Washington’s Gas Price Blame Game

April 26th, 2011 at 6:43 am | 20 Comments |

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Here we go again: Gasoline prices are dancing at or above $4 per gallon, and politicians on both sides of the aisle are dusting off tried-and-true gimmicks for politicizing the issue, pointing fingers, and doing their utmost to avoid squarely facing up to the root cause of the problem – oil dependence is risky and getting more so.

This is not what good government folks mean when they call for bipartisanship.

The Democrats, self-proclaimed champions of the little guy, are going after greedy speculators, conniving hedge fund operators, and other financial sharks determined to rob said little guy blind, so we’re told. Senator Richard Blumenthal (D-CT) has called for empaneling a federal grand jury to hurl subpoenas at the suits on Wall Street. Unfortunately, Blumenthal is treating a symptom and sending the patient home to die.

The Republicans, self-proclaimed champions of the little guy, are no better, with their strident pushing of drill-till-we-drop legislation that would do nothing to bring down gasoline prices in the short term and do a great deal to perpetuate America’s dangerous oil dependence in the long term. While Republicans like House Natural Resources Chairman Doc Hastings (R-WA) give lip service to diversifying America’s energy menu away from oil, their hearts are not in it, which suits the House of Saud to a tee.

A narrative that the drill-everywhere crowd is pushing is that if the federal government would just send the oil companies a “come on down” invitation to drill all oil fields under federal ownership, happy cheap gas days would be here again. Recently, Senator David Vitter (R-LA) went so far as to claim that 95 percent of U.S. fossil fuel resources are locked up from development.

An outlandish claim, to be sure, but here’s the salient issue that Vitter and the rest of the drill-everywheres do not dwell on – the faster we and the rest of the world deplete cheap-and-easy oil, the more quickly we will be forced to tap expensive-and-hard oil in ultra-deepwater and polar regions, and the low-grade stuff like kerogen, a wannabe oil colloquially called “oil shale” that is not economical today because of high capital and production costs.

High-cost fields require high prices to go into production. Sure, there might be 800 billion barrels of kerogen in the Rockies. If getting the goop out of the ground and turning it into usable fuels requires sticker-shock fuel prices, would there be enough demand to make production pay?

These are the long-term issues that get buried when politicians like Blumenthal and Hastings tout hand-waving gimmicks to grab headlines and score transient political points. Rational strategies that will help us navigate our way to a less risky energy future get lost in the shouting.


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20 Comments so far ↓

  • TerryF98

    “Recently, Senator David Vitter (R-LA) went so far as to claim that 95 percent of U.S. fossil fuel resources are locked up from development”

    It was not meant to be a “factual” statement. Lies are all they have. When Republicans want a big number 95 pops into their head.

  • armstp

    Jim,

    You always seem to mostly be reasonable, although your view on nuclear is just wrong. However, I don’t quite understand this sentence or post.

    “…to avoid squarely facing up to the root cause of the problem – oil dependence is risky and getting more so.”

    What are you talking about in this statement? Root cause of the problem (ie. why price of oil is high) or the impact of that high oil price (“oil dependence is risky”")? Those are to complete disjointed thoughts. That sentence does not make sense.

    You need to understand a few things:

    * it is against the law to speculate on oil and other commodities and laws against speculating are to be tightened: The Dodd-Frank Financial Reform bill, signed into law on July 21, 2010, mandated that the CFTC write rules for the oil markets designed to stop speculation from controlling prices on crude oil and gasoline and driving them to astronomical levels, as they did in 2008. The bill also demanded that these rules be in place and working by February of this year. Industry resistence and the GOP have stalled these new rules from being put in place.

    * how do you explain a 30% increase in the price of oil in a very short time (a couple of months)? There certainly was not 30% increase in the demand for oil or any prospect of a 30% increase any time soon. In fact, Saudi Arabia just cut production due to a lack of demand.

    * why is it not alright to blame the increase in the price of oil on speculators? The Department of Energy statistics show that investors increased their demand for oil over the last ten years by exactly the same amount as China did. So investors are as much to blame for an increased demand for oil and China has been. There are just many many more investors/speculators investing in oil these days, which has increased volatility.

    The GOP arguments are just silly. More drilling in the U.S. will not impact the price of oil whatsoever. At least the Democrats arguments are based on a reality.

