Gas Prices: Avoiding the Obvious Solution
By Pat Cleary Posted in User Blogs — Comments (8) / Email this page » / Leave a comment »
If the current imbroglio over rising gas prices weren't so serious in its consequences for average Americans, it would be almost comic to watch this all unfold. Watching the Congress react to this week's "crisis" is nearly laughable.
As we noted yesterday, there are some very clear and logical reasons for the current high gas prices we now labor under. When all is stripped away, insufficient supply to meet escalating demand emerges as a key factor. So what has Congress done? In the last few days, a number of members of Congress and Senators have rushed to the microphone to offer their solutions.
In his response to the President's Saturday Radio Address, Sen. Bill Nelson (D-FL) urged every solution except tapping the Outer Continental Shelf off his home state. Fidel Castro can do it but we can't. Sen. Dianne Feinstein (D-CA) -- reports the National Journal's Congress Daily -- plans to introduce a bill that will require energy market traders who trade electronically to keep records and provide them to federal officials if requested. Sen. Maria Cantwell (D-WA) will reportedly re-introduce a bill that would make price gouging a federal crime. Sen. Bob Menendez (D-NJ) is introducing a bill that would waive the federal gas tax for 60 days. The House Agriculture Committee has scheduled a hearing for this week on futures markets and gas prices.
Sens. Byron Dorgan (D-ND) and Chris Dodd (D-CT) are planning on introducing a bill that will levy a 50% excise tax on any oil selling for more than $50 a barrel, reports the WaPo. Nevermind that our companies only control 13% of the oil supply, and that we pay a global price for oil. Will they levy this fee on Hugo Chavez? Vladimir Putin? Ah yes, the long arm of Congress....
House Minority Leader Nancy Pelosi says, "Democrats have a commonsense plan to help bring down skyrocketing gas prices by cracking down on price gouging, rolling back the billions of dollars in taxpayer subsidies, tax breaks and royalty relief given to big oil and gas companies, and increasing production of alternative fuels."
OK -- how's that going....?
So here's the lunacy of it all: According to the Minerals Management Service (MMS) at the US Department of Interior -- a pretty well-respected group -- there are 85.9 billion barrels of oil and 420 trillion cubic feet of natural gas in the Outer Continental Shelf. These are conservative estimates. Our experience in the Gulf of Mexico, in fact, reveals that the more we search for oil and gas, the more we find. Initial estimates of reserves in the Gulf were off by a factor of 10. If we tapped this oil in the OCS, we could meet the entire current US consumption of oil for a full 11 years without a drop of foreign oil. The natural gas could heat 210 million homes for 30 years. ANWR oil reserves are equal to all of Texas' on-shore output.
As many commenters here and elsewhere have noted, supply and conservation are not mutually exclusive. In fact, quite the opposite. We need to conserve, we need to find new sources, too. But we absolutely need to be tapping these enormous reserves of energy. And, it all can be done in an environmentally-sensitive way.
And so we sit back and watch the Washington parlor game of finger pointing and misplaced blame. While they scurry about taxing this one and that one, and mandating electronic filing of whatever and railing against price gouging (talk about a safe issue -- anybody in favor of price gouging?), we sit atop this huge reserve of oil and gas. We remain the only nation in the world that limits access to its own natural resources. Do you think our competitors would let themselves get in this pickle? They must just look at us and laugh.
We should note that one rational voice in all of this came Tuesday from Rep. Richard Pombo (R-CA), Chair of the House Resources Committee. Said Pombo, "Time and again, [we] have warned that America would end up at the mercy of OPEC if we didn't put Americans to work producing more of our own energy. We were right", he says, "As the price at the pump illustrates, again."
The solution is right here if we want it. Click here to tell your elected representatives to stop with the speeches and turn on the spigot.
solution to one part of the problem.
RAISE THE MARGIN RATES ON OIL FUTURES CONTRACTS FOR ENTITIES THAT HAVE NOTHING TO DO WITH OIL PRODUCTION OR DISTRIBUTION.
