Sunday, February 26, 2012

Oil Companies and the Relationship of Corporate Goals to Gasoline Prices

A. What drives corporate decisions?

In order to understand what drives the actions of any corporation, you must start with what motivates the executives who make the decisions. Nearly all major publically held corporations that are not managed by their founders, have the same mandated business objectives. The first objective of virtually every executive is to increase stockholder value and return to the investor. What that means is that revenue through sales must increase each year and profits must grow in order to increase the company’s stock price.

B.How are executives compensated?

Senior executives of these companies are compensated in a number of ways. They normally receive a salary, bonuses for meeting specific objectives, benefits, and stock options. The value of stock options may exceed all other compensation value if the price of stock rises high enough. Some executives can receive millions of shares of stock options in a single year. An option is an offer to the executive to buy a share of stock at a predetermined price. There is usually a time limit on when this share must be bought or the offer is terminated. If the price of the company’s stock increases during that time frame, the executive can buy and sell the share immediately and collect the difference between the offer price and the price sold. If the stock price goes below the offer price, then the stock is worthless to the executive, unless they simply decide to buy it anyway and hold it at a loss. Therefore executives are highly incented to make sure their company and profits are growing.

C. How does corporate growth affect prices?

The mandate of every senior executive is to increase stockholder value by increasing the value of the company. They must grow revenue each year, increase profits and the return to the owners (the investors), and increase the stock price. Unless they do this, not only won’t they earn as much, they may well lose their jobs. In the case of oil companies, there are only a few ways to increase these numbers. To increase revenue, they must sell more each year, increase prices, or acquire more market share through acquisition or merger. Increasing revenue through sales is very difficult in the fuels market because the public on average will use approximately the same amount each year, unless there are significant changes in the population of the society or the environment. However, over time even these conditions tend to average out. We tend to drive the same number of miles each year and the number of gallons consumed remains relatively stable and predictable. The single biggest factor that changes consumption is population growth. If the population increases dramatically through new births or immigration, then usage will increase accordingly. Growing revenue in this industry through sales then is relatively fixed in terms of volumes.

D. Growing revenue through price increases

Another way to increase revenue is by increasing price. In order to increase price, a company must have either a superior product or at least perceived superior by the consumer or significant control over the market to prevent competition from undermining their price through their own price cuts. Oil companies learned decades ago that price wars usually result in injury to all competitors and rather than increase revenue, they reduce it. Therefore they strive to avoid head to head price competition in markets. Most chose to simply match the price of their competitors. Since government environmental regulations have dictated the formulation of gasoline and other fuels, car engines have been designed to meet those specific standards and all gasoline tends to be pretty much the same regardless of who refines it. There is no real competition through product quality. Price competition then is not a viable way to increase revenue.

E. Growing market share through acquisition or merger

Another option for increasing revenue is to increase market share. Since oil companies avoid capturing market share through price wars, are limited to how much the consumer will increase usage, an option is to buy market share through acquisition or merger of a competitor. This has been a highly successful strategy for all of the major vertically integrated multinational companies in all industries, not just oil. A vertically integrated company is one in which it controls all segments of product production from raw material production to the finished consumer product, including distribution points in between. Once a company has a market share large enough that it can control the volumes going to market, it can also control prices. While these aren’t monopolies, their control over prices makes them oligopolies. Within the US market, and especially within specific regions, these oligopolies do exist. Over the last 20 years, oil companies have combined over and over, forming mega corporations. Dozens of companies have been acquired or merged and that activity continues today. The US now has 5 or 6 vertical oil companies that control a large majority of the refineries and gasoline production within the US market. Exxon/Mobil, the largest of the Big 5, had more than $418 billion in revenue in 2011 alone. They will soon be generating a half a trillion dollars in annual sales. Combine that with the other companies and we get some perspective of the size of this industry. The entire US gross domestic product (GDP) of all goods and services is only a little over 15 trillion dollars. The Big 5 sell under many familiar brands and consumers often have no idea that most of those brands all belong to the same parent companies. For example, Texaco was originally acquired by Royal Dutch Shell, broken up and the brand and some assets sold to Chevron. All Texaco sales are now part of Chevron. Nearly all the major brands fall under the Big 5 companies. In some parts of the country, only one or two of these companies may have refineries and are supplying most of the fuels to all gasoline stations in those states. Exxon/Mobil, Chevron, British Petroleum (BP), Royal Dutch Shell, Chevron, and Conoco/Phillips currently make up the group referred to as the Big Five. While there are others who have major assets and revenues in various fossil fuel production, like natural gas, the Big 5 continue have the dominate market share in the gasoline and refined fuels US market. While discussion of size is often debated, for purposes of the discussion, these five have dominant market shares of the gasoline market. Details of company financials are usually closely guarded by all large corporations and the same is true of the oil industry. How companies actually price their products is never discussed and only a few within the companies’ own financial organizations know exactly how those prices are established. Even other company executives may not be privy to that information. Company financial statements can give a glimpse into their operations, but they do not reveal such detail and analysis is based on what is released to the public. One example is that excessive highly profits can be disguised by using them to acquire other assets such the purchase of other companies or their assets. While not hidden, these purchases lower the profit numbers for those focused on profits.

