At $80 a barrel, an excess of one billion dollars a day is being lifted from the pockets of the American consumer through higher gas prices, heating bills, and lost jobs because of higher industrial feed stock costs, all of which is going into the pockets of oil interests and, most ominously, to foreign suppliers, many of whose policies present us with grave national security concerns.
Let me explain. First the math. We consume some 20 million barrels of oil a day in the United States. Without manipulation nor speculation, with rational government initiatives that are totally lacking at present, the price of oil should be $30/bbl and probably less (doubters, please note the quoted price of oil was $33/barrel just about a year ago). The difference between today's $80/bbl price and a $30 price is, of course, $50/bbl. Multiplied by 20 million brings us to a billion dollars a day or $365,000,000,000 a year. I leave it to your imagination what that sum could mean to our struggling economy. (As an aside, a functioning government could readily mandate other policies to reduce consumption of fossil fuels, necessary to confront the existential danger of global warming, rather than transferring billions upon billions of our dollars to oil interests and their allies worldwide)
It has been the contention of this blog that the price of oil is being grossly distorted by a combination of irresponsible, if not collusive, government policies in combination with feckless oversight of a corrupted commodity trading process. All this results in oil prices that have little or nothing to do with the market discipline of supply and demand. And especially at this moment, where the world is awash with oil and supply is beyond industry's capability to store it readily (super tankers are being chartered to stockpile oil because land storage is at capacity) and consumption is diminishing to the point that a number of refineries have shut down, (please see "Obama Finally Takes on the Banks -- Commodity Futures Trading Needs be Next").
Much of today's price aberration can be attributed to the policies of the oil industry's President in residence, George W. Bush. He carried the beacon of the oil patch's priorities, from a policy coaxing Iraq back into the arms of OPEC, from lack of oversight and regulation of oil trading on the commodity exchanges, from tepid automobile gas mileage standards, from a Department of Energy almost totally wedded to and becoming an apologist for the oil industry and its interests, from a corrupted Department of the Interior filled with oil industry partisans ever happy to accord the industry cozy accounting in the determination of royalties, from coddling Saudi Arabia and OPEC policies, from blocking all Congressional initiatives for "NOPEC" legislation which would have ended the sovereign immunity under U.S. law extended to OPEC national oil companies precluding legal action against OPEC's monopolistic conspiracy, and on.
Of particular significance was Bush's State of the Union address in 2007 pledging to double the nation's Strategic Petroleum Reserve (SPR) to 1.5 billion barrels from its then 727 million barrels (for those counting, 727 million bbls is the approximate equivalent of Iran's annual oil exports to world markets).
The impact of that announcement, though little commented upon at the time, was cathartic. Prices had already risen to a then extraordinary $60/bbl weeks before and were in the process retreating toward $50 and below. Well shazam! The president's announcement changed all that, to the consummate glee of oil producers and potentates. The turnaround was immediate. Prices jumped $2.45/bbl or 5% with the announcement to $55/bbl and never looked back, until hitting $l47/bbl by the summer of 2008, price levels undreamed of, even in the wildest fantasies of the vested oil barons.
Bush's declaration doubling the SPR had a dual impact. First, it stopped in its tracks the downward pressure on oil prices at the time. Doubling the SPR would take ever more expensive oil out of the market, at government expense, but would also reduce market availability of oil, thereby putting additional pressure toward higher prices for oil and oil products. Most critically, it sent a message to the oil barons and their flock that the sky was the limit and the government would be tolerant of whatever they construed, used, hyped, or orchestrated to raise the price of oil. This government was on their side and would worry about its impact on the daily lives of Americans some other time. As the price of oil escalated, the government and the media, extending to Nobel laureates, bent over backwards to keep us all in a trance, spinning the same old threadbare song, "It's all about supply and demand," and its all about the "weak dollar." Please see:
-"Paul Krugman and the New York Times Pious Pontifications At The Pump" 05.l6.08
-"Our Treasury Secretary Pumps For OPEC," 06.02.08
-"Oil's Largest One-Day Gain On Record:Thank You, Mr. Bernanke," 06.06.08
-"A Short Tutorial on the High Price of Oil and The Falling Dollar," 10.19.07
Until it all blew up. With hindsight, quite a number of economists have found that it wasn't simply spurious financial engineering, but the triple digit oil prices of the summer of '08 that made a major contribution to the collapse of the financial markets. After all, how many spec homes in the suburbs can you sell with gasoline at over $4 per gallon and at $5 in some locations, with no end to the acceleration in prices in sight? Please remember that among others, Goldman Sachs was 'helpful' in 'calming' matters at the time by predicting $200/bbl oil.
The financial collapse and the resulting economic downturn was so pronounced and money became so tight that even oil was impacted, with prices retreating to just over $30/bbl in December 2008 . After a brief hiatus given the distorted pricing of the summer the SPR was put back into full operation in January 2009. Far be it for Bush and Energy Department to leave the scene without giving their oil patch buddies one last swipe at the SPR boondoggle.
And then the Obama administration took over. During the campaign, Obama had made statements about suspending the purchases and releasing oil from the SPR (please see "Obama Nails It: Calls For Release of 70 million Barrels From The Strategic Petroleum Reserve" 08.04.08). For the first 30 days of his administration, the price lingered around $30plus/barrel. Then it became clear that Obama had neither the will nor ability to take on the oil interests and deal with escalating oil prices by releasing oil from the SPR, let alone suspending oil purchases for the SPR, and oil prices went on their merry way. They are now more than l00 percent higher than they were a year ago. So much for realtime energy leadership. Well and good that windmills will be built, corn for ethanol will be planted, nuclear plants are on the drawing board, but the day to day economic problems caused by high and distorted oil prices are in the here and now and the economic bite taken out of the economy, given the jobs and income impacted by high oil prices, are being felt by the country at large, now, at this very moment.
There is no excuse for the current high price of oil. Saudi exports of oil to the U.S. are at the lowest levels in 22 years. And not because OPEC mandated export quotas have restricted shipments. There is just no call for more product. Nor because the Pacific Rim markets are pulling more crude. Russia has only recently initiated a pipeline for Siberian oil shipping from the Russian Pacific port of Kozmino. It has already taken significant oil market share from Saudi Arabia and Iran in the Japanese, Korean and Chinese markets.
But there are also other reasons. We continue to have dysfunctional oversight agencies such as the CFTC, that has only now, after much internal debate with commissioners who give the impression of being more focused on the post commission sinecures on Wall Street than the issues at hand, has finally proposed limits on energy speculation subject to a 90 day comment period. It was in August of last year that Chairman Gensler acknowledged that oil prices were being influenced by 'speculative' trading (please see "The Huffington Post Outs The Oil Price Speculators," 08.02.09) and in near one year nothing of consequence will have been done.
NOPEC legislation has not been introduced nor acted upon by this administration. Its Department of Energy, while working diligently on long lead-time alternative energy issues, seems asleep at the switch on real time economic concerns related to the current high price of oil.
And of course, there is the SPR, still being dutifully filled to the happy cheers of the oil pooh-bahs both here and abroad at ever increasing expense to American pocketbooks.
Ladies and Gentleman, this is an emergency. The economy in its current condition can not tolerate $80/bbl oil. It is time to release oil from the reserve as a signal that enough is enough and to make the oil speculators aware, finally, that the price of oil is not a one way street!