The Oil of Politics

  Of all the meaty issues that are going to be served up on the presidential election platter -- health care, Iran, deficits, the future of Social Security, Medicare, immigration, the future of America to name but a few -- it is highly likely that the price of gas will be that platter's main course.  For unlike any other issue, this one affects our lives not in the abstract, but in capital letters; not once a month, but nearly every day.  And, where one might, through an act of will or self-preservation, hide just about any other issue under the mental rug, the price we pay for a gallon of gas is simply too central, too overwhelming, to be separated from our daily concerns.

   As central a focus as the price of gas-at-the-pump is going to be, it is an issue which candidates will address with fatuous finger-pointing, superficial slogans and brainless bromides where tachlis -- Yiddish for "seriousness of purpose" -- should reign supreme.  Moreover, most every challenger -- whether running for President, Senate or House of Representatives, will espouse the same simple-minded solution for this utterly complex challenge: "Vote for me! I will lower gas to $2.50 a gallon!" "Vote for me!  I will drill everywhere from Butte, Montana to the Beaufort Sea"  "Vote for Me! I will free America from its dependence on Arab oil!"

   Sorry fans, but it ain't gonna happen.  Candidates who suggest that utter complexity can be parsed through sheer simplicity are charlatans; voters who buy into that simplicity are to be pitied.

   And so, in keeping with the old adage "To be forewarned is to be forearmed," we present a little quiz about oil, energy independence and the price of gas . . .

   1. The world's largest producer of oil is:

       A. Saudi Arabia

       B. Iran

       C. United States

       D. Russia

       E. China

   The correct answer is D, Russia. The next four, in order of production output are Saudi Arabia, United States, Iran and China.

   2. The largest single foreign source of American oil comes from:

       A. Mexico

       B. Venezuela

       C. Saudi Arabia

       D. Nigeria      

       E. Canada

   The correct answer is E Canada.  In order of quantity imported, ranging from most to least, America gets its oil from Canada, Mexico, Saudi Arabia, Venezuela and Nigeria.  

   3. True or False: During Barack Obama's first three years in office, America's rate of oil production and exploration fell dramatically.

        False: According to the International Energy Agency (IEA), during the last 3 years of the George W. Bush administration (2006-2008), America produced 1.78 billion barrels of oil.  During the first three years of the Obama administration (2009-2011), America produced 2 billion barrels of oil, a nearly 13% increase. 

   4. True or False: The best way to lower the price of gas at the pump is to drill for more oil here in America.

       False.  A statistical analysis of 36 years of monthly, inflation-adjusted gasoline prices and U.S. domestic oil production by The Associated Press shows no statistical correlation between how much oil comes out of U.S. wells and the price at the pump. If more domestic oil drilling worked as politicians say, we'd now be paying about $2 a gallon for gasoline.

   5. True or False: If America could reduce its oil imports to zero, we could insulate ourselves from the global market and set our own prices.

        False.  It is virtually impossible to be insulated from the global market -- even if we do not import a single barrel.  Gasoline prices will always be determined by world petroleum prices.  The only way to keep prices significantly lower than the world market would be to institute price controls, which President Richard Nixon did in March 1973.  (In 1973 Congress passed the Emergency Petroleum Allocation Act which created a two-tier system of price controls on domestic oil. The price of “old” domestic oil was frozen, but “new” domestic oil was decontrolled.  These controls were phased out by the end of the Carter Administration.)

  There is no single reason why gas prices rise or fall.  Having said this, it must be admitted that the price of gas at the pump does have more to do with the petroleum futures' market than with either the production or consumption of gasoline.  And what frequently "fuels" the petroleum futures' market is a combination of worry, fear and uncertainty about the future.  When, as an example, there is a rise in bellicose rhetoric vis-à-vis Iran ("If elected, Iran better watch out!" or "If you persist in putting more economic sanctions on us, we'll retaliate by shutting down the Straits of Hormuz!") speculators drive up the price per barrel against the possibility of what might happen in the future.  Interestingly, even if Iran finds itself  able to sell only half the oil due as it did prior to sanctions, if the price per barrel will increase 30% or 40% -- which it could well do -- their income won't be all that much less.  In other words, it would be wise for politicians to lay off the bellicose blather.

   Is the market really that sensitive to rumor and possibility? Absolutely.  Just listen to any day's closing market report on CNN, MSNBC or the BBC, and you will hear analysts explaining what, in their opinion, led the Dow Jones led to advance or decline.  Uncertainty about the Greeks' ability to handle their debt, for example will send the market down.  If, however, the next day the EU and the IMF even hint at providing Athens with, say,  a $100 billion loan, the market will go up.  It's just that sensitive.

   So too with energy.

   America's and the world's energy future is a highly complex issue.  The Department of Energy's "International Energy Outlook" anticipates that world oil consumption will increase from 85.7 million barrels per day (mbpd) in 2008 to 112.2 mbpd in 2035.  And the largest increase in consumption is not going to be taking place in the United States, but rather in emerging economies in Africa and Asia.  This means that America's energy needs are going to increasingly come from unconventional sources like oil sands, extra-heavy oil, biofuels, coal-to-liquids, natural-gas-to-liquids and shale oil -- all of which we have (at least potentially) in abundance, and all of which come with serious ecological consequences.

