Friday, March 25, 2011

Up like a rocket; down like a parachute

There is something exciting about watching a Space Shuttle launch. The acceleration is incredible, especially when you consider the gross weight of the space craft to be about 4.5 million pounds. Within seconds of launch the shuttle is going 100 mph, 1,000 mph after one minute, and in a little over seven minutes, the craft is pushing 18,000 mph! But, have you noticed when it is landing, the Space Shuttle is going barely more than 200 mph. Going up is fast, but coming down is always slow.

Of course, the physics of putting large bodies into orbit around the earth requires nothing less than spectacular acceleration. The aerodynamics and physics of returning to earth safely demand that the vehicle slowly decelerate over a longer time to avoid burning up or breaking up upon touch down.

Even though economics is not a physical science per se, I have observed over the years that the same physical laws of space travel seem to apply to certain economic trends. Have you ever noticed how quickly interest rates rise during uncertain times only to slowly come back down long after the crisis is over? The stock market can “crash” in a day, but may take years to recover from that single event. In recent years, the price of gasoline has shot up like a rocket on news of a hurricane in the Gulf of Mexico, or political upheaval in the Middle East. However, even though the hurricane may pass by with little or no impact on the supplies, or the interruption of oil deliveries in the Middle East may not be significant, the price of gasoline can take months to come back down to pre-event levels. It is as though the prices ride a rocket up and take a parachute back down.

The explanations for this phenomenon are plentiful and I am sure your email inbox has been inundated with plenty of speculation, castigation, and a few suggested remedies during the recent jump in gasoline prices. I believe some explanations and remedies have more merit than others.

There is one very important thing that makes gasoline at the pump unique among the thousands of products Americans buy on a daily basis. Retail gasoline is the only product that posts its price in one-foot-tall letters that can be read from one-half mile away or more. As a result everyone knows what a gallon of gas costs even though most people could not tell you what they last paid for a gallon of milk or a loaf of bread.

I suppose posting gasoline prices in big numbers keeps the stations competitive. After all, how many of us have driven until our tanks were nearly empty until we found that station that was two cents a gallon cheaper. Yep, we showed them; nearly running out of gas to save ourselves 30 to 40 cents on a single $45 to $60 tank full!

If displaying gasoline prices for all to see encourages competition, it could also be said that it makes collusion easier as well. Under anti-trust laws in the United States, collusion among suppliers or retailers to set prices for their products is expressly forbidden. But, if the gas-station operator doesn’t even have to leave his store to see what the competition is charging across the street, then it is difficult for any prosecutor to make the case that the station owners met in secret to set their prices.

Imagine for a moment you are a gasoline retailer. Your average gross profit on gasoline is about seven cents a gallon. If you put yourself in their position, you would probably understand that it is less likely to be a conspiracy and more often just a case of business survival. When one station sees another raise their price a couple of cents a gallon, they all quickly follow suit. And it is certainly not in any operator’s best interest to be the first to drop the price when supply costs go down. Consider this: if your local gas station operator is making so much money selling gasoline, why do gasoline retailers spend so much time trying to get you into their store to buy things you can get at a hundred other locations? Cheap gasoline is a pricing theory called a “loss leader” that is intended to get you in the store to buy other more profitable products. Many a gasoline retailer has gone bankrupt trying to use gasoline as a loss leader.

At the other end of the supply-line spectrum is the price of a barrel of crude oil. You get the price of crude oil reported in the media every evening along with the daily stock market results. However, what makes the news is not the cost of the oil being delivered to refineries today, but rather it is the price expected to be paid for oil at some point in the future. When events cause speculation to drive the future price of oil up, it inevitably results in journalists prognosticating that the price of gasoline at the pump will be going up soon. With the consumers psychologically prepared for the increase, it is now logical for suppliers and retailers to go ahead and raise the price of a gallon of gas.

The last and perhaps the most significant factor that affects the price of gasoline here in the United States is that we are grossly under capacity for refining oil into gasoline and other products. Many small refineries have shut down over the years as their processing capacity made it uneconomical to bring them up to current environmental standards. At the same time, stringent environmental standards and the not-in-my-back-yard (NIMBY) syndrome has resulted is fewer new refineries coming online. Meanwhile, gasoline consumption has increased, and during the summer, many states and even some municipalities require specially blended fuels to reduce emissions. As refineries annually transition from making heating oil to ramping up to meet summer gasoline demand, they must stop production to retool their facilities. This leads to constrained supplies and the annual price increase that usually peaks around Memorial Day. The rest of the summer pricing remains relatively high because of increased driving and a constant cycle of shutting down refineries to adjust for the unique summer blends required by different cities and states. Add to that one or two hurricanes that may temporarily shut down gulf coast oil production and refineries and we can see a drop in supply with a corresponding increase in the price at the pump.

The reality is the supply and demand for energy, especially gasoline, is very volatile. There are many reasons why the price of gasoline at the pump may change—some are better explained than others. Nonetheless, the cost of gasoline does fluctuate often and can rise quickly. If you are frustrated about recent increases, and many of us are, don’t punish your neighbor who happens to be in the gasoline business. Don’t bother trying to boycott the big oil companies; they make just as much money selling cheaper products as they do selling expensive stuff. If you want to bring about real and positive change that will help the price situation at the pump, call your Representative and Senators. Tell them we need streamlined permitting for new refineries. We need more of every kind of energy. We should stop the ban on deepwater drilling and we should open more offshore areas to exploration. We should not let the EPA regulate green-house gases and implement a de facto energy tax. And, we need more oil, coal, natural gas, oil shale, tar sands, etc., developed in Alaska and the Mainland USA. Tell them we need to drill here, drill now, and pay less!

