The Price of Oil Has Doubled on Obama's Watch -- the Time for Action is Now
The price of oil has leapt by more than 100% since February from a shade under $33 a barrel to over $71/bbl at yesterday's close on the New York Mercantile Exchange. Clearly the sudden and sharp escalation in prices is a looming danger to a deeply fragile economic recovery. To add insult to injury, the price is being driven by "investor sentiment" rather than fundamentals (WSJ, "Some See Replay of 2008 in Crude Oils Recent Surge," 06.08.09), this with tabulated oil stocks 19% higher than a year ago, according to the U.S. Energy Information Agency, not taking into account the scores of millions of barrels of oil and oil products in storage floating at anchor in supertankers from Rotterdam, the Mediterranean, to the Eastern Seaboard and beyond.
Combine this with the inane comments of the Executive Director of the International Energy Agency Nobou Tanaka, whitewashing OPEC's manipulations, complimenting them for keeping output "steady" while OPEC was making it clear that their current intended price target is $75/$80/bbl by saying, "Our message to OPEC is they made a sound decision." No mention here that Saudi Arabia alone has shut in 4.5 million barrels a day of production capacity and the rest of OPEC some millions more.
An escalation in price of this magnitude for a commodity this basic to our economy is untenable. And you can be sure if OPEC and its denizens get away with achieving their goal of $75-$80/bbl, after a short hiatus $100/bbl will be their next target. It is imperative the administration take action now otherwise they and the economy will be rolled over by oil interests both here and abroad.
First, where is our Department of Energy? What steps are being taken to alert the public to the dangers the economy will face by these speculation-driven prices? Where is the bully pulpit confronting oil interests and OPEC? Mr. Steven Chu, Nobel Laureate and all, is a fine gentleman, but is he up to the rough and tumble of the oil patch? His focus on alternative energy is and should be a high priority, but here we are dealing with the beginnings of a real time crisis calling for real time solutions. Who are the people around him? Much of the Energy Department and the Interior Department was staffed under the Bush administration with oil patch cronies. What kind of advice is he getting and from whom?
Second, speculation and psychology go hand in hand. The Department of Energy has it within its powers to change the temper of the marketplace. It can forcefully signal its displeasure with the current ratcheting up of prices that are risking the wellbeing of the nation's economy by simply stopping all purchase for the Strategic Petroleum Reserve (STP) until prices come down significantly. Oil storage throughout the world is filled to bursting and adding more oil to the SPR is just helping to further push up the price of oil. Stopping purchases would send a powerful message to the market, to the psychology of the market makers, and even to OPEC that this government is not sitting idly by while oil interests bleed us dry.
Third, to go the extra mile by deeming the steep and current price of oil as a strategic threat to our economy, and actually releasing measured quantities of the STP back into the market at intervals that would upset the current one way direction of oil prices. If speculators knew they had releases from the STP to worry about they wouldn't be so game to play what has recently been a one-way winning ticket.
Fourth, it is imperative for the Department of Energy and the new management team of the Commodities Futures Trading Commission (CFTC) to liaise closely to determine the nature of oil speculation on the commodity exchanges. It is the exchange driven prices of virtual oil contracts that are the key driver in the current oil price environment. The price of virtual barrels on the commodity exchanges have lost all relationship with the fundamentals of the actual wet barrels being consumed. An intense study needs be undertaken to bring transparency to the commodity exchanges. Who is doing the trading, under what auspices and to what end? This, to ascertain some definitive data on the level of speculation and the determination of whether the markets have been manipulated, how and by whom. Certainly the wherewithal is there by large trading houses and banks, not to speak of sovereign wealth funds who have the means and among oil producing nations the keen incentive to willfully, either directly or indirectly, move these markets.
