Hillary’s Stupid Energy Plan

I had intended for this, my 500th essay on this blog, to be about my recent trip to Choren’s new plant in Germany. But Hillary Clinton has just come out with a plan for high gasoline prices so asinine, it had to be addressed. Note that I have already picked on McCain’s plan, and Obama’s plan isn’t all that different from Hillary’s. In my opinion none of these candidates have demonstrated that they actually have a grasp of the reasons for high oil and gas prices.

So, in stark contrast to the proposals I laid out in my previous essay, here is Clinton’s plan, along with some comments from me:

Hillary Clinton’s Plan to Address Soaring Prices at the Pump

Hillary’s plan includes:

Imposing a windfall profits tax on oil companies and using the money to suspend the gas tax for the peak summer months;

Closing $7.5 billion in oil and gas loopholes and using the funds to provide assistance for lower-income families to pay their energy and grocery bills;

Cracking down on speculation by energy traders and market manipulation in oil and gas markets that are driving up the price of oil by at least $20 a barrel;

Pressuring OPEC to increase oil production, including by filing a WTO complaint against OPEC countries

Stopping new additions to the Strategic Petroleum Reserve and standing ready to release oil to counter market spikes and reduce volatility.

This plan builds on Hillary’s long-term plan to reduce our dependence on foreign oil and address global warming.

Notice the irony in that last phrase? Let’s lower gas prices and address global warming! Hey, I know what else we can do. Let’s eat more, and lose weight. It’s genius.

Let’s pick apart her proposals, and I will tell you why her positions are stupid.

Hillary will impose a windfall profits tax on oil companies and use the money to temporarily suspend the 18.4 cent per gallon federal gas tax and the 24.4 cent per gallon diesel tax during the upcoming peak summer driving months. Hillary will ensure that this relief is passed along to consumers by charging the Federal Trade Commission with conducting aggressive oversight. Unlike Senator McCain’s plan, Hillary’s plan will be fully paid for by taking away oil company profits through a windfall profits tax. This will ensure that the Highway Trust Fund is not affected at all by the gas tax suspension, and can continue to support critical repairs and maintenance for our infrastructure and highways.

Why This is Stupid

If Hillary had anyone on her staff who had a clue about energy issues, they would see that refineries are already cut back due to low margins. Historically, low margins are the very reason that underinvestment has taken place in the refining sector. I seem to recall many politicians screaming about this underinvestment last year (even as they argued to confiscate profits which happened to be good in the refining sector last year). Total oil company profits are currently a result of very high oil prices – and most of that is flowing right out of the U.S. So there are a couple of ways this could break, both contrary to Hillary’s expectations.

If the policy could actually be implemented as Hillary outlines it, it ensures that demand remains high through the summer months. It sends a message to consumers that high gas prices really aren’t a worry; the government is going to take care of you. Thinking about buying a Prius? No, don’t do that. Because you see, the government is going to do everything possible to ensure that gas prices stay low, so you can continue to contribute your carbon emissions and we can continue our dependence on oil.

But that’s not really how it is likely to pan out. What will happen is that oil companies will allocate those taxes to their already struggling refining sector (they don’t produce all that much oil in the U.S.) Then what happens? Percent refinery utilization, which is currently running in the low 80’s (normal for this time of year, when margins are usually better, is upper 80’s or lower 90’s) will fall into the 70’s. Why? Let’s say you run a business, and you are making thin profits on one of the products you sell. Now someone wants to tax it at a higher rate. What do you do? Personally, I would shift my investments into something that offered a higher return. That’s exactly what oil companies will do. There will be less incentive to focus on upgrading and maximizing refining capacity.

Next up:

Oil and gasoline markets contain loopholes for traders, and the markets are inadequately policed by regulators under current law. As a result, there is considerable concern that current market prices reflect the influence of speculators and other forces beyond supply and demand. In early April, an Exxon Mobil executive testified under oath before a House committee that the price of oil should be $50 to $55 per barrel based on supply and demand fundamentals.

Why This is Stupid

So now you trust ExxonMobil? Do you believe them all the time, or only when you are trying to make a specific point?

The reason this proposal is stupid is not because there isn’t speculation in the market: There is. The problem is trying to identify how much, how to police it, and most importantly – how to apply those policies world wide. Because haven’t you heard? The oil market isn’t specific to the U.S. We don’t pay higher prices than they pay in Asia because of speculation. If speculation was responsible for $50 of the price as Clinton implies above, shouldn’t we see gross disparities in crude pricing?

How about taking on OPEC? A stupid plan wouldn’t be complete without threatening to bring legal action against OPEC in order to force them to lower prices for us:

OPEC recently reiterated that it will not even consider increasing crude output until September 2008, even though limited supplies are contributing to record oil prices. Hillary believes we should be taking more aggressive action to address OPEC’s control over global production levels and hold OPEC accountable for its decisions. President Bush’s efforts to pressure OPEC over the past seven years have been inconsistent and unsuccessful. Hillary supports sending a strong signal to OPEC that the era of complacency has ended. Hillary will:

Use the WTO to Challenge OPEC’s Production Quotas – With nine of the thirteen OPEC member countries also being members of the WTO, Hillary believes we should use the tools available at the WTO to address OPEC’s refusal to increase production.

Allow OPEC Production Decisions to Be Challenged Under U.S. Anti-Trust Law – Currently, OPEC countries cannot be challenged under U.S. anti-trust laws, even when they are engaged in coordinated, commercial activity to control the global oil market.

