Oil's Massive Price Distortion Militates the Reconvening of the 1970s Federal Oil Price Task Force
Steven Chu, our Secretary of Energy in his October 30 post on the Huffington Post "Weatherization: Saving Money by Saving Energy" focuses on the savings that can accrue to those conscious of how to reduce energy/electricity in their homes; insulation, programmable thermostats, efficient windows and the like. "I have always been an energy efficiency nut", he tells us.
He then goes on to inform about the various programs instituted by the Department of Energy to assist homeowners to weatherize homes and encourage home energy efficiency. Well and good, and as it should be.
But the Department of Energy has other mandates, and here its actions have been totaling lacking, other than continuing, in a Bush like trance, to fill the Strategic Petroleum Reserve irrespective of price nor consideration that it already holds some 750 million barrels of oil (more than Iran's total annual oil export loadings). The Department seems oblivious to the fact that in the nine months of the Obama presidency the price of oil has skyrocketed by nearly 250%, from $33/barrel in February to touching $80/barrel late in October. In the world of commodity trading, given the massive oversupply of oil on the market today with storage overflowing, and scores of tankers anchored at sea with hundreds of millions of barrels of oil with no place to discharge, a price for oil shading $80 a barrel can be nothing more than a willfully contrived aberration. Clearly something is amiss. (Please see "Chairman of Gazprom Predicts $100 Oil Because of Speculation. Speculation, Really?" 09.08.09)
Added to this effrontery, is a market inured by a brain washed public, helped along by a somnolent press, comatose analysts, oil industry flaks and an oil lobbyist conflated government presenting these prices as a fair reflection of a free market. Then, to add the icing on this poisoned cake is the ongoing OPEC babble by such as its President, Jose Botelho de Vasconcelos, who in an epiphany of altruistic concern was reported by Reuters/CNBC announcing that the oil ministers of OPEC will raise output "to protect the global economic recovery at a meeting in December if oil prices rise to $100 per barrel". Here we have OPEC in the guise of Santa Claus bringing Christmas goodies if we all behave.
Such is the Alice in Wonderland world that we have come to accept without serious questioning, acquiescing as we are all being taken to the cleaners. And that is the Department of Energy's job, to wake us all up to the day to day willful distortions and manipulations that are costing the consumers and the nation billions. To date, not a peep from the Department of Energy other than a most welcome focus on long term programs toward the development of alternative energy fuels. This while the national economy is bleeding billions to foreign suppliers and oil interests throughout the world, in these deeply challenged economic times. Billions that could be put to far better use at home.
Consider the enormous potential savings to America's balance sheet. Consuming around 20 million barrels of oil a day at say $80 barrel transfers $1.6 billion from American consumers into the pockets of oil interests both here and abroad. Were the price at February's level of $33/bbl the transfer of wealth would radically lower, barely $660 million/day. This would result in a saving of $940 million/day or $342 billion a year. Let me repeat, $342 billion a year. More than the "staggering" $243 billion in money alone that the war in Afghanistan has cost us, according to Sen. John Kerry's testimony to before the Senate Foreign Relations Committee only a week ago.
It is long past time that our government take seriously and study intensely how oil prices are determined in a world of OPEC, speculation, timid oversight, failing transparency, international trading platforms, vast reserves of liquidity as those of sovereign wealth funds and their equivalents who have deeply vested interest in oil prices being quoted ever higher on the world trading exchanges. The whole gamut of oil price formation needs be examined and a government commission focused on this issue is long overdue.
In 1977 the then Department of Energy under Secretary James Schlesinger created a task force to address oil pricing and compliance to then existing oil price regulations. Given the turbulent and irrational movement in oil prices in the past few years, the appointment of a government task force has become essential to determine whether oil prices as currently constituted are truly an unfettered response to market forces, or an endgame of far more devious and malign pricing strategies to maximize illegally, even criminally, the profits accruing to oil producers at the expense of the public's well being.