Fifth, given the level of distortion and the strong potential for manipulation, one might go so far as to close down the oil exchanges altogether. Though seemingly draconian, oil was traded some years ago on a wet barrel, contract and spot market basis. Yes, there were spikes and valleys but at least one knew where all the bodies were buried. The march to $147/bbl oil last summer was a clarion call that the current pricing mechanism is deeply flawed. Perhaps it needs to be done away with altogether.
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Alternative energy will not make the US less dependent on foreign oil. Oil is refined to make gasoline, distillates (heating oil and jet fuel/kerosene) and residual oil. Very little of the products are used to generate electricity and most of it is used for transportation and industrial uses (petrochemicals) and some for heating houses.
Much of the dollars earmarked for alternative energy are looking for new technologies in solar and wind from electricity production. Some are looking at biomass for ethanol and other transportation fuels. There is no guarantee that throwing hundreds of billions at new technology will generate anything new. The laws of chemistry, biology and physics aren't changed by the dollars used to fund research. Just think of the war on cancer and the search for a fusion reactor. Tens of billions have been spent and we have only scratched the surface.
Forcing people to use high priced alternative energy will make this economy more inefficient and be costly. This does not create security.
"Alternative energy will not make the US less dependent on foreign oil."
Depends on the kind of alternative energy. Biofuels, if done right, can replace some oil, although it's very little. Renewable sources of electricity all by themselves won't reduce oil use. One needs to add electric vehicles to the mix. Those can be plug-in hybrids, trolley buses and electric freight trains.
The fastest way to reduce fossil fuel use at this moment are efficiency measures which reduce the size of cars, their ICEs and make vehicles more efficient overall.
Forcing people to pay more for energy makes them use less, which, in turn, makes us more secure. This is called a punitive tax and is the second perfectly legitimate use of taxes after raising revenue for government.
Clearly oil speculators have driven the price of oil from the $30/bbl range to $147/bbl and down to $34 and back to $72/bbl. The world uses 82 million barrels of oil each day. This is down from a peak of around 86 million last year. This corresponds to 82,000 NYMEX WTI, Brent ICE and Dubai ICE futures contracts. However, the average daily volume of these exchange traded futures is around 750,000 contracts or 750 million barrels per day. Then there are a substantial amount of over-the-counter (OTC) oil swaps that trade each day. Then you have have to add all the refined product contracts and physical contracts to the mix. There is substantially more "financial" oil traded than actual oil used (12-15 times.)
To dampen price volatility the government could enact new taxes on energy futures and derivatives trading, place limits on the number of contracts and eliminate section 1254 tax treatment of futures (60% long-term cap gains even if < 1 year). While this would reduce short-term oil prices it would put the long-term prices at high risk. New supplies would slowdown because of investment and consumers would continue to drive large vehicles. We need to reduce demand through disincentives. The easiest is to increase the gasoline tax so the at the pump price is around $3.50 per gallon. It slows demand, makes people seek more efficient vehicles and raises sorely needed revenues for spending spree government.
Most of those 750,000 contracts that change hands a day are not linked to any physical deal at all. One could, as well, bet on a rice corn on a sack of rice that's stored in a back office of the exchange. It wouldn't make any difference.
The only market mechanism that actually sets the price of oil happens at the gas station. If people are not willing to buy gasoline at more than $3/gallon, the price of oil can only trade at the level one gets by going back from there after removing refinery margins, transportation cost, etc. Any contract substantially higher than that will lose enormous amounts of money for the trader.
Anyone who really think we have a choice and do not have to buy gas is RETARDED!
Sure, we can consolidate grocery runs, errands, drive slow and easy, etc. and save a few percent of our gas costs. But unless people are willing to quit their jobs and abandon all their responsibilities we have no choice but to buy gas. Not only as individuals but the entire society has no choice from the food supply to the delivery of everything. PERIOD.
The entire fabric of the USA's infrastructure would need to be remade to get off gas and that would take a couple decades even if we started today. Look how many years it took to do something simple such as getting rid of analog TV signals! Now try getting rid of the energy source that keeps the world secure, produces food, gets us to work, etc. That is decades.
