Another jump in oil prices.
Think it has anything to do with the fact that both presidential candidates favor a hidden tax on energy and oppose expanding domestic oil production?
You know, in the past, when I’ve said that prices in this range are not sustainable, I always assumed that, at least at some point, sanity would reign in Washington. What a dumb assumption.
[Thursday morning update]
Wise words from Lileks:
…there’s hope. An article in the paper last week said that the gyrations in the oil market may indicate that the laws of supply and demand no longer apply. Well, clever us, to live in an age where immutable laws are abolished with ease; no doubt faster-than-light travel is now possible as well. Whenever someone says that the old laws no longer apply, it’s a sure sign that the laws are about to reassert themselves with brutal force.
Three-buck gas by October? Likely.
As Carl notes in comments, even when you know you’re in a bubble, you don’t know when it’s going to pop.
[Update a few minutes later]
Anyone wondering why U.S. energy policy is so dysfunctional need only review Congress’s recent antics. Members have debated ideas ranging from suing OPEC to the Senate’s carbon tax-and-regulation monstrosity, to a windfall profits tax on oil companies, to new punishments for “price gouging” – everything except expanding domestic energy supplies.
Amid $135 oil, it ought to be an easy, bipartisan victory to lift the political restrictions on energy exploration and production. Record-high fuel costs are hitting consumers and business like a huge tax increase. Yet the U.S. remains one of the only countries in the world that chooses as a matter of policy to lock up its natural resources. The Chinese think we’re insane and self-destructive, while the Saudis laugh all the way to the bank.
And unfortunately, both presidential candidates are economic ignorami:
Recent weeks have seen some GOP stirrings on Capitol Hill, but John McCain has so far refused to jettison his green posturings, such as his belief in carbon caps and his animus against offshore development. A good reason for a rethink would be $4 gas. At present, it is charitable to call Mr. McCain’s energy ideas incoherent, and it may cost him the election.
Of course, Obama’s even worse, but even if McCain wins, it will be a lot closer than it need be. And prices will continue to soar. Needlessly.
Oil and its by-products are global commodities. The companies that extract and refine oil are global companies. They extract and refine wherever it is most expedient and ship it to where it is most profitable. Hence, phenomena such as domestically produced diesel being exported to Europe and European refined gasoline being imported to the US. It really doesn’t matter whether we ramp up domestic extraction and refining. It won’t have a meaningful impact on the price of oil or it’s by-products in the short term. There is plenty of oil in other places where it can be extracted and refined. In the short term, there is no harm in delaying the development of our domestic reserves.
In the long term, as a nation, we are better off waiting to tap out our domestic oil reserves. More than half of a barrel of oil is refined into gasoline, the balance is made into plastics and fertilizer. There is more value added and more profit in the plastics and fertilizer. In the long term, as oil, globally, becomes more scarce and refined gasoline becomes cost prohibitive to use as a fuel; refining will shift more to the higher value added products. As a nation we are better off maintaining our reserves for the higher value added products which can be consumed domestically and will be a valuable export.
US production may not make enough dent in World production to lower the free-market price, either here or for our trading partners, but it sure could make a big difference in balance of payments.
Some of the people who are dismissive of ANWR or coastal drilling as having only a marginal impact on oil supply, ignoring that most economic decisions have a marginal effect on a much larger whole, are all excited about Toyota Prius’s (how many are on the road and what percent impact are they having on oil consumption?) or Federal funding of Amtrak (carries .1 percent of passenger miles travelled with 1 billion/year in subsidy — does this mean it will cost 1 trillion/year out of the Federal budget to replace cars with trains?)
The litany is, ANWR, only a couple years supply at global consumption rates. Coastal drilling, same thing. Oil shale, not same thing but some other excuse. A million barrels per day production here, a million barrels there, and pretty soon it adds up to real oil production.
Think it has anything to do with the fact that both presidential candidates favor a hidden tax on energy and oppose expanding domestic oil production?
No, actually I don’t. In the first place, a tax on gasoline will not make crude oil more expensive, so there’s nothing to be gained (as far as a possible tax goes) to locking in the price of your future oil purchases now (which is what buying up oil futures does). Indeed, a tax on gasoline can be expected to drive down demand, so logically the threat of a tax should depress the price of oil futures.
Secondly, it’s not like expanding domestic oil production in the ways he means (ANWR, oil shale, offshore drilling) was all set to go, except it will be stopped by a President McCain or Obama. These particular projects have been mostly dead in the water for 10-15 years or more, and the case is better stated that neither candidate is enthusiastic about resurrecting them. So the fact that these methods of increasing domestic production aren’t going to happen has already been part of oil futures speculation for years. It’s true that if Obama, say, who everyone thinks will win, came out strongly for ANWR or offcoast drilling, that might exert a downward pressure on oil futures, although not so much, because oil futures are about the price of oil six months from now, not 10 years, which is when ANWR or offshore oil would start flowing.