Among the issue the task force could take under review:
-To determine the role of speculation in setting oil prices
-To determine the efficacy of such oversight agencies as the Commodity Futures Trading Commission (CFTC) in monitoring the fairhandedness of trading activity on the Commodity Exchanges'
-Back in July the CFTC made bold announcements pinning much of the oil price increases on speculative trading in the commodity pits. Yet since then little has been heard from the CFTC. What was the nature of their findings that permitted them to arrive at those conclusions? (Please see "The Huffington Post Outs The Oil Price Speculators" 08.02.09)
-Have the efforts of the CFTC to expose the role of speculation been derailed by Wall Street influence and their allies in government? (Please see "Wall Street Stampedes to the Aid of the Oil Speculators" 07.12.09)
-What is the impact on the price of oil as the result of trading oil by the Bank Holding Companies such as JP Morgan Chase, Morgan Stanley, Goldman Sachs and other banks the likes of Barclays who have dedicated billions to their proprietary oil trading/speculating departments while having access to virtually cost free funding at the Fed window? And how has this diversion/use of funds impacted their lending activities as banks in a time of economic stress?
-How does arbitraging the price of oil and oil products traded on offshore exchanges impact oil prices/products being traded on American exchanges such as the NY Merc?
-How transparent are these offshore exchanges, say London, Dubai, Singapore, Hong Kong among others?
-If they are not transparent are they subject to manipulation?
-What interface exists between our regulatory agencies, say the CFTC, and these offshore exchanges?
-The OPEC countries hold vast reserves of dollars and foreign exchange. Their sovereign wealth funds are bulging in cash. Can it be determined whether they or Russia are using this massive liquidity to move the energy markets on the International Commodity Exchanges to support the price of oil and oil products, these being the commodities that are the bedrock of their economies?
-Why did Saudi Arabia suddenly and only recently drop the widely used West Texas Intermediate (WTI) oil contract as the benchmark for pricing its oil, substituting a new London based "Argus" index? Explanations offered talk about disparity in pricing. But could it be that with the potential of a more vigilant CFTC the WTI contract becomes more difficult to "influence"?
- How effective is OPEC in restraining production of oil and impacting its price?
-What political options present themselves vis a vis OPEC and if any, are they being implemented and should they be?
-What role could NOPEC legislation play in restraining OPEC's willful collusion by striking the sovereign immunity extended to OPEC members that gives them leave under American jurisprudence?
-During the Bush administration the House passed NOPEC legislation that would have permitted the Department of Justice and the Federal Trade Commission to take action against OPEC members in American courts, charging them with restraint of trade and anti trust collusion. Nothing ever came of it because President Bush threatened to veto the legislation. The issue has not been revived under the Obama presidency. Should it be?
-What benefits might accrue in our negotiating posture with OPEC,and all foreign suppliers were all imports of oil into the United States subject to an import license issued based on of country of origin. Yes, oil is fungible, but a rigorous licensing program might well be able to deal with that. Would it not send a clear signal, once and for all, that access to our market can no longer be taken for granted and begin to change our negotiating posture with foreign suppliers from being supplicants to being equals?
-Is there a role that the Strategic Petroleum Reserve (SPR) can play in keeping prices at reasonable levels, and how would that be defined?
-Should price limits be set above which the Department of Energy would stop oil purchases for the SPR?
-How can the oil industry and the media be brought to task and the public made more aware of the realities of the oil marketplace rather than being fed such endless pabulum as 'high oil prices are a response to a weak dollar' (please note the dollar has eroded by some 15% since the beginning of the year while oil has escalated near 250% since February ) It is a canard that permits such as the CEO of BP Mr. Tony Hayward to explain away in stern instruction to us all, that in recent months the "drop in the dollar is a major factor behind oil prices breaking through $75/bbl." This is but one example of the patently misleading and self serving explanations for every jump in the price of oil, blindly being mimicked ad nauseum by the media as in the New York Times ("As the Dollar Sinks Oil Skyrockets" 10.22.09) and its endless incantations on CNBC as elsewhere (also please see "A Short Tutorial On the High Price of Oil and the Falling Dollar" 10.19.07). The public should be taught to understand self serving nonsense when it is ritually presented to them as fact. What can be done to make the public more aware and thereby more alert to the distortions being visited on them by the oil interests?
- In the need to combat the existential problem of green house gases, what steps must be taken to reduce the consumption of fossil based gasoline to offset the dramatic drop in oil prices that could well result from the implementation of effective policies countering the current high and likely manipulated oil price levels?
It is essential policies need be enacted that encourage the use of alternative fuels by establishing a voucher system, or gas tax, or whatever works to keep the potentially much lower oil prices from encouraging heightened consumption of gasoline. Better that funds gathered from gasoline taxes or other programs are circulated within our economy than the billions of dollars being shipped to foreign coffers, as is currently the case.
