$4 gas, free market, tax burden question

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Submitted by Dukehorn on February 28, 2008 - 1:49pm

I'm a tech lawyer so my econ background is pretty mediocre.

President Bush today said he hadn't heard about the predictions for $4 gas, but that the proposed 18 billion dollar tax increase on the oil industries from Congress was going to bump the price up.

From a free market perspective, does the tax increase really matter? The gas companies turned in another quarter of record profits so I'm trying to figure out the supply and demand question for something that literally everyone needs (due to the sad state of public transportation in this country).

Since this is a market area where the consumers have limited options and therefore will pay whatever price is being charge (to a certain extent), the only possibility is if one of the companies decides to undercut the others price-wise, but what's the incentive to do so? This isn't a luxury item so in essence the market is an oligopoly (isn't it)?

De-regulation is great in industries where you have to compete for consumers but that really isn't the oil industry.

Submitted by Nor-LA-SD-guy on February 28, 2008 - 2:23pm.

I believe we are very close to being done with Oil as far as transportation is concerned, The more they raise the price of Gas, the faster we will be free of the need for it.

There are several technologies that are very close ie.. cheap lithium ion batteries.
nanoparticles that could make hydrogen cheaper than gasoline..

and sereral others

The Mid east will just be a other spot on the map in 10 years IMO,

Maybe a religious vacation spot who knows.

Submitted by bsrsharma on February 28, 2008 - 2:43pm.

technologies that are very close ie.. cheap lithium ion batteries. nanoparticles that could make hydrogen cheaper than gasoline..

Sadly, as a technologist, I should disagree with the "very close" description. We still have to depend on public transport, rail and conservation for near future. Battery and Hydrogen are nowhere near maturity to replace oil. The capital costs to build & replace the batteries and charging systems are still not well understood. e.g. we all know about CO2 emission/green house effect/global warming etc, but can anyone tell the effect of scrapping, say, tens of millions of high capacity lithium batteries per year? What are its impacts on air & water pollution? health impacts (cancer/birth defects/mental retardation? - Lithium is used in psychiatric medicine) We may get stuck with problems like nuclear waste or asbestos.

Submitted by kewp on February 28, 2008 - 2:44pm.

When I moved 3 years ago I picked a place that was within walking distance of free transportation to my place of business.

Expect this trend to increase with gas prices (and jingle mail).

There is also the chance of a 'black swan' type tech event that is game changing. Like a sub 10k biodiesel roadster that gets 100 mpg. Or hyper-efficient batteries, solar cells, teleporters, whatever.

The real problem, however, is its not just a transportation issue. Oil is used in shipping, industry, farming, manufacture, etc. So even jerks like me that don't drive every day end up paying for it one way or another.

Submitted by Arraya on February 28, 2008 - 2:46pm.

"There are several technologies that are very close"

Close is not the issue. The issue is scaleble.

Hydrogen is an energy carrier, not an energy source. It is that you need to generate the energy to create the hydrogen somehow (which is problematic if energy becomes scarcer) and that this process is wasteful as there are losses at each stage of the energy conversion process.

The car of the future is a railroad car and a bike at the other end. Except for maybe 1% of the population.

Submitted by DWCAP on February 28, 2008 - 2:59pm.

There is a speculative bubble in oil right now and it will continue for a while. What little change taxes may have had on the price of oil are easily overshadowed by this bubble. Supplies are higher, demand is down and prices are spiking? I dont mean at the pump where switches from winter to summer blends may have a few % influence, I mean the wall street market where oil is priced.
The companies will scream bloody murder over it and Bush will make retarded predictions about it that are scary but he is so far behind the curve I really question how he got an MBA. But in the end the dust will clear, and nothing will have changed cept the Federal gov will just spend another 14billion and the oil companies will keep going on making record profits until this bubble goes pop.

It kinda seems that the bubbles are going more and more to the markets that have very steep demand curves. Huge swings in prices affect demand for gas very little. Our population growth easly outpaces this change. It started in Tech stocks which have very gradual demand curves, they are not necessities. Then to housing, which is much steeper but has alternatives (rent, move, downsize), now to oil which has very few viable alternatives right now. In the long run itll be good because itll make alternatives viable, but it hurts now. The next ones are in Food and healthcare, which have no alternatives. Corn and wheat are the base of modern societies and prayer sessions are not viable alternatives to a regular checkup.

