Ignoring the law of supply and demand Posted by: McQ
on Wednesday, June 25, 2008
Why do you suppose Congressional leaders are spending all their time blaming current oil prices on speculators, price gougers and OPEC?
Because if they addressed the real problem - supply and demand - it is they who are at fault for not foreseeing the obvious building problem or acting on it with a coherent and rational energy policy. And, of course, politicians aren't about to take the blame for their short-sightedness. Instead they're casting about for anything or anyone on whom to hang the blame.
Price gouging is a red herring:
“Price gouging proposals get attention in Washington because they help politicians assign blame to political bogeymen, but they do not lower the price at the pump for consumers and could lead to fuel shortages, especially in times of emergency,” said Thomas J. Pyle, president of the Institute for Energy Research (IER). “Like baseball and barbeques, price gouging rhetoric has become a rite of summer for Washington politicians. Today’s gasoline prices reflect record global demand for crude oil, but another year has gone by without an increase in American supplies. If the consumer is getting gouged, it’s by their own government.”
REP. NANCY PELOSI: I heard it was coming down 3 cents. What we have to do is think short-term and long-term on this. There is the possibility it could go up. We have to make sure that does not come true, and we have to do it by thinking in terms of what we can do right now today to bring them down, and one of the things we were successful at doing was to encourage the president, who resisted at first, into not for filling — filling the strategic petroleum reserve. Why should we buy oil and this high price to fill the reserve when we could just be putting it into the market to increase supply and reduce the cost at the pump with
SUSTEREN: That was suggested by April, past, signed by the president in may, and now down about 3 cents to date. Most Americans think, that is not a whole lot of money.
Not only do most Americans not think that is a whole lot of money, most Americans with even a passing understanding of economics understand it could be nothing more than a fluctuation in the market having nothing to do with "not filling the SPR". In fact, as you'll see, that hasn't even begun to happen.
REP. PELOSI: June 30 is a critical day in that, and we would have loved to have done it sooner, but the president resisted. but now, the people have spoken. The members have voted, and the president has signed the bill, but June 30 is an effective date for the stopping of the refilling of the SPR.
SUSTEREN: Do you anticipate that the work the Congress is doing that the price will be down further, because over $4 is really rough?
REP. PELOSI: Six months from now, I would certainly hope so, and we have to make every decision in favor of that. This week, on the floor, we will have legislation in addition to the strategic petroleum reserve legislation that has been resisted but that we hope will be signed by the president — one is called use it or lose it, and that means that there are 60 million acres of drillable lands on land or at sea, onshore or offshore, that the oil companies have these leases. They simply have not drilled. And they are asking to drill other places.
That, of course, is total nonsense. As pointed out previously, any lease with any potential is being prepared for drilling. Any lease with no potential is not. Those which aren't yet producing oil, even though the oil company with the lease is in some stage of preparing to do so, is listed as a 'nonproducing' site. It is simply semantics used to again deflect blame. If you don't believe me, read the rest of this explanation:
REP. PELOSI: That is the question we're asking them. If you are not going to use it, then give it to somebody else, a small company or an independent, an opportunity to use those leases, which are not expensive, but they could contain oil or gas, and so, our legislation would tighten the rules governing how to get a lease and what happens if you do not drill, and I think that that — as the administration and others, John McCain and others say, let's drill offshore or in the Arctic Refuge, an environmentally sensitive area, and others, why not drill where they have the permits right now and do that to increase the supply to hopefully reduce the cost?
A) most of the leases in question out west are held by independents, B) they're very expensive, and C) those with potential are under development.
So this is simply a stalling tactic foisted upon a public which knows no better. Those leases now held with commercially recoverable gas and oil are going to be drilled. What Pelosi is demanding is nothing more be leased until those leases (all those leases) are producing. That's simply stupidity on a stick but precisely the type of thinking and inaction that got us into this shape to begin with.
