Thursday, July 31, 2008

Kunta Kinte Festival

After suffering the ultimate embarrassment last post by initially stating that a bill had passed when it really failed, I phoned the city clerk to verify the passage of O-24-08 on Monday night, an ordinance that authorized the lease of the city dock for the 2008 Kunta Kinte Festival.

The public hearing for the bill was the same night as the final vote, which means that the bill's passage was a foregone circumstance. Somebody decided that it was necessary, and I promise you that anything short of a riot would not have prevented this bill from passing. You will have to believe me when I tell you this, but the use of the dock was advertised on the festival's web site before this lease was even proposed.

The theme of this post is "Downtown businesses get screwed because the Kunta Kinte Festival needs money". The festival is to take place between 11 am and 7 pm on Saturday September 27, which are probably the busiest 8 tourist hours of the entire year for downtown Annapolis. The Festival will occupy the Dock from the visitor center down to the water, as well as the seating area where the dinghies are docked and the seating area next to the market house. The cost of renting these spaces: $1. At least the Festival has to pay for the fire, police, and public works, right? Only if they make enough money! The lease reads:
...that Lessee shall assume any and all financial responsibility for any such
other services that may be required by Lessor. However, if the Director of
Finance is satisfied that the payment of charges would result in expenses
exceeding revenue the Director shall waive such part of the charges as may be
necessary to prevent expenses exceeding revenue for the event.

For any of you familiar with business, or life, you will know that this sweetheart lease does not exist. In fact, Mrs. Politics asked to move in with me and I told her I would need 3 months' rent up front.

So, is the Festival going to make money? No. The 2006 event was short about a quarter of its $90,000 cost for the event. How the event costs $90,000 is beyond me, as they charge an admission fee as well as fees in the hundreds of dollars for both vendors and exhibitors.

I've never been to the Kunta Kinte Festival. I'm sure it's a good time. I'm sure it's educational. The trade off is that the city has to subsidize the event, and local business suffer heavily on what would otherwise be one of their busiest days of the year, as downtown patrons eat food from outside vendors and take up the space that would be utilized by businesses downtown. If downtown businesses want to compete, they must submit an application to be a vendor and shell out $500 to sell food where they are already allowed to sell food. Does the trade off sound worth it to you?

Wednesday, July 30, 2008

The Future of Sidewalks

Alright, as promised here is the latest and greatest info regarding the notorious 2008 sidewalk tax. I originally made this post at 3:30 this morning, and by the time I opened my computer again at 8:30, I had 2 emails saying I got it wrong! I left the city council meeting early and failed to verify what went down. Purely amateur blogging. I have since corrected my errors, and here we are.

As you know, the city council last October enacted a $25 tax on each resident in the city in exchange for the city doing general maintenance on sidewalks, taking the burden away from property owners. The tax was set to raise $500,000, but generate over $17 million in liability! Even if the city council didn't know those exact numbers, they certainly knew that they were drawing the short stick in that deal. So why do it? Well, my guess is to set a precedent. There is a ton of property in this city that is property-tax exempt for one reason or another, and this sidewalk tax would have avoided that by taxing everyone. If you set a precedent by taxing everyone $25, it's a lot easier in the future when you want to hit everyone up for $1000.

The public and the media largely ignored this issue until residents began receiving their bills for $25 a couple of months ago. People without sidewalks realized that they were being charged for sidewalks. Others were concerned with the city taking on so much liability. The city council began to hold hearings on the matter, and the tide began to turn towards repealing the tax. As if that weren't enough, the tax was unconstitutional, and word came from the Attorney General's office that the tax wouldn't pass muster.

Alarmingly, the issue didn't die there. In a recent work session, Mayor Moyer asserted that the unconstitutionality of the tax was only established in an advisory opinion--rather than case law--implying that she was willing to run with the tax until the city actually got sued and the tax could be invalidated in a more formal manner!

This brings us to Monday's city council meeting. The council considered O-21-08, which would have repealed the tax. But, that's not all it did. The bill went on to define the process by which sidewalks are to be repaired from now on:

-private property owners are responsible for sidewalk maintenance and upkeep.

-the director of public works, at his subjective whim, can determine that a sidewalk is "necessary for public convenience and safety", and compel a person to fix or install a sidewalk.

-after being notified, a person has 20 days to obtain a building permit and make the repairs. Or, they can file an appeal which must be done no later than 30 days after notification.

-design specifications for the sidewalk must be approved by the director of public works in accordance with standards that he designs.

-a 'Sidewalk Assistance Revolving Fund' is to be established, funded with 5% of the city's allocation of the State Highway User Fee.

That bill was better than the $25 tax, but not by much, and it failed. What did pass was R-34-08, a bill which suspends collection of the $25 tax but leaves the original O-12-07 intact. More importantly, it enumerates a laundry list of nearly 20 things that the city must due in regard to sidewalks--things that should have been considered before O-12 was enacted in the first place.

The result is as follows. Property owners are still responsible for first-time installation of sidewalks, but the city is on the hook for repairs. This is halfway to the solution that makes sense to me, which is to have the city be responsible for it all and pay for it out of normal funds. Speaking of funding, R-34 is not good. While it repeals the fee, it leaves the provision requiring a Sidewalk Fund. So, there is a mandatory fund without a source of funding, and mandatory spending without a source of funding = structural deficit. This is easily resolved by removing the fund and creating a capital program for sidewalks, but the fact is R-34 does not do this.

So in summary:
1. no more $25 tax
2. city taking more liability for sidewalk maintenance
3. no established funding source for said maintenance
4. further study needed

Monday, July 28, 2008

City Council Meeting, 7/28

Ok, it’s the fourth Monday of the month, which brings us here, to the public hearing for the citizens of Annapolis. You might remember that during the legislative meeting, citizens can speak about whatever they want, whereas here at the public hearing, you are limited to speak only on the bill you sign up for, and only when called upon. Make sense?

(Column intermission: halfway through writing the above paragraph, my attention was diverted to Alderman Finlayson, who opened the meeting by announcing that she went to one of our sister cities in Canada, where she toured a graveyard and learned about someone who started a business with a wheelbarrow. All thoughts immediately vacated my head, and I envisioned myself sipping sherry, dreaming of a time where I can watch 37 consecutive hours of Home and Garden Television, hi-def, and riding in a wheelbarrow.)

I wasn't really in the mood to stay long at the meeting tonight, so I didn't. There is one transportation/zoning/property related bill that was heard, which I have listed below. Everything else dealt with either the Kunta Kinte Festival or the Sidewalk Tax.

Public Hearings:
O:11-08: Prohibiting parking on Unpaved Services
People against: Tony Evans, Chris Ladue,

People for: Alderman Shropshire, Alderman Stankivic

Arguments For: cars on grass are ugly, neighbors complain. Cars destroy grass and cause runoff to surrounding creeks. Overcrowding needs to be addressed.

Arguments Against: This is a custom penalty ordinance. Let people park on their property if they own it. This encourages paving and the creation of impervious surfaces. The bill intends to limit car ownership and therefore rights of property owners. Laws exist to address the problems that this bill intends to address. Also, this is big brother extending his reach even farther.

O-21-08: Changes to Sidewalk Tax:
This one is confusing…I’ll sort it out in a full post devoted to the issue. Maybe.

O-24-08: Lease of City Dock For Kunta Kinte Festival
Also gets it own post.