Submitted by Arraya on February 28, 2008 - 3:40pm.

There is a speculative bubble in oil right now and it will continue for a while. What little change taxes may have had on the price of oil are easily overshadowed by this bubble

Bubble would indicate a disconnect from fundamentals which could not be further from the truth.

If anything oil is way underpriced.

Also RE: Lithium, it is also a finite resource.


Submitted by afx114 on February 28, 2008 - 3:56pm.

If GWB really wants "free market" rules to govern the oil industry, he should take away all those government subsidies they have.

Submitted by DWCAP on February 28, 2008 - 4:19pm.

If anything oil is way underpriced.

Arraya, you are kidding right? Future supply disruptions caused by demand that India and China will have in the future are being priced in today, even though they are not drawling on supply like they WILL be. If you wanted to benifit from future gains in demand, you should buy oil stocks or oil land, not oil that is gonna be used in 10 weeks.


On Wednesday, oil prices fell $1.24 a barrel after the Energy Department reported crude inventories rose more than expected last week. But that reflected a rare reaction by oil investors to supply and demand fundamentals. Oil prices have been far more affected in recent months by dollar- and interest rate-driven investment decisions, analysts say.

"[Fundamentals] have no relationship to price right now," Flynn said. If prices were responding to supply and demand, fundamentals, they would be falling, he said. Several recent forecasters have lowered oil demand growth predictions for this year due to the slowing economy, and domestic oil inventories have been growing.
Oil prices have received some support in recent days from word of a technical glitch that temporarily disrupted the flow of a small amount of crude out of Nigeria. Eni SpA denied earlier reports that its Brass River oil terminal had been attacked by rebels. Turkey's recent invasion of Northern Iraq in search of Kurdish rebels has also been supportive, Flynn said, but these stories are not enough in and of themselves to explain why oil continues to trade above $100.

Many analysts believe it's just a matter of time until the fundamentals reassert themselves on the market, pushing prices down

Submitted by sdduuuude on February 28, 2008 - 4:33pm.

I think your assumption that consumers will "pay whatever price is being charged" is simply not correct.

Make sure you don't mix up the idea of a monopoly/ogilopoly and price sensitivity.

Just because oil is needed, and there are a small number of sellers, doesn't mean there is 100% insensitivity to price and that demand will not drop if the price is increased.

Also, given how much oil we use (waste?), I think usage could be reduced significantly with little loss in lifestyle. Thus, the price will have an effect on demand, especially when people are starting to feel poorer as they are now.

Not sure what you mean by "does the tax increase really matter?"

It does matter. It makes gas more expensive and lowers the profits of the oil industry.

The math works out to show that a tax manifests itself as both a price increase to buyers and a profit reduction to sellers. I forget the details, but the slope of the supply/demand curves affect what ratio of the new tax is absorbed by the buyers and the sellers. If buyers will buy at any price, they absorb the cost.

Again, this is related to price sensitivity, not to the number of sellers in the market. Even a tax in a monopolistic market can reduce the profits of the monopoly if the demand curve allows for it.

Submitted by Disgruntled Patriot on February 28, 2008 - 4:33pm.

Before getting too carried away in demonizing the oil industry, consider the following:

- Crude oil alone makes up 54 percent of pump prices. Refining for 20 percent. Retailing another 11 percent. Taxes for 15 percent.

- The latest published data for the third quarter 2007 show the oil and natural gas industry earned 7.6 cents for every dollar of sales compared to 5.8 cents for all U.S. manufacturing and 9.2 cents for U.S. manufacturing, excluding the financially challenged auto industry.

- Earnings within the oil industry rank well below Beverage and Tobacco, Pharma, Electronics, Computer, Chemical, Aero, Apparel, and Machinery.

- The oil industry has spent $98 billion in emerging energy technologies since 2000—almost 73 percent of the total $138 billion spent by U.S. companies and the federal government combined.

- Company stock in the oil industry is owned by virtually all americans: 29.5% mutual funds, 27% pension funds, 23% individual investors, 14% IRA's, 5% institutional, 1.5% corporate insiders.

- The average effective tax rate (current taxes) of the top 27 energy companies was 37.1 percent in 2006 ($81.5 billion). The effective tax rate for the market as a whole is 32.3 percent, or 3.3 percent less than the top energy companies.

