It's Not Oil Supply -- It's the High Fear Hype!

This debate over oil and energy policy disgusts me because both Obama and McCain are trying to force short term, knee jerk responses to a major policy challenge for the nation. I remember hearing John McCain once tell me that "Congress never makes good policy decisions in the heat of a crisis."

But that's what McCain and Obama are trying to do to each other on offshore drilling and use of the strategic petroleum reserve.

The price of oil has been driven far beyond sensible demand/supply values because of Bush/Cheney sabre-rattling and fear-mongering against Iran and Ahmadinejad's escalation of reckless rhetoric.

Gary Sick, an insightful and important sane voice on Middle East policy at Columbia University offered some confirming views in an interview with Research Magazine:

As for the economy, American households' economic woes, as well as voters' concerns, have a lot to do with gas prices surpassing $4 per gallon and heading higher. "There is no doubt that current oil prices incorporate a substantial political risk premium," says Sick.

Sure, oil traders are worried about possible shortages of oil. But any such shortages wouldn't happen before a decade from now. This is not why the price of oil has been bid up now, because currently oil supply and oil demand are basically in balance.

"Every time Bush threatens Iran by saying that all options are on the table, including the military one, oil spikes," says Sick.

High though oil prices already are, Sick disagrees with those who believe that the market has discounted a military strike against Iranian nuclear sites. "Prices would go a lot higher, and stay there, too, if the market really believed that an attack on Iran were imminent."

Another informed perspective on this comes from former First USA Bank and Barclays USA CEO Richard Vague whose views track with those of Gary Sick.

To get the price of oil down, candidates should work harder at thinking through what the characteristics of a new equilibrium in the Middle East and globally might look like. What kind of deal can be done with Iran that preserves Israeli security, Iran's domestic energy interests, and does not leave Iran with a domestic capacity to covertly manufacture nuclear weapons? There's much that can be done.

Why aren't the Republicans demanding Nancy Pelosi and the House come back to debate a more sensible national security strategy than we have today? That might make some sense -- compared to the Republicans demanding the House stay in session while racing to the airports with their packed bags.

The price of oil is not about supply -- it's about high-fear hype.

-- Steve Clemons is Director of the American Strategy Program at the New America Foundation and publishes the popular political blog, The Washington Note

Comments

[serena1313]

Across the nation a large swath of people are suffering. Some are choosing between buying diapers and heating fuel. Others burned their furniture and/or sold family heirlooms. People need relief -- immediate relief.

Knowing off-shore drilling will not bring immediate relief McCain has no compunction telling voters it will. Republicans want to pass bad legislation that does nothing for the immediate future, except fill their pockets with campaign contributions. McCain received $1.1 million dollars from the oil companies after announcing he supports lifting the ban.

Vulnerable Americans believed McCain. Little do they know he sold them a lie in exchange for their votes. The media is wont to tell the real story considering the energy companies are big advertisers.

Obama resisted, but compromised to get alternative energy sources included in legislation: limited drilling and only as a last resort. McCain wants to drill now anywhere, everywhere, anytime. Nevermind that the energy co. hold over 7000 leases for off-shore drilling stretching over 68 million acres. Do they really need more?

War, oil traders and climate change intermingle. Each time Bush threatens Iran the price of oil shoots up. Each hurricane warning likewise. Immediate relief would be better served by less speculation: ending the Iraq occupation and keeping Bush quiet. Thus the long term effect of lessening the carbon impact on the environment might mean fewer hurricanes, too.

[deminmo]

A writer at Truthdig brought up the idea that Bush might use
a military strike on Iran, as a way to change the government
set-up in America by bringing all the current system crashing
down. It would be the idea of Disaster Capitalism brought
into reality. Fear has always worked well for Bush. The need for
"Homeland Security" and the fight against terrorism justifies
spy programs and policy of secrecy in the White House. Our
whole way of life could change with a blockade of Iran. And Congress
takes a vacation!

[Rescisco]

The so called energy debate is recycling so many bad ideas and proposals (e.g. off shore drilling, nuclear power) that it is simply not advancing the nation towrd any meaningfui policy shifts. And its not just energy. The economy, the war, climate change, you name it and we insist on dumbing down and evading the crying need for fundamentally new and innovative solutions. The fact is, time is short and the margin for error on all of these vital issues is shrinking. Yet we seem to have no sense of national urgency about getting it right. At a time when we can no longer afford to get it wrong, our politics recycles all of the short sighted myths and seems destined to repeat failure after failure. Frankly, if this is the best we can do I will be ashamed. When absolutely everything is wrong, doing more of the same (no matter how popular or easy to sell) is an option that will destroy what is left of us. Wake up America! Get it right and do it now! That's my slogan for this campaign. Getting it right starts with using our brain to move our feet. Fear is powerless as a political weapon if we do that.