There were several legislative items put on the agenda for first reader for fast track passage sometime in the future. There were also the items which recieved final votes: the sidewalk tax bill(s) and the Kunta Kinte Festival approval. (FYI both aforementioned issues went before public hearing only today—they voted on them at the same meeting.) See the future posts for details.

Tuesday, July 22, 2008

Fox For Mayor

So, as you may know I am the campaign manager for Chris Fox, who is running for Mayor this cycle. I am not going to use this blog to campaign because these are my opinions and not Chris' opinions.

That being said, I am going to publicize his web site right now because (1) I want him to win and (2) I designed the website from scratch, and I am proud that it functions. I previously knew nothing about web design, and now I know 1% of everything there is to know about the web design, which makes me a web design expert.

The site is, and you can certainly make donations*. But remember, my thoughts are on this site, and Chris' thoughts are on his site.

(*subtle hint)

Saturday, July 19, 2008

City Taking Steps To Affect Structural Budget

The original title of this post was to include the word "problem" at the end, but then I realized that there wouldn't be a problem if there was responsible leadership, and I didn't want to mislead my loyal public.

In any case, the city is taking a positive and proactive step to improve its financial situation. It has created a blue ribbon panel* to investigate certain aspects of the city's finances. The bill was sponsored by Alderman Israel, which means that it was well researched and/or based on viable theory. The rest of the city council is always eager to look as if they are part of such excellent research, and they ALWAYS request to be added as co-sponsors to Alderman Israel's legislation. In this particular case, comically, every other alderman plus the mayor are listed as co-sponsors to the bill.

(*I am so tickled by the phrase "blue ribbon panel". It reminds me of a prize pig a state fair. In 1998, I made a New Year's Resolution that one day I would commission a Blue Ribbon Panel to investigate the difference between a sun-roof and a moon-roof.)

The story goes like this. Annapolis is in a unique tax situation--it is home to many state buildings, many public housing projects, and many Naval Academy buildings--none of which are subject to property taxes. The state government (and I think the county government as well), instead pay PILOTs, which are Payments In Lieu Of Taxes. But, nobody has ever crunched numbers to see if the PILOTs offset the value of the lost property taxes, PLUS the value of the services that the city provides these to these locations, such as police, fire, water, sewer, and shoe-shining.

The unfairness of said situation is somewhat widely acknowledged, at least by city officials. The sidewalk tax was an attempt to circumvent this problem, with bills sent to every property owner in the city--even the ones exempt from property taxes.

(Post Intermission: Legislation in general is typically worded as follows. First, the word "whereas" is listed any number of times, followed by various, typically vague, assertions. Later, the phrase "Be It Resolved" is used, and is followed by what would change if this bill were to be adopted. In a perfect world, the 'be it resolved' changes would be at least partially justified by the 'whereas' facts. Example: Whereas dogs do not wear makeup, and whereas one of my friends misguidedly opened a dog cosmetic business, be it resolved that every dog must wear makeup in public so my friend won't go out of business.)

This bill basically says: whereas we don't get as much money as we should, be it resolved that several citizens determine how much money we should be getting, so come budget time we can ask for that much from the institutions that don't pay taxes. At least that's what I hope it's saying.

Wednesday, July 16, 2008

Sidewalk Tax To Be Struck Down On Constitutional Grounds

I heard a comment from someone in the VIP crowd Monday night that the Attorney General was reviewing the sidewalk tax on constitutional grounds. I wasn't going to post about it, but then one of the Aldermen said something out loud about it, which makes it public record, and here we are.

So, Alderman Israel has been in contact with some of his old mates over at the AG's office, and the word is that the infamous sidewalk tax doesn't pass Constitutional muster. I will tag this as a rumor alert, but the word is that the tax has already been struck down.

The constitutional issue in question is the authority of municipal corporations (such as the city of Annapolis) to levy taxes. The charter of the city of Annapolis deals specifically with the taxation of real property. This is for a reason--the Maryland Constitution expressly grants that authority. Section XI-E deals with the taxation powers of municipalities:

No such municipal corporation shall levy any type of tax, license fee, franchise
tax or fee which was not in effect in such municipal corporation on January 1,
1954, unless it shall receive the express authorization of the General Assembly
for such purpose, by a general law which in its terms and its effect applies
alike to all municipal corporations in one or more of the classes provided for
in Section 2 of this Article.

Not only has the general assembly not approved the sidewalk tax, but reportedly they have considered such a matter in the past and have voted it down. Translation: don't pay your sidewalk bill because it's not going to stick.

What's more, is that the city failed to learn from its past. Mayor Hopkins, back in 1995, created a Revenue Authority for the city and asked for an opinion from the Attorney General. In his opinion, the AG addressed the tax/fees issue:

Of course, the revenue authority must operate with Article XI-E and with public
general law. To take but one example, a municipality may not levy any tax
or fee without authorization by the General Assembly in a generally applicable
law. Thus, for example, Attorney General Sachs advised that a municipality
could not create a special taxing district without legislative authorization,
because "a municipality has the power to levy a tax only to the extent granted
by the state."

So whatever they say about the best laid plans of mice and men, add this to the list.

Tuesday, July 15, 2008

Police Request Help With Missing Person

The Annapolis Police Department is seeking the public*s help in locating a Missing Person.
62 year old Barbara Ann Woulff of 207 Georgetown Road has not been in contact with friends or relatives since July 10th, 2008.

A check of her residence on that date revealed that she was not there and that her car was gone as well. According to friends and family, she was depressed and has made statements about harming herself.

She is described as a white female, 62 years old, 5'8" tall, weighing
175 pounds. She wears glasses. She usually wears pants. She drives a
2006 Blue Hyundai with Maryland Bay Tag 57784 C/A

She frequents the Hyattsville, MD area as well as Annapolis. She may be traveling to Florida or Massachusetts.

Anyone with knowledge of Ms. Woulff*s whereabouts is asked to call Annapolis Police at 410-268-4141.

City Council Meeting 7/14/08

Reporting here, from the newly frigid city hall, it’s me. While the air conditioner now works, there is still no wireless internet at city hall, and my efforts to “borrow” an internet signal from a nearby wireless router have all come up dryer than my sense of humor.

The VIP crowd is large, with many luminaries hurrying to make appearances before the city council goes on August break. Smartly, I arrived 34 minutes early to leave plenty of time for myself to obtain a proper seat and a diet coke.


All aldermen are in attendance. During roll call, six say “here”, and two say “present”.


I have never seen anything weirder than what is happening now. A local historian Arthur something-or-other is the first speaker, and he is having a dialogue with Alderman Shropshire in French. I have no idea what they are saying, because it’s in French. I gather that they are talking about something related to France, because they are speaking in French.


A representative from the Key School, a private school located outside of city limits, is speaking before the council requesting that the city issue a $9.7 million bond on the school’s behalf. The city, according to the man speaking, would not be on the hook for repayment of the bond; rather the school would make the bond payments and pay all city fees incurred by the issuance. Such an action would render the bond payments tax-deductible for the school. The justification is that the school has many ties to the city.

Finance director Tim Elliot informs us that this is called conduit debt. He also says that the school comes to the city because it's cheaper—the city merely asks that the school pay the related fees, whereas the county charges an additional fee for the process. Such a fee would of course be appropriate, since the city would be burdened with paperwork and other mundane tasks associated with the tactic.