So we need it and the governments of the world need to universally nationalize the stuff, get it off the trading exchanges and promote a true supply and demand market while we transition to other types of energy to power our world. The economic, social & military stability of the world is at stake of oil goes to $300 a barrel.
Any system where that is even a possibility needs to be dismantled for a product that costs less then $2 a barrel to produce and where there is no current or foreseeable natural world real shortage for decades.
Oil is still pretty cheap considering how high it could go once worldwide economies start to eventually recover (whenever that may be). Filling the SPR is a sound policy at current prices. The more oil that is stored in the SPR the better. Sooner or later there will be a disruption in Middle East oil and having a month or two (or more) of oil gives us leverage against Iran, Saudi Arabia, etc. These Middle Eastern nations must pump oil to pay for their heavily subsidized societies. Their populations are largely unhappy with their governments and a subsidized lifestyle (cheap gas for example) helps to keep the peace. It would be a contest to see if we could go without their oil longer than they could go without that revenue coming in. Without the SPR they would hold all of the cards.
Obama has slapped a 13% Excise Tax on oil produced in the Gulf Of Mexico in the last few weeks and our government is doing everything possible to discourage offshore drilling. Only a fool would believe this has no effect on oil prices and is a good long term plan for oil production.
The 13% excise tax is not in effect yet, it is included in the so called "energy" bill passed by the House. It is aimed at oil companies that have deepwater leases subject to royalty suspension volumes, The congress (under CLinton) passed the deepwater royalty relief act granting royalty relief to oil companies to stimulate deepwater exolpration, it worked, then Uncle Sam tried to renig with a rule making that set a commodity price camp. Kerr McGee sued and two courts have held that the legislation did not impose a price cap. The dems are going after "Big OIL". It is part of the Obama plan to drive the price of petroleum up to further his green agenda. You are correct that the govt is doing everything it can to discourage drilling while enjoying the hell out of the taxes and royalty.
The USA has abundant natural gas reserves.
Why is there not a concerted push to use that as a vehicle fuel?
.
That's what T Boone Pickens wants. I think the problem is that no one is making vehicles on a mass scale that can run on natural gas.
"The USA has abundant natural gas reserves."
And once you look at the geological reserves, you will find that simply not to be the case. Natural gas is going to run out on the same time scale we are going to lose cheap oil. And if you want to power vehicles with it, it will run out even faster.
We have a hell of a supply of natural gas in the lower 48, not to mention Alaska. It is interesting that Obama is silent on natual gas and prices for the stuff is predcicted by some to go below $3 in the near future due to a glut of CNG on the world market.
I think natural gas as a vehicle is not part of the Obama green plan although Pelosi would like to use it to "get off fossil fuels".
The higher the cost of oil the better. Oil and its products are destoying our country and our earth. We will not find alternatives until oil becomes economically unatractive. Unfortunately necessity being the mother of invention is the ultimate truth for the human race.
We will drive ourselves and our world to extintion before we act and forget how stupid we were the next day.
When oil goes up people solve the problem, they drive less, use public transportation, science goes to work.
We are driven by need otherwise we just sit on our asses and accept what is.
So true.
The Obama administration and dems might want to repeal the Commodities Modernization Act...oh wait they signed it into law....another 'great product' from Republican Sen. Phil Gramm and his merry band of friedmanite deregulators and other corrupt economic ideologies. The 1% win, everyone else loses as usual.
naming the GOPunk La Hood ,a friend of oil companies,to the Cabinet, just puts no pressure on them--so back to their old greedy ways!! Obama should be using the pulpit to bring these prices down!!!!!
We need to move to a hydrogen economy. The writing is on the wall. You can talk oil till your blue in the face and it will do no good. The only way to get away from the oil industry is to get away from it by utilizing another form of readily available energy such as hydrogen. Change the focus of the debate from problems with oil price and availability to hydrogen and you will find the oil prices falling again. So you can kill two birds with one stone so to speak.