That would take some of the spec out of the market from easy money hedge funds with nowwhere else to throw money.
Second, put some money into Montana to develop the coal to gas process that Gov. Schweitzer has been pushing.
tell me what you think it would accomplish? I think it would raise the cost to hedge funds who are speculating in the oil markets. If you have a tiered margin requirement it raises the cost to speculators because most of the time they are LEVERAGED. They are paying the margin with borrowed money. More margin requirement= less profits and less speculation.
The second point is self evident. We have enough coal in the U.S. that if we used the Fischer Tropsch process to refine it into fuels we could be completely off middle east oil within 10 years.
"The significant rise in longer-dated futures prices reflects the perception of continued tightness in the physical market, and is facilitated by increased investor interest. The futures market in the United States has deepened considerably since 1990s, with short-dated contracts increasing from around 30 percent of the U.S. crude oil production in the 1990s to 80 percent in mid-2005 (Figure 4), and synthetic 6-year futures contracts reaching 9 percent of U.S. production (Figure 5) in 2005 compared to less than 1 percent in 1997. Longer-dated futures prices are also responding more to daily oil market news, suggesting that while market participants are more actively forming views about prospects for supply and demand, their assessment of the likely impact on future prices has become more uncertain. This has also created incentives for new players who, through hedging or speculative activities, can potentially benefit from the uncertainty surrounding future supply."
http://www.imf.org/external/np/pp/eng/2005/092105o.htm
and speculation-
Recent entrants to energy markets (for example, pension and hedge funds) have added diversity to the market and can be a source of liquidity and price discovery. Many of these institutional investors have sought to diversify their investment portfolios by entering energy markets. Industry estimates suggest that approximately $100-120 billion of new investment in the past three years has been in active and passive energy investment vehicles. Hedge funds, which seek to arbitrage perceived inefficiencies in market valuations, typically employ more active investment strategies and could influence market outcomes in the short term. In contrast, the index-related vehicles used by passive investors tend to be strategic (i.e., seeking portfolio benefits such as diversification) and relatively long-term in nature, responding to perceptions of a structural component in recent price movements.
While the new investors could be instrumental in translating expected future fundamentals into current prices, excessive activity based on limited information may lead to a disconnect between the futures and physical markets. In particular, excessive activity by newcomers or herd behavior by investors may exaggerate the impact of concerns about current and future supply conditions at all points along the futures curve, including spot prices. Given that only about 5 percent of futures contracts are ever delivered as a physical product, increased uncertainty can encourage speculative behavior in the futures market. This, in turn, may push up futures prices beyond that warranted by future market fundamentals.
THE KEY PART HERE IS TO NOTE THAT ONLY 5 PERCENT OF FUTURES CONTRACTS ARE EVER DELIVERED AS A PHYSICAL PRODUCT.
Thus, I posit that we should restrict who can trade some of these products by requiring them to have different, much higher margin requirements.
The speculators make the market liquid.
Interesting remarks.
I wonder, how much of the OCS has siginificant exposure to hurricanes? Is it a risky area in that regard?
Also, I agree that conservation is doable. If we implemented an agressive bottom-up telecommuting system in the federal government and made that a point of preferential bidding for government contractors and vendors, we could drive down the cost of oil dramatically, practically overnight. It would also save the government a ton of money in facilities expenditures, as well as give it a greater ability to identify redundant and unnecessary positions that could be eliminated.
Your disdain for Presdient Bush seems to stem from his departure from conservative principles. Yet here you go proposing an idea that would impede a free market. Free market rules are a two way street, they can bring prices down as well and liquidity is important aspect of this.
Regarding coal, excellent idea. Not just for Fisher-Tropsch but also for IGCC power generation. Who's money do you want to throw at it? Certainly not the federal governments. Perhaps you were using your post to remind energy companies of the great potential in these areas.
What has been the objection to drilling on the OCS? Environmental impact?
All I know about this issue is that the Supreme Court said that the government can't keep the money if it sells drilling permits and then refuses to allow drilling.