If the city grants such a request, I will instruct my legal and financial braintrust to immediately move forward with a request for conduit debt on behalf of my company, because tax-deductible principal payments would be fabulous.


Even though this is a legislative meeting, people can speak about whatever they want, if they want. I favor restricting free speech in this matter, because it can be after 9:00 before we get to the legislation, then everyone gets tired, then items get postponed, and pretty soon there is a city council meeting every Monday instead of every other Monday, and Mrs. Politics begins to wonder if “5-4 vote” is my code word for a secret girlfriend.

The mayor hates these people too, and reminds people that there are public hearing meetings. Today many people are here to gripe about the sidewalk tax, and the mayor has hinted several times that there is no vote on the matter today, nor is the public hearing today, plus there is a special work session for this next Monday. But this is sure to fail, and I may need another diet coke.


City roads are maintained by the city. City sidewalks, which border city roads, are currently maintained by private citizens. Am I the only person that finds this odd? Why is having homeowners maintain their own sidewalks less ridiculous than having them maintain their own roads? The city’s mistake, in my view, was to tie their responsibility to this silly $25 fee. Develop a comprehensive sidewalk plan, with enough room for parents to push strollers by trees, figure out how much it costs, and pay for it out of the general fund. If you don’t have enough money, cut some other nonsense and free up some money.


Alderman Finlayson verbally engaged with a citizen! Betters in Vegas received a 50-1 payout for that rarity. The VIP crowd is frantically searching for a teleprompter that she may have read.


People are still testifying. Maybe we need to have 2 public hearings a month. More frustrating is the fact that there is no wireless internet in here. I demand accountability….where is Ray Weaver…….


Ray Weaver just walked in! Amazing. He is kind of far away though….I’ll just send him an email.


The mayor has admitted that the communication of the tax and the implementation of it were flawed. She has thus far stuck to her guns that the public had their fair shot at the bill, and she certainly has not hinted that she favors repeal of the tax.


Voting--at the legislative meeting that started at 7:30--begins.

Alderman Israel moves to postpone CA-01-08, the City Administrator charter amendment, in favor of further deliberation including a possible change to a city manager form of government. Alderman Shropshire jumps on the city manager bandwagon—that will be an interesting vote if/when it comes up because the mayor will oppose it but there are clearly Democrats that support it.


O-59-07: Amending the configuration of harbor lines: PASSES. Vote 6-2 (Cordle, Stankivic, I think. Didn’t hear Paone.)

O-10-08: Banning the sale of phosphorus lawn fertilizers: PASSES (didn’t hear the roll call).

O-12-08: Requiring Fiscal Impact Notes For All Legislation: PASSES. (8-0, Arnett abstained).

O-15-08: fails to receive a 'second'.

R-20-08: fee schedule for lawn fertilizer ordinance: PASSES. (9-0)

R-25-08: Waiving Fees for West Annapolis Octoberfest: PASSES. (9-0)

R-29-08: NEW SISTER CITY IN BRAZIL! PASSES. (6-3..Paone, Cordle, Stankivic). Let me tell you something that is not a joke: Alderman Shropshire just justified this sister city through possible reciprocal benefits including the development of bio-fuels.

R-30-08: Supporting State Financing of Admiral Oaks Rehabilitation: PASSES (6-2..Paone, Stankivic. Finlayson abstains.)

First Reader Passages:

O-20-08: Updating Lease for Chesapeake Marine Tours.

O-21-08: Repeal of Sidewalk Tax: PASSES.

O-22-08: Modifying Residential Parking District.

O-23-08: Requiring non-profit grant recipients to file quarterly reports.

O-24-08: Lease of City Dock For 2008 Kunta Kinte Festival. Note: even though the council has not allowed through ordinance the use of the city dock as a location, it is already set in stone according to the Annapolis 300 web site. Don’t count your chickens!

O-25-08: Limited Additions for Non-Conforming Duplexes.

O-26-08: Requiring non-profits to file BIANNUAL reports. THIS IS THE SAME AS THE BILL JUST PASSED 3 BILLS AGO, EXCEPT TWICE A YEAR INSTEAD OF 4 TIMES A YEAR. Everyone in the room is confused, especially after the mayor just said there is already a law requiring them to report.

R: 32-08: Enhancement of the Chesapeake Children’s Museum

R-33-08: Amending Sidewalk Fees

R-34-08: Sidewalk Improvements and Fees

Friday, July 11, 2008

Drug Bust

I particularly enjoy the pretty wedding photo at the forefront of the seized items:

On July 11tth, 2008 at 12:43 PM, the management of the Forest Hills
Apartments reported that an unknown foul odor had been noticed for the past few
days coming from somewhere in 12 Melrob Court. After checking all common areas,
management gave prior notice to all residents that an individual apartment check
would be made in attempts to find the source of the odor on July 11th. When they
came to 12 Melrob Court, Apartment # 1, there was no response at the door.

It was evident that someone was inside. Due to concerns for the safety of
all, police were called. Officers could not get a response at the door either.
The officers made entry to the apartment and found two people were locked behind
an inner door. After a brief hesitation, the subjects heeded orders to come out.
During the course of checking the apartment for obvious signs of safety issues,
a large amount of marijuana and marijuana paraphernalia was seen in the open.
The premises were secured and a search warrant was obtained. Upon serving the
search warrant, a large amount of marijuana and paraphernalia were seized. Some
of it was freshly cultivated. It was also found that a growing room for the
purposes of raising, cultivating, and processing marijuana had been set up in a
spare bedroom of the apartment. The drugs and other seized articles are still in
the process of being quantified and catalogued at this time. The two subjects
were arrested. Resident Jonathan David Stievert, 25 is being charged with
Possession/Manufacturing of Illegal Drugs and other related offenses. Jennifer
Lynn Wilkins,21, of Waterview Drive in Edgewater is being charged with Drug
Possession. She is a former resident of the apartment, who had moved out a few
months ago and was apparently there visiting today.

Some Political Facts About Oil

I tried to add this onto the other post, but it was giving me some formatting nightmares so I decided to make a new post. This was forwarded to me and has some political (rather than economic) facts about oil that are useful for a more complete understanding:


Here we are with a new week and another round of posturing, politicking, and punditry regarding the price of petroleum. As happens when folks do a lot of talking, very little is said.

I hang around educated and talented people. Each individual has at least one university degree. Most read, watch, or listen to more than one news source every day. They span generations with ages ranging from the 20s to the 70s.

Yet, not a single person among them knew the answers to some basic questions pertinent to the growing discourse regarding the rising price of oil. A few knew some of the answers, and some knew a few of the answers. To be fair, I had to look up the answers, or else I would have been among the shoulder shruggers.

For instance, how big is a barrel? Answer: 42 gallons. So, now you know that when the price for a barrel of crude oil hits $140, that's the same as $3.33 a gallon.

What nation supplies the most crude oil and petroleum products to the United States? Answer: The United States. According to the Energy Information Agency (, our country supplied 41 percent of the oil we consumed in March of this year.

What nation, other than the U.S., supplies the most crude oil and petroleum products to our country? Answer: Canada. Our northern neighbor accounts for 12 percent of our nation's oil and 20 percent of all the oil we import. The rest of the top five include Saudi Arabia (7 percent and 13 percent); Venezuela (6 percent and 11 percent); Nigeria (6 percent and 10 percent); and Mexico (5 percent and 8 percent).