- Petrochemicals are used not only for liquid and gas fuels, but also lubricants, plastics, and fertilizers.

The relationship of Big Oil to our society at large might be considered through the words of the great philosopher Ayn Rand "I don't build in order to have clients. I have clients in order to build." If you don't like a product or service then it is the law of our wonderful land that you have a right to utilize your God-given talents to develop a better product or service. Complaining about the success of your industrious countrymen (be they corrupt or not) serves no useful purpose and fails to improve the circumstance of you or your community.

Disgruntled Patriot

Submitted by sdduuuude on February 28, 2008 - 4:37pm.


Do you think it would be easy to produce batteries without oil? You gonna lubricate the machines with whale blubber or something?

Submitted by Arraya on February 28, 2008 - 4:41pm.

Arraya, you are kidding right?

Let me break it down:

A barrel of oil contains 42 gallons. It can be made into about 20 gallons of gasoline (give or take, depending on the grade of the oil). Each gallon of gasoline contains about 36 kilowatt-hours of chemical energy (kilowatt-hours are the number of kilowatts, a measure of power, times the number of hours, yielding a measure of energy). An efficient internal combustion engine turns about one quarter of that energy into useful work, with the rest lost as heat. One horsepower is equivalent to about 3/4 of a kilowatt. However, one human working hard continuously can only put out about 1/10 to 1/5 of a kilowatt (compare the power output of a human to a one-horsepower horse). A recent article in Bicycling on the Tour de France showed that the average power output (during the several hours per day of the race) of a top-finishing bike racer, Floyd Landis, was 0.23 kilowatts, or about 1/3 horsepower, continuous. In a 75 minute time trial, the same cyclist was able to put out 0.38 kilowatts continuously -- a full 1/2 horsepower!

The 20 gallons of gasoline made from one barrel of oil contains about 180 useful kilowatt-hours. If we divide that by say, 1/8 of a kilowatt -- a generous continuous output for a fit person -- we get 1440 hours of hard human work. Let's assume that a person can put out this 1/8 of a kilowatt for 6 hours per day. That is, half of the output of a top Tour de France cyclist for a continuous 6 hours (not counting breaks) per day. This means that you would need 240 days to get 180 kilowatt-hours (or more, if you are a dimmer bulb), which is minimally equivalent to one year of 5-days-a-week very hard labor by a fit human. This boils down conveniently to: ONE BARREL of oil = ONE YEAR of hard human labor.

Couple this with the fact that for the first time in history we are about to have not enough go around. Yeah, I'd say it was underpriced, the market has just not figured it out yet.

Submitted by sdduuuude on February 28, 2008 - 4:44pm.

arraya - you have done an excellent job of spelling out the upper bound of the value of oil.

Sadly, this has little to do with the price.

Submitted by DWCAP on February 28, 2008 - 4:53pm.


My point wasnt that we are not sensitive to oil prices. We most certainly are. My point was that relative to Tech stocks, the demand curve is alot higher. We double the price of a gallon of gas and most people will still pay. (2000 proved that isnt true of stocks) They will cut back, some, but they will still pay most of the time. Housing is even steeper than oil because we dont all need gasoline (we all use oil in someway, everyday) look at people in downtown areas that are close to work. Many just bike or walk. We all do need some form of housing. (I know all about delivery trucks and moving vans and such, but I am talking about peoples personal decisions to buy, not macroeconomic interactions)
But those with big houses in the country that have to commute will still have to pay, they just may cut back on that ski trip to mammoth or that fishing trip. So demand will fall, but not as much as other things would.
Food is even a steeper demand curve. We may trade down from Steak to hamburger, but we still need to buy SOMETHING.

I dont have to buy your stock, I can move to cheaper areas if I dont like your housing, I can ride a bike if I dont want to pay for gas, but I have to eat something. No matter if it is processed grains themselves or something we fed grains too and then processed, we still have to eat.

Submitted by sdduuuude on February 28, 2008 - 4:55pm.

DWCAP - my reply was to the original poster.

Submitted by afx114 on February 28, 2008 - 5:30pm.

Gas IS under priced, especially in the US, due to all of the government subsidies. Let see you get some 'petrol' in Europe for $4 a gallon.

