Buffet Buys the Dip. Cheney Asks Dems to Switch Parties – Vote for Her.

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Today’s Key Takeaways:  The highway trust fund could go broke if gas tax is suspended. Warren Buffet continues to love oil! Final investment decision for AKLNG in 2024? The value of coal for avoiding high energy prices. Cheney asks WY dems to switch parties and vote for her.


Alliance for Innovation and Infrastructure Blog, June 21, 2022

There is an energy crisis in the United States impacting families at the pump, diesel-powered supply chains, and the broader electricity grid. With gasoline and diesel prices skyrocketing in recent months – reaching all-time record highs – the Biden administration is considering temporarily suspending the federal excise tax on fuel at the pump. Suspending the gas tax would result in the price at the pump changing overnight, but there are several significant impacts to consider.

1. The price of gasoline will fall by 18.4 cents overnight

The price you see at the pump already has taxes baked in. Unlike an item at the store priced at $2.00 that you end up paying $2.16 due to taxes, at the pump, the number on the sign already has local, state, and federal taxes. The federal tax is 18.4 cents per gallon. The moment this tax is suspended, the price at every pump in America should fall by 18.4 cents, making a 10-gallon purchase $1.84 cheaper.

While this is an actual price reduction, the 18.4 cent fall, in context, would drop the national average from about $5.00 per gallon to $4.816 – a far cry from the roughly $2.30 per gallon price when President Biden took office or even the roughly $3.40 per gallon price when Russia invaded Ukraine. This action would therefore only temporarily reverse 18.4 cents of a roughly $2.70 price increase over the last 18 months. Nevertheless, it would have an immediate effect.

2. The price will not continue to fall and there are no more at-the-pump tricks

While the effect of an 18.4 cent price drop per gallon would be immediate, this price drop would not be sustained or augmented. To begin with, once the full gas tax is suspended, the federal government cannot reduce the price anymore; it is a one-time play. States and localities could act to shave off a few more pennies, but the federal government’s action at the pump cannot go beyond 18.4 cents for gasoline and 24.4 cents for diesel.

There is no promise this savings would hold either. As long as the gas tax is suspended, those pennies per gallon will be withheld from the price, but other market forces could eat away the savings and put pennies back on the sign out front. With federal limitations on oil and gas exploration and production, pipelines facing intense scrutiny or cancelation, cartel behavior by foreign oil producers, refinery capacity facing significant restraints, and the general trend of gas prices rising, there is no reason to think the gas price would stay where it is or decline further, and the price could easily return to or surpass the level it currently is sits even though the tax itself is suspended. What is more, the gas tax cannot be suspended forever, so it may be reinstated at a time of high gas prices that would be punishing to all Americans. When the gas tax is reinstated, there will be an overnight 18.4 cent per gallon increase (or higher if the gas tax is increased, but more on that in No. 5 below).

3. Demand for gasoline will increase

Whenever prices change, demand also changes. While the decline in price may be small, the marginal consumer will increase their demand and consumption of gasoline as a result of the gas tax suspension. In fact, many desperate families already struggling to afford gas, but who have no choice but to fill their tank to get to their job or the grocery will likely jump at the chance to fill up as soon as the price drops. While many still can’t truly afford the high price even without the gas tax, they will hit the pump as soon as possible to get gas before market forces drive the price back up or even further.

Increase in demand can itself drive up prices. More people are competing for scarce resources, so the supply of gasoline will fall and prices will rise as more consumers seek to take advantage. That puts upwards pressure on the previous step in the supply chain: refineries.

4. Refining margins will increase, possibly making gasoline more expensive

Higher demand for gasoline sends a signal to refineries to make more gasoline. The problem is that refineries are already operating at near maximum capacity to produce the gasoline, diesel, jet fuel, and other distillates they are. Every barrel of oil that comes in is in competition to become gasoline or diesel or another fuel, depending on the refinery’s capacity, demand for the fuel, profit margin, contracts, and other factors.

Increasing gasoline consumption and demand by reducing the price at the pump will send refinery margins higher, which will reverberate back to gas stations as higher prices. Again in context, while refineries are putting out 93 to 98 percent capacity, a new large-scale refinery has not been built in the U.S. since 1977 and dozens have closed in the interim. This means a dwindling number of refineries are refining crude oil into finished products we use every day and deciding the level of gasoline versus diesel and jet fuel to make based on tightening supply and demand signals. None of these underlying factors are addressed by suspending the gas tax.

5. The Highway Trust Fund will go broke

The gas tax is not merely a penalty at the pump, even if it feels like that. It is a separate revenue stream intended to fund the maintenance and safe operation of the nation’s roads and highways. The 18.4 cents from every gallon of gasoline and 24.4 cents from each gallon of diesel pumped goes into the Highway Trust Fund (HTF). Unfortunately, this fund has faced insolvency for years. In the simplest terms, the revenue has not kept up with expenses. There are a few reasons for that, but there is no question that suspending the gas tax would exacerbate the issue and possibly push the fund over the cliff.