Why This is Stupid

This is probably the stupidest of her proposals. Oh, the can of worms it would open up. Here’s the analogy I have used before. Let’s say Saudi Arabia loves American wood. They love it so much, that their purchases start to drive the price higher. It seems other countries love American wood as well, so supplies are tight. But Saudi feels like they have a God-given right to cheap wood. Therefore, they demand that we increase production of our wood to bring prices back down. They demand that we overproduce our resources in order to meet what they would prefer to pay, because they have grown dependent on our wood. So, they threaten to
sue and take us before the world court.

Of course the big difference here is that wood is a renewable resource. When Saudi’s oil is gone, what else do they have? Yet we demand that they produce according to the price we prefer to pay – not necessarily what’s in their own best long-term interest. How self-centered is that? Can’t Hillary recall when the Mideast cut us off from their oil because they didn’t like our policies? Does she think they couldn’t do it again?

Hey, we haven’t pulled the Big Oil card since the first paragraph. You just can’t do that often enough when you are pandering for votes:

Hillary believes that in addition to imposing a windfall profits tax on large oil companies, Congress should move immediately to end the approximately $7.5 billion per in tax giveaways and subsidies that we continue to provide to oil and gas companies, despite their record profits. These subsidies are in part a result of the 2005 Energy Bill she voted against. She would use those resources this year to provide assistance to lower-income families who are not only being hit at the gas pump, but with skyrocketing energy and food bills as well.

Why This is Stupid

Similar to her first proposal, Hillary wants to send a message that it isn’t the consumer here that is the problem, it’s those big, bad oil companies and their gouging ways. That’s why you are paying higher prices: Greed. She will take that money and return it to the consumers, thus achieving her goal of lowering prices AND fighting global warming. Don’t start that car pool just yet – Hillary is going to refund the extra money you have been paying. No need to worry.

Any why not tap the SPR?

Hillary is calling on President Bush stop taking oil off the market and putting it into the Strategic Petroleum Reserve (SPR). The SPR is now 97 percent full, which analysts believe is more than adequate. Continuing to fill it at these high prices exacerbates high oil prices and costs taxpayers money. Hillary also believes that the SPR should be more actively managed to enable releases from the SPR to counter market spikes and reduce volatility.

Why This is Stupid

If the SPR is 97 percent full, why do you need a policy to stop filling it? Won’t that happen pretty quickly anyway? Also, it seems that Hillary (and many others) don’t understand the purpose of the SPR. It is for national emergencies. The fact that I am paying more for gasoline is not a national emergency. A war with Iran that could curtail our imports sharply is more along the lines of what the SPR is for. And if you drain it right now for political purposes, and then you need it for an actual emergency, it wasn’t very strategic, was it?

Using it to try to counter market spikes suggests that you can predict where the market will be in the future – when you need to buy the crude back. The fact is, politicians on both sides have been urging releases from the SPR ever since oil was at $20/bbl. Where would we be now if we had done so? With an empty SPR, and with oil prices still at very high levels.

In the long term, Clinton proposes the following:

Proposals to Reduce our Dependence on Foreign Oil Over the Long-Term

Key elements of that plan include:

Raising fuel efficiency standards (CAFE) to 55 miles per gallon by 2030;

A $150 billion investment in researching, developing, and deploying renewable and alternative energy;

Cutting our foreign oil imports by two-thirds by 2030;

Providing $1.5 billion per year for public transit, an additional $1 billion for intercity rail, and additional funds for congestion reduction, better traffic management and telecommuting;

Providing tax credits and research and development funding for plug-in-hybrid vehicles, which can get up to 100 mpg; and

Conserving fuel in the federal fleet. Hillary will call on all federal government agencies to suspend non-essential travel and other activities that use gasoline or diesel fuel, and encourage employees to carpool, telecommute, and use public transportation to reduce fuel use. And she will direct federal employees to reduce maximum speeds to conserve fuel, with exceptions for law enforcement and other emergency services. Under Hillary’s plan, the agencies will to report to the White House once a month on their energy use and the impact of conservation efforts.

That 3rd one is brilliant: Cut our oil imports by 2/3rds. Why didn’t someone already think of this?

I won’t call those proposals stupid, but they all have something in common: The painless fix. There isn’t a single proposal there that suggests consumers need to cut back (except for the last one, in which government employees are asked to do so). For the average consumer, this all sounds great. They get to continue the status quo, and Hillary is going to see to it that they are not inconvenienced.

This is the kind of shallow political rhetoric that put us where we are in the first place. Two thumbs down for Hillary’s energy plan. Now where’s that president with courage; the one I was looking for in my previous post?

34 thoughts on “Hillary’s Stupid Energy Plan”

  1. Billary is pretty much out of the race anyway. I don’t know about you guys,but 20 years with a Bush or Clinton in the White House is more than enough for me.

  2. I doubt that either Clinton or Obama are stupid enough to believe their own plans. They’re pandering for votes and betting that voters aren’t paying close enough attention to the details to realize it’s a sham. Sadly, they’re probably right…

  3. I agree with genelewis. At least I’m hoping he’s right.

    Which brings me to the question. If we ignore the current campaign posturing, assuming it’s just window dressing, and instead look at pre-campaign statements and positions, how do the three candidates stack up? In terms of voting record and general energy IQ? Is there much to go on?

    We can, l guess, hope that Hillary or Obama will choose Bill Richardson as veep.

  4. I too hope genelewis is right but it doesn’t leave much hope that they’ll actually develop the courage to do something useful once they’re in office. Gotta get re-elected you know?

    The only thing I can think of that might address what we’re seeing in the short term is to INCREASE the gas tax and use the added revenue to help lower income families pay