Sushi Money

How long are the elected leaders within the U.S. going to let OPEC, oil companies and investors determine the price of oil and the price of gas that consumers across the country pay to put in their cars?  Oh, well maybe that’s the way the free market works. 

But when the price of oil doubles over the last year, there’s something wrong with the free markets.  Maybe they’re not so free after all, and between the oil producing nations, the giant oil companies and enormous investment and commodity trading practices, consumers are paying a premium that just doesn’t seem fair.

So now the politicians continue to blame the oil companies for these problems, wringing their hands over what to do.  Of course there’s enough blame to go around for everyone it seems, even those of us driving gas-guzzling vehicles that cost a fortune to fill at the pump. 

But the Congress itself is also to blame, even though they recently passed the symbolic NOPEC law targeting the OPEC nations for potentially monopolizing oil.  Some journalists have astutely observed that Congress is really doing the same thing that they have accused OPEC of doing:

“This [law] is designed to make OPEC’s activities illegal. But here’s the problem: All that talk about “limiting the production of oil” could apply to Congress just as much it does to OPEC. Thomas Pyle, president of the Institute for Energy Research, comments:

“The Congress itself is guilty of committing the crimes outlined in this legislation. In fact, it is a repeat offender. The only difference between the Congress and OPEC in this regard is that OPEC is willing to produce oil for its citizens and its economies. The U.S. Congress, unfortunately, is not.”

“Pyle is referring to Congress’s refusal to lease more public lands for oil and natural-gas exploration. His group receives substantial funding from the oil industry, but he makes a point that even an environmentalist can appreciate. Congressional Democrats, together with a few moderate Republicans, have killed repeated attempts to open America’s Arctic National Wildlife Refuge (ANWR) for oil exploration, and Congress has barred states from deciding whether to allow drilling on the Outer Continental Shelf in the Atlantic and Pacific Oceans and the eastern Gulf of Mexico. All these actions were taken, in part, to limit carbon emissions. But if NOPEC somehow managed to reduce oil prices (which it will not), it would do so by pressuring OPEC to increase oil production. And any OPEC increase large enough to lower prices would cause far more carbon emissions than any potential increase in American production.”

But what about the oil companies?  If the oil companies are guilty of something, it’s their ignorance and hubris at failing to understand how oil prices are affecting the American economy and consumers.  Instead of defending their profits, which of course is the goal of any business, oil companies should be working with government to solve both the demand questions and the speculative investment concerns. 

So is the price of oil running up purely because of fundamentals with demand and the price of the U.S. dollar?   From a long term view there’s little doubt that the fundamentals and global demand have determined the prices we pay.  But the debate regarding the influence of investment speculation is valid, especially in recent years.

Some have cited that it’s not like other commodities such as corn or wheat.  No one is “growing” more oil, although they could be doing more exploration to find it.  In the face of increasing demand however, and managed (aka OPEC) production, prices are generally going to head up.  Paul Krugman looks at it as a consumption versus supply storage issue, and hence prices influenced by those dynamics.  Is it that simple? 

I guess it depends on how you look at it.  If consumer demand decreases, we would like to think prices at the pump would fall because inventories would rise.  But what if the oil companies also do not demand enough oil purchases from producing entities?  In other words, rather than store excess oil,when the oil companies see reduced demand they simply don’t buy more oil from OPEC and inventories actually fall.  When inventories fall, supply is reduced and prices are going to head up.   So are the oil companies to blame? 

Maybe the oil companies don’t manage demand per se, but they do influence inventory and refinery production immensely.  Are they making money at the expense of the American consumer?  Sure looks like it.  But so are the investment banks and hedge funds. 

Are we in a speculative bubble with oil prices too?  Probably.  But unfortunately, the long term view indicates the fundamentals of supply and demand will be the primary driver governing oil prices.  Without more oil, and greater oil and gas refinining inventories, we will continue to pay higher prices.

So what else could government be doing?  The politicians could provide incentives for building new refineries, and open up regions for drilling both in Alaska and off the coasts of the nation.  One of the oil company executives made a pretty good statement when replying to one of the politicians in congress:

“This is the only country in the world that denies its citizens access to known reserves of oil and gas.”

Think increasing drilling won’t help?  Actually it would help incredibly, but takes time.  For the past decade too many people- mostly politicians- have argued against it, rather than doing something about it.

“If the nation set a goal of increasing domestic production by 2 (million) to 3 million barrels a day by opening up new sources of exploration and production, we could demonstrate to the world that we are in control of our own destiny,” Shell Oil Co. President John Hofmeister told a Senate panel.

It would probably be a lot more than that.  From the National Review article above,

“The amount of oil we could produce is not negligible. Take ANWR, just one of several untouched sites that contain known oil supplies. Based on figures from the Energy Information Administration, ANWR alone could produce enough oil (in 2004, the EIA estimated 900,000 barrels per day by 2025) to make 6.4 billion gallons of gasoline annually. Because producing and refining five barrels of oil requires energy equivalent to one barrel, this translates to a net energy gain of four-fifths that amount, or 5.1 billion gallons of gasoline annually. That is enough gasoline for 13 days of American consumption at the current rate. Moreover, Uncle Sam would make somewhere between $150 billion and $300 billion on ANWR leases over the estimated life of the oil deposit.”

That’s actually a lot of oil production, and would offset and compete with the prices for imported oil. What about off-shore drilling? We could expand or build new refineries if we really wanted to. I wonder if we’ll reach that point… more importantly, we need to develop an energy plan for the next 50-100 years for the nation.

If our elected leaders would simply throw politics aside for a moment (!), maybe we could get off the Blame Train and have that Energy Summit and start working on a way forward for the nation. 

One of these days we’re going to find ourselves not needing quite as much oil with highly efficient vehicles running around the roads.  I believe technology and the stark economic realities will foster the transition to new types of alternative fuels and the demand for oil will drop over time.  Maybe there will be some cataclysmic event or technological marvel that revolutionizes transportation.  Can you imagine what would happen if we discovered something that effectively negated the need for oil-derived fuels for public transportation across the nation?   Energy independence! What a great concept.

Whatever the future holds, the OPEC nations won’t always be showered with U.S. dollars as we buy endless barrels of oil.   Indeed, OPEC really should get smart and start pumping more oil. 

For more on The Oil Conundrum see:

• The Oil Conundrum Part III: Who’s On First?

No comment - Post a comment

« A Little Garden Goes a Long Way | Economic Challenges Continue »