For your information... the only economically viable hydrogen source is natural gas. And I believe that's still a fossil fuel. Hydrogen is not an energy source, it's merely a chemical energy storage medium. Moreover, it happens to be one of the worst energy storage media of its kind.
Spot on: energy density of hydrogen is simply too low. Cryogenic temperatures are also a disadvantage. Fuel cell efficiency may compensate that somewhat.
You need the right combination of energy density, energy efficiency and recharging speed. Do not forget infrastructure too.
Though the internal combustion engine has rather low efficiency, recharging and energy density make it still a winner.
That would be nice but ain't gonna happen anytime soon. Methane and the usual sources of energy are the only options till someone figures out how to break the ionization bonds of a hyrdogen atom to oxygen atoms economically and efficiently. A hell of lot of politicians certainly don't understand the facts and thus lead people in very wrong and unrealistic ways...just like with economics and trade.
Mr. Learsy. It's summer time.
I don't suppose anyone recalls the big "emergency" generated last summer to justify the ridiculous price gouging. Granted, last year was a "grab all we can while we can" maneuver, but the whole price hike during the summer is nothing new.
"On Obama's watch."
You’re kidding, right?
Right - how much was oil on Dubya's watch when he entered office versus 6 months before his term was up? What percentage of a hike was that? From $20 to $148?
It's because we have an oilman in the White House!
The author says:
The price of oil has doubled - the time for action is now!
I agree. I am not 100% certain whether we should institute a tax that double the current price ($4 gas seemed to get the country moving away from fossil fuels). Or if the slightly less efficient yet somehow more palatable cap and trade system is better.
But we do need to act right away! The triple threat of peak oil, atmosphere degradation and giving $$ to our enemies can all be solved by getting off of fossil fuel.
American patriots know this and are taking action and fomenting for additional coordinated action (gas tax or cap and trade).
The deniers (aka the elders of Krypton) and America haters would have us move on, as there is nothing to see here.
This is one battle the patriots must win!
Tom
One more thing that's Obama's 'fault'. I hear the sun is going down today - yup, Obama's fault too.
NIce try, but inaction is never the answer. The question is what is Obama going to do about it.
I suppose he could suggest a much higher gas tax... oh, no, wait, you would be screaming murder if he did.
:-)
Personally, I am all for the author's fifth suggestion.
There is no need for Oil to be on the futures-market - this isn't leverage against a wheat harvest - the oil companies have the most advanced technology in the world, there's no need to prop up prices. And there's no need to maintain a market that is so easily manipulated, via leverage, by a few players.
Stop the commodity trading!
my only responce to this is to belch
and scratch my belly
where's my beer?
Before there was commodity trading, the oil markets were based on producer-refiner contracts. On October 15, 1973, the OAPEC decided that they would not honor any of their contracts with American refiners because the US was actively supporting Israel in the Yom Kippur war. The result was the oil crisis of 1973.
It was actually nice. I Germany you could ride your bike on the Autobahn because the government had stopped the traffic on Sundays to conserve oil.
This is one of those enigmatic images of my youth that I just can't forget:
http://1.bp.blogspot.com/_V0PgYFgDLQY/SDLI-4bVp-I/AAAAAAAAJr8/UzX6E_8xJm0/s400/oelkris2.jpg
http://my-option.blogspot.com/2008/05/0303-pro-liter-benzin.html
Cool! I wouldn't mind doing that again! I would walk or ride the two miles to the next highway from our house just to stand in the middle of the road for a couple of minutes and hear... the silence. That would be wonderful.
:-)
Subtext--
Faved and fanned!