The gas tax has not been raised since 1993. Consumers have been paying 18.4 cents per gallon all 29 years since, despite their cars on average going farther on a single gallon, weighing more, and the state of the roadways getting worse. There are several reasons for these factors, including general innovation in fuel efficiency, the introduction of hybrid and electric vehicles, Corporate Average Fuel Economy (CAFE) standards, and more. These conspire to undermine the gas tax as a proxy for road use, meaning the tax does not serve as a user fee to maintain the roads as each driver pays his own way at the pump. Instead, it is a shadow of cost recovery for high road usage. On top of this, inflation has destroyed the purchasing power of the gas tax revenue in the Highway Trust Fund (for 29 years, most critically and steeply in the last two years).

The Highway Trust Fund also contains two accounts: the Highway Account and the Mass Transit Account. Money coming in from the gas tax comes in from highway usage but goes out the door to both accounts. So, road-based fuel taxes do not all go to fix roads. Lastly, money from the HTF has largely gone to building new infrastructure rather than maintaining and repairing old roads, highways, and bridges. Together, all of these factors means that the gas tax collected is not nearly enough to actually keep our nation’s roadways safe and maintained. This problem has been growing for years. A suspension of the gas tax would be a nail in the Highway Trust Fund’s coffin.

The Bottom Line

Gas prices are at historic highs because of a confluence of climate and energy policies spanning decades and exacerbated in the last 18 months. From exploration and production permits and leases to pipelines and refinery capacity, the bulk of fuel prices are set long before the pump. The latest action contemplated by the Biden administration seeks to tackle only the last step in the process: the actual price at the pump. By suspending the federal gas tax, there would be an immediate price drop of about 18 cents. But without addressing the many underlying issues, prices would likely rebound, and other issues will arise.


Warren Buffett Adds to Massive Stake in Occidental Petroleum, Buying the Dip After Oil Prices Drop
Sergei Kleibnikov, Forbes, June 23, 2022

With oil prices down this month, billionaire investor Warren Buffett is once again buying the dip by adding to one of his favorite energy stocks, as his investing conglomerate Berkshire Hathaway purchased roughly $500 million worth of Occidental Petroleum shares this week.

Buffett’s Berkshire Hathaway purchased roughly 9.5 million shares of Occidental over the past week at a cost of nearly $530 million, according to a new regulatory filing late on Wednesday.

After a buying spree that started in late February, Buffett’s investing conglomerate now owns roughly 152 million shares of Occidental—a 16.3% stake worth nearly $8.5 billion that makes Berkshire by far and away the largest shareholder in the energy giant.

Shares of Occidental Petroleum failed to rally on the news Thursday, but it remains one of the best-performing stocks this year, rising over 90% thanks to the massive spike in oil prices that has occurred this year.

Though oil has spiked this year—reaching a high of nearly $140 per barrel ever since Russia’s invasion of Ukraine in late February, prices have moderated this month, with energy stocks paring back some of their momentous gains from earlier in 2022.

Oil continued to fall on Thursday: The price of U.S. benchmark West Texas Intermediate sits at nearly $105 per barrel (down from nearly $120 at the beginning of June), while international benchmark Brent crude trades at $110 per barrel.

Buffett is betting that the spike in oil and gas prices won’t end anytime soon and is using some of the recent declines as a buying opportunity amid analyst predictions that oil will remain well above $100 per barrel throughout the summer.


Alaska LNG advocates see reasons for optimism, but some industry watchers still skeptical
Sean Maguire, Alaska News Source, June 22, 2022

The Alaska Gasline Development Corp. is moving ahead with plans to build an 800-mile natural gas pipeline by the end of the decade from the stranded reserves on the North Slope to a yet-to-be-built liquefaction plant in Nikiski.

The $39 billion Alaska LNG project has been dreamed about for decades, but supporters say that Russia’s invasion of Ukraine, which has helped send energy prices soaring, has made it a more attractive prospect for Outside investors.

Late last month, Gov. Mike Dunleavy traveled to Japan with Alaska Sen. Dan Sullivan and Frank Richards, head of the AGDC, on a trade mission to pitch the project to private investors and Japan’s government. Richards said the Alaska delegation received a positive response.

“They have a lot of needs for energy, but they don’t have energy sources,” he added.

Dunleavy noted that Japan has been importing natural gas from Nikiski for 50 years. He said through a prepared statement that Alaska’s gas could play a role in helping the Asian country transition to using cleaner sources of energy.