F. Where do oil company’s refineries get their oil?

Most of the oil used in American refineries is produced by the same companies that own them. About half of the oil is produced domestically and is delivered to a refinery from the nearest production point. For example, much of the oil for the state of California is produced in or off shore in the state. Also, companies like Exxon/Mobil ship much of the oil they produce in Alaska to California or other refineries along the West Coast. Contrary to popular belief, only a small portion of the oil consumed in the US comes from the Middle East. Only about 9% comes from all Middle Eastern countries combined. The largest volume of oil imports come from Canada. Again, most of this oil is also owned by the same companies that refine and sell gasoline in the US. The oil that comes from most countries is produced by these same companies and is not owned by the country of origin. Oil from Canada is only Canadian oil while it stays in the ground. Countries or states may tax, lease the land or charge an extraction fee for the oil that the company pumps out. Once it is extracted from the ground, the oil company can do what it wants with that oil. If US markets cannot absorb that production, then it must be sold elsewhere or left in the ground. Drilling more new wells does not increase sales of refined products. Refineries have a finite amount of fuels that the market is able to buy. Producing more does not drive down prices, it just presents a storage problem. Because fuels like gasoline can degrade with time, they have a shelf life and must be sold within a specific period. Today, all demand is being met by the US market and they can’t sell more here. Any excess production must be sold to other markets if they exist. US refineries currently produce about 19 million barrels of refined fuels per day. About 17 million are sold domestically and the remaining 2 million are exported and sold to consumers in other countries. This is a surprising fact to many in the public. Producing more oil does not lower prices at the pump. It just increases the opportunity for sales in other countries. Since oil reserves will someday be depleted, exploration for new oil reserves is critical for the future. However, it does little for current markets.
Oil companies also import oil from Mexico (5%) the Caribbean, and various South American countries. Venezuela exports about 5% of consumed oil primarily through its country owned company, Petroleos de Venezuela and their US based subsidiary Citgo. While Citgo is controlled by the dictator Hugo Chavez, it represents less than 5% of the US gasoline market. Recently, Nigeria has increased its imports to the US as well. However, it should be noted that oil companies remain the major suppliers of their own oil. OPEC countries and other dictator controlled countries do play a role in the cost of oil around the world, but their production is not the major factor in the US market.

G. World markets versus regional and local markets

The term world market is often confused with the term world economics. World economics is the affects of various financial activity on the economies of countries around the world. Where it comes to products produced by any company, there are very few true world markets and that is also true of gasoline and other fuels. Nearly all products are produced for a specific region, such as a country or a defined area within it. Gasoline produced in the US is designed specifically for vehicles sold in the US. Some of those fuels cannot be used in other countries, just as those made in other countries can’t be used here without changing their formulation. Even the marketing of them is specific to the culture and specific needs of the consumers within the country or local markets. The term world, market when discussing oil, is grossly misused at times by the media. Even certain types of crude oil cannot be used by all refineries. Refineries must be designed specifically to process different types of crude oil. Automobile engines in the US are now designed to meet certain emission and performance standards and require specific blends of fuels. Gasoline in the US cannot always be used in Europe and vice versa. Oil company refineries produce what a region requires and price it accordingly.

