So What's Really Keeping Oil Prices at Inflation Inducing Levels. Would you believe inflation?

Sheesh. If this isn't Catch 22, I don't know what is.

People and funds are investing in commodities as a hedge against inflation pushing the price of oil into the stratosphere.

But, as we see, the high cost of fuel is adding to inflation.

The change in one analysts' reasoning since January (when the Fed drop interest rates) is rather scary.

Will anything that used to work be effective today?   Can we put a pin in that bubble?

According to a Washington Post report "Oil Price Defies Easy Calculation " the experts bemoan the fact that oil, itself,  isn't distributed in a capitalistic way.  OPEC and oil exporting nations can control how many barrels they sell.

Well, that's a point, but the alternative would entail continuing to invade oil producing nations and setting the oil free for Exxon and Chevron to exploit. 

That would be insanity, except in the Bushco world, and maybe John McCain's.  

And the invasion of Iraq sure didn't turn out so well, anyway did it?  Where is all that cheap gasoline we were promised?  Okay, I wouldn't have traded the blood of one of our soldiers nor any Iraqi's life for cheap oil.  I'm just pointing out that one of the Bush administrations supposed reasons for invading Iraq has had the exact opposite result.

And the reasons for high oil prices tend to shift.  I'd like to figure out more conspiracy theories, but after reading some articles and analysis, I'm beginning to believe that the causes really are shifting.

Last summer we were told we would have to  more for petroleum products because of China's manufacturing. Unfortunately, then the global economy went into a bit of a tailspin and it turned out that we wouldn't need so much stuff from China after all.  Yet, the price of fuel kept rising.

In January, commodities advisor Philip K. Verleger  in Made in the USA: The Causes of High Oil Prices  (PDF) blamed EPA actions and the Bush administration stuffing oil into the Strategic Petroleum Reserve. 

In my view, two energy policy actions drove prices to nearly $100 in 2007. Left unchanged,
these actions will take prices higher in 2008. The first policy act was the imposition of new regulations requiring removal of almost all sulfur from diesel fuel and gasoline in the United States, Europe, and some Asian countries.

Now that sounds bad,  Real Rush Limbaugh ranting stuff,  (and I believe the guy will probably use this sometime) but remember Verleger mentioned two policies and he indicates the EPA move was not the worst part of the fuel price run up.  And the Bush administration could take steps immediately to lower the price of the kind of oil being used today without endangering anyone's health.  

 Verleger adds:

Refiners have met these new requirements by investing in sulfur removal equipment. Their
record over the last ten years has been remarkable. The investment has enabled them to produce low-sulfur products from crude feedstocks with very high sulfur content. In addition, though, the regulations have created a stronger demand for very-low-sulfur crude oils. Low-sulfur crudes those containing less than 0.5 percent sulfur) can be processed into low-sulfur products more easily than high-sulfur crude.

Yet concludes: 

Absent other changes, the imposition of the new regulations would have added a  modest upward bias to crude prices – but it certainly would not have taken oil to $100 per barrel.

So what else happened?

The U.S. Department of Energy resumed adding sweet crude to the Strategic Reserve (SPR) in August 2007. At the time, crude prices were $70 per barrel. DOE’s decision ignited the rise toward $100. On the heels of its “success,” DOE nnounced it would double the input rate of sweet crude into the SPR beginning this month. In effect, the price rise has been Made in America.

Actually, specifically, created by the Bush administration.

Remember that Republicans have been getting 73% of Energy and Oil industry donations in this current political season  and that's down from 82% in 2006, but that amount could rise since the Bush administration has been so good for their bottom line and McCain keeps rattling swords at Iran which still has abundant oil if  it could get better technology to refine out the sulfur and clean out the sand (Iran has been denied this technology through sanctions.  This is a major reason that Iran says it needs nuclear energy.  But we put on more sanctions when they try to develop it.  Another Catch 22.)

Verleger finds a simple solution that doesn't even require a moratorium on putting oil into the strategic oil reserve.  Now, I'm pretty sure every candidate's  team has read this, and knows that they could continue to stuff the SPR if they only did it correctly, but I'm sure they all decided much of the electorate wouldn't understand the nuances and therefore they have all called for a moratorium.  Yes, all three.  Though McCain did it loudly in the last few days, and Hillary was very vocal in her last call which was for a year's halt in addtions, Obama's team did say they would stop putting into the SPR even as far back as March according to OregonLive.com -- Mapes on Politics: "Gas prices and the presidential candidates ".  I guess there is some value in not trying to out "working class" the masses. 

