Oil Prices in Steep Decline: Be Afraid, Be Very Afraid!
The following piece was originally published on July 21, 2008:
Here we go again. Oil prices tumbling "in the steepest four day decline in history."
The sense of relief throughout the land is palpable. For a moment the fact that we are still at levels over 160% above prices of only a year and a half ago -- prices unheard of before -- seems lost in the ebullient moment. And silenced for the moment is the inane commentary of President Bush, of our stalwart Secretary of Energy Sam Bodman, not to speak of our Chairman of the Federal Reserve Ben Bernanke, of myriad oil company poobahs, and of course our ex-Wall Streeter, Secretary of the Treasury Henry Paulson who understands that when his cronies on Wall Street are bleeding it's because of the manipulation of the "short sellers", but when it's you and I paying through the nose at the pump "it's all about supply and demand". All this while our regulatory commission, the CFTC, has become more of a casino huckster than vigilant overseer, forever whitewashing the commodity exchanges, proclaiming "We see no evidence of manipulation or undue speculation" -- as if an eighteen dollar plunge in four trading days had everything to do with "supply and demand" -- thereby shamelessly providing this administration, especially our Energy Secretary, talking points to rationalize doing nothing.
But something far more sinister is afoot in the steep descent in oil prices. Our national sense of outrage at the egregious actions of the oil industry, of oil producers, risks being mollified. Just when we become deadly serious about alternative fuels suddenly, magically, the price of oil retreats and we go back to the gluttonous consumption habits that were such a major contributing factor to the dilemma in which we find ourselves. Just think of the post-Carter years whereby administration after administration did nothing of consequence to mitigate our binging on fossil fuels. Even the one policy initiative set in place, the national 55MPH speed limit, was laid to rest.
In those years, and before 9/11, we were not nearly as conscious of the deep downside of our fossil fuel addiction. Issues of global warming and environmental destruction were hardly on peoples minds. The economic (such as the erosion of the value of the dollar) and the social consequences of the transfer of billions upon billions of our national wealth to the oil producers and oil producing countries was not an issue much in focus. Nor were we as aware then as we are since 9/11 of how this transfer of wealth not only risks our economy but our national security as well.
Will the price of oil continue to recede? I don't know, nor by how much or when. Certainly a fair return on the production cost of installed capacity could and should reflect a price of less than $50 a barrel. At that level the Saudis, as one example, would still be making some 33 times their production costs per barrel of crude oil sold.
But that is not altogether the point. We have learned something of deep importance from this run-up in crude oil prices: unlike the neighborhood grocery store, selling our families a container of milk at what might be an albeit recently higher but fair price, the oil producers are voracious and shameless in their drive to gouge each and every one of us here and across the world. The higher they can push the price of their fossil fuel poison, the more they will. They are dangerously unreliable and we can no longer permit ourselves and our economies to be held hostage to their excess of greed, spite and arrogance. Just consider the metaphorical and humiliating "poke in the eye " our president received when he went to Saudi Arabia to ask King Abdullah to significantly increase production and availability of oil on world markets. After all, like him or loathe him, he is still our president. And this with oil relentlessly clambering to levels in excess of $130/bbl, levels never seen before.
Humiliating our president was not enough. Shortly thereafter the Saudis called their OPEC brethren and major consumers to a hastily organized producer/consumer summit in Jeddah. Such luminaries as U.K.'s Prime Minister Gordon Brown and our Secretary of Energy Sam Bodman dropped everything to be in attendance. One could say that the summit was inspired and themed by King Abdullah's ruminations and profound ponderings -- "We are very concerned for consumers in all countries" -- given the miasma descending on the world's economies.
What was the result of this professed concern? The summit came and went and other than listening to lectures and background commentary by the Saudis and OPEC President Chakis Khelil on their version of markets and economics, the only thing that was achieved was a realization that the Saudi-led OPEC was not even going reinstate the full 1.7 million barrels a day production cut of late 2006 and early 2007 of which less than half will have been reconstituted by the end of this month. This, even though the price of oil has skyrocketed. With no meaningful effort on the part of the oil producers to abate the runaway price of oil, the price continued to shoot up from the low $130's a barrel to over $147 in the fortnight after the much heralded meeting. So much for the concern of kings, and oil producer economic babble.