   As noted above, complex problems require far more than simple slogans or birdbrained bromides. "Vote for me!" is obviously not a serious solution to a complex problem. Any candidate who suggests that simply doing "X" or "Y" will solve America's -- and the world's -- looming energy crisis is full of hot air. 

    And the last time I looked, hot air -- although existing in great abundance -- isn't a great source of energy.

©2012 Kurt F. Stone

Comments

[Wheel Alignment Equipment]

I was of course aware of the controversy over biofuels because of their negative effects on food security, when poor countries devote increased acreage to grow a non- food biofuel crop rather than grow food or indeed grow a food crop for fuel rather than eat it.

[Steven]

I have enjoy reading your blogs, since we met at J Street Launch. Your last topic--oil & gasoline prices-- is the topic that I recently wrote an issue paper. I cut and pasted my 2 pages to this email. I hope you find it useful.

As you know, I live in St Lucie where Congressman Allen West has decided to run for the new District # 18 seat. I still contribute a lot to J Street; but it seems those wheels turn very slowly.

Take Care,

Steve

OIL AND GASOLINE PRICING

3/15/12

Fast Facts:

WTI: West Texas Intermediate Crude—A Standard Bench Mark for Pricing. If and when a Future contract holder takes delivery of Product (crude) it is at Cushing, Oklahoma, where there's adequate infrastructure of pipelines and Storage tanks.

Brent: Brent North Sea oil is another world Price Bench Mark for crude. There is no automatically delivery location but most contracts will stipulate that Delivery will occur at Rotterdam.

Forecast for 2012: According to JP Morgan, 2012 average price for WTI will be $97.50; and for Brent it will be $114.25.

Forecast for 2013: Again according to JP Morgan, 2013 WTI is predicted to average at $114.25; and Brent it will be $121.25.

The Big CAVEAT is no External Event--Like War.

Oil Pricing

Since the 1920's, the price of crude petroleum has been set by artificial means and authoritative groups. The Texas Railroad Commission had the first role of regulating the price of crude oil in Texas and as a result for the entire country. In 1973, pricing changed by OPEC (Oil Producing & Exporting Countries) when it withheld supplies to the market and the United States, Europe and other oil consuming countries had great difficulties in obtaining oil and refined gasoline products. Today, oil prices are set by commodity traders, who have factored into the price a premium between 25% and 33% for risk and uncertainty.

The entire world consumption on a daily basis is approximately 88 million barrels and there is very little surplus capacity to drill and extract more oil except for Saudi Arabia. OPEC Countries, who try to restrict supply, plays havoc with the markets, which is not good.

Pricing comes from Commodity Trading of futures contracts, mostly through the New York Mercantile Exchange. Any investor, whose qualified with previous experience and a minimum net worth of $250k outside of his/her primary residence could trade commodities; but the large consumers of petroleum products, like airlines and shipping companies, play an active role as does Oil Companies themselves.

Investor or speculators along with the industry end-users buy and sell contracts and thus setting the current and future price for a barrel of crude. The U.S. Commodity Future Trading Commission regulates the New York Merc and other Futures trading; but many people feel that the Commission's impact and performance could be better.

Trading and Actual Delivery

Every day approximately 80 billion barrels are traded,through future contracts even though the world only consumes 88 million barrels daily. Those are the speculators. The end users will take delivery of approximately 1 billion bbl in a year, but annual consumption is approximately 30 billion bbl. So, about 3% of the trades in future contracts take delivery and this is considered the spot market. The other 97% of annual consumption is under long term contract that have set prices.

Prices in the futures market do not form actual supply and demand; they form perceived supply meets perceived demand. Participants in the futures market merely represent the world around them. A veil has been placed over the public's eyes and they accept this illusion of a fair price. This is why there is 25 to 33% higher for perceived Risks: Persian Gulf, Pending Wars, Threats against the straits of Hormuz, etc.

Oil Suppliers Want Prices to Increase

Since suppliers know that oil is finite supply, there's a desire to maximize the price of a barrel.

The future market players such as investors, hedge funds, oil companies, and OPEC countries are the very people, who benefit from massive and consistent oil price increases. That's where the “conflict of interest” is built into the price.

An oil supplier would only have to buy future contracts to affect a price increase.

Integrated Oil Companies

If 97% of the oil moves under long term contracts, the majority of these contracted prices are way below the spot futures price. An oil company that is integrated with extraction, transportation, refinery, and retail distribution has many opportunities to increase the price of the product by the time it comes out of the refinery.

An integrated company can charge its various subsidiaries , transportation, refinery or retail costs that approach the futures price. This gives economic rents (or excessive profits) to the integrated company.