    By the way according to the Department of the Interior oil production increased by more than a third on the U.S. Outer Continental Shelf — from 446 million barrels in 2008 to an estimated 600 million barrels in 2010. There are also millions of acres of land and miles of sea that have already been approved for drilling and the industry is not using it. So with such a large increase in domestic production over the last two years, why has the price of oil continued to go up?

    .
    .
    .

    “But it’s important to remember that chasing destructive speculative activity out of a commodity market is not an impossible task. In January 1980, the Federal government and the exchange overseeing silver futures trading, the COMEX, took collaborative action: In a series of draconian but necessary measures, the exchange instituted a “liquidation-only” restriction for the market, forcing speculators to either take delivery of contracts or find massive credit for their holdings while the Federal Reserve blocked commercial lenders from extending that credit. The impact was immediate: Within three months, prices dropped 77%.

    The example of silver in 1980 shows that the tools are available and that only with the combined will of the industry and our government can we restore fair prices to commodities. Whether we see such will in action to help lessen oil prices for consumers, however, remains to be seen. “

  • ggore

    There is something going on here, you can’t escape the fact that the price of gas is skyrocketing, even though actual demand has dropped both in the U.S. and worldwide the past several months because of the skyrocketing price. That leaves only one possibility, the activities of traders running up the price in a frantic effort to control supply and price. This happened during the GWB presidency, with the result being that once the price reached a certain point people stopped buying, traveling, buying gas guzzler cars, etc, and those traders were stuck holding all this oil and had nowhere to put it, contracts coming due, and the price crashed. The same thing could very well happen again, because these people did not learn that valuable lesson. The government did not intervene in the previous instance and I see no sign that they will this time either, because these traders are among the top 1-2% of earners in this country and thus should be shielded from all taxation and regulation.

  • sinz54

    Every single time the price of gasoline has risen, politicians have demanded that the unnamed “speculators” be found and jailed.

    Without bothering to look at the economic forces and issues at play: The instability in the Middle East. The decline of the dollar, which makes petroleum more expensive when denominated in dollars. The fact that the U.S. consumes one quarter of all the petroleum produced on earth. The OPEC cartel, composed mostly of nations which have their own nationalized oil companies that they dictate to. Americans’ love of big cars and big trucks–I can’t believe I’m seeing Hummers in Massachusetts again.

    And last but certainly not least, the fact that Obama and his environmentalist supporters actually WANT the price of gasoline to rise sharply in order to discourage demand for it. So why should they do anything substantive to bring the price down? They like it high.
    (Liberals didn’t know that the purpose of a carbon tax was to drive up the pump price of gasoline??? Give me a break.)
    .
    It’s positively Stalinist, blaming the poor economy on “saboteurs” and “counter-revolutionaries” rather than on economics.

    Not once–NOT ONCE–has any investigation of any of the past price rises in gasoline (like the 1970s, the 1980s, or just 3 years ago), found any evidence that speculators were the main problem. The main problem always turned out to be economics.

    One more thing: Gasoline prices rise and fall due to economic conditions.

    The same Democrats who are howling for “speculators” who allegedly drive up the price to be found and jailed, should also be demanding that when the price goes down again (as it will), speculators who drove down the price should get the Presidential Medal of Freedom or something.

    During the Reagan administration, the price of gasoline fell to 68 cents a gallon. I didn’t hear any Democrats calling for speculators to be congratulated over this.

  • talkradiosucks.com

    “During the Reagan administration, the price of gasoline fell to 68 cents a gallon. I didn’t hear any Democrats calling for speculators to be congratulated over this.”

    I seem to recall crude dipping below $50 not two years ago as well.. same thing then.

    • armstp

      Talk,

      Once the oil bubble was created in 2008 and things started to look over-valued and pricy, I am sure the speculators started shorting their position in oil, which likely helped to driven the price down. It is why volatility increases. I would also say that the large global recession had something to do with the decline in the price to $50, as demand drop. Sure demand is coming back with the global economic recovery, but not likely enough to justify $120 a barrel.

      The average 30 year price of oil is actually closer to $20 to $25, so these high prices are really extraordinary. Seems like crazy high prices, given the global economy is not so completely healthy.

  • High Gas Prices Hurting Obama

    [...] not surprisingly,Washington is playing politics with higher energy prices: The Democrats, self-proclaimed champions of the little guy, are going after greedy speculators, [...]

