Presidential Candidates Accelerate Oil and Gas Flames

What's behind prices?

Ken Silverstein | Apr 25, 2012

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The U.S. presidential election is escalating now that summer driving season is near. At issue is what is causing near-$4 a gallon gasoline and whether anything can be done about it.

Two immediate positions are forming: The first is that speculators are flooding the market with billions of dollars, which drives up gasoline prices. The second is that this phenomenon is a function of supply and demand -- that Americans are driving more at a time when Middle Eastern turmoil is restricting supplies. To this end, many are arguing that the way around such a conundrum is to allow domestic drillers more access to areas now off limits to production.

“We will need to work extra hard to protect consumers from factors that should not affect the price of a barrel of oil,” President Obama said this week in a Rose Garden speech. By that, the president means that the “irresponsible few” are “illegally manipulating” or “rigging the energy markets for their own gain.”

In other words, speculators are buying up oil and creating the false perception that shortages exist. Prices then rise and the traders sell those “futures contracts” for quick profits, hurting American families. That's a view generally supported by the Industrial Energy Consumers of America.

Immediately, the president wants Congress to add $52 million for the Commodities Futures Trading Commission so that it can put more “cops on the beat,” as well as provide digital oversight, to keep oil markets in order. He would impose greater civil and criminal penalties while also empowering the commission to require traders to have more skin the game to avoid excessive speculation.

Those ascribing to supply and demand theories say that traders create liquid and transparent markets, buying low in one area and selling high in other regions that need the product. Efficiencies form, they say, noting that the same type of trading is done in natural gas markets where prices are extremely low.

“While American families struggle to pay gas prices that have doubled on his watch, the President’s only solutions are to target oil and gas producers for higher taxes and now to dramatically increase federal regulation,” says the presumptive Republican presidential nominee Mitt Romney. “And they will not distract the American people from the president’s consistent record of sacrificing America’s energy future to appease the environmental extremists in the Democratic Party.”

New Money

Traditional thought has held that commodity prices all correlate with oil. In fact, the Federal Reserve Bank of Dallas authored a study in 2007 that said the prices of oil and gas tend to move in tandem by a factor of 10 to 1, or $100 a barrel would mean $10 per million Btus.
 
But natural gas prices are now cheap in comparison to the price of oil. The most conspicuous explanation is that oil is a global commodity that is affected by those conflicts in oil producing nations while natural gas is largely a regional fuel that has been left unscathed by recent events.
 
At the same time, the large and accessible shale-gas deposits have kept such prices unusually low, or less than $2 per million Btus. All this is transpiring while the large pension funds are moving money into the commodity index funds and artificially driving up the price of oil. In other words, “speculators” smell blood and the ability to increase returns.
 
When “new” money floods commodities funds, it can create upward price momentum that will exacerbate any supply and demand distortions, says Valerie Wood, president of the Madison, Wis.-based consultancy, Energy Solutions.  However, falling natural gas prices don’t necessarily mean that speculation has entirely disappeared. “The shale-gas phenomenon has reduced the influence of speculation on natural gas prices.”

There are not any quick fixes to rising oil prices -- not the proposed legislative remedies nor more drilling access. In fact, President Obama says that during his tenure the country has quadrupled the number of operating rigs. The problem is that this nation uses 20 percent of the world’s oil but that it has only has 2 percent of the world’s proven oil reserves.

Beyond the current “all-of-the-above” strategy, the administration says that the most effective way that government can assist oil consumers is to take steps to prevent market manipulation. That view is to the dismay of others, who say that prices are pushed down by driving less and drilling more. As the presidential race heads into summer, the debate is bound to get hotter.


EnergyBiz Insider is the Winner of the 2011 Online Column category awarded by Media Industry News, MIN. Ken Silverstein has also been named one of the Top Economics Journalists by Wall Street Economists.

Twitter: @Ken_Silverstein

energybizinsider@energycentral.com

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Comments

Fix the problem in the long haul!

Oil prices are high for a number of reasons including those mentioned in the article and if they can prove that there are some people/companies manipulating the markets, then by all means "crucify them".  But, for the most part, I don't think that this is what is happening.

The speculators are just placing their bets as to what they think prices will do and I don't see anything wrong with that.  As long as when they are wrong, they are able to cover their bets, in the long run they provide a valuable service to the economy.

The real reason that oil is going up is because demand continues to climb and production isn't keeping up.  Now, that doesn't mean that the answer is to drill in environmentally sensitive areas that only contain a few months worth of our national consumption.  That would be silly and the only ones who would benefit are the oil companies that would make a buck off of that oil.