How much oil do we import from Persian Gulf countries? I'm glad you asked. Persian Gulf countries accounted for only 16 percent of our foreign oil imports each year from 2005 to 2007. In fact, our Persian Gulf imports declined most of this decade, from a 15-year high of a little more than 1 billion barrels in 2001 to 791.9 million barrels in 2007.

What's the difference between crude oil and petroleum products? Answer: Crude oil provides, among other products, gasoline, diesel and jet fuels, heating oil, liquefied petroleum gas, lubricants, asphalt, plastics, synthetic fibers, detergents, fertilizers, ink, crayons, bubble gum, deodorant, tires, and heart valves.

One barrel of crude oil (which is 42 gallons, remember?), yields about 19.6 gallons of gasoline. The other 22.4 gallons go into the products just mentioned.

How much of the cost of oil goes into the price of gasoline. Answer: A bunch. We consumed about 390 million gallons of gas a day last year in our cars, trucks, recreational vehicles, boats, farm implements, and construction and landscaping equipment. Back when crude was $68 a barrel (that was just last year), it accounted for about 58 percent of the price of a gallon of gasoline. The rest of the price came from refining costs (17 percent), federal and state taxes (15 percent), and distribution and marketing (10 percent).

By the way, the price of crude accounts for about 77 percent of the cost of gas at $4 a gallon.
Here's a little something you may not have considered. What products that you buy on a regular basis are sold with tax included? Answer: Gasoline. For everything else, you add the tax at checkout.

The folks in California pay 63.9 cents a gallon in state and federal fuel taxes, the most in the nation. That's just the base, though. Motorists there also pay an additional 6-percent state sales tax, with some paying another 1.25-percent county sales tax plus applicable local sales taxes. Same in Illinois, where Chicago motorists pay 12.75 cents per gallon on top of the 57.9 cents per gallon in state and federal taxes. Some Illinois motorists also pay a 6.25-percent sales tax.

Politicians, pundits, and other TV talking heads don't like to provide these answers, because facts get in the way of positions that pander to the mob. We don't point fingers at Canada, because it's de rigueur to paint the Saudis with the broad brush of blame. Folks float the idea of a moratorium on state and federal gasoline taxes without explaining its minimal impact on gas prices, or without mentioning the $3 sales tax some motorists pay on top of a $50 fill up.

Policymakers don't explain that oil trades in the dollar, which is weak vis-Ã -vis the Euro, because that would require solutions for strengthening the greenback.

And, it's easier for simple minds to convince simpler minds to impose windfall-profit taxes on pension funds and owners of Individual Retirement Accounts who invest in oil companies than to take on credit card issuers charging double- and triple-digit interest rates to the millions of people using plastic to pay for food and fuel. Talk about irony.

And, we sure wouldn't want to impose a windfall-profit tax on someone who goes from making $56,000 a year as, say, an Illinois legislator, to $165,000 a year as, say, a U.S. senator, an increase of nearly 200 percent (not counting book deals or real-estate related loans).

Mundus vult decipi (and as my magician friends add: decipiatur)

Published originally at


Wednesday, July 9, 2008

McFall Campaign Response To Weikel

This is from Dennis Conti, the campaign manager:
Although Trudy McFall's campaign will not get into endless debates with
Chuck Weikel, we will answer his most recent remarks.

Regarding Trudy’s personal contributions, she felt strongly as a matter
of principal that if she was asking her long time friends and professional
colleagues to help her, she should demonstrate her own commitment.
After reimbursements, therefore, she has contributed $2,538 to her campaign,
indeed a few dollars more than her largest contributor. Other big contributors
mentioned in Chuck’s memo do include Trudy’s Mom, brother and best friend and
business partner, Nancy Rase, which makes Trudy a very lucky person since they
are all persons of modest means.

Of the 113 donations Trudy received, about 1/3 are from the Annapolis
area – they are long-time friends, volunteers, and business colleagues. With
respect to the Annapolis area, this initial fundraising phase did not intend to
reach beyond these people. When Trudy reaches out beyond her
local long-time friends in future fundraising, we expect she will have a
strong Annapolis grassroots’ response. As to the other donors who are out of
town, they do represent Trudy’s longtime friends and colleagues from her field,
affordable housing. Remember that Trudy has spent 40 years at the Federal,
state, and local level as an affordable housing expert. This has given her many
close colleagues around the country. There contributions are a demonstration of
their respect and affection for Trudy.

Tuesday, July 8, 2008

Chuck Weikel Positions To Challenge Trudy McFall

Earlier today, Trudy McFall's campaign manager sent out a press release announcing the "July surprise" that we were promised, in the form of a big fundraising head start for Trudy. The point of such an exercise is to impress potential future donors--most politically involved people try to support the winner (regardless of ideals or policies), and interpret current cash as a sign of future success. I can't reproduce the press release here because Blogger doesn't support the format that it's in, but the email preface says enough:

Thought you all would be interested in the latest City campaign filings and
results. Attached is a press release announcing the substantial lead in fund
raising that Trudy McFall demonstrated in the recent July 1 City-wide campaign
filings. Also attached is a spreadsheet showing all of the other candidate

As indicated in the release, Trudy was not only the leading
overall fundraiser (raising over $56,000) since her committee was formed in
August, but almost more significantly, had a substantial lead in net funds,
after expenses and obligations. This by the way is the last filing until July of
next year.

Let me know if you have any questions. Thanks.
Dennis Conti
Committee Chairman, Friends of Trudy McFall
Chuck Weikel, another purported mayoral candidate, quickly responded in an email blast:


What isn't in this email:

1 - Trudy's number one
contributer is... Trudy. And her business
partner is a top contributer also:

Trudy McFall $1,500
Trudy McFall $1,200
Trudy McFall $2,000

Nancy Rase (business partner) $1,250
Nancy Rase (business partner) $500

2 - Why all the contributions that, on the surface, have no relation
to Annapolis? Take a look at the list of contributions $1,000 and over:

Annapolis Towne Center, Greenbelt MD $2,500
Rosemary Miller, Bloomington IN $2,500
Michael Miller, Cincinnati OH $2,500
James Humphrey, Annapolis, MD $2,500
Dworbell, Ind, Washington DC $2,500
Eugene Ford, Silver Spring, MD $2,500
John Manning, Boston, MA $1,000
Hamel Builders, Elkridge, MD $2,000
H&G Properities, Elkridge, MD $2,000
David Reznik, Potomac, MD $2,500
Gallagher, Evans & Jones LLP, Balto MD $1,000
Hankins Builders, Marriotsville, MD $1,500
Habitat America, LLC Annapolis, MD $1,000 (affiliated business?)
Mark Joseph, Baltimore, MD $2,500
M-B of Annapolis $1,000
Unit Construction LLC $1,500
Osprey Property LLC $1,000

Only one individual who is a
resident of Annapolis. Boston &
Baltimore? Annapolis Towne Center?

You can see it all on line on the city's website. Reports are all
posted there now.

Weikel is an interesting case. He claims that he is not running for mayor, an assertion that would not be contradicted by the sub-$1000 balance in his city campaign account. Weikel, however, also has a county committee which took in some $14,000 in contributions last year. The devil, as they say, is in the details. Weikel's city committee was opened in November--why would he need to open a city committee if he didn't plan on running for office? Is he planning to transfer the balance of the county account into the city account? Is that even legal? It is already done?!