Submitted by Dukehorn on February 28, 2008 - 6:39pm.

Interesting replies.

Sdude. I don't necessarily agree with you on the dismissal of the oligopoly issue. Price sensitivity can only carry you so far. Folks need heating oil to survive in the NE. Yes, they can try not to heat their homes, but I don't think that's the argument you want to make. As for alternative transportation, there's a certain flexibility to move to public transportation, but I, for example, am not going to move back to DC so I can use the Metro and I can't move to LaJolla from 4S Ranch so that I can bike to work--I'd like to, but I can't afford it (and for safety purposes, I wouldn't want to make that bike ride at night on weekdays).

Disgruntled Patriot. You had a reasonable post till that "corrupt" tangent. Are you suggesting that my friends at the SEC and EPA not enforce the laws or that we not get upset if "corrupt" folks take advantage of others? I'm sure the ex-employees at Enron would disagree. However, IF, as this President states, we're in a time of war, it is certainly unseemly that certain corporations profit off of it (War is supposedly about national sacrifice while our troops are dying-not about generating record profits)

As for "true pricing"
I've driven enough in Europe to understand that gas is underpriced. I'd rather have high pricing just to force some of the gas-guzzlers off the road.

My question is whether any economists here can resolve the issue of "record profits" with government subsidies (and the side issue of whether the tax increase is appropriate on these entities).

If this is a bubble, are the speculative costs being passed proportionately down to the consumers? It obviously doesn't feel that way if Exxon is pulling in a few straight quarters of record profits.

Submitted by Arraya on February 28, 2008 - 8:14pm.

"If this is a bubble, are the speculative costs being passed proportionately down to the consumers? It obviously doesn't feel that way if Exxon is pulling in a few straight quarters of record profits"

Oil is NOT a bubble.

-World production is flat and has been for 2+ years
-Exporting countries are using more of their oil internally thus exporting less.
-Even though there is a world economic slowdown demand is still higher than last year.
-Oil prices are very in-elastic
-The high quality oil is becoming harder to get and being replaced with lower quaility oil that is more expensive to refine.
-a 4% decline in the 70s and caused a 400% spike
-EIA put world demand down to 87 million bbl per day from 88 while production is still at 85ish.
-This trend will not stop with the exception of a serious recession/population reduction etc

All these so called analyists do a disservice by not explaining in more detail the supply/demand dynamic.


Just and FYI if read the article Matt Simmons was on the Cheney energy task force that is so so secretive.

Submitted by Aecetia on February 28, 2008 - 8:27pm.

Perhaps Congress should sponsor shale oil development, now that it is more affordable (at the current cost of oil). That should limit the oil hegemony.

Submitted by Arraya on February 28, 2008 - 8:35pm.

Perhaps Congress should sponsor shale oil development, now that it is more affordable (at the current cost of oil). That should limit the oil hegemony.

You have to understand EROEI(energy returned on energy invested). Shale is negative. They have pretty much given up on shale.

Submitted by Aecetia on February 28, 2008 - 8:52pm.

I found this on the Econbrowser, apparently oil was on $66. a barrel then.... something for the politicos to ponder.

"September 27, 2005
Oil shale report
A number of observers have been pointing to oil shale as the solution to all our energy problems. If oil shale does turn out to be the resource of the future, then our problems are only beginning.

Instapundit sees a 'plan to put Middle East oil producers out of business' in this story from the Rocky Mountain News:

[W]ith crude oil above $66 a barrel at the close of trading [on Sept. 20], oil shale is a promising alternative to crude. The Green River shale deposits in Colorado, Utah and Wyoming are estimated to contain 1.5 trillion to 1.8 trillion barrels of oil, and while not all of it can be recovered, half that amount is nearly triple the proven oil reserves of Saudi Arabia."

Submitted by Arraya on February 28, 2008 - 9:03pm.

Methinks the Econbrowser does not understand energy....