The real solution is first to pick the low hanging fruit that is efficiency.  This could be done a number of ways, but however you choice to encourage it you need to give an economic incentive for people to conserve energy.  The other thing that we could do would be to switch to renewable energy sources as quickly as possible.  By doing things such as switching trash and delivery trucks...any vehicle that runs a route.. to electricity that is generated by renewable energy, we can lesson our dependence upon foreign oil.  The list goes on and on and while it may take to long to address our immediate gas price concerns, in the long haul it will solve our energy problems!

 

Bob "The Clean Energy Guy" Mitchell

Getting sick of hearing "renewable" like it is all so green

Wind and solar are not quite as clean as many people seem to believe.  The breatheon.org commercials to promote renewables wherein the little girl is playing with the toy sailboat and other such pap is pretty much that.  We are investing a ton of taxpayer green into wind farms and solar installations via PTCs and cash grants that are not doing nearly as much for the environment as they would have you believe.  Wind and solar are both relatively uncontrollable variable output generating facilities and you cannot get them to put out scheduled power.  This means that there must be fossil power running at partial load (a pretty inefficient operating regime) just in case the wind falls off suddenly or clouds move across the path of sunlight.

From articles and papers I have read, wind turbines require some 4.6 times more concrete and 11.5 times more steel than even older nuclear plants on a per MW nameplate capacity basis--and older nukes used a lot of concrete and steel per MW.  Compound that by the low capacity factor of wind and you will rapidly find that on a delivered energy basis, wind requires 14.4 times more concrete and 35.9 times more steel on a per MWh basis.  What does one reckon that does to the prices of those commodities?  Check the commodity prices during the periods of heavy wind construction and see for yourself--it certainly appears to correlate to me.  Then what about the wind pattern changes sure to result from putting massive wind farms up and what about the bird and bat kills?  Talk has centered around eagles and other raptors but what about the birds (and bats) that act as an ecological control for insect populations--insects that destroy food crops and may carry diseases?

Then there is solar PV planned to cover vast acreages of wilderness lands expropriated from the states by the Interior Department to preserve these natural lands from developers.  The chemicals used to make solar cells are toxic and when used up must be disposed of.  Reports out of China indicate the chemicals are being dumped.  Then what is the ecological impact of shading vast areas of land?  What is the impact of reradiating into the atmosphere during the middle of the day solar energy that is normally reflected from lighter colored surfaces rather than being reradiated as infrared which is absorbed by clouds and water vapor in the air (water vapor is a greenhouse gas and clouds trap heat as well).  Solar panels are near-black bodies.  The 80 to 85% (or more) of solar energy they absorb but do not convert to electricity has to go somewhere.

Here is what the official said

The Romans used to conquer little villages in the Mediterranean. They’d go into a little Turkish town somewhere, they’d find the first five guys they saw and they would crucify them. And then you know that town was really easy to manage for the next few years.

And so you make examples out of people who are in this case not compliant with the law. Find people who are not compliant with the law, and you hit them as hard as you can and you make examples out of them, and there is a deterrent effect there. And, companies that are smart see that, they don’t want to play that game, and they decide at that point that it’s time to clean up.

And, that won’t happen unless you have somebody out there making examples of people. So you go out, you look at an industry, you find people violating the law, you go aggressively after them. And we do have some pretty effective enforcement tools. Compliance can get very high, very, very quickly.

That’s what these companies respond to is both their public image but also financial pressure. So you put some financial pressure on a company, you get other people in that industry to clean up very quickly.

EPA has a history...

of using lawsuits to browbeat companies which were not violating the law. Their suits against electric power plant owners, accusing them of making changes to their power plants during maintenance shutdowns which would trigger NSR, essentially put an end to any improvements in efficiency or emissions performance which might have occurred during maintenance shutdowns. This Clinton-era policy was adopted out of frustration that utilities, while actually complying with the law, were not reducing emissions as rapidly as the Administration and EPA would have liked. Companies then simply chose to avoid any potential of being "crucified" by doing exact equipment replacements, even when efficiency and emissions improvements might have been made at very limited additional cost.

Being sued by the federal government is much like dealing with the Queen of Hearts: "Sentence first; verdict afterwards."

"All of the above"

"Beyond the current “all-of-the-above” strategy, the administration says that the most effective way that government can assist oil consumers is to take steps to prevent market manipulation."

"Sen. James Inhofe (R-OK) took to the Senate floor today to draw attention to a video of a top EPA official saying the EPA’s “philosophy” is to “crucify” and “make examples” of oil and gas companies - just as the Romans crucified random citizens in areas they conquered to ensure obedience." http://cnsnews.com/blog/craig-bannister/epa-officials-philosophy-oil-companies-crucify-them-just-romans-crucified

"If somebody wants to build a coal power plant they can, it's just that it will bankrupt them because they are ...", Barack Obama, November 2008.

I call BS!