What to do? There are many possible solutions, from keeping prices at current or higher levels ("the cure is not cheaper crack") as espoused by Tom Friedman in his current column, "9/11 and 4/11", to reining in demand through a voucher-type program calling for an absolute national ceiling on fossil fuel consumption (please see "A Forceful and Immediate Antidote to Our Oil Dependence"). Each have their pros and cons: Friedman's could be viewed as regressive, while the voucher program smacks of rationing, anathema to many (though from cursory personal observation I am amazed how many people would be willing to sign on if the system is fair.) The important thing is that we must begin to have national leadership and a serious national debate on an issue that is of existential importance to the future of the nation. We can not let lower oil prices in any way deter us from the initiatives undertaken to get this oil monkey off our back once and for all.
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The whole thing with the increasing price of oil started with the attack on Iraq and I'm not entirely sure that wasn't the point in the first place. After all Cheney met with a number of oil men around the same time and won't come clean as to what was discussed. I blame the president for the escalation of oil prices worldwide as you can't stir up the whole middle east without causing an oil crisis of some kind. Once again U.S. egregious foreign policy is at work lavishing oil companies with new found wealth and beggaring the general populace at the same time. No wonder Bush sleeps so well!
Oil went down because of supply and demand (or more appropriately because of speculation about supply and demand). No progressive can ever answer the question about why they think oil prices are what they are. Could they be higher? Do oil companies lower them because of altruism? The answer is simple. Oil companies want to make as much from oil as humanly possible. They will sell it for as much as they think you will pay. You, on the other hand, want to pay as little as humanly possible and for any given amount, you will only buy as much as you feel is necessary. This is done voluntarily. It is called commerce.
Well, according to Senate hearings, over 70% of the price of crude is a result of speculation.
Unfortunately, the body you cite, the Senate, knows absolutely nothing about the market, economics, business, or speculation. What they know about is demagoguery.
If a one over speculates oil by 233% (70/30), when it comes time to sell the product, the speculator will lose significant amounts of money. It doesn't make sense. They're goal is to calculate as close as possible what the oil (or any commodity for that matter) will be worth when it comes time to sell it.
Alan Reynolds (he deals economics, not with getting re-elected) has a good op-ed on the purpose of speculators, http://www
It's call market manipulation. A pure market economy with equal power held by both buyers and sellers is pure fiction, especially in oil markets. Research the history of mass transportation following WWII and you will find that the tire and oil and auto industries did whatever they could to encourage the expanded use of diesel buses and removal of electric trolley lines in urban areas. Fortunately, in cities like Portland, Oregon, we're seeing a return to electric. Fortunately, cities like Portland and Eugene, Oregon, invested extensively in bike lane construction years ago.
How do you believe the market is being manipulated? Do you buy oil and gas voluntarily? Again (I've never had a progressive answer question) do you believe the current price of gas is set where it is because of corporate altruism?
And as far as municipalities go, they are easily "encouraged".
I just want to get to where I need to go! You know, like work, school, the grocery store, my sister's house for family gatherings - that kind of thing. You can only cut down on so much of your driving, by making dual-purpose trips or going grocery shopping less often (and buying more when you're there). After that, the common consumer is just plain getting screwed by gas prices, and the money for gas comes from the money for other things, including mortgage payments (note the current housing crisis).
In my view, gas going down is a blessing that allows me to pay off other things which I've been putting off for months. But that's just me.
Did you read this commentary?
" we are still at levels over 160% above prices of only a year and a half ago -- prices unheard of before -- seems lost in the ebullient moment..."
Pay attention to the guy in the Oval Office, he is doing nothing to create an energy policy. If we don't, none of us in the middle class will be driving anywhere.
I have to go and don't have time to finish reading this article right now, but of all the people that write for the Huff post, Mr. Learsy is my most very favorite!
A fundamental change in our driving habits is now required.
The Automobile Industry is going to be in the same position as the Airline Industry in the next few months. Unless we get away from gas combustion vehicles, including Hybrids, the automobile industry (as we know it) will die.We need to make drastic moves. America needs to move to ELECTRIC. The vehicles are not as fast, not always as fun to drive, but the move will save Americans money (Billions) and help bring change to our automotive companies. Let's "Be Green"!!!!!!!!!!!! BG Automotive Group Ltd. has a car that will travel 80-100 miles per charge for $15,995. Finally a car that most Americans can afford. Did you know that 80% of all drivers, drive less than 50 miles per day? This new car will cost an equivalent of $0.20-0.25 cents/gallon (depending on electricity rates in your area). Why send $700 Billion per year to OPEC (now buying up U.S. companies) when we can use this money for our schools, health care, social security for all Americans, etc, etc, etc. We can make the difference if WE change.