I have placed the odds of Chuck's candidacy at 1-55 (nearly a guarantee for you non-gamblers), and I stick to that. He has been all over the place, and for better or for worse, has been cultivating the persona of the heir apparent to the Mayor. He is a known political operative with ambitions, and the only reason why he would care so much about Trudy McFall is because she poses a big threat to him in the primary--he could have made the same criticism about nearly everyone else with money to spend. Rest assured that at this time next year, they will both have a lot of money, and will be spending it to combat each other.

Zina Pierre

So, someone asked in my "Who will run for mayor" post if Zina Pierre was going to run, and at the time I didn't know who she was. I still don't, but apparently I should.

Zina has been raising money, and has been getting involved--at least in Democrat circles. Her campaign finance report shows her as having raised over $26,000 since September--a substantial amount for this point in time--and the Democrat Central Committee report shows her as buying tickets to a couple of events. However, her disbursements and obligations are amazingly high, and she actually owes like $5000 more than she actually has.

So who is she? The short answer is an Annapolis native who has been active in politics, including at the federal level, for quite some time. She seems to be a Democrat super-lobbyist and career political operative. For the long answer, you can look HERE, to the extent that it's true.

Let's talk about some of the more interesting politics. A look at her report shows a lot of large donations, amounts large enough to disqualify her from eligibility in an aldermanic race, which suggests a Democrat candidacy for mayor.

There is a residency concern. In previous campaign reports, her address has been identified as 1915 WOODSHADE CT, Mitchellville MD. She now shows an address within the city (at 1901 West); however, the charter stipulates that a mayor must show voter registration in the city for 2 years prior to the date of the general election. There are other discrepancies. Notably, Ms. Pierre's campaign committee owes her $5000 for consulting fees. It is ok to pay yourself back a loan, but it's not ok to be a paid employee of your own campaign.
(EDIT: A commenter pointed out that the $5000 probably IS to pay herself back for a loan, which is within the law.)

Today's rumor mill involves the office sought. The amount of money would say Mayor, but hold the phone. Zina Pierre lives in Ward 3, home of the soon-to-retire* Alderman Hoyle. Rumor has it that the Democrats are trying to convince Zina to run for Alderman to hold that seat. The experience is there, and the money probably will be there, plus the residency requirement for an alderman is more lenient.

(*if you believe the hype)

At least now we know something.

Campaign Finance Reports

HERE is the link to the city web page which lists all finance reports recently filed by the July 1 deadline. Any organization that raised or spent money to spend for political purposes was required to file. Here are the individual links:

Annapolis Democratic Central Committee

Annapolis Republican Central Committee

Citizens for Chuck Weikel (D)

Classie G. Hoyle (D, Ward 3)

David H. Cordle (R, Ward 5)

Debbie McKerrow (D)

Ellen Moyer (D)

Fox for Real Change (Chris Fox, running for mayor) (I)

Friends of Fox (Mike Fox, former alderman) (R)

Friends of Frank Bradley (R)

Friends of Fred Paone (R, Ward 2)

Friends of Scott Bowling (R)

Friends of Trudy McFall (D)

Friends of Zina Pierre (D)

Jennings for Annapolis (G)

Julie Stankivic (R)

Richard Israel (D)

Ross Arnett III (D)

Sheila M. Finlayson (D)

Shropshire Letter (D)

I don't quite have time to go through all of them, but the issues that I am aware of at this time are as follows:

-Zina Pierre is definitely running for mayor because she has accepted contributions that are above the level allowed for aldermanic campaigns. Zina herself did not sign her campaign report.

-Trudy McFall has like $39,000 in unallocated cash, which is a good start. Her campaign chairman, Dennis Conti, does not live in the city and therefore is prohibited by city code from being the chairman. I ran into this situation, and I had to label myself the 'senior advisor' to the campaign. Not a huge deal, but someone looking to get in a cheap shot could raise the issue in the future.

-Sam Shropshire is unbelievable. You'll notice that the link is to the "Shropshire Letter", rather than his campaign report. Apparently his house flooded, prohibiting access to the finance records. Even so, one would expect either (1) the treasurer to have the records, (2) the records to be in electronic form on Alderman Sam's computer, or (3) someone go to the bank and at least record the cash balance in the account so the appearance of at least trying to make the report would be made! This is not the first election shadiness from Alderman Sam. Although I was not paying attention when this happened, I think Alderman Sam actually changed his name to avoid particular election law. Weird.

Friday, July 4, 2008

The Economics of Oil

My normal method of blogging involves typing a secret password into the Republican National Committee Mainframe, and plagiarizing whatever bit of propaganda that has already been developed for my particular issue. For this post, I decided to research facts on my own, which took like 3 weeks of hard work, confirming my worst suspicions. So, I hope you take the time to read this post, because I took the time to write it!

With consumers facing record prices at the pump, there is plenty of anger to be directed and misdirected at various sources. After doing some research, I am now marginally more prepared than I otherwise would have been to present you with the facts about the oil business, and which factors weigh the most on the price of gas and heating oil.

Ownership Of Oil Reserves

You all know the equation: big oil = Exxon Mobil = Beelzebub. But in the scheme of things, Exxon is small oil. The truly big oil are the nationally owned companies of many oil rich nations. (Note to readers: state ownership = communism). In fact, state-owned oil companies control 90% of the world's oil. Here is the list of the 20 largest oil companies by reserves (not production):

1. Saudi Arabian Oil Company**

2. National Iranian Oil Company**

3. Qatar Petroleum**

4. Abu Dabhi National Oil Company** (United Arab Emirates)

5. Iraq National Oil Company**

6. Gazprom (Russia)

7. Kuwait Petroleum Company**

8. PDVSA** (Venezuela)

9. Nigerian National Petroleum Corporation**

10. National Oil Corporation** (Libya)

11. Sonatrach** (Algeria)

12. Rosneft (Russia)

13. Petronas (Malaysia)

14. Exxon Mobil* (USA)

15. Lukoil* (Russia)

16. Pemex (Mexico)

17. Petrochina* (China)

18. BP* (England)

19. Chevron* (USA)

20. Petrobras (Brazil)

(*Public, ** OPEC)

The Supply Chain

Crude oil is pumped out of the ground, then shipped via tanker or pipeline. The world's largest consumers (North America, Europe, Asia) all import oil, and all other regions export it. The general rule is that it is cheapest to refine oil when it is close to its final source; therefore, oil is almost always shipped in the crudest form possible, and the biggest consumers are also the biggest refiners.

The only US port that can accommodate oil supertankers is in Louisiana, so often the supertankers divide their cargo onto smaller tankers that can go directly into any port, where it then goes to refineries. The Gulf region, specifically Texas and Louisiana, refine more oil than anywhere else in the country. No new refineries have been built since 1976, but refineries have seen significant technological advances. Most demand for refined oil is in the form of light products such as gasoline (think "light sweet crude"). Refineries in the US have focused on something called "downstream processing", which allows refineries to take crude oil and produce up to 60% gasoline, as opposed to the 20% produced by more rudimentary refineries. Many refineries without downstream capabilities were shut down, and the utilization of the remaining refineries remained high.