H. Establishing price through price elasticity or what the consumer will pay.

Price Elasticity is a marketing technique that helps businesses establish the most profitable level for their product. Companies constantly test the market by raising prices to find out how much consumers are willing to pay for their product before more consumers quit buying. Losses in sales may offset profits gained when prices are too high. It is finding the point where profits are maximized that all executives seek. Oil companies are not nationalistic. They are multi-nationals and have no real national loyalty. They are simply businesses with the mission of maximizing return to stockholders. They are not charitable non-profits and their goal is to constantly grow their business. When people forget this and try to assign national labels or other goals to them, they misunderstand the business. Their constant goal is to make as much money as their market will allow. It is not to reduce prices and profits for other public goals. Any CEO who did that would soon find himself out of a job. They are only political to the extent that they must to protect their own companies and objectives. It is naïve to believe they will act otherwise. That is not what they are paid to do.

I. Spot market oil versus company production

Spot market prices for oil futures sold on the commodities exchange are often quoted in the media during discussions of gasoline prices. In terms of the cost of raw material or crude oil used by US refineries, this price has little bearing on the real costs for refining gasoline. First, most oil used by US refineries is produced by their own wells which have been in production for years. They don’t buy that oil from themselves on the commodities exchange. Investors who are speculating on the price of oil buy those contracts in the hope that the prices of oil sold to others by these oil companies will go up. Since most oil does not come through the commodities exchange but directly from oil they already own, those supply costs remain relatively stable with the exception of their own rising costs of labor and other business costs. These other costs make up the majority of the business costs anyway, not the actual oil. Oil is the single largest cost component in the production of gasoline, but it is considerably less than half of the total which includes exploration costs, drilling operations, transportation through ships, pipelines, and other means, refining operations, distribution, marketing, corporate overhead, investment, profit, and a number of other costs. Even when crude oil supplies must be augmented from other producers, that is only a percent of their total oil needs and does not account for the difference in the rate of price increases at the pump. One interesting note in executive expense is that a recently retired CEO of one of the Big 5 received a retirement package valued at more than $400 million dollars. That cost too must be passed to the consumer. It is also noteworthy that profits for all of these companies have been massively increased since 2005 compared to historic averages over the last few decades. They are currently at historic levels.

I. Other financial and political interests in higher prices

While oil companies themselves have an obvious interest in increasing prices, revenue, profits, and executive compensation, they have a lot of support from a vast number of other interested parties. There are investment houses that benefit from rising stock prices, commodities traders who want to attract investors, major stockholders, portfolio managers, and dozens of other financial organizations who financially benefit from rising prices and profits of these companies. There are environmental groups that see rising fuel prices as a good thing in the hopes it will reduce the dependence on fossil fuels. There are political interests who benefit from the support of these same people. Political agendas nearly always focus on factors that have little or nothing to do with the actual production of oil, its distribution, or the refining of gasoline and other fuels. The political discussion over construction of the Keystone Pipeline, off shore drilling, and expansion of drilling in Alaska are excellent examples. None of these projects will change the price of gasoline at the pump, but will create some jobs, improve the infrastructure, distribution, and possible oil reserves for the oil companies and our own needs in the future. However, many politicians have used these issues to promote their own electability while ignoring the actual affects on the consumer. Because of all of these various supporters, the trillions of dollars in revenue at stake, and affects on what most of these people earn, it seems unlikely that we will see any abatement to these pricing strategies. The dollars are too big and influence on policy makers too great. Only the limits on price acceptance by the public will limit how high prices can be pressed. Higher prices will continue to have major impacts on inflation, the growth of other industries, and the ability to reenergize the economy. If prices are stabilized long enough for the rest of the economy to absorb and adjust to them, then the country’s economy will be allowed to grow.

