Timing Tortillas

Apparently, the latest trend in Washington is self-flagellation. Nancy Pelosi and her merry crew just passed a bill mandating they all—Republican, Democrat, and Senator McCain—be "punished." The punishment is vague, but in Madame Speaker's own words, the legislation will "punish those who are cheating America's families by artificially inflating the price of gasoline."

We're pleased to see Congress taking accountability for once for its harmful meddling. Though, on second thought, perhaps they aimed to punish so-called Big Oil. (They should have worded this bill better.) The Federal Price Gouging Prevention Act makes it illegal during an "energy emergency" (not defined) to sell gasoline at a price that's "unconscionably excessive" (also, not defined). Nor is anyone supposed to take "unfair advantage" of consumers. Holy cow! How did we survive this long without the government mandating no one takes unfair advantage of us?

The following article walks you through the mind-bending objectives of this nation's legislators:

The Case for Gouging
By Robert Samuelson, RealClearPolitics
https://www.realclearpolitics.com/articles/2007/05/the_case_for_gouging.html

What politicians call "gouging" we call market-driven pricing. Demand for gasoline is high and growing in the US (globally too)—and gasoline demand doesn't grow when the economy is stagnating. Additionally, the US has a woeful shortage of refining capacity—squabbling congressional NIMBYs have assured no new major refineries have been built on American soil since 1976. Higher demand and lower supply mean higher prices.

One would think the higher price of gasoline would satisfy politicians wanting to cure us of our addiction to foreign oil. Higher gas prices also goad demand for polar bear-saving hybrid cars—another benefit! Why punish oil companies for windfall profits? They should be rewarded for curbing our energy usage and saving the earth.

These are not discrete groups calling for decreased usage and lower prices—generally the same group demands cheaper energy that we'll magically want less of. This is not the way the world works: If something is cheaper, we'll generally use more of it, and vice versa. Political tinkering with either supply (through subsidies and ethanol mandates) or demand (through taxes and price-fixing) sets the world upside down. Just a few of the unintended consequences so far this year include pricier milk, beef, pork, chicken, soda (and on and on and on) and tortilla-driven inflation in Mexico (not to mention an impending shortage of tequila—https://www.msnbc.msn.com/id/18926019/).

The good news is: High, low, or artificially fixed—historically there's no correlation between gas and stock prices. Higher gas prices might contribute to dour sentiment in the short term, but there's no reason to expect high gas prices will hold back stock returns this year. In fact, higher gas prices can be a boon to energy companies—we won't be surprised to see the energy sector, as a whole, outperforming the broad market this year.

That doesn't mean we condone further legislative tomfoolery. And we certainly are puzzled by this headscratcher of a conclusion:

The New Salem Witch Trials
By Alex Taylor III, CNN-Money
https://money.cnn.com/2007/05/29/news/economy/pluggedin_taylor_gouging.fortune/index.htm?postversion=2007053009

"The only way to bring down the price of gasoline is to use less of it. And how do we do that? Put economics to work again. Raise the price and shrink demand. The government should phase in a tax on gasoline to give drivers an incentive to travel fewer miles and use the revenue to develop mass transit and increase research in alternative methods of propulsion."

So, to lower gas prices, the government should increase taxes and raise prices? And then, use the tax revenue to develop mass transit and train an army to force people to use it? No thanks—we prefer to let the market sort out what innovation comes next. In the meantime, now's a great time to dynamically overweight the energy sector (and possibly go double-long tortillas).