The irresponsible acquiescence of governments here and abroad to what has become perhaps the greatest rip off of consumers since the heady days of the Standard Oil Trust need be taken in hand.The difference being that then it was blatant monopoly control, whereas today it is insidious and duplicitous manipulation by cartel producers and a combination of speculative and manipulative trading on the commodity exchanges all countenanced by acquiescent governments lulled into inaction by the influence and wealth of oil interests and their lobbyists and an irresponsibly somnolent press too often sensitive to the priorities of their advertisers before their responsibility to the public.
Richard Stuebi: Money Walks, Fossil Fuel Talks
Over the coming months running up to the Copenhagen Climate Change Conference, it will be interesting to see which side can amass more force: finance or fossil fuels.
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The price at the pump is being held up by the fact that even though reserves are high, refining has been cut back and investment in refining is even worse. The oil companies like high prices at the pump - they have no incentive to refine.
Actually, refining margins have been very low all year; and they're even lower now than they were back in June, when oil prices went over $70 a barrel for the first time this year. Refining margins are way way way down from the high levels of 2005, 2006, and 2007. Also BTW, most oil companies don't refine gasoline. Some do, most don't. And refining companies (like Valero and Marathon) prefer low oil prices. They have to buy the oil to refine. High oil prices usually result in low refining margins.
Raymond, it has been so long since you blogged about energy, that energy news has just been piling up in the IN box, eh?
As always, there is some disagreement about the cause of the price-rise in oil-
Some say the dollar’s depreciation is driving investors to buy oil as an inflation hedge, thereby pushing up the price of crude.
Another view is that as oil represents 40 to 50 percent of the U.S. current account deficit, the higher oil price represents an outflow of dollars that pushes the currency lower.
I am of the view that production has not kept pace with demand- even during this recession- primarily because of the emerging markets like China. Yes the OECD demand is way down, but we are no longer the center of gravity.
Did you read how China will no longer publish data on China's stockpiles of crude oil?
Anyway, we will ALL have a lot to talk about as the world economy picks itself up off the ground and we see the $100 oil again.
I just cant wait!
The cost of weatherizing buildings will far outweigh any savings from reduced energy costs. It won't even dent demand for oil. It will only cut into demand for domestically produced energy like coal, natural gas, and cut utility margins. The focus of the program is misplaced. He needs to reduce demand for oil, which has been draining wealth from the US at ever increasing rates ($250 billion to $450 billion per year).
About the author, he like always assumes demand for oil is all domestic. He ignores global demand, particularly from China, that has been booming. Auto sales in China have been up 75+% year over year for the last six or so months. That's a huge increase in demand.
The author also continues to point out the percentage increase in oil from that low $33 base. That price was hit for a few hours of one day on the front month contract. That happened in the great financial unwinding that occurred at the peak of the financial crisis, and when commerce was at a near total standstill. The current front month contract only hit $46 a barrel at its ultimate low last February. It's been between $60 and $83 a barrel almost the entire period between mid-March and now. The price actually looks like it could rally to $89 a barrel in the next month, unless the equity market sells off.
You are so correct. Everyone points out the extreme low prices as somehow "preferable" and why - because this suites them. The extreme low was a s distorted as the extreme high of $145. If you ask me, we better have $145 than $30 per barrel so at least there is hope this country will realize its addiction and will start seriously to implement energy alternatives. For an addict, the worst thing is to continue to have an easy and cheap access to the addiction.
That is baloney. The USA said NO to the new photosynthesis technology that would provide a year's worth of energy to the whole globe for tapping the sun for one hour! Why, because that would not make big money for them as oil is. If you study history on oil you would see we are in the PEAK Era for the third time! Are we dumb yet? The real price of oil currently should be $ 10 per barrel and gas should be 99 cents, we are swimming in it.
Zerohedge lays it out nicely: "....since the government deficits are pretty much a worldwide phenomenon at this point, it would make sense to see commoditiy benchmarks appreciate against all currencies as a hedge against the fiat money system."