During the Japan visit, there were discussions about exporting “blue” ammonia from Alaska to Japan, which is used to clean up coal power generation, and talks about Cook Inlet’s significant potential for carbon sequestration.

And there are other reasons for cautious optimism that the natural gas pipeline could finally be built. Two years ago, the Alaska LNG project got the federal authorizations it needed to start construction and Congress approved a $27 billion loan guarantee last November as part of the infrastructure bill.

Wood Mackenzie, an energy consultancy firm, analyzed the LNG project in 2016 and found that Alaska’s plan was “not competitive.” Another analysis by the same firm at the beginning of the year suggested the project’s potential has significantly improved due partly to the federal loan guarantee helping to reduce cost estimates.

Richards agrees that “Alaskans have heard this story many, many times before,” but he suggested that this time, it could be different for the natural gas pipeline. There are concerns in Europe that Russia could turn off the gas supply this winter, and the U.S. is seen as a more trusted and stable energy producer.

“The reality is that we have a tremendous interest that’s developed in our project,” Richards said.

He explained that the state-owned gas line corporation has received letters of interest from potential investors and pipeline developers such as Enbridge, Inc., a Canada-based firm. The corporation is hoping to announce final investment decisions in 2024 and hire thousands of Alaska workers to help begin producing gas for Alaska consumers two and a half years later.

The goal then is to have an average of 3.5 billion cubic feet of natural gas running through the newly constructed pipeline each day ready for export by 2030, but some long-time industry watchers remain skeptical.

Roger Marks, an Alaska-based economist, penned an opinion piece in the Anchorage Daily News on Wednesday, saying the pipeline is not close to being built despite the optimism. Larry Persily, who was the federal gas coordinator during the Obama administration, is similarly dubious.

“Letters of introduction, letters of interest, memorandums of understanding; those are like exchanging business cards,” he said. “There’s never a check attached to any of them, for good reason.”

Persily said the market is currently in “a panic,” but that doesn’t necessarily mean investment will come for a project that won’t produce natural gas until the end of the decade. He explained there are more attractive investments for natural gas around the world, and he is doubtful about the $39 billion cost estimate with high inflation and increasing costs for construction.

Independent former Gov. Bill Walker, who is running for reelection, has been a long-time advocate of an Alaska natural gas pipeline. He traveled to China in 2018, partly hoping to secure investment in the project. A non-binding China deal was reached before being scrapped by the newly-elected Dunleavy, who Walker says should have been pursuing the project much more aggressively over the past four years to see it move forward.


INDUSTRY POINTS TO EUROPE IN STRESSING THE VALUE OF COAL: Coal interests see Europe’s crisis-driven reversion to coal as a “wakeup call” to the U.S., arguing that it should better value the fuel in order to avoid the high energy prices afflicting allies in the region.

“It’s certainly a message to the United States as well that we need to prioritize all of our domestic fuels, including coal, to get through this and to preserve national security,” Rich Nolan, president, and CEO of the National Mining Association, told Jeremy.

Overall market conditions do not favor coal over the long term, to say the least. Power generators have retired 48 gigawatts of coal-fired capacity over the last five years, and the Energy Information Administration estimated that coal retirements will make up 85% of capacity retirements this year.

Those retirements have been partially blamed for the shortage of reserve generating capacity among midwestern power generators, which put the region at a higher risk for blackouts this summer.

At the same time, coal-fired power as a share of generation rose last year to 23%. EIA primarily attributes this to higher natural gas prices — prices that have been significantly higher this year than last, making conditions even more favorable to coal for now.


Cheney encourages Wyoming Democrats to switch parties and vote for her
Jacob Knutson, Axios, June 23, 2022

Rep. Liz Cheney (R-Wyo.) is urging Wyoming Democrats to switch parties to vote for her during the state’s upcoming Republican primary, the New York Times reports.

Why it matters: Cheney, who serves as vice chair of the select committee investigating the Jan. 6 Capitol riot, is significantly polling behind her Trump-endorsed primary opponent for the state’s at-large House seat.

  • Cheney, who voted to impeach Trump for inciting the insurrection at the Capitol, has repeatedly said that she believes that the former president’s baseless election fraud claims and the “cult of personality” around him are threats to U.S. democracy.
  • Trump in turn criticized Cheney and endorsed and fundraised for Wyoming Republican Harriet Hageman in an effort to oust Cheney from the House.

The big picture: Democrats in the state have recently received mail from Cheney’s campaign that included instructions on how to change their party affiliation so they would be able to vote for her in the upcoming Republican primary, according to the Times.

  • Her website also now includes instructions and a link to a form for changing parties in the state. It also informs voters that they can change their party affiliation at their polling place on the day of the primary or general election, or when requesting an absentee ballot.