. The Dubuque Telegraph (registration required) in today’s paper unintentionally makes a convincing case for the curious oil refinery construction talk coming from the House Republicans.

Diesel costs hit economy
Trucking firms add surcharges, which are passed on to consumers

Every time his drivers fill up, Steve Hurst sees his profits fall.

As the price of diesel fuel soars, filling big rigs is like siphoning income straight out of the pockets of trucking companies like Hurst Logistics.

"It really hurts the bottom line; the profits are just getting lower and lower for us," said Hurst, president of the Dubuque-based freight hauler.

His company is paying as much as $5,000 more a month to keep its 12-rig fleet fueled, even as diesel prices eased to about $3.30 a gallon Tuesday.

The hurt gets worse at points west in Iowa, where prices are approaching $4 a gallon, and supplies at some terminals have all but dried up.

Unable to absorb the price spikes, truckers are forced to pass along surcharges to their customers. The national average for the surcharges were running at 32 percent as of Tuesday, Hurst said, and moving up.

"We've got to bill it back or we'd go out of business," he said.

Truckers pass the increased costs onto suppliers, and suppliers pass them on to stores, which ultimately is paid for by shoppers.

The skyrocketing diesel prices come at an especially difficult time for farmers. Gary Lahr, president of the Dubuque County Farm Bureau, said it's harvest time and farmers have no other choice but to pay the high fuel costs.

"You're kind of stuck with whatever the price is that day," he said. "What are you going to do? You've got to have the energy to get the crops out."

While other industries can hike their prices or add a surcharge for their services, Lahr said farmers don't have that opportunity.

"We get stuck with the same price for grain no matter what our fuel costs are," he said.

The effects of hurricanes Katrina and Rita continue to ripple through much of the economy, experts say, most pointedly in the Gulf's refining capacity. While gasoline prices have dropped precipitously from previously unheard of highs, thanks in large part to some of the lowest demand levels in years, diesel fuel costs have continued to rise at a clip that has energy experts baffled.

"I'm amazed," said A.L. Goldberg, supervisor of the energy section of the Iowa Department of Natural Resources. "It is simply a case of supply and demand, and the diesel infrastructure has been affected more by the hurricanes."

Many of the major terminals in parts of Iowa are dealing with diesel fuel shortages, forcing petroleum marketers to drive longer distances to bring in the fuel.

Jeff Streinz, owner of Dubuque Discount Gas, said his station, like so many others, are on allocation, meaning he can only order so much diesel fuel per day.

"There has been enough supply. It's not like anyone is being turned away," Streinz said. "It's a little tougher on the supply source but it's not like we're not going to have it."

There is a little relief on the way.

The EPA on Tuesday issued a waiver clearing the sale of high sulfur dyed diesel for on-road use in Iowa and Nebraska. Retailers will be able to sell the diesel, typically permitted only for ag equipment and other off-road vehicles, through Nov. 13.

"The IRS and Iowa Department of Revenue have agreed to waiver the usual penalties for using dyed diesel on road ... as long as all federal and state taxes are collected and remitted," states a letter to retailers from the Petroleum Marketers & Convenience Stores of Iowa.

Goldberg said the high sulfur fuel should have no impact on Iowa's overall air quality in the short time its on-road use is permitted.

Streinz, who worked for years in the wholesale gas trade, said he believes more fuel in the market will "change the supply and demand structure," ultimately sending prices down.

"I see this bringing diesel under $3 a gallon in the next two weeks," he said.

But Goldberg argues prices won't ease much until Gulf refineries and pipelines are up and running at full speed.

It may actually make sense to provide state financial incentives, alternately known as corporate welfare, to entice Big Oil into Iowa. This is the underlying logic; if we can produce fuel, particularly diesel, it will lower shipping costs and, in turn, the price to our Iowa suppliers, thus lowering the price at the pump, which is particularly important to maintain taxable profit margins in the agricultural segment of our economy.

The cleverness is in the politics. Tom Vilsack, in his 'will live to regret' WSJ column, made these comments about oil & gas subsidies.

Cut Oil and Gas Subsidies. The energy bill provides an assortment of government subsidies (e.g., $750 million over a 5-year period -- with the option to double the amount -- for research into deep-water oil and gas drilling likely to be conducted by the Texas Energy Center in Tom DeLay's hometown of Sugar Land) to an oil industry that is currently banking record profits at a rate of $7 billion a month. More than $23 billion over five years could be saved by simply asking these industries to pay their own way. (Cuts That Heal by Tom Vilsack, WSJ, October 13, 2005)

So how will Governor Tom Vilsack respond to the GOP legislative proposal to subsidize, very possibly from the $144 million tobacco bond-refinancing windfall, an oil refinery that will ultimately enhance the profitability of Iowa’s major economic engine? Stay tuned.

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