Gasoline Pricing

Factors Influencing Prices at Retail Outlets

The price per gallon of gas at the pump is determined by various complicated factors and a whole range of issues which includes - the demand and supply of crude oil along with factors like inflation, local taxes and changes in currency valuations. A typical breakup of the per gallon gas price would be as follows:

Price of crude oil - 68%

Federal and state taxes - 14%

Refining costs - 10%

Distribution and marketing costs - 5%

Profit margins - 3% Though demand and supply is responsible for substantial hikes, "free enterprise" is to be blamed at all other occasions. And how? The moment there is speculation that crude will be trading higher, retailers usually increase their prices in an attempt to keep their margins intact for future purchases. Contrarily, when the price of the crude decreases, retailer price per gallon of gaslers are not inclined to lower rates as fast as they have raised it in order to maximize profits.
When the crude is in an upward spiral, the retailers have little or no opportunity to earn profits. But when the crude is cheaper, they see a chance to capitalize on the situation and delay lowering of prices at the pump. It might be correct from their point of view because if they suffer losses, they may have to shut down their business. This in turn will lead to fewer jobs, lesser competition and even higher gas prices.

Recommendation one universal type of gas

. One aspect for the shortage of gasoline is that different states( with California having the most restrictive regulations for air) requires the most unique gasoline blends.

If there were standardization of gasoline qualities, there could be some savings and efficiencies; but at the cost of air quality standards. Standards that were hard fought for and currently has a working solution.

Gasoline Taxes—Federal

Some people talk about reducing Federal taxes on gasoline, so that a there is a savings for consumers. The problem with this action is Federal Gasoline taxes goes into the Highway Trust Fund and is used for highway and bridge repairs. Both the House and Senate has recently passed a Transportation bill that will authorize work on many highway projects. The bills will go to conference and hopefully this funding will pass and more construction jobs will result.

[KFS to Bernie]

That is true about gold . . . nor can he control what happens to the Chicago Cubs . . . although in this case, I'm sure he wishes it were otherwise!

[Bernie]

Very true.
Obama cannot control the price of gold either

[Stanley]

This is both a well-written and thoughtfull article.

It's possible that all of these primaries have colored my thinking, but it's occured to me that since there are lot's of schmuks amongst our voters i t is to the Republican wannabees advantage to talk up the problem and thereby help to keep prices up by every means available. I'm saying that they know what they're doing in taking advantage of stupidity.

[The Midnight Owl to KFS]

I won't argue the figures, as there is no end to it; however, it is difficult to convince any reasonable follower of the news that Obama has been a friend of the carbon fuels that we use in surface transportation, and to my way of thinking has been viewed by the people who produce this needed commodity, as a foe. Furthermore, to trot out the old canard of subsidies to the oil industry, at a time when gas hits $4.35 a gallon is pure theatrics---but what do I know-- I voted for a purer person than Bush, and got a Chicago street fighter/orator, who better disguises his failings to an adoring following

[KFS to The Midnight Owl]

That 14% figure is the one originally brought out by Rob Portman; other Republicans have used figures as high as 40% (less on public lands). And yet, there are also figures that show production on public lands up by as much as 13% . . . it all depends on which figures you care to accept. It is, however, an incontrovertible fact that in the past year, the administration has held oil and gas lease sales in 23 states, offering some 4.4 million acres for sale.

But then again, what do I know?

[The Midnight Owl]

It appears you have done some research, which is laudable ---what is missing is how much our president has mismanaged the rhetoric, and the action to accelerate carbon production. This has encouraged the futures market higher, as worldwide speculators are encouraged to buy and hold oil contracts.

You correctly recognize speculators have something to do with prices, and unlike Obama's earlier thinking, you understand that carbon fuels will have to be used by our children and grandchildren; however, Obama has hindered its development. Production from federal lands is down some 14%, while production from lands out of federal control is up, no thanks to our president, who has tried to keep the environmental vote. He has encouraged little the drilling in offshore areas, and we acknowledge it must be done safely, but he is just now thinking that he had better get on the bandwagon.

3 refineries serving the east coast have been shut down, and he has said nothing, nor done nothing,about that, nor has he encouraged or promoted the building of a pipeline to the east. Furthermore, he is doing precious little to encourage the increased use of natural gas, in between his obsequious promises to Medvedev. By the way, as I may have said before, he has extracted nothing from Iraq's vast oil wealth in exchange for our loss of lives and treasure, as he withdrew troops. I respect your view of this president; however, the path he has taken, the debt he has incurred, and the masking of all his failed campaign promises,with socially responsible grandstanding, that has fooled some of the people all of the time, is irresponsible. Fortunately for you, he will probably be running against defenseless opposition

[KFS to Mike]

Sorry Mike, but here you are wrong: There is next to nothing President Obama could have done to keep the price of gasoline low, no matter how much -- or how little -- attention he might have paid to the situation . . . and where are they paying $6 a gallon? It's the speculators more than any other cause . . .

[Mike]

We both know that if the same effort had been expended over the past 3 years protecting American citizens from $6 per gallon gasoline as was spent ramming through a flawed health care bill, which was the wet dream of every progressive on the planet...........its really a shame since the guy has been absolutely incredible virtually everywhere else! I dont think this gasoline crises will get any of the current crop of Republicans elected but I do feel that your progressive friends took advantage of a neophyte in this case