Actually electric cars are faster, in terms of acceleration at least. The major problem with electric is the restriction on driving distance - road trips are impossible. Hybrids are a good temporary solution and stepping stone to something more permanent and more green, I think.
A change to electric requires an increase in electrical plants. If we need to decrease use of fossil fuels, oil, natural gas, or coal can not produce the electricity. It will be hard to avoid coal because we have so much. It would be difficult to use coal power for anything except electricity. Clean coal-burning systems to produce electricity are possible.
The source would have to be as reliable as the immediately available as the internal combustion engine. Nuclear is the most likely choice. Mr. Pickens’ idea to use wind is also plausible. The French have a way to deal with the waste. They get over 40% of electricity from nuclear.
If tomorrow, by some miracle, 50% of the cars, trucks, etc. were suddenly OFF the roads for good. Gas would be 8 dollars a gallon. Big oil WILL make it's BIG profits, you can believe that.
Don't be fooled people!!! Its a setup!!! We as a people are finally waking up.Lets get these clowns out of office then we can refocus and start improving our lives again in this GREAT UNITED STATES!!
Obama in 08
Right now I am so proud of him.He is representing the U.S in ways I could not have even envisioned.
We will make the right choice in November..
Obama has NO energy plan, other then "we should invest in new" innovation
"energy" proposals put forth by Bush. Do nothing and stay the course. No caps on oil prices, no investigations into the futures markets, no repeal of the Enron legislation that have led to this, no....I could go on, but it would scare you.
What are you so proud of?
I believe that there is more to the plan than that. Of course, I have read Obama's statements and speeches and listened to him. I know for a fact that he proposes a windfall profits tax on these companies that are making OBSCENE profits at our expense. I suppose that's 'not much of a plan' in your eyes, eh? And what will he do with this income from windfall profits taxes? Why-he will reinvest them in ways which will help the environment. I think it's a right good idea-making the profiteers pay for the solution to thier mess! Or are you one of the 'drill more holes and maybe we'll get lucky' crowd?
Proud of f the fact that your narrow mind can not see the bigger picture. Read the article again CAREFULLY!!! Its not just about energy,dum
Obama in 08
His plan is not your plan. Your list above is not a plan, nor could it be passed in any legislature. Capping oil prices is impossible, since the USA does not control the price of oil. Investigations will not increase the amount of available energy. Repealing the Enron excessive trading legislation may be helpful, but you have not explained how it would help.
Please explain. Then we all can for the change you want.
Didn't McSurge just credit Bush for the drop in oil prices? WTF?
Perhaps it's time to remove oil from the futures market, with on time production, transportation reliable. No longer necessary to have oil on the futures market.
The futures market is necessary for a modern economy. Just ask Southwest Airlines, who were able to lock in last year's price on aviation fuel by hedging. If you want companies to have reliable pricing, they need to hedge.If you have hedging, you have to have speculators to take the other side. That being said, it needs to have intense regulation and transparency, something our republican and DINO friends have forgotten.
Nobody really knows how much speculation is built into the price. Personally I think the Chicoms and the Indians getting off their bicycles and driving right when we're hitting peak oil is the main culprit. Also, the Energy companies have learned to game the supply, like Enron did in the Ca electricity crisis.
Yes, futures have a use for volatile commodities. Oil is not one of them, perhaps in 1890, but not now. Too much of oil's price is based on fund mangers, not oil production managers. Don't blame big ol for prices, blame the fund companies mangers for rapid price increases/decrease.
The rapid rise of oil has really put a crimp on the airline industry. But it did get too big for the territory it occupied. Airport expansion, and all those crony contracts, can now take a hiatus. The world was up to a million flights a day, 85 billion gallons of jet fuel a year. I don't fly very often, and resent paying so much more, but like the freeway traffic clearing up a little, the good news is that there's likely to be fewer obnoxous types disturbing the peace on the public transit planes. You are no longer "free to move about the country." The economic seriousness is catching up with the security aspect.