That’s not to say I don’t think oil futures are affected by the Presidential race. I think they are, because (1) it means uncertainty in general, and uncertainty means you try to lock in your price now, bidding up the price of futures, and (2) in Obama there’s probably the fear that he will abandon the Iraq enterprise, considerably destabilizing the Middle East, and (3) there’s the sense that the general Democratic victory widely expected will be bad for capital invested in American enterprises — the new Congress will come down with “windfall profits” taxes, raise the capital gains taxes, repeal the Bush tax cuts, nationalize (or at least hyperregulate) the 15% of the economy represented by healthcare, and in general carry on a vengeful populist attack on “the corporations.” Such an expectation, of a broad-based and confiscatory attack on profit and capital gains would certainly deter foreign investors from investing their savings in American enterprise, which drives down the value of the dollar and drives up the price of oil futures. (Kudlow made the point somewhere at NRO that a nontrivial chunk of the recent rise in the price of oil can be attributed to the fall of the dollar.)
That said, there’s very little doubt we’ve got an oil bubble going, and it will pop sooner or later. I’m sure the speculators know this, but like the recent greedy “flippers” in the real estate bubble, they don’t care. Or rather, they know that the bubble is actually a great opportunity to make fast and huge profits so long as you bail before the bubble pops. Since everyone assumes he’ll be the smart one who does so, the awareness of that fact that they’re in a bubble doesn’t stop them from continuing to inflate it.
> They extract and refine wherever it is most expedient and ship it to where it is most profitable.
That’s not a law of nature – it’s a political decision, one that the US could, at great cost, change. For example, the US could decide that no oil was exported from the Americas.
> They extract and refine wherever it is most expedient and ship it to where it is most profitable.
You say that as though transportation, logistics and regulatory costs for those commodities is zero and it isn’t. Gasoline has always been cheaper the closer you are to the major pipelines. And in this case its particularly so because inventories in the oil business are tight (it is in any market where the amount of time between manufacture and consumption is very tight). Any perturbation in supply, refining or getting the final product to market can have significant effects on the final price.
The price of pump gasoline is the biggest political issue, and in the USA that price is heavily influenced by self-imposed supply limitations — i.e., regulatory prohibitions on refinery construction, and rules mandating different gasoline blends in different parts of the country. There’s also substantial federal, state and local taxation imposed on every gallon of retail motor fuel.
In the big picture, an enormous amount of additional crude becomes available as the price goes higher, but only if we allow ourselves to exploit it via new exploration, drilling, and production technologies. So far we have not been willing to do this.
You say that as though transportation, logistics and regulatory costs for those commodities is zero and it isn’t. Gasoline has always been cheaper the closer you are to the major pipelines.
Transport of oil by (super)tanker, however, is very economical. The cost of transporting oil to the US from the middle east, for example, adds only a few cents per gallon to the cost of gasoline.
So, once oil is put into tankers, it really is part of a nearly homogenous global market (some exceptions being regulation and differences in oil composition, for example the hard-to-refine, high sulfur heavy petroleum from Venezuela).
Arguing about how long something is going to take to come online is irrelevant. It takes whatever time it takes. What is relevant is the direction we’re going and it’s not about oil, it’s about energy.
As far as I can see, the only means of generating energy on a scale that makes an impact on oil is nuclear.
We need to be cutting the red tape and getting on with it.
Locally, we can incentivize builders to include solar in new housing.
Mr. Anthony, you are probably right – in the short term, because nuclear is the only technology proved to work at the scale required. I am not going to bore everyone by once enumerating all the other alternatives; but there are a hell of a lot of them and they will all probably work. They all need time to perfect, however.
I explicitly exclude, however, wind power and ground-based solar electricity, for two reasons that apply to both – terrible power density (and associated high production cost) and unreliability.
Solar heating might be a useful thing to aim for in new construction in some circumstances, for space heating and hot water.
Another thing that will make a lot more difference is much higher energy efficiency, in buildings and vehicles; I have read an article today about a house (incidentally, built from sustainably-grown timber) that takes less than 400W of power for all heating and lighting needs. This house is on the coast of one of the Shetland Isles, not exactly a tropical paradise!
All the nuclear and solar power in the world isn’t going to move gasoline prices much. You don’t see the French enjoying low gasoline prices, right? And they get 70% of their electricity from nukes, a fraction the US could only approach twenty years from now, and with an unlikely and radical change in the popular attitude.
Replacing current electricity generation (largely coal and gas, at least in new plants) with nukes, and home water heating (almost entirely gas) with solar panels isn’t going to budge the demand for oil, because oil is mostly used as a transportation fuel, e.g. gasoline.
Until the wonder battery comes along that can achieve anything near the power density and speedy recharge capacity of liquid chemical fuel, so that a car can practically (not in the fantasies of Green Party fanatics) be “fueled” by electricity from the mains, “alternative” energy sources that only work for fixed power plants aren’t going to change the price of gasoline much.
The Saudis are about to increase production. I see a needle on the horizon.
http://www.iht.com/articles/2008/06/15/business/oil.php