 But the simple solution that Verleger gives is:

The Bush administration can ease upward pressure on prices by altering its SPR policy. DOE need not release oil from the reserve or even stop filling it. It needs only to stop inputting sweet crude. I believe crude prices would ease dramatically were this to happen, possibly to $70 per barrel.

Hello,  Washington.  Can you hear him?

Unfortunately, that was then January 7, 2008 and this is now.  Things happened and then we got the notice of $4 a gallon gas by summer and we are already almost there.

(And BTW, Sweet crude?  Could they please stop making a toxic substance sound like a dessert topping? ) 

When experts say supplies are tight, they mean the low sulfur kind.  There is actually quite a lot of high sulfur product lying around. 

(Remember the  PVK analysis linked and summarized above comes from early January.  Other actions taken or not by our government apparently spurred further increases that led to the $4 a gallon we're heading for.)

 Remember in January when some people were bemoaning the Fed cuts as inflationary?  Well, they certainly were to the price of oil.  Now those lower credit card rates don't look so pleasant, anymore.

From WP (again as linked near top of post):

"I think more cash will come in and keep coming in until people are convinced that the Federal Reserve is going to do something about inflation," said Philip K. Verleger, an Aspen, Colo.-based oil analyst.

Verleger estimates that the flow of money into oil commodity investments rose from $450 million a week to $3.4 billion a week from the time the Fed cut interest rates in January until mid-March. Unlike traditional oil traders, the hedge, investment and pension funds are buying oil to diversify their portfolios, he said. That means that high oil prices have not stopped them from buying more.

 I do trust Mr. V even if he is involved with the commodities markets as an adviser.  The reason that I trust him is that he admits that oil (and other commodity futures, but especially oil) are the new bubble according to an article in Reason Magazine.  We remember all the advisors about stock market, and the housing market that wouldn't be honest about their sector experiencing a bubble.  That showed too much pandering to those who were benefiting from the price increases in the sector, and especially the already affluent and powerful.  If Verleger is admitting the run up in gas prices is a bubble, then he must be honest enough to not pander to his clients too much.  Any admission from a guy who would get so much press that what we are seeing is a "bubble" would tend to put a little downward pressure on such increases and possibly his own income or capital gains.

The WP sees reasons for the price of oil to continue rising. 

Suckers. 

Okay.  They may be correct.

But then they report some ideas on what the true price even in our tough times for a barrel of oil.

Some economists say the price of oil today should be slightly higher than the cost of finding and producing a new barrel of oil. If that were the case, the price might be about $60 a barrel, the cost of getting oil from Canada's abundant tar sands.

Saudi Oil Minister Ali al-Naimi said recently that the Canadian cost was the new price floor -- even though world oil market prices only surpassed that level a year ago. Yesterday, Total chief executive Christophe de Margerie told an energy conference in Paris that "there is a new floor linked to costs" of developing new fields, and he said prices would stay above $70 a barrel.

Other analysts say the cost of developing new oil fields is much lower, as little as $10 a barrel, in much of the Middle East but that war in Iraq and restrained expansion in Saudi Arabia prevent cheaper oil from coming onto the market. Investment obstacles from Russia to Mexico also keep current production lower than it might be.

Still $70 a barrel is  only c. 60% of $117 per barrel which we saw in the past few days.  Imagine taking 60% off the price of gasoline.  The cheapest regular I've seen lately is $3.60.  That become $2.21 almost the same as we saw last summer.   (Actually lowest local we saw was c. $2.08, but I'll take that hit.)

Now, I don't want to be too nice to the commodities advisers,  and investors, and Big Oil.  As Raymond J. Learsy at Huffington Post noted last summer, the oil producers, traders and whatnots are not exactly pushing for quick workable ways to supplement our energy needs by sustainable means.  Now even I can't wrap my mind around Learsy's solution, "gasoline rationing".  (I don't have a noble reason for this.  It might work well to suddenly put brakes on the rise of gas and oil prices.)  And I guarantee, no candidate will dare breathe those words, nor is such a scenario likely under any president that is now likely to win the presidency.