[long333]

The author calls it high hype and then goes on to quote some very real situations in the Middle East and in oil causing the high price problem that I agree with. Well it isn't hype by definition if it caused by real world situations.

Is he disagreeing with himself?

The volitility in oil prices is the volatility of the supply line. This is why the line that domestic production "just doesn"t matter $.01" is false. His own expert identifies that.

"There is no doubt that current oil prices incorporate a substantial political risk premium," says Sick.

The "security premium" or what his expert calls the "political risk premium" I have seen placed at $15 dollars a barrel whatever it is, it is there. This only argues that domestic supply like offshore and ANWR without a "security premium" would lower prices.

All that will happen with blocking offshore drilling is that democrats will be paint themselves as obstructionists on energy and trust is hard to win back.
If it goes through they will have egg on their face that they don"t understand markets well enough to make decisions when the time comes and the market moves. Time to stop beating the drum about "domestic drilling doesn"t matter". It does and it will and the effect will be a lack of support for democratic suggestion on energy policy going forward. All Americans are watching on this people and they are looking to see who can lead.

[speakeasy]

Oh, to suffer the fools who want to take our homelands final reserves of oil and waste it away. What then? Want to talk about dropping your drawers to OPEC then? Buying oil from the open world market has never been the problem. Selling guns and military equipment to countries for "favored" status and then sitting back and watch them use them on their own people and then somehow blame it on us, is the problem.

We should drill everywhere once we have a conservation and renwable energy plan in place so that oil lasts for a long time. To pump it into your hummer so you can drive 50 miles to work by yourself is just not gonna cut it anymore.

We could probably go into ways that we could stop China from growing so fast making all of the mistakes we made 50 years ago, but thats another post...

[fetchezlavache]

People: do not believe the Bushies and McCain about how much good increasing offshore drilling will do. We do not have the refineries to handle more, and the ones we do have, have two serious problems: they are rotting and rusting away--no one wants to spend money on maintenance--and they are located in the worst spot imaginable for being struck by hurricanes. If we have any significant loss of refinery capacity, the price of gasoline will probably double. The only answers are alternative forms of energy and saving energy.

[brakmaster]

Actually this is about supply v. demand. They are currently faced off around 85 mb/d v. 85 mb/d. Any major disruption in supply could have dire impacts on the traditional commercial and personal transportation networks. High prices are forcing Americans to reduce demand, and we should try to keep it that way.

[FalconerHK]

The problem is actually manipulation of supply and demand. Oil prices up 100% since January of this year? Blaming China or India for the increase is a non-starter; those two countries combined have not increased their appetites for oil by anything near 100%.

Follow the money, people. Who stands to gain the most from higher market prices?

1. Obvious: the oil companies. How many refineries are there, and at what capacity are they running? Right now: approx. 85% capacity. They could build more, but that would mean more supply in the market. Where's the candidate who talks about mandated increases in processing capacity? Hmmm...

2. Commodities traders. You can buy oil on 80% margin (credit), so if oil keeps going up, you never have to shell out a dime, as the margin covers the actual cash outlay. A consequence of this type of trading is the rows of oil tankers parked off the coasts near refineries. We're overbought. This is directly due to relaxing the rules on commodities trading. Eliminate the futures market and you're back to $50 oil.

3. Oil-producing nations. The guy that bumped oil from $97 per barrel to $100 - just so he could claim he was the one who did it - only had to lay out less than 10 grand. With OPEC-nation sovereign wealth funds buying oil commodities, how hard is it to keep the price inflated?

[Craig]

Could you expand a bit on 2. Thanks

[idabamaho]

Just what, exactly do you expect? Reason, Judgement, Intellect?

We are talking about America right? None of the above apply.

[WretchedEtcher]

It is becoming increasingly clear that a lot of us Americans are just plain short sighted if not downright stupid.
We have to take it slow, we have to have some short term perks.

[JimR]

Quiet, I'm trying to watch "American Idol."

[ceindependence]

Gee, I guess you forgot that both Hillary and the annointed one said "all options are on the table". In case you missed the previous sentence, I' ll say it again. BOTH HILLARY and the ANNOINTED ONE SAID, "ALL OPTIONS ARE ON THE TABLE"! When did you miss this? Gues you forgot that it was ahmadinejad who makes the threats against Isreal and is doing all he can to create nuclear material that could be made into a bomb. Now if ahmadinejad did have a nuclear bomb and wanted to and did use it, what would happen to the supply of oil out of the middle east. If Bush did nothing and ahmandinejad used the bomb, you would be the first to scream its Bush's fault.