Let me also point out that the Federal Reserve has printed over $2 trillion (yes, trillion) over the past year and Britain has printing some hundreds of billions as well. Countries are printing their fiat money like crazy. How does it not make sense that people would prefer to own physical assets rather than all that money coming off the printing press? And that's not to mention the 8% GDP growth coming out of China, growth coming out of the Asian tiger countries, and increased production from worldwide deficit spending (stimulus programs)?
But with oil at 80 dollars a barrel doesn't it make Secretary Chu's plan cost effective? I mean, I like all your suggestions because in fact we are getting gouged but how do you get America off foreign oil? To me, the current plan, is the “Kill the Goose that lays the golden egg plan” the only other way would be a tax. Raise the tax on foreign oil using a U-shaped model with the most tax breaks in the early years and the most taxes in the later years over a ten-year time frame. This at least has the potential to be deficit neutral and also add-in the 700 billion dollars spent in this country instead of abroad with the multiplier effect. But the international, economic and the market ramifications to me are unclear.
How about ..., RAISE TAXES on all oil
PEAK OIL
Short-term pain, long-term gain.
Oil/gas has fallen since Thursday last week but the price at the pump has not. Seems to me they are doing everything to keep the price of gas at $ 2.50! We are swimming in oil supplies, thanks to the bankers who took our bailout money and bought oil and store it in off-shore tankers and now are selling it back to us making big money. Since our politicians are invested in oil expect no changes.
Ask yourself why congress is not addressing their Commodities Futures Modernization Plan of 2000?
If they would reduce the price of gas, they would sell more gasoline rather than keeping the price high and only a few driving. But then perhaps the rich soon will their own highways. And we need to punish the banks, they were bailed out to help us and now this!
"we are swimming in oil supplies"
no we're not
PEAK OIL
Yes, we are swimming in oil supplies. Inform yourself, government website! Besides, if you study history on this very subject we have had PEAK OIL SCARE now 3 times already.
But the Department of Energy has other mandates, to fill the Strategic Petroleum Reserve irrespective of price nor consideration that it already holds some 750 million barrels of oil (more than Iran's total annual oil export loadings). In the world of commodity trading, given the massive oversupply of oil on the market today with storage overflowing, and scores of tankers anchored at sea with hundreds of millions of barrels of oil with no place to discharge, a price for oil shading $80 a barrel can be nothing more than a willfully contrived aberration. Clearly something is amiss.
Added to this effrontery, is a market inured by a brain washed public, helped along by a somnolent press, comatose analysts, oil industry flaks and an oil lobbyist conflated government presenting these prices as a fair reflection of a free market. Then, to add the icing on this poisoned cake is the ongoing OPEC babble by such as its President, Jose Botelho de Vasconcelos, who in an epiphany of altruistic concern was reported by Reuters/CNBC announcing that the oil ministers of OPEC will raise output "to protect the global economic recovery at a meeting in December if oil prices rise to $100 per barrel". Here we have OPEC in the guise of Santa Claus bringing Christmas goodies if we all behave.
It's easy. Big money gets what big money wants. Even though they have nothing at all to do with oil consumption, they are allowed to make billions on speculation which us regular citizens must pay. Then our wonderful legislators use our tax dollars to hold oil reserves to keep the price up. What a country.
You got it - I am not alone in this. Others repeat the garbage they are fed.
Oil being driven up by speculators is nothing new. So is Congress doing nothing. This is why most Americans view both parties with suspician. We elected Obama for change, but we've seen tiny steps not bold moves. We are bleeding with the military budget, two wars, TARP, and pork. Many millions more will lose their jobs and those jobs are not coming back--at the same time prices are going up. Yet Congress claims we have deflation, so my social security will not see a cost of living raise. (Tell that to the state tax collector who just raised my property and school taxes.) I've spent months encouraging people to take to the streets because it seems nothing else works.
Take to the streets....
It wont change anything
PEAK OIL
Could it be that all that oil is being hoarded in tankers in preparation for an attack on Iran which would cut off a big chunk of the world's oil supply?
Yeah right......,
PEAK OIL
Yes, whenwill educated economist start factoring this into thier equations?
"The difference being that then it was blatant monopoly control, whereas today it is insidious and duplicitous manipulation by cartel producers"
A cartel is also a type of monopoly. They all get together to screw the consumer instead of competing with each other.
Wishfull thinking
Actually, OPEC does us a favor
If it weren't for them..., we'd have Peaked sooner
PEAK OIL
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