What the candidates are saying is to stop putting oil into the SPR as I reported above.  During the debate, Hillary did mention investigating the oil and gasoline industry.  The threat of investigations actually did work to suppress oil and gasoline prices during her husband's tenure.  I used to note that on my earlier blogs in the early Bush years.  There is a problem with that though.  The last investigation wasn't completed until after the Bush administration took office.  Guess what the Bushies found.  Nope, no speculation.  Nothing wrong with the oil and gas markets. Nada! 

You know how the press considers the US government as one unchanging, non political seamless guide and protector (unless, of course a Democrat lives in the White House, but I digress...).  

In 2002, the Senate finished an investigation that found the gasoline market was non competitive and easily worked up schemes to increase the price of gasoline.  They even pushed for environmental controls that they could use to self mandate price increases.  Of course the press reported on the investigation and report once and since then has dropped it's influence when doing any analysis of gasoline prices because "the government" found no problems.  Um, hey wait guys!  The Senate is part of "the government" too... Oh, nevermind.

Well, to keep from prejudicing your perspective of what Senator Clinton's intentions are, here are her words from the debate :

SENATOR CLINTON: Well, I met with a group of truckers in Harrisburg about a week and a half ago, and here's what I told them. Number one, we are going to investigate these gas prices. The federal government has certain tools that this administration will not use, in the Federal Trade Commission and other ways, through the Justice Department, because I believe there is market manipulation going on, particularly among energy traders. We've seen this movie before, in Enron, and we've got to get to the bottom to make sure we're not being taken advantage of.

Number two, I would quit putting oil into the Strategic Petroleum Reserve and I would release some to help drive the price down globally.

And thirdly, if there is any kind of gas tax moratorium, as some people are now proposing --

MR. GIBSON: Like John McCain.

SENATOR CLINTON: -- like John McCain, and some Democrats, frankly -- I think Senator Menendez and others have said that we may have to do something, because when you get to $4-a-gallon gas, people are not going to be able to afford to drive to work. And what I would like to see us do is to say if we have that, then we should have a windfall profits tax on these outrageous profits of the oil companies, and put that money back into the highway trust fund, so that we don't lose out on repair and construction and rebuilding.

But ultimately, Charlie, we've got to have a long-term energy strategy. We are so much more dependent on foreign oil today than we were on 9/11, and that is a real indictment of our leadership. And I've laid out a comprehensive plan to move us toward energy independence that I hope I will have the opportunity to implement as president.

And Obama's solutions as expressed in the debate: 

...people are cynical, because decade after decade, we talk about energy policy or we talk about health care policy, and through Democratic and Republican administrations, nothing gets done.

Now, I think many of the steps that Senator Clinton outlined are similar to the plans that we talked about. It is absolutely true that we've got to investigate potential price gouging or market manipulation. I have strongly called for a windfall profits tax that can provide both consumers relief and also invest in renewable energies.

I think that long term, we're going to have to raise fuel efficiency standards on cars, because the only way that we're going to be able to reduce gas prices is if we reduce demand. You've still got a billion people in China, and maybe 700 million in India, who still want cars. And so the long-term trajectory is that we're going to have to get serious about increasing our fuel efficiency standards and investing in new technologies.

That's something I'm committed to doing. I've talked about spending $150 billion over 10 years in an Apollo Project, a Manhattan Project to create the alternative energy strategies that will work not only for this generation but for the next.  

So will any of this be effective in the short term? 

I think we should try some of these. Though Verleger sees only the inflation, what we know about bubbles is that they are very thin skinned.

I believe it was Mr. Verleger who said once people and funds  (CalPers is mentioned in the Washington Post) see profits declining on oil futures they will bolt. 

But the Bush administration and oil industry will be doing all they can to protect their little orb. 

So what's the solution? I don't know, but though it can seem insurmountable, a financial bubble is named a bubble for a reason. Driving substantially less (if we all did it) or the president calling for a halt to filling the SPR might be enough.  Notice this president isn't even trying.  I can hardly wait until February of next year.

tags: oil prices  gasoline prices  commodity futures  oil shortage  hillary  clinton  barack  obama  john mcccain  

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