We use oil for a lot of things: gasoline, propane, food wax, motor oil, asphalt, petrochemicals, and more. Downstream refining allows refineries to quickly adapt to the particular demand profile of final products, and those products are sold to retailers.

The gasoline marketers are a particularly interesting case. Most gas stations that we are familiar with are supermajor brands, whereas a 'supermajor' or 'major' is an oil company that has reserves, refineries, and retail stations. There are 6 supermajors: Exxon, Shell, BP, Chevron, ConocoPhillips, and Total S.A. But all is not as it seems....over 95% of retail stations are independently owned--not owned by the supermajors. The retail stations may or may not be part of a regional distributor, but what they do have is a branding agreement with their respective supermajor to sell only that company's gas.

This brings us to the next item: how gas stations get their gas. When refined gasoline comes to port, it is up for sale. Distributors and branded stations may have some power to set prices--but not much. They have to buy gas from their supermajor's refinery, and cannot shop for the best price. Conversely, the generic gas stations are free to shop the best price, and can typically have some effect on the price they pay, resulting in lower prices at the pump. Consumers decide if they want the lowest price, or the consistency of a proprietary gas blend.


OPEC countries control about 40% of the world's oil production, with everyone else accounting for the rest. Mining oil supply consists of several steps, including finding the oil, drilling a test well to see if the total find is economically viable, then setting up a pumping operation.

As noted above, most of the world's oil supply is located in the Middle East.

Oil supply has typically fallen victim to a low success rate. Exploration of fields where oil has not already been found historically yields only a 20% chance for finding a supply that is economically viable to pump. Much like in refining, technology improvements have increased this success rate to as high as 50%--still a risky proposition considering the costs involved with finding oil.

The most important feature of the supply for oil is that it is not perfectly competitive. Markets work best when they are perfectly competitive: involving numerous or infinite participants, no restrictions on trade, and no barriers to entry. The supply market for oil has none of those features; rather, it is characterized by high fixed costs and relatively few participants (companies).

Let's consider why. If you want to start a handyman business, all you have to do is buy a hammer and convince your mother that your father hung a painting crooked, and you have your first job. If you want to start a company to pump oil, you need infinity government permits and like a hundred billion dollars.

A market in which suppliers are relatively few, and each relatively large, is called an oligopoly, and the oil market is indeed oligopolistic. And the think about oligopolies is, they usually band together to form a cartel. OPEC is the biggest cartel the world has ever known, and they can basically exert their will over the supply market. In a competitive market, individual suppliers have no control over the price they can charge. If you charge $30 per hour to be a handyman, and there are 10 other guys on your street who do the same job as you for $25 an hour, you will be out of work--you have no choice but to charge the market rate. But for OPEC, they control such a large share of the supply that they can control the price through their decision of how much oil to bring to market. Since there are not enough other suppliers with excess capacity to steal business from OPEC, refiners must buy OPEC oil and bid the price up or down based on scarcity.

It is important to note the price elasticity of oil supply, which means how sensitive oil supply is to price. The more sensitive supply is to price, the more elastic supply is said to be. The more the price of a good goes up, the more of that good suppliers want to produce, as would be expected. If everyone in the country wanted handyman services and the going rate for handymen jumped to $500 an hour, you would cancel your engagements, dump your girlfriend, and try and perform your handyman duties all day long--the supply for handyman services is relatively elastic.

Oil suppliers, on the other hand, cannot respond so quickly. Just because the price of a barrel of crude goes from $100 to $130 overnight doesn't necessarily mean that oil suppliers can capitalize on the higher price by producing more. This is because oil exploration is a lengthy process, and because there are no close substitutes to oil production--oil producers cannot change their oil rigs to produce natural gas if the price of oil drops and gas rises. An elasticity of 0 means total dependence on price, and an elasticity of 1 means total independence of price--oil supply elasticity has been estimated at .1, which is relatively inelastic.

So, how much supply do we still have? Well, nobody really knows because there is still oil that we don't know about plus OPEC countries are shady with their reports of how much they already have. As recently as 2 days ago, The Economist reports that the world has enough oil to accommodate current consumption levels for 42 years. Of note, it also states this is slightly more than last year, implying that we are currently discovering oil slightly faster than we are using it.

The USA has proven reserves to supply ourselves with oil for 3 years given our current usage and without dependence on foreign oil.

Oil supply is a shaky thing. There is always a risk of a supply shock, which refers to an immediate and significant drop in production. I must say that there are reasons to be pessimistic about future supply. First and foremost, oil is not a renewable resource and will eventually run out if we keep using it. Short-term supply is maxed out. Some people think that Saudi Arabia could pump a couple more million barrels a day but that's about it. Long-term supply doesn't look much better. Politicians in the United States are gallivanting around failing to pump or build refineries. Politicians in China need all the oil they make (for the first time), and Russia's oil industry is suffering at a time when demand is peaking.


First things first: consumption = demand. Now then, industrialized countries consume much more oil than less industrialized companies, and the US and Canada consume the most. Canada and the US consume 3 gallons of oil per person per day, whereas the rest of the developed world averages about 1.4, the undeveloped world .2. The difference is attributed to transportation sectors, where in the US and Canada private vehicles are heavily utilized to travel relatively long distances.

Gasoline is by far the most important refined oil product, accounting for 45% of total oil consumption. But there are certainly other products, and other uses besides oil for transportation.

The most important demand issue is probably the trends in world demand. The developed countries are feeling the sting of higher prices, and demand for oil in the OECD countries is predicted to decline by 240,000 barrels in 2008. Developing countries, however, are still seeing growth in oil demand. China and its 400 ka-billion people have seen average annual growth in oil demand of 9% since 1990, and predictions are for another 5.5% increase this year! China is consuming about 7.4 million barrels per day of oil.

Now back to Russia...despite the misfortune of its oil producing industries, many of its other industries are starting to hit their stride. Russian oil demand in the 1990's fell off as the economy struggled to reorganize after the fall of communism. As luck would have it, one of the industries to recover in this decade is the auto industry, and as we know, autos need gas. Russian automobile sales have tripled in the past 5 years, and forecasts predict that Russia will account for more auto sales than any other European country by 2010.

(Column Intermission: If any of you are still reading this, I'm quite sure you are tired of words. I just found a great power point presentation that has a lot of this info in short blurbs, with pretty colors. So look at it if you want!)

The United States is the biggest consumer of oil in the world, using nearly 3 times as much total oil as the next largest user (China). The US consumes between 20 and 21 million barrels per day of oil, which is actually at or below what is has been this decade.

For economists and other general nerds, the price elasticity of demand is a fascinating study. By how much do gas prices have to increase for people to car pool? By how much do they have to rise before people cancel their vacations? Before they move closer to work? Once the current oil volatility settles, maybe in a couple of years, we will have a fabulously accurate answer to that question. As for now, I found an oil demand elasticity estimate of .1, meaning that gas prices would have to rise by 10% to induce a 1% reduction in usage. Compared to other goods this is particularly extreme; in other words, we are more addicted to oil than most other goods.

How the Market Works

Markets determine how much of a good is sold, and at what price, by the intersection of supply and demand. Supply curves are upward sloping, meaning that as a price of a good rises, producers of the good want to sell more of it. Demand curves are downward sloping, meaning that as the price of a good increases, people want less of it.