Of course prices are coming down now that there is an international demand for alternative fuels. Even the United States, who is stuck in the last century has joined in. What company/corporation doesn't put their product "on sale" when facing the threat of losing customers (aka consumers). Oil is finite, it will run out. The oil producers and oil companies are just hoping that the "sale" will distract us long enough that we forget this and go back to our consumptive ways and stop working on the alternatives.
Really? Because Britain just dropped their biofuels program because they discovered they are a joke.
And also announced at the exact same time a 200 billion pounds program to invest in wind power and other renewables
The main thing to keep in mind that the price of oil has been manipulated--and continues to be manipulated by speculators. Nothing has really changed in the game. 60% of the oil's price is due to speculation. And now the speculators are moving into grain.
If you believe that speculators are the main issue, drilling would cause a drop since they are speculating that we are going to have a shortage . . . correct?
US territory drilling with its inconsequential impact in any time frame has utterly no consequence in the time frame of the commodity futures contracts - so no, drilling won't do squat.
As I'm sure many other posters have pointed out, it's hard to see this as a natural effect of the supply/demand process, considering that since before I began driving (16 years ago), diesel fuel always was cheaper than regular/unleaded -- by at least 50 cents per gallon. This was due, in part, to the cheaper refinement of diesel. However, after Bush took office, and following Sept. 11, regular fuel and diesel switched positions, causing a domino-effect in skyrocketing prices not only for the fuel itself, but for peripheral industries that depend largely on delivery by diesel-powered vehicles. How coincidental it is that while regular consumers have more leeway in adjusting their driving habits with rising gasoline costs, truck drivers, airlines and commercial-vehicle operators can't be as flexible -- and when it costs them more to supply goods, the costs of those goods increases for consumers. It bears mentioning that the cost of refining diesel has not become more expensive than regular/unleaded refinement'; it's still cheaper. Shell, Mobil, BP, et al basically told the public in not so many words: "You may think you outsmarted us by driving less, but we'll make you pay -- one way or another." Consumers have a choice; truckers don't. And now, when it comes to milk, corn, eggs and manufactured goods, none of us has a choice anymore: we're going to pay the oil piper. I hope there aren't just a few of us seeing this for what it really is.
The runup in the price of diesel certainly is a supply/demand event. The last numbers I saw showed diesel demand was up over 30% year over year in both China and India, and that increase has been steady and compounding for a long time. Second, anyone thinking alternative fuel/energy has to do with the recent decline in energy prices is just plain wrong. Energy prices are going down because demand declined significantly when oil went over $140 a barrel and the world economy is weakening everywhere, which means energy demand will go down dramatically. This is purely a supply/demand issue. The global economy simply can't withstand $140 oil at this point.
10 years from now, when oil is $300/bbl we'll look back fondly on "cheap" $140 oil. I think T Boone Pickens is right.
As of right now, we have to burn fossil fuels to generate electricity, so moving 100 million cars off of gas to electricity will just cause more fossil fuel to burned in the form of coal
20% of power in the US is generated in nuclear power plants.
We need to build more.
Who says we 'have to burn fossil fuels to generate electricity'? Just because we've always done it that way doesn't mean we have to continue. Britain has a program where HUMAN WASTE is providing electricity to a good part of London. It's not altogether 'online', but I haven't heard of any power outages at these 'waste-fueled' power plants. Quite the contrary! There probably won't EVER BE a shortage of human waste....
Right on target:
"Just when we become deadly serious about alternative fuels suddenly, magically, the price of oil retreats"
Absolutely on target!!
OILMEN Bush-Cheney's pals BIG OIL have played games with consumers all along, bamboozling us
with media manipulation.
It's not news that government's job is TO REGULATE INDUSTRY & MARKETS and TO KEEP ORDER IN ECONOMY.
Bush-Chene
SHUT THAT BARN DOOR NOW!
Return to common sense and ORDER by re-regulating BIG OIL and all the culprits crashing our economy.
I am in my mid fifties. I was unaware big oil had been regulated at any time. Can you clear that up? When did all the regulation and de-regulation happen?
As to tax subsidies for big oil, can you also tell me when that began? I like to keep track of these things.
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