You read about "oil from shale", right? You heard about 1,000 billion barrels of oil out west? Don't get excited, it's going to stay there. Dr. Hubbert told the Senate Committee on Interior and Insular Affairs it wouldn't work, three years ago this month.
It really sounds simple. You "simply" dig up such enormous quantities of shale (1.88 million tons a day,) that it's equal to digging a Panama Canal every week. You crush it fine and heat to 1,100 degrees in a retort to boil off the oil locked in the rock. Then you get rid of the rock. Only now it's turned caustic and has increased in bulk by 20% to 33%. So you back-fill the leftovers, called tailings, into the hole you dug it out of. Since you still have a lot left over, you dump it into the empty scenic canyons of the west. To do this you need to grab off 89% of the undeveloped water of Colorado and Utah and half of Wyoming's. Oh yes, and you turn the Colorado River system into alkaline salts which means you wreck the agriculture in Colorado, Arizona and southern California. What will this get you? 1-1/2 million barrels of oil a day out of the 17 million per day that the U.S. is using!

A news item in the Milwaukee Journal of August 29, 1976,25 says that the last of the oil shale development companies, Standard Oil, Gulf, Shell and Ashland, have walked away from the projects in Colorado and Utah, asking the Department of the Interior to release them from paying any more on their leases. Standard and Gulf have already paid $126 million of the $210 million they bid, and Shell and Ashland have paid about $70 million of the $117.8 million they bid. You have to admit they tried, really tried and they spent a big buck to make it work, but it won't


Submitted by Aecetia on February 28, 2008 - 9:11pm.

Perhaps clean energy is more to your liking:
How about this? Toshiba's building a "Micro Nuclear" reactor for your garage?
Posted Dec 19th 2007 11:40AM by Paul Miller
Filed under: Household

Alright, details are slim, and we really have no idea if Toshiba has any plans whatsoever to sell these nuclear reactors to consumers -- in fact, we hope it doesn't -- but it does seem like the company is well on its way to commercializing the design. Toshiba's Micro Nuclear reactors are designed to power a single apartment building or city block, and measure a mere 20-feet by 6-feet. The 200 kilowatt reactor is fully automatic and fail-safe, and is completely self-sustaining. It uses special liquid lithium-6 reservoirs instead of traditional control rods, and can last up to 40 years, making energy for about 5 cents per kilowatt hour. Toshiba has been testing the reactors since 2005, and hopes to install its first reactor in Japan in 2008, with marketing to Europe and America in 2009.

Submitted by Arraya on February 28, 2008 - 9:19pm.

Feasible but it does nothing for transportation, which is the big issue.

What this all boils down to is we have to give up our cars. Also, air travel will only be for the rich.

I have a feeling will start a lot of new wars before we come to this realization though.

Submitted by flu on February 28, 2008 - 11:37pm.

If I read it right, I don't think it was Congress is going to tax oil industries more. It's that Congress is going to take away subsidies from oil industries.

Anyway, perhaps I'm too optimistic. But I think with high oil/gas prices, it will provide more incentive for us to come up with alternative energy sources...Because it may actually start to make sensennow.

Tesla anyone?


The good news is that they worked out the transmission issue.  


----- Sour grapes for everyone!

Submitted by Deal Hunter on February 29, 2008 - 1:03am.

At what price point does gasoline have to be for people to change their fossil-fuel guzzling lives???

It's nice to talk about alternative energy and Tesla cars (but, golly, I really want one of those), but it's still a car - which means we're not really ready for life as we know it to change.

Much more than cars are the things we have come to expect as our god-given American right to have lifestyle that are the real sources of our vast consumption of pertroleum:

-Fresh fruit from 8 different countries available at our local Costco.
-99 cents store
-Starbucks Monday special: Morning Roast Arabica Espresso
-Prestine corn on the cob, not half eaten by corn grubs
-Abnormally large avocados
-Abnormally small tomatoes
-Taco bell
-Bottled water
-Nike shoes

I don't see Americans doing without these things even if gas goes up to $10-$12. Maybe at $20?

Submitted by Arraya on February 29, 2008 - 2:01am.

The good news is that they worked out the transmission issue.

One word "scalable". Get it while you can.

All alternatives to transportation fuel have serious limitations.

Just can't re-create what nature made. As much as we try.

Maybe the just in time technology fairy will come through, we'll see....


At what price point does gasoline have to be for people to change their fossil-fuel guzzling lives???

When we are given a societal structure that is no so dependent on it... Good luck on that one.

Submitted by 4plexowner on February 29, 2008 - 6:57am.

"The car of the future is a railroad car and a bike at the other end."