The demand side is easy. Individual people have no affect on the price of oil; they simply decide how much oil they want to use given the market price. The supply side is where all the magic happens. Oil companies have to find the oil, which is a pain in the ass. They pump the easiest stuff first, then move on. It is critical to understand this investment decision. If all of the Great Lakes were made of oil instead of water, oil companies would be willing to sell gas really cheap because all they would need is a bucket to scoop it out--their fixed cost would be relatively low.

Sadly, the Great Lakes oil would be quickly used because it would be so cheap. The oil companies would then have to pump oil from deeper into the ground. They would need seismographs to find the oil, drills to access the oil, and numerous environmental permits. Their fixed cost would increase dramatically, and this cost would be incorporated into a gallon of gas. As oil becomes more scarce, it becomes more expensive to pump out of the ground, causing the supply curve to shift upward and raising the general price of oil.

Oil exploration does not continue forever. Oil companies know how much it costs to search for the next oil site, and will not undertake drilling or exploration if the market price of oil will not produce a positive return on investment. That point is is the single most important policy implication of oil economics. If the price of oil is high, more exploration investments will be profitable, leading to increased oil supply, and reduced oil prices. Consider this excerpt from The Economist:

No one in the Saudi oil ministry has forgotten what happened after the oil shock
in the 1970s. The Arab boycott called in 1973 to protest against Western backing
for Israel tripled oil prices. But it also prompted oil exploration in tricky
places such as the North Sea and conservation measures that reduced demand. The
result was a long-term slump in crude prices and a drop in the Saudis' market

Markets work, and this is a beautiful thing. The simple supply and demand interaction outlines by Adam Smith in 1776 can predict almost any outcome--maybe not perfectly, but darn close. Free markets create incentives, and incentives drive behavior. If oil costs too much, oil companies will explore more, and the price will go down. Then, people will demand less of the oil at the new higher price, and the price will go down. So prices go down! Suppliers then cut back while people consume more, and the process reverses itself. The market always gravitates towards its equilibrium.

Market Failure: The Government

The 'how the market works section' above is one of the shortest sections of this post, because markets are pretty simple.....except when the government screws them up. The first government market distortion is environmental permits. For places where drilling is allowed, this is relatively small potatoes--maybe several months of waiting and a couple hundred thousand dollars; I really have no idea, but my guess is that it doesn't distort the investment decision. But consider the extreme, where exploration is prohibited by the government for environmental or other reasons (think ANWAR). In this case, the oil companies cannot move along their natural progression of supply sources, causing a dramatic upward shift in the supply curve and artificially high prices.

Government market distortion #2: TAXES! The tax concept is easy to illustrate using a business decision that most of us have to make at some point: buying a house. A common bit of information listed for potential buyers is the total annual taxes. Let's say a million dollar house in Annapolis incurs a $15,000 per year tax bill. Fine. If a million dollar house in a less desirable area cost only $14,999 in taxes each year, would you buy that house? Of course not. But what if the less desirable house had a tax bill of only $1000 per year? That's a big difference--maybe enough to change your investment decision. As noted above, the oil companies calculate the profit they expect to make from pumping through comparison of the cost of that pumping operation and the market price of refined oil. Taxes simply add to the cost of production. The higher that taxes are, the lower the return on investment, the less oil that is explored, the lower the supply, the higher the price.

Government market distortion #3: price ceilings. Taxes, at least, are a traditional and therefore relatively predictable circumstance. When the government regulates such a specific condition as how much a business can charge for its goods and services, that market will inevitably have a mismatched supply and demand. Supply curves are upward sloping and demand curves are downward sloping; the market price and quantity produced are determined by their intersection:

Now lets take a look at what happens in the case of price ceilings:

Based on the above graph, the free market price would be 600 and the quantity produced would be 5 (I am just reading the numbers on the axes for simplicity). But in this market, the government has mandated a price of 400! So, the quantity demanded equals 7, but the quantity supplied eqauls 3--creating an oil shortage of 4. Price ceilings create supply shortages. China is the example that we can point to in the oil market.

Who Determines Price and The Role of Wall Street Speculators

Supply and demand, even when corrupted by market imperfections, always determine price. If you are ever in a market where the government or some panel of "experts" sets the price, run. Far away. The price of oil is high because world demand is outpacing supply, largely due to political reasons. Demand growth has been unexpected, and there is no excess supply capacity to lower prices in the short run.

Regarding said market (supply) imperfections, we now have to consider them. In a competitive market, producers are numerous and any given producer cannot affect the price of the good being sold. In the oil business, OPEC is a cartel and can control the price of crude by limiting or expanding short-run supply. Note: Exxon, Shell, or any other individual "big oil" company cannot affect the price of oil. They probably couldn't even affect the price if they colluded, and I would hate to see the governmental regulator-types the day after they learned of big-oil collusion. Big oil are price takers, and if you don't believe me you can believe the IMF.

Politics and stupidity also affect the price. Domestically, there has not been a new refinery built in my lifetime, impeding long-term supply growth. OPEC has similarly neglected its infrastructure, causing the same result. We are currently seeing the fruition of this recipe for disaster.

Suppliers as a whole can only move along their supply curve--meaning adjust their level of production based on price--if they have mobility in their production both downwards AND upwards. If total production capacity is at the level of demand, an increase in demand causes a supply shortage and the price starts to move upward. It's been a wee bit since since I stayed current with such things, but I learned the sustainable estimate of industrial capacity to be 82%--meaning that if industrial production is more than 82% of its maximum potential, there tend to be inflationary pressures that push the price of the good upward. Oil production is nearer to 100%, and indeed the price is going up.

There are some who play the blame game with financials, professing the evils to various degrees of either corporate greed and $20 million CEO bonuses, or speculators on Wall Street. The Petroleum Marketers Association of America is certainly a loud voice in this room, fulfilling their charge to support gas station owners. The truth is, neither of these 'evils' affects the market fundamentals enough to have even the smallest effect on oil prices. Let's talk speculators first. They deal in future contracts, which essentially means that they bet on the future price of oil deliveries. The first crucial thing to remember is that each future contract has 2 parties: the buyer and the seller. Each party wants to make money, so one side is betting that the price will go up and the other that the price will go down. If they are wrong too often, they will alter the prices they are willing to agree to. The other thing about futures is that they are contracts for actual physical deliveries of oil in the future. But, traders have no interest in receiving the oil, so they sell their futures before they come to maturity. If the supply and demand conditions at that time dictate a different spot price than the price of the future, the trader could make or lose a lot of money--but the price of oil at that time is still dictated by the market fundamentals.

The CEO compensation thing is even more of a joke. Last year, Exxon's CEO got a bounus of $20 million. (Note: Exxon = Exxon Mobil). I am not going to compare that to sales--not even to profit. In the 4th quarter of last year, Exxon spent $6.2 billion on oil exploration. This means that the CEO's bonus was three one-thousandths of 1 percent of the money they spent on oil exploration IN THE FOURTH QUARTER! The scale of Exxon's operations is beyond comprehension, which is why people have trouble accepting the scale of the pay. Let me assure you of 2 things: #1: if their board of directors thought they could hire a CEO that would make them more money for less pay, they would find that person, and #2: giving $20 million to a CEO has absolutely no effect on oil exploration investment decisions, therefore no effect on supply, therefore no effect on the prices you pay at the pump. People got really mad when Exxon gave their old CEO a $400 million retirement package. Consider this: most of that money was in stock, and Exxon's stock valuation is $468 billion. So, in return for making Exxon the largest public company in the world and steering the ship while the stock price went up 500%, the Exxon board gave that guy nine ten-thousandths of 1 percent of outstanding stock. Give me a break. They can do what they want--it's their money and it doesn't affect our money.