Tuesday, March 15, 2011

Most Common Side Effects

In the last decade, there has been an exponential increase in the amount of advertising for prescription pharmaceutical medicines and a corresponding increase in prescription drug consumption. This is partly the result of a significant change in the way drug companies are marketing their products. Back in the day, pharmaceutical companies sent drug reps out to visit doctors and hospitals. They generally came bearing gifts—radios, clocks, sometimes even television sets. But, more importantly, they provided technical information about what their drug could do for the patients and what side affects might occur. They answered questions and gave medical professionals all the information they needed to make qualified medical decisions about what, if any, drug would best address the illness the patient presented.

The new model for marketing drugs has the pharmaceutical companies skipping right over the medical professionals and going to the consumer directly. Often times, even after seeing an ad several times, the consumer may not know what illness the medicine is intended to treat. But, it sure sounds good. Maybe I better ask my doctor if that drug is right for me.

I remember watching NFL football with my 12 year old son years ago. One of these drug ads kept appearing that depicted a middle-aged man throwing a football through a tire swing. The audio message was intentionally vague, and being na├»ve, I missed all the phallic symbolism that was meant to convey the message that this was the newest of what a friend of mine called “giddy-up drugs.” Stupid me! I turned to my son and asked him what he thought that drug is supposed to do. His response was priceless, “I think it makes him throw the ball better.”

The point is these messages about sophisticated drugs are dumbed down and intended to make us all think we can’t live without these medicines. We are not sure what they do, but that person sure looks happier. And who doesn’t want more control over their health care decisions? I believe we should all assume more responsibility for our physical and emotional well being, but that does not make us trained and qualified medical diagnosticians.

Of course, to ensure that as an informed consumer we all make the right medical choices, we are told about all the possible side affects of the particular drug we are being sold at the moment. Have you listened closely to some of the contraindications of these wonder-working medicines? Here are a few snippets of the choicest “Most Common Side Effects”:
• “chest pain; confusion; fainting; fast or irregular heartbeat”
• “new or worsening mental or mood problems”
• “sudden, severe dizziness or vomiting; slurred speech; uncontrolled muscle movement; unusual weakness or tiredness”
• “suicidal thoughts or actions”
• “abnormal thinking; behavior changes”
• “hallucinations; memory loss; new or worsening agitation, panic attacks, aggressiveness, impulsiveness, irritability, hostility, exaggerated feeling of well-being”
• “decreased sexual desire or ability” (Don’t worry; there are plenty of other drugs that counteract this symptom)
• “red, swollen, blistered, or peeling skin; ringing in the ears; seizures”
• “sudden decrease or loss of hearing; sudden decrease or loss of vision in one or both eyes”
• and, my all time favorite, “sudden urges to gamble”

The pharmaceutical industry is big business, and to be fair, they have developed some really valuable medicines that treat previously untreatable conditions. Medical care has improved thanks in part due to research and development by drug companies. Research and development is expensive and the testing and application process to get Food and Drug Administration approvals cost a lot of money as well. As a result, some of the newest and best drugs are also very expensive as the industry prices their product to recover their investment before the patent runs out and cheaper generic versions of the drug come on the market.

Prescription drug use in America is up—way up. We cannot discount the impact this has had on the cost of delivering health care services in this country. Over the past ten years, the percentage of Americans who have taken at least one prescription drug in the past month has increased from 44% to 48%. The use of two or more drugs increased from 25% to 31%. The percentage of Americans using five or more drugs per month increased from 6% to 11%. In 2007-2008, 20% of children and 90% of older Americans reported using at least one prescription drug in the past month.

Prime time television ads rates vary widely from $40,000 to $400,000 per ad. Full-page color ads in a popular men’s magazine can cost more than $70,000, and by the time the drug company buys the extra page and a half to print all the disclaimers in fine print, a $175,000 per month per magazine budget is not out of the question. It doesn’t take rocket science to see that drug companies are spending a lot of money to get you to “ask your doctor” about their latest wonder pill.

If you have followed my columns over the last few years, you know that I am a free-enterprise advocate. I favor market solutions over government regulation. Although the government has historically banned alcohol and tobacco ads, I am not suggesting that prescription drug ads be banned. Besides, the government has no nexus that would empower it to ban advertising in the print media or on cable and satellite television.

However, I do wonder about the ethics of marketing prescription drugs directly to the consumer. I do believe it significantly contributes to the escalating use of prescription drugs and the spiraling cost of providing health care. And, perhaps I am old fashioned, but shouldn’t we all leave the decision to prescribe or not prescribe drugs to the medical professionals and not the consumers. There are certainly a number of circumstances that warrant prescription drug use and I am neither anti-medicine nor anti-drug industry. But, I wonder if it is really necessary or in our best interest to take “Mother’s little helper” for every perceived problem we have in life. Maybe we would all be better off if we took charge of our own physical and emotional well being. As consumers we can exert market changing power through our consumption patterns. We can all reconsider our prescription drug use, and through the free market, we can have a positive impact on our physical, emotional, and financial well being and help bring down the cost of health care in America. As Nancy Reagan said about illegal drug use, “Just say ‘No.’”