  • Rabiner

    Sinz54:

    You realize Republicans are playing the same games as the Democrats here? Yet you still go on to blame the Obama Administration.

  • Stewardship

    The Detroit News reports today that 60 cents of the per gallon price of gasoline (today) is due to speculation. Another significant price driver is the dropping value of the dollar….we simply have to pay more dollars for the same amount of oil.

    Exxon’s president, last week, stated that we have an ample supply of gasoline in the US right now.

  • balconesfault

    The problem is that a healthy oil economy depends on more stability in pricing. Liberals don’t want ridiculous price spikes followed by price collapses, because this (a) leads to rushed exploration and bad environmental policies when prices are high, (b) leads to people making bad infrastructure decisions when prices collapse that lock in high fuel consumption (buying homes with longer commutes, buying gas guzzlers), and (c) damages the renewable energy/alternative vehicle fuels markets, which depend on predictability in the market to justify the large front end capital expenditures they require.

    Stalinst? Seriously, Sinz. If you want Stalinist you look at Gulag-style prisons, not at Congressional investigations.

  • Carney

    The real culprit is OPEC, which controls 78% of world oil reserves and keeps production artificially low to keep the price artificially high. Compared to the OPEC giant, our less than 2% of world oil reserves makes us a mouse. We could drill all out and OPEC could casually and easily counter our maximum effort with a minor cut in production to keep the supply low and the price just as high. So the problem is not drilling restrictions.

    Nor is it “speculators” – for each “speculator” who bets that oil will rise, there must be another who disagrees or nothing changes hands. Nor could “speculators” keep prices high in an oil glut.

    The real problem is that we make ourselves a helpless captive market of OPEC by passively letting millions of new cars join the fleet each year that are unnecessarily “locked in” to only being able to run on OPEC juice. It would cost only $130 per new car at the factory for carmakers to add compatibility with alcohol fuels such as methanol, which is made from natural gas, coal, or biomass, all of which we have in abundance (unlike oil), and which is cheaper than regular (even after accounting for mileage) and higher octane than premium.

    See EnergyVictory dot net, SetAmericaFree dot org, or this brilliant talk by aerospace and nuclear engineer Dr. Robert Zubrin to Google employees: http://www.youtube.com/watch?v=NLRuGUPkyh4

  • Stewardship

    Carney….not necessarily true in regard to speculation. I could sell a contract to deliver oil in June 2012 at a price of $160 per barrel, even if I don’t own any oil. Only 1% of speculators actually take physical possession of the underlying oil (according to today’s Freep). The spot market takes cues from the futures market, and buyers begin to pay higher prices.

    But, your larger fact about OPEC is spot on. The Republican leadership–in particular Fred Upton–is simply pulling the wool over Americans’ eyes–with the ‘let’s drill everywhere’ plan.

  • balconesfault

    The larger fact about OPEC is spot on … but one thing in particular that reflects the blinders that Americans wear when thinking about the issue is Carney’s “OPEC … keeps production artificially low to keep the price artificially high”.

    OPEC, and in particular the Saudis, keep production artificially low also because they’re practicing sustainability in a way that us free-marketeers don’t understand. They understand that their economy is wholly dependent on oil, and they’re managing their reserves to extend that day that the last drop is extracted as far as they can.

    Here in the US, the attitude for every resource is “extract and sell as fast as you can”, because we don’t think of our reserves as having intrinsic long term societal value. Thus, the term “production” rather than “extraction”.

    • Carney

      Balconesfault, if the Saudis were farsighted and careful stewards of their oil wealth, they’d have been preparing for the day when it all comes to an end.

      They’d have inculcated a work ethic. But only 15% of them work; the rest idle in palaces, brothels, or extremist mosques, and the joke is that no Saudi ever lifts anything heavier than his own billfold. They’ve imported countless indentured coolies from elsewhere to do the work instead, creating a major future problem.

      They’d have diversified the economy, but despite lip service and a few showcase projects, nothing has changed. In 1974, nearly 91% of Saudi income was from oil; three decades and a staggering $2 trillion later (for a nation of 25 million), the proportion was the same.
      Energy Victory, page 40:

      “There has been no real economic development in the kingdom. Instead, most of this vast treasure has been wasted on the most incredible collection of narcissistic expenditures the world has ever seen. Hundreds of palaces have been built; luxury cars, yachts, private jets, and thoroughbred horses bought and dissipated by the thousands; narcotics, fine liquors, jewelry, haute couture, child sex slaves, and concubines purchased and consumed by the ton. Through his 22 wives and those of his 43 sons, King Ibn Saud had more than 600 grandchildren and they, in addition to some 3,000 other relatives from collateral lines, all needed to live royally, with allowances for each starting at $270,000 per month. Beyond that there were tens of thousands of additional “aristocrats”, retainers, advisers, clerical allies, insiders, and other sycophants who were all dealt substantial cuts.”