Energy Policy and The "Long-Term" Argument

So, what energy policy will lower the price we are paying for gas? This question is undoubetedly why you are still reading this post. Our government cannot control demand to any effecient extent. They cannot control supply that is owned by soverign nations. Individual people can push oil prices down by figuring out ways to consume less, and the government can affect prices by allowing supply capabilities to increase. It's as simple as that.

Imposing a "windfall profits" tax on oil company profits is an example of what the government should NOT do. Whether it's a regular tax, a 'windfall profits' tax, a fee, a cost of getting a license, or any other name for an action when the government takes money from a business--the result is always the same. The supply curve shifts upward because the producer cost structure goes up, and prices are higher for us.

I don't think I will be so presumptuous as to suggest I have a perfect solution. But, I don't think the government does either. In the general sense, I think government should lift restrictions and let the energy companies figure out where drilling, or other energy sources will be viable.

The reason why I think this is the proper attitude is that nobody has been able to figure out a good solution yet. Let's talk about the demand side solution. There is little argument, if any, that individuals reducing their own energy consumption cannot be bad. However, any government mandates to control such behavior is an overreach--the benefit does not justify the reduction in liberty.

As for the supply side solution, it's even more confusing. Let's say we mandate battery powered cars--how would we equip the power grid to handle the increase in electricity demand to recharge 100 million batteries every day? Natural gas power plants? Coal? Nuclear? As for ethanol, increased demand has been linked to rising corn prices, and plowing pasture land to plant corn for ethanol releases a negative carbon footprint on the atmosphere!

Some make the argument that energy companies are cannot be trusted to think of long-term solutions because the demands of public stock ownership and of capitalism in general create pressure to make short-term profits. That hazard is certainly possible, but rest assured that businesses would invest in new technologies if they were viable, and the government is not helping that potential return on investment. More importantly, politicians are even less likely to favor long-term solutions because they have to be re-elected every 2, 4, or 6 years!

Petroleoum economics is the same as any other economics--you just have to understand supply and demand. It is fair to say that increasing demand, constrained supply, and fear of supply shock are all pushing up crude prices. Sadly, the oil market is a study in political economy rather than pure economics; 93% of oil reserves are owned by soverign nations. While nations can generally be considered profit maximizers in the oil market, there are politics that undoubtedly determine allocation of the precious resource.

The market will eventually reach the correct prices and resource allocations. If there are high oil profits, companies will undertake more exploration projects, supply will increase, and the oil price will drop. If supply is depleted, companies will work to develop alternatives to meet the energy demand. These companies are expert in such matters, and the government is not. Furthermore, the government cannot do anything to speed a move to market equilibrium: taxes on oil profits discourage exploration, and subsidies for finding more oil delay the development of other technologies. However disappointing or angering some might consider my conclusion, it is the same as it usually is: the government should stay out of the way.

Let me end with the someone else's words, and a rather elegant summation of the future of energy:

The last time such alternatives were widely discussed was during the early
1970s. Then, too, a spike in the price of oil coincided with a fear that natural
limits to supply were close. The newspapers were full of articles on solar
power, fusion and converting the economy to run on fuel cells and hydrogen.

Of course, there was no geological shortage of oil, just a politically manipulated one. Nor is there a geological shortage this time round. But that does not matter, for there are two differences between then and now. The first is that this price rise is
driven by demand. More energy is needed all round. That gives alternatives a
real opening.

As these alternatives start to roll out in earnest, their rise, optimists hope, will become inexorable. Economies of scale will develop and armies of engineers will tweak them to make them better and cheaper still.

Competition should do the rest—for the fledgling firms of the
alternative-energy industry are in competition with each other as much as they
are with the incumbent fossil-fuel companies. Let a hundred flowers bloom. When
they have, China, too, may find some it likes the look of. Therein lies the best
hope for the energy business, and the planet.

Wednesday, July 2, 2008

Sidewalk Liability

Maybe I have a lot to learn about sidewalks, but it strikes me that maintaining sidewalks should be the government's responsibility. In response to citizen outrage, most of the Aldermen are holding public-meeting-type gatherings for the dual purposes of discussing the issue and eating cookies. One of this blog's operatives at one such meeting obtained the fiscal note that accompanied the bill, and I find it appropriate to reproduce the text:
The fiscal impact this legislation produces is an estimated
$510,000 for FY 2008 and has already been provided in the Adopted Budget.
The fees have been set at $25 residential and $150 non-residential annually along with a $10 inspection fee under section 14.04.080/090.

The city has roughly 125 miles of sidewalk or 2.64 million sq. feet.
It is estimated that 25% is brick or 660,000 sq. feet and the balance of 1.98
million sq. feet is concrete. Repair and replacement cost is $12 per sq.
foot for brick and $5 per sq. foot for concrete. Under this legislation
the city is taking responsibility for sidewalks with an estimated replacement
value of $17,820,000.

This is certainly an interesting issue. Here are the main components of citizen response to this issue as I see it:

-some citizens are angry because they have to pay for sidewalks when there aren't any in front of their house

-some citizens are wary that the city is taking on an additional $18 million in construction liability

-some citizens are concerned that the cash we be used for purposes other than fixing sidewalks

-some citizens believe that sidewalks are a priority at any expense

Here is my view. Sidewalks are important, and they should be taken care of by the government. Take downtown--nobody would argue that people need the sidewalks to patronize the stores. It does not make sense to have the stores themselves maintain their own sidewalks, because some might be red brick, some white brick, some cement, some dirt--who knows. It would be ridiculous. Sidewalks promote non-motorized-vehicle transportation and make such pedestrian travel safer.

Even so, the manner in which this issue was handled probably still deserves criticism. As is so often the case, the city seems to operate in a bubble that considers only the face of the issue at hand and fails to consider neither the long-term consequences nor the ambient economic situation. We all know that 2 budgets are tight right now: the city's, and also everyone's. Heck, I had to cancel the monthly replacement of my solid gold toilet seats just so I could afford my monthly massages! Usually, the financial well-beings of the city and its taxpayers have an inverse relationship. Incredibly, this bill actually places an economic strain on both the taxpayer AND the city at the same time.

The issue is the liability. Before, citizens had to replace their own sidewalks but were not taxed extra for this. A sidewalk repair can cost thousands of dollars, yet the city is willing to assume that responsibility for the mere charge of $25 per person. So, people are pissed to pay an extra $25 (even though they may be saving thousands), and taxpayers are pissed to have to pay the thousands. Distinction: under the old situation, the city could determine how strict it was going to be when making citizens fix broken sidewalks, whereas now the city must fix sidewalks if the citizens place an order.

Ultimately, I think that the city should take responsibility for the sidewalks. They should not pay for it through a special tax--they should pay for it out of the general fund. If there isn't enough money in the general fund, they should cut other nonsense things like the Department of Economic Affairs or the Sister City Program. Should this happen now? Probably not: it is a major policy shift, it probably should go through a bit more scrutiny, and the timing is crummy. I'm not saying there shouldn't be outrage, but I wonder if it's not misplaced.