And the argument against speculation (used by both sides) is also a deflection from the real issue. Check out how the questioning here is set up:
MAGGIE RODRIGUEZ: Congress is starting to take action against rising oil and gas prices. It includes legislation that cracks down on speculating. While others are asking if government subsidies might work. Senator Olympia snowe is a Republican from Maine. Good morning, Senator.
Subsidies? Who out there is asking if "subsidies might work?"
RODRIGUEZ: Certainly we have different government than these countries where gas is cheaper. But they are doing a much better job of keeping their prices in check. Given the dire situation here in our country, can't our government step in and stop listening to the lobbyists and stop arguing about the role of speculators and do something substantive to bring down our prices?
SEN. SNOWE: Well, it's a combination. Obviously, it's going to require a comprehensive balanced energy policy, including all alternatives. They are going to be important to encouraging innovation and entrepreneurship to develop those alternatives. We have an obligation to address the role of speculation in these energy futures markets. That's why Senator Feinstein and I cracked down on the Enron loophole. It was an egregious loophole that exempted the electronics trading of energy futures on the markets. That recently was enacted into law.
So, anyone - how would we know if speculation was effecting the price of oil?
Market prices are always determined by supply and demand. However, when analysts blame speculators for driving up prices higher than the “fundamentals” justify, what they mean is that speculators enter the market with an artificial demand that is laid on top of the commercial demand for oil by refiners, industrial customers, etc. By supplementing the commercial demand with the speculative demand for oil, the resulting price will be higher.
The data do not support this theory. If speculators raise the price of oil above the level that balances supply with (commercial) demand, then there will be a glut of oil on the market that must be hoarded for future sale. For example, suppose that at a world price of $90 per barrel, world oil output is 85 million barrels per day and commercial demand is 85 million barrels. The market clearing price of $90 is thus the correct one based on fundamentals.
Now if speculative investors suddenly purchase billions of dollars worth of oil futures contracts, they will push up the futures price of oil, which in turn will drive up the spot price of oil. Suppose the new world price settles at $130 per barrel. At this price, world oil output is slightly higher, say 85.5 million barrels per day, while commercial demand is lower, falling to (we’ll say) 84.5 million barrels per day. Because of the speculative demand, there is now a daily glut of 1 million barrels per day, because the higher world price of oil has encouraged producers and discouraged consumers of oil.
Naturally the numbers in our example were chosen for simplicity, but the point remains: If speculators really have driven up the world price of oil above the level justified by the fundamentals, then world output should be exceeding world consumption. That oil must be going somewhere. The investment banks and hedge funds investing in oil futures contracts need not engage in physical stockpiling, but some group must be. On the other hand, if there is no hoarding, meaning that commercial consumers are purchasing every barrel that producers bring to market, then the world price is justified by the fundamentals.
Meanwhile, as they waste time on meaningless legislation and investigations that ignore the real problem, votes that would allow further exploration and exploitation of known reserves in federal lands and waters is being purposely delayed because, apparently Congressional leadership fears such a bill might actually pass.
So while going after speculators and price gougers and not filling the SPR get tossed around as solutions to the gas price problem, Democrats continue to refuse to address the real problem of supply and demand. They continue to block all efforts to begin the process of putting more oil on the market. Hopefully voters who may be paying over $6 for gas at some point in the future if nothing is done to expand the supply, will reward Democrats (and those Republicans supporting them) with the retirement they deserve.
The construct is simple. The Dems/Communists/Liberals want to take away our freedom. It means using public transportation and blaming the Republicans [they call the GOP the Grand Oil Party now!] for this crisis. This blog is correct, but it is also referring to the trees [details] and overlooking the forest [overview]. The fact is the Europeans have had very high energy costs for over 100 years, especially for gasoline and diesel. Have they developed an alternative to gasoline in all this time with a population bigger than the USA? No. There is no alternative to oil for low cost energy. We’re deluding ourselves, Mc Cain with his 300M prize, Congress with ethanol and ’renewable’ food energy. What is the cost of corn oil in a supermarket per gallon [$10 plus]? Europeans pay $10/gallon still NO alternative. The lowest cost fuel is oil. If we start drilling right away, it will come down exponentially. Why? Because Saudi Arabia will not permit the loss to their market share to American oil. They did it back in the 80’s when shale oil exploration was threatining to bring a whole new market mechanism to work. They will do it again. Turn on oil exploration and the bubble WILL BURST. There is no fuel cheaper than oil. Period. This is the same as ’THERE IS NO PLACE LIKE HOME’. For the left restricting your freedom starts with your ability to drive and go and see what you want. Think about this and the Obama campaign. Don’t give in on this.