But in the last thirty years, BOTH PARTIES, have allowed us to get into this bind of less production, while technology with hydrogen and batteries lagging, you want to absove the progressives and blame the conservatives. To find the people at fault, look in the mirror.

[MourningDude]

Yes, the word "Obliteration" springs to mind...

[speakeasy]

Wow, a mind reader! Can see into the eyes of Ahmandinejad and see his soul. Heres some news for you, Fox news talking points are not based on facts they are based on how you will react (i.e. keep watching and be afraid, very afraid). Obviously you got some treble hook tracks on your lips...

As far as it being Bush's fault if this scenario comes to fruition, then it will be his fault and it will be based upon factual info. Axis of evil comes to mind. Did you know that after 9-11 happened Iran helpd in the invasion of Afghanistan by backing the anti-Taliban Northern Alliance? Did you know that America ran search and rescue ops out of Iran into Afghanistan? Didn't think so... You never could figure out that Sunni, Shiite thing, could you?

Jimmy Carter tried in vain to enact tough new rules on fuel efficiency and invest in solar, hydrogen and wind, but was quickly stopped during and after he left office by the repubs. You are batting on zero genius.

[deminmo]

ceindependence,
What happens to oil supply and cost of gas when Bush
goes to war with Iran? It takes 7-10 years before any of
the off-shore drilling will provide enough supply to effect
price and available oil for use in the US. What do we do
in the meantime? McCain and the Republicans seem
to think it will be the miracle cure-all. What about keeping
demand down for 10 years by not driving big cars, suv's,
vans, and trucks? How about all countries get rid of nukes
period!

[MalamuteMan]

Just because Barack is advocating for short term solutions to the energy problem does not mean that he is not committed to a major change in energy policy.

[UnbiasView]

I don't think either of the candidates is advocating anything that makes sense.

[djelimon]

His rather detailed and comprehensive energy policy makes sense to me

[BBackSoon]

Have you looked at Obama"s energy plan? He has plans that will start immediately and will include alternative energy, energy rebates for citizens, ways to help Detroit make more efficient cars and stay in business and finally long term plans to deal with the oil addiction.

And McSame wants Nukes and more drilling.

One sounds like a plan the other sounds like a nightmare.

[JimR]

Take the time to read Obama's complete energy plan. It's worth it. He most definitely is committed to a major change in energy policy.

[Cathexis]

Good points, Mr Clemons.

In addition, the "solutions" they propose (drilling, Strategic reserve, etc.) are *useless* and will do nothing to help the problems.

If they gort absolutely everything they wanted TODAY, where do they think any extra oil would go? America? Guess again ... it goes to the oil companies, to sell on the International Market.

I swear, it's as if the whole nation panics and just stops thinking ... !

[UnbiasView]

"the "solutions" they propose (drilling, Strategic reserve, etc.) are *useless* and will do nothing to help the problems"

So with your logic, what would happen to price if we just stopped drilling tomorrow? Supply obviously doesn't effect price in your mind since adding more would do nothing, then stopping our supply would also do nothing to price right?

Now you see how dumb that argument is.

[kdubbg]

Your post fails all tests of logic.

The number of barrels that we could get out of the ground in ANWR and from under the miles of ocean off the continental shelf are not enough to bring down the price in any meaningful way, especially in the near term.

1 because it takes years to get new wells online.
2 because there is not enough equipment in place to bring new wells online soon.
3 because oil companies have an oligopoly with no motive to increase production.

[paixa3]

A realistic and excellent blog. I do not understand why USA citizens are so fearful of everything; puzzles me. They seem to analyze the hell out of life, but are too afraid to live it. What a shame.

[flatus]

Fearful? Hell, we aren't fearful! We only spend half of our money on defense. Sure that's much more than any other country but does that make us fearful? Oh, wait....

[flipbiscut24]

Maybe because the media presents it to them in a way where fear is the reaction?

Americans (sadly) get their views from the news, never questioning the sources bias, or agenda.
Ignorantly going along, never questioning the agenda of the media, those who own it, and those who present it to the US.

Then again, maybe Americans aren't that afraid, and the media is just presenting it as truth.

Wanna be happier in life?
Quit watching your TV, and go live your life.

Quit being afraid.

[paixa3]

Excellent response, thanks. I hope many take your message to heart.