This sounds like James Kunstler's viewpoint - he thinks that all the talk of alternative energies is just typical human denial behavior - not wanting to accept that their unsustainable lifestyle (highly dependent on cheap petroleum) will have to change, they cling to fantasies like micro-nuclear generators in their garages, oil shale and oil tar sand


Speaking of Tesla. Has anyone researched Tesla's inventions or Wardenclyffe Tower?

Some branch of the US government confiscated all of the experiments and equipment from Tesla's laboratory - what was Tesla working on at the time? - where did that technology go? - why was Tesla's tower torn down?

Immanuel Velikovsky is another interesting scholar - he was studying historical calendars and wanted to resolve what he perceived to be a dating mis-match between them - he thought that if he could find a global-wide event (earthquake, celestial phenomena, etc) he might be able to correlate the different calendars he was studying and resolve the dating mis-match

The global-wide event that Velikovsky found was a comet passing through our solar system - the event was documented by numerous sources originating from multiple peoples living on different parts of the planet - this discovery changed the direction of Velikovsky's work and he ended up with a series of books documenting how comets have passed through our solar system and the effects those comets have had - his work was highly controversial at the time (1950s) and the mainstream scientific community actively tried to suppress it [if you have ever wondered about manna from heaven or fire and brimstone raining from the sky you need to read Velikovsky's books for an interesting take on these phenomena]

James McCanney is another interesting scientist - he believes the universe is primarily electrical in nature and that the conventional gravitational models of the universe are incorrect - his books describe his electrical model of the universe and the plasma effects that occur when a comet passes through a solar system

I mention these three men for a reason - they all talk about the electrical nature of the universe and the type of events that would occur in an electrical universe - they all present evidence that makes the electrical model of the universe seem more logical and credible than the gravitational model being pushed by mainstream science - and, most importantly, they all hint at the unlimited energy that is available to us by tapping into the free electricity that permeates the universe

Tesla's tower was an attempt to tap into this energy source - Velikovsky believed that the lost society of Atlantis had learned to tap this energy source - McCanney explains the science behind the energy source

Now here's a conspiracy theory for you to think about: Tesla discovered how to tap into the free electricity coursing through the universe - he intended to provide this technology to mankind as part of their birthright to the stars - the implementation of this technology would be unacceptable to people with vested interests in petroleum so the technology was confiscated and suppressed


It's ironic that I started this post by bashing people for clinging to fantasies and finished it by suggesting that we can tap into a free source of electricity - oh well, it isn't easy being a whacko nutjob!

Submitted by 4plexowner on February 29, 2008 - 7:12am.

since we are talking about petroleum and how important it is to our society

I find it interesting that nobody knows for sure how petroleum is created on our planet - there are numerous theories but no consensus of opinion

Velikovsky explains where petroleum came from and McCanney explains the science

Submitted by flu on February 29, 2008 - 7:41am.

since we are talking about petroleum and how important it is to our society

I find it interesting that nobody knows for sure how petroleum is created on our planet - there are numerous theories but no consensus of opinion

Velikovsky explains where petroleum came from and McCanney explains the science


Did your ever see the comedy "Airplane 2"? Dumb movie, but Jacob's explains it well.

Steve McCroskey: Jacobs, I want to know absolutely everything that's happened up till now.
Jacobs: Well, let's see. First the earth cooled. And then the dinosaurs came, but they got too big and fat, so they all died and they turned into oil. And then the Arabs came and they bought Mercedes Benzes. And Prince Charles started wearing all of Lady Di's clothes. I couldn't believe it.....


anyway, it will probably take $5+ gas prices before we see any material impact to the way americans consume gas and before we really push for alternative fuel imho. Still plenty of guzzling suv's out there.


Anyway, would some really rich person from piggington go pre-order your tesla from teslamotors so that

1) you can help teslamotors stay in business

2) you can tell me how the car drives?


Come on. Trade in that ferrari, astro martin, porsche, or massarati. This is way cooler, not to mention a real flat torque curve, and good for the environment.


Plus since this is a limited production car, you still get all bragging rights at the country clubs. You're buddies won't pick on you when they find out this does 3.6 in 0-60, and is built by lotus.By keeping teslamotors in business, you'll allow the rest of us peons to purchase whitestar:



Thank you :)



----- Sour grapes for everyone!

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