I’m used to Congress being stupid, but this boggles the mind. The simple laws of economics are fairly powerful, by which I mean that while economics can get very complicated, the very simplest laws of supply and demand can help out understanding a lot.
So why, why, why does every Congressional Democratic "solution" involve reducing supply? Why? Why?!?
I mean, I have a few cynical answers in mind, but none of the cynical answers I have can overpower "They’re going to lose their jobs once people figure this out".
U.S. Rep. Alcee Hastings, D-Miramar, has a double dose of predictions on gasoline prices that nobody wants to hear: Prices are going up a lot more, he says, and the nation doesn’t have any good ways to bring prices down.
"There are no short-term answers. And I know that there’s going to be long-term pain. I predict to you that gas prices will be as much as $5 before the end of this year and they will go to $6 at some point next year," he said during an interview with reporters and editorial writers at the South Florida Sun-Sentinel.
"When they go to $6 it will fluctuate between $5 and $6 and more for some time to come. That’s the harsh reality no matter what law we pass," he said.
"I get tired of hearing people, politicians, friends of mine, Democrats, Republicans, liberal, conservative, all of them telling you they have the answer," said Hastings, serving his eighth term in Congress. "There ain’t no answer, OK? ... All the talk is feel good talk."
So Pelosi’s "common sense plan" to reduce gas prices as all a lie.
I like where she can’t even get McCain’s position correct. He opposes drilling in ANWR (not something I agree with, I say go for it) but it is his position to not drill there. It’s a big issue because it keeps him sounding liberal even as he talks about more off-shore drilling.
So Pelosi’s "common sense plan" to reduce gas prices as all a lie.
Yeah, perish the thought that a politician would lie and pander to get elected.
A certain ex-congresscritter passed away and was brought to the Gates of Heaven. He was told he could choose Heaven or Hell and was given a preview of each. "Heaven" was a dusty desolate desertscape while "Hell" was a lush verdant garden teeming with flowers, tall trees and singing birds. Naturally, he chose Hell. When he escorted to his final destination he found a desert, definitely not what was advertised. When he protested to his escort the response was "that was election campaign rhetoric."
I can’t find it on You Tube, but in the run up to the Pennsylvania primary, one of the unions in support of Obama ran a TV spot that had people at gas pumps saying that Obama had a plan for gas pump relief.
Well according to the quote of Alcee Hastings (above) it’s quite obvious that this plan must have consisted of a dose of Beano.
In the 80s there was another factor beside oil shale which shaped the price of oil, the Iran-Iraq War. Two nations with reserves of 265B barrels squared of in an 8 year, WWI style conflict that were paid for by violating OPEC quotas.
If I were marketing for the API, I’d make a graph of all those federal oil leases. How many are in each stage of production, because it’s not just "productive" and "unproductive."
For instance, I could see categories being:
New Exploration Preparation Producing Cleanup
On the top I would show the government status, producing, or non-producing. A picture is worth a thousand words, and America would understand the situation with leases a little better. They could also show how much capital was tied up in each category, and how many jobs they were providing.
Well, I was hoping a certain blogger who’s been on oil company press junkets might be able to forward the idea to someone who might be able to do something like that...
And I did.
The answer from API:
I wish we could develop a graph, but the fact is that there is no repository of that information. In fact, we are in the process now of hiring a firm that can gather information from the oil companies that have leases. It’s going to take some time, though, before we have hard data. There are about 120 companies that have offshore leases, which gives you an idea of the work involved in producing a study. I’ll send you the results of the study as soon as it has been completed.