  • balconesfault

    I didn’t say they’re being careful stewards of their oil derived wealth. They’re being careful stewards of their oil.

    Meanwhile, to inculcate a work ethic, you must create a middle class. And as the middle class grows, it begins to want political power. And then the royal family starts to have real problems.

    What the Saudis have done is to buy a lot of investments that produce revenue streams from overseas businesses. And I presume they have the GOP dream going – a 0% tax rate on unearned income. So why work?

  • valkayec

    So, Mr. Dipeso, when will you or your colleagues stand up to the GOP legislators and tell them not only are they wrong but that their current hue and cry is not an energy policy for the future? If the GOP really wanted to score big points with the American people they’d create a comprehensive energy policy that would/could wean us off oil.

    But I don’t see that occurring. Instead big oil is being protected – like the old horse drawn carriage industry – by legislators, on both sides of the aisle I might add although a great deal more on the GOP side, who take huge sums in donations from various oil magnates. In other words, these legislators appear to care less about the U.S. economy and future economic growth that their own re-elections.

    Staying stuck in mid-20th Century policies and ideas are sure losers for the future.

  • sinz54

    valkayec: “If the GOP really wanted to score big points with the American people they’d create a comprehensive energy policy that would/could wean us off oil. ”

    FYI, the GOP and the Obama Administration were close to a deal on energy last year. It would have been an “all of the above” strategy that would have increased domestic oil production and nuclear power (as the GOP and moderate Dems from Red States wanted), in exchange for investment in alternative energy (as liberals from Blue States wanted).

    Then came the BP oil spill, and the deal fell apart. Liberals immediately backed away from any deal that included domestic oil production.

    And now with the Japan nuclear disaster, I can guarantee you that liberals won’t accept any deal that includes nuclear power either.

    That leaves the GOP with the options of either doing nothing or helping liberals try to run America the way Greenpeace would prefer.

    Doing nothing is preferable.

  • sinz54

    Lisa Jackson, until now the darling of the liberals for her management of EPA, just wandered off their reservation.

    No insinuations about anonymous “speculators” coming from her. Instead, she said this was the main cause of rising oil prices:

    “What appears to be the most important factor at work is our dependence on imported energy. This is what leaves us vulnerable to jumps in prices. When something changes thousands of miles away, the American people pay for it at the pump.”

    http://www.politico.com/news/stories/0411/53716.html

    Ms. Jackson carefully avoided discussing whether the Obama Administration could have handled those “changes thousands of miles away” in a better way. But in this economy, no one wants to stick their neck out and get fired.

    So if anybody is still touting the line that “speculators” are driving up the price of oil (don’t they ever drive it down?), I suggest they argue with her.

    • balconesfault

      Ms. Jackson carefully avoided discussing whether the Obama Administration could have handled those “changes thousands of miles away” in a better way.

      It’s not a matter of addressing or avoiding any specific foreign policy action.

      It’s a matter of whether it is healthy for our energy policy to be held captive by our foreign policy.

      Where we send our military should be a matter of protecting America’s national security. It is a collective failure of our system that we’ve done little to wean ourselves from oil over the last 50 years – but instead sent our military across the sea to keep the oil flowing once America’s reserves could no longer support our habit.

  • balconesfault

    FYI, the GOP and the Obama Administration were close to a deal on energy last year. It would have been an “all of the above” strategy that would have increased domestic oil production and nuclear power (as the GOP and moderate Dems from Red States wanted), in exchange for investment in alternative energy (as liberals from Blue States wanted).

    I don’t believe the GOP would have ever approved the deal. It was one more pipe dream being floated by a few talking heads, that had no little or no chance of passing a GOP filibuster.

    Last I looked, increasing nuclear, and investment in alternative energy, BOTH require a lot of Federal Spending. You want to tell us how many hundreds of billions the GOP was going to approve? Good luck with that one!