Under Bush, oil soared from $36 to around $150. Why is is this man so damn upset now? Another Neo Con shouting "Obama did it", ( maybe tired of shouting "Clinton did it".) I am sick to death of these writers only now drawing attention to the messes Bush and Cheney created. Bush and Cheney borrowed the money to fight the Iraq war (!) the first time in history a President did not rasie taxes to pay for a war. The GOP has been the party of "spend, spend, spend and BORROW, and now they are raising hell because Obama has to head a party that must spend, spend, spend, and TAX, to clean up the mess and blood left all over the floor by Bush and Cheney. This crap got old very quickly.
You need to understand that Mr. Learsy is one of those who sells books by pointing his finger at someone shouting "He did it!". He is not alone. There is a whole industry of these people out there. And, as you can see, they have ample followership.
I disagree often with Mr Learsy, but having read his blog for the last couple of years, I would not call him a neocon nor would i say he has given a pass to Bush and Cheney for their f'ed up energy policies.
You might want to go back and read his older stuff from when oil was going thru the roof.
I don't think our president should get a pass for a lack of an energy policy either- it is too important.
Anyway, I voted for Obama but i am afraid there is not much he will be able to do without a major revision of our way of doing things and many people will in turn (as you pointed out) be blaming him.
Too bad, but that is the kind of people we have become- and too entrenched in our 'mericun non-negotiable lifestyle to be able to get past the blame game and buck-up, get busy, and weatherize our house before the storm.
So good luck to all of us.
The difference between a successful politician and everyone else is mostly the knowledge of what is impossible to sell to voters. I would think that a gas tax that would actually set an end to the US dependence on oil is close to impossible. I am sure Obama would love to stop the country from crashing and burning itself on this one, but I am also sure he does not have the necessary influence to stop it. He will, for sure, not attempt the impossible because it wouldn't accomplish a thing but cost the Democrats both the White House and both houses.
At best we can see an easing into a workable energy strategy over the next years, followed by another crisis after which enough people might actually be willing to go on a gas diet to make taxes and effective measures politically palatable.
ROL, bear with me as I repeat something I had said to you a couple of days ago. I mean everyone, including Raymond, is here repeating themselves to exhausting silliness, so why not join in, eh? ;)
Declining reserves are a reality as ROL stated in a comment to http://www.huffingtonpost.com/raymond-j-learsy/is-jp-morgan-a-bank-or-a_b_212971.html - “.Will we run out of oil, natural gas, even uranium one day. We know that the answer is yes….”
How can I not agree with that?
This decline is documented, measurable, and on-going.
Having said that, This decline does not negate yours' or Raymonds' point(s) about manipulation.
I don't know what "true free market supply and demand" is without inherent collusion and manipulation- that IS the "free market" as we know it.
Every time there is a shortage of ANYTHING, (or in the case of commodities- a perceived impending shortage), the mobsters, er, businessmen, are taking advantage of it. It's their job.
There will always be someone buying & selling a seat in the lifeboat on the Titanic- guessing their future prospects- and we are all players to some degree in that market.
Regulation, taxation, rationing, and any number of other debatable solutions might help ease the pain of transition to a future of less of everything, but someone other than the average citizen is going to get rich in the process.
Ok?
There is no collusion to buy gasoline. It's not an essential like bread (and we have probably fewer regulations in the bread market than in the oil market!). The problem is that most people have been adopting gas as a daily means without thinking about the possibility that it could become an Achilles Heel one day. And it's not like we weren't even warned in the 1970s. We just happened to ignore the warning and now we are being hit, again.
Well, actually, it's not even "us". It's only the people who have made themselves the most dependent and who do not have the means to break the cycle. Those of us who are better of and who actually think about the operating cost before buying a vehicle can live with twice the price of gas. Me, personally, I could do $25 per gallon and live to tell the tale of the empty highway.
Oh ya, you have a Pius don't you KTM?
Those cars only put out small amounts of SMUG, right?
Haha, ;)
(just stealing a joke from Southpark.)
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