J. The role of the media in gasoline prices

Probably no other group has been more influential in consumer acceptance of rising gasoline prices than the mass media. There has been more disinformation and misdirection by television and publishers about the reasons for these increases than there has been real information. Most of the information they disseminate originates from all of those with a financial interest in seeing prices rise, either from paid industry spokespeople, financial houses, or political interest groups. Once this information is received, it is repeated over and over as though it were the final word on the subject. There seems to be no investigative journalists left who are paid to seek out objective facts and analysis of the oil industry. They seem to rely on college freshman economics and the stories that are provided by others. There have been few broadcasters who have even asked the questions that are raised here. Oil company executives themselves have avoided any personal interviews on this subject and when they have appeared, the questions directed to them have little relevance to the points raised in this document. Most executives would chose not to comment directly on them claiming that it was getting into company confidential information that might compromise their position with competitors. Recent opinion surveys indicate that the average American believe that most of the nation’s oil comes from Saudi Arabia and that spot oil prices are driving the cost of gasoline up. As previously stated, these do have some influence, but they do not account for the prices we are seeing for gasoline. Consumer expectations have a great affect on the decisions the oil companies make about when prices should be increased and by how much. Consumer expectation currently is that the price of oil will continue to rise, therefore gasoline prices, and that there is little they feel they can do about it. It is therefore highly likely that oil companies will continue to escalate their prices as high as consumers can afford to pay for it.

K. Political influence affects price

In 2007, Dr. Mark Cooper, Director of Research for the Consumer Federation of American testified on many of these same points to the Anti-Trust Task Force of the Judiciary Committee of the Unite States House of Representatives. For a copy of those comments and the charts presented, go to

Many members of the House have been advised for years of the growing problem of potential oligopolies being formed in this and other industries. Both the House and Senate have taken no legislative action to prevent these potential antitrust issues or to increase competition within the oil industry or any other. Major industries segments continue to merge and reduce any competition in their markets. Why this is allowed to continue is not yet factually determined.

All oil company executives are invited to provide data that is counter to the statements in this report.

Sunday, July 24, 2011

The Wealth of the Nation

Often we hear newscasters and elected officials speak of the National Debt as though it was simply a problem of finding more money. While that is related to the problem of the national debt, it isn’t the real problem of why the debt exists.

Socialists see the government as the vehicle for redistribution of wealth. They see it as spreading around the money supply so that all share equally and that wealth is not accumulated in the hands of a few. What they fail to realize is that money is not wealth in the true sense. Currency has no value in itself. It simply represents real wealth in terms of what we have to sell. What we produce is the wealth. You can print money all day and not increase wealth. It is only through increased production of products and services that a nation’s wealth increases. That is why communism as a system is such a total failure. If people are simply sharing the money supply, but do not contribute to the production, all we do is erode the value of that which is produced. That is why it so important to do everything that we can to stimulate production and not simply consume it. Consumption without production is destruction.

It can’t be any clearer that President Obama and his socialist colleagues simply don’t get it. When they transfer money from the wealthy who produce the wealth to those who don’t, they just undermine the production of more wealth. Transferring money to the government, who produces nothing in terms of production output, reduces wealth. There are many ways to assist the poor, but socialistic government control is among the worst ways. We simply equalize our poverty, not increase wealth. All of the government entitlement programs, government spending on projects, and bailouts of poorly managed business is the exact opposite of how you stimulate an economy. They are wondering now why these programs fail. As things get worse, they keep trying to do the same thing. Somewhere along the line, they got philosophy confused with economics.

What we are seeing in Washington is not really about solving the debt problem. It is about power and control. It is about who has it and what direction they will take the nation. It is about whether we transfer power from the people to the elite in government.
In fairness, there are plenty of people in both parties that do not understand the fundamentals of economic systems, but the difference is one believes in more government and the other less. More government means less wealth. Less government at least provides the opportunity to grow it. Why then would the citizens of a country choose to become poor, while giving away their right to free choice? Americans better wake up to these realities soon or they will awaken to a new reality. They will find themselves working for a government that tells them they will enjoy sharing their poverty with their fellow man.

Resolving the Government Stalemate

President Obama said on July 23rd, in a nationally televised town meeting, that the primary problem was that people were only listening to one side of the debate on solving the national debt problem and capping the debt. He said that if they only got their news from one source like Fox News, that they just don’t understand the problem and that it was causing entrenched positions. Essentially, he was blaming the news for the problem of a stalemate between him and Congress. Obviously, if people only listen to one source, they may have a biased view, but that is not the cause of the problem in Washington and his relationship with Republicans in Congress. The problem is much more basic than resolving differences in whether to increase taxes or not. The problem is that there are fundamental differences in belief between him and Conservatives about the role of the Federal Government. He believes the solution is government. Conservatives believe the problem is Government. Those beliefs are so radically opposed as to make it impossible to agree on much of anything.

It always strikes me as strange that any well educated person in the subjects of history, government, economics, finance, business, or political philosophy can in the year 2011 believe that governments can manage any nation’s economy, can deliver services more efficiently than the private sector, or can provide for the wants and needs of all of its people at a higher level than a capitalist system. I would just love to debate this publically with anyone that believes that government is better. You cannot find any examples, anywhere when that was true. The answers are so obvious that they cause me to wonder what our education system teaches these days. It isn’t about differences in philosophy. Those have been debated for hundreds, even thousands of years. Most of the issues debated today were addressed by Cicero more than 2000 years ago. Most of the major philosophies have been tried numerous times and Capitalism has always been the winner. Sovereign Republics as a form of government have been the most efficient and they are for some very simple reasons.

Don’t let people try to tell you that socialism and communism are different things. They are both part of Marxist Communism as defined by Karl Marx. Socialism is the governmental system for achieving a communistic economic state. It has been tried over and over and all end the same way in totalitarian states whose economies collapse from their own weight, resulting in social revolution. It is an evitable evolution toward collapse because no one has yet found a way to prevent it. Socialism, like the kings or emperors of prior times, requires complete control of all social activity. In order to do this, it requires an enormous bureaucracy to manage it. The growth of the bureaucracy is uncontrollable for reasons too numerous to discuss here, but because of the size, it requires larger and larger segments of the revenue of the nation to support it. Since governments produce nothing on their own, this revenue does not produce growth, but slowly strangles the output capacity of the non-government segment until there is simply not enough money to support it. Does that sound at all familiar?

The Soviet Union, Cuba, Venezuela, most of South America, and Eastern Europe, all experienced economic failures under these systems, yet they keep repeating the same mistake. Isn’t it insanity to make the same mistake over and over while expecting a different outcome? Why would sane people want to turn over their liberty and decisions to government bureaucrats whom we all know do little, complicate our lives, and generally make a mess of everything they are involved in? The problem here is not where we get our news. The problem is that politicians and the public have a fundamental difference about whether we want more government or less. It is whether we want government to take more control of our lives or less. It is whether we believe in our founding fathers belief in a free people or one in which government makes the decisions. It is whether we believe in free markets or government controlled markets who decide what and how much to produce. It is Socialism versus Republicanism. We won’t change those differences in view. We can only change the politicians and elect those who believe what we believe.

Thursday, March 3, 2011

Oil Executives and Their Encore Problem

People have asked me why I think the oil company executives are acting in a way that seems contrary to America's national interests. If prices of fuel continue to climb, it will have a very negative effect on economic growth, job creation, and consumer purchasing power. I believe the answer is fairly simple and really has little to do with conspiracies or other potentially illegal acts. This is a more fundamental business problem that most CEOs of mega sized companies eventually face. It is called the Encore Problem. All publically owned businesses are measured by Wall Street analysts and investment companies on the growth of their business from quarter to quarter and year to year. Annual comparisons of revenue growth are often considered among the most important and one of the reasons people buy or sell a stock. For businesses, it is grow or die. If you are a company that already vacuums in several hundred billion dollars from the market, those year to year growth comparisons become a real problem. This is especially true in a commodity market like oil in which there is virtual market saturation of your product. There is only so much gasoline that the public can consume and the amount is very consistent from year. The only real growth factor in the consumption numbers is for population growth. The more people we have, the more we consume so that figure is basically tied to the growth of the population. When it comes to investing, people expect to see better growth than just keeping pace with the population growth. How then do these companies grow? They only have a couple of options. One is to raise prices and the other is to buy more market share. These huge oil giants are doing just that. They are certainly not going to compete on price and drive the revenue down. They are going to do everything they can to get the public willing to pay higher prices. Second, they are spending huge sums of money acquiring additional deposits of oil, natural gas, other competitors, and various other sources of energy to help prop up those revenue numbers. Those enormous expenditures also serve another purpose in that they disguise what might otherwise be obvious exaggerated profit earnings that would not be good for their own narrative. They are able to raise revenue, increase asset value, increase market share, marginalize excessive profits, and most favorably they increase stock prices and the value of their own stock options.

The resources available to these companies are staggering. Their budgets are greater than many countries. The money available to influence political opinion is greater than all the other industries. A million dollars to them is not even lunch money. They are not going to change without a considerable fight and unless the public begins to understand what is happening to them, these oil giants will simply buy up what they want and charge as much as they want. I don't ask anyone to accept these things based on my word for it. They should go out and verify it for themselves. Ask questions. Demand answers and if the answers don't quite fit, then you know there is more going on. It isn't usually what they say that is wrong; it is the part they omit.

What these companies know though is that public will do very little about it. Like most national problems, most people are too busy with their own lives to be bothered. They will whine and complain about it at home and among themselves, but they will simply accept it and say, "Well what can one person do? Nothing I can do." Obviously they can, but most won't. Unless you do, then we have no chance of stopping this price gouging at the pump and the further destruction to the economy. Pass this information on to someone. Make a difference. Have them read my other articles on this blog site. If people differ, then share those thoughts. We can all learn.

Thursday, February 24, 2011

A scam coming to a gas station near you?

Normally, when I am writing about scams I read on the internet, it is to warn people that the information they have been sent is either a hoax or some kind of scam to get information or money. This time I am warning people about one that I see that is all around us. It isn't exactly a scam though. It is more like cooperative pricing while taking advantage of the public's ignorance about how their industry works. They also do nothing to correct misinformation. I am speaking here about the major oil companies who dominate the gasoline and fuel markets. It is surprising to me that so many people in the media today simply take whatever information is fed to them and then repeat it over and over. Pretty soon the public believes it. What we hear from the media and many politicians is that we have world oil shortages, not enough supply for the US, and that is why we have rising gasoline prices. Nothing could be further from the truth. I don't want others simply to believe me. They should verify what I tell them, because all of it is publically available information from the government and the industry itself. It just isn't very well known.

We are told that we are dependent on Middle Eastern countries like Saudi Arabia for our oil and that all of our money is going to Islamic sheiks. Let's discuss this for moment. Where does our oil come from? More than half is produced right in the United States. Canada, Mexico, and Venezuela account for another 20% with the Caribbean and other South American countries making up most of the imports. Did you know that Saudi Arabia accounts for only about 5% and the entire Persian Gulf region is only 8.8%. Do you think that the United States refineries use all the oil that those companies produce here and import are for consumption in the US? The total amount of oil used by oil companies is about 18.7 million barrels per day. They import from Canada alone about 2.5 million barrels per day. They export to other countries about 2.5 million barrels a day of crude and refined oil products such as gasoline, liquefied gas, jet fuel, diesel, and so on. That means they export for the consumption of other countries about the same amount of refined product as they import from our largest oil trade partner. If these energy products were kept in the US, we wouldn't even need the Persian Gulf or Venezuela oil. Yet aren't you told we must drill more wells? Aren't we told we are shipping all of our money to the Arabs?

Who owns all this oil? Most is owned directly by 5 major oil companies who dominate the markets in the US and Western Europe. Most of the brands you see are all owned by these companies and those who aren't must often buy their gasoline from them. These same companies own many of their own wells, just like BP in the Gulf of Mexico and Exxon in Alaska. They simply pay extraction fees for oil pumped from leased proprieties. They drill, pump the oil, and refine. Most of these wells were drilled years ago, paid for, and fully depreciated. They aren't paying those enormous prices you see on TV for spot market oil. In fact the price you hear on TV isn't really even spot market prices, but are the price of the "front-month" oil futures contracts traded by investment companies and speculators. Those contracts have very little to do with any oil that these oil companies are using. It certainly isn't what oil companies are paying for oil. Those who do buy on the spot market are those who don't have their own. Oil companies might supplement their supplies on the spot market, but when you own your wells to feed your own refineries, you are paying very little per barrel.

So why are you and I paying so much at the pump? The answer is simple. Because they can charge it and you are willing to pay it. If all competitors charge the same prices, what choice do you have? It isn't as if every one of these companies has identical cost structures. They don't and all are different, but they learned decades ago that there is no advantage to any company to start a price war. They just cooperatively price so as not to drive prices down, but drive them up. All win that way, with no losers, and since most of the small guys have already been driven out, there is no need to scramble for market share. They just let the oil speculators on the financial exchanges play with the open spot market and that prepares the consuming public for the supply and demand argument. Most Americans are now well trained on that message.

The problem here is not conspiracy among businesses. They are simply maximizing profits for their investors as all business does. The problem here is that Congress has done nothing since the early 1900s to control monopoly formation. Oil companies have merged over and over and now form virtual oligopolies. Unless competition is reestablished, this will get even worse, driving up inflation to even higher levels. The answer may be to break up these companies as they did in the past to force competition back into this industry that is now draining the economy of enormous amounts of economic resource.

Wednesday, September 29, 2010

What's Wrong With Higher Education?

When I first asked that question, it was in the mid 1970s. My company was spending tens of millions of dollars each year on tuition refunds while at the same time we were pouring millions more into training programs for our managers. I was a very young and somewhat naive young manager charged with administering our management development programs and assumed my vice president would just keep the money flowing. When I submitted my annual budget I was surprised when he called me into his office and demanded to know what the business payback was for all those millions we were spending. I had no answer. For many months after that, I researched the problem and finally provided an answer. We weren't getting very much. From that point on, I went a crusade to try to improve the return on our business investment by challenging presidents of major universities to improve their curriculums and prove to us too why people should invest so much in them. That is a long saga, which I will not reiterate here. I only use the story to explain my interest and early involvement in the problem of rising tuition and the value of education.

Many assume that you cannot place a dollar amount on education, citing all kinds of esoteric and intangible reasons that education is for education sakes. There are arguments for that, but it is untrue that you can't measure it and place a financial number to it. You can determine how much of a return you are getting for the investment. It is just expensive to measure behavior modification and that is what most education is about. With college tuitions exploding, it is unlikely that the majority of people send their kids to college purely for the sake of education itself. There are few liberal arts degrees awarded these days.

When I've directly asked university board members and administrators to show the value of the investment that they are asking millions of parents and students, few if any are able to answer the question. Many can't even give a coherent answer to the question about what their mission is. That is especially true among board members of state owned universities. State Universities do not have the same mission as private schools, yet their boards often believe they do. They think they are competing for the same students. They are not. In universities that are owned by the states, that is the taxpayers; their obligation is first and foremost to the residents of that state, not outsiders. While it is good to have a diverse cultural experience in college, that is not their primary mission. Normally these publically owned schools are charged with providing a high quality education at as low a cost as possible to the citizens of the state. There are lots of other things you might want to include in that mission, but that is usually the very first and most important reason for their existence and continued public support. It is also the one that is most often forgotten by board members in their decisions to raise tuition costs while continuing to build new brick and mortar facilities, buy new uniforms for the football teams, and pay exorbitant salaries to professors who contribute less, not more each year. These same people justify why it is more important to accept out of state students to utilize these facilities yet they cannot show you where that is in their mission. Some board members claim to agonize over raising costs, but never suggest cutting costs. It is as though everyone is entitled to a raise. They claim to agonize, but I sincerely doubt that they agonize anywhere near as much as those who must pay back these monstrous student loans. If everyone would go back to asking the schools to justify the investment payback and to demand to know what they are doing to meet the first objective of their mission, then tuition might actually go down. No business operates the way universities do and whether the schools believe it or not, they are in business to educate the students and prove they have value. The citizens of the states must take back ownership of their schools and demand that they be run as they would their own businesses and start to see a return on their investment.

Sunday, September 26, 2010

Explaining Communism and Socialism

Even though I was a political science major in my college days, it has taken me many years to really understand the various political philosophies of the world. I came to realize in my research over several decades that a great many people in both politics and the media are quite misinformed about the fundamentals of various world philosophies. Lately, I've been involved in numerous discussions trying to explain the differences in the various labels that are applied to individuals. Because some people have found these explanations helpful, and at their request, I am adding this information to my blog site. I hope it will help others to better understand how these terms apply in our current political environment. It should be kept in mind that these are philosophies and as such are always open to debate. That is the nature of philosophy. However, where it comes to describing a specific philosophy such as Communism, that philosophy is defined by its creator. In order to understand its meaning, people must go to the source and not rely on individual interpretations and claims of academic pundits of some particular political position. Claiming to believe a personal version of a philosophy does not make it a correct interpretation. You don't need to rely on my explanations or those of any other writer to get the correct version. You can read it for yourself in the source documents of their creators. That statement will also likely spark some debate, but I would encourage all to do their own research and I don't mean by reading some book that analyzes these things and offers their own opinions.

Lately, we've been hearing lots of liberal politicians calling themselves progressives or political moderates or various other terms that in my view simply obscure what they really believe. Even Glenn Beck who I believe has done an excellent job in trying to educate the public on the political issues, seems to have missed some key points where it comes to understanding political philosophy. He has made some distinctions about progressives that I view as a bit artificial and unnecessary. It took Marx an entire book to describe the principles of Socialism and Communism and no one that I know can boil that down in a few paragraphs, so I will try to confine my explanations to the most basic points I can. The first is to try to explain why Socialism and Communism are part of the same thing and cannot be separated. We have a great many politicians in Washington doing their best to avoid being called Socialist or Communists when they seem to not even understand the terms. Those who do are intentionally distorting their positions to avoid the negative connotation of those terms in America. Americans often associate communism with brutal totalitarians, like Mao in China, Stalin in the Soviet Union, and Castro in Cuba. However, many of our own members of Congress and the executive branch appear to hold very socialist communist ideologies. It isn't who they say they are or want to call themselves that matters. What matters is what they believe and do, and lately that has been very much a socialist communist behavior and legislation. I'll try to explain why that is true.

Many people try to avoid the label communist, while admitting to holding socialist values. They often believe there is a difference between communists and socialists and even talk about them as though they were different philosophies. They don't understand that socialism and communism are just different parts of the same philosophy. You cannot claim to believe in one without the other. Communism is simply the economic system and the ultimate goal in which all socialist systems seek to achieve. Socialism is the governmental system for administering policies and programs to achieve the communist objective. Nearly all socio political systems require two or more components to operate. There is the economic system like communism and capitalism and there are governmental administrative systems such as socialism and republicanism, as just two examples. Communism, like most philosophies is an idealistic governmental objective that has not been achieved by any nation. It is the economic system of in which a government operates. The polar opposite of communism is capitalism. Both are economic systems. There are no communist governments in any Western European country, nor socialist governments. All are capitalist parliamentarian systems who have adopted various socialist programs. None operates as socialist nations and it is a complete misunderstanding to call them socialist. They are not. Use of these labels becomes dangerous because people really do not understand what they mean. They tend to assume they know because they heard someone say it on television or heard a politician say it. Most politicians I've talked to don't seem to understand the differences either.

Republicanism relies on very little central control by a government unit and decentralizes authority down to the lowest levels of government, usually at a local level. Capitalism can only survive in such a government structure because it depends on the freedom of individual initiative and invention to grow. The more direct government control over capitalism, the less individuals can decide for themselves and the less they can achieve through individual initiative.

Socialism requires complete central control in order to operate, because it is government that makes all decisions for the economic system. It decides what will be produced and how much. It decides who receives the benefits of the output. It makes all decisions for the citizens. Communism must have such control in order to operate. However, the reason it has and will always fail is that government does not produce wealth and can only operate by extracting the money it needs from industry that it controls. As it pulls more and more resource from the system to support the bureaucracy, there is a constant draining of the wealth and unless production can outpace that extraction, people become poorer. Since there is never enough wealth to make everyone equally wealthy, people become equally poor, thereby creating a new society of discontented citizens ready for the next revolution. That is what has happened repeatedly in such countries.

When people refer to themselves as progressives or liberal democrats, often they mean they favor a strong central government that makes the economic decisions for the individual. Many believe that government knows best what is good for the majority. The problems with that belief are many, but the one that has happened throughout mankind's history is that the growth of central control is never satisfied. The power to control always leads to more control and the power is usually held by the elite's within the government. Governments are almost never static. In nearly every populous revolution, the goal was to take back power from the elites and give it back to the people. However, human social evolution seems to lead to individuals who believe they know what is best and begin again to seize power and control from the masses. Progressives might believe they are creating a benevolent central powerful government, but it has never turned out that way. Once control is acceded to the government it is seldom ever returned to the people until the next revolution occurs. Such governments have always ended in totalitarianism and that is why it is such a danger for the public to give away their freedom. What they get in return is never what they expected or wanted.

What we tend to have in most countries is a mixture of different political and economic philosophies in which the society has adopted various levels of the principles of one philosophy or the other. None are pure forms of anything, but tend to be in transition from one type of government to another. There are entire books devoted to these subjects and I cannot begin to get into the details in an article such as this. I am simply trying to explain here the most fundamental differences in these terms. For more information, readers need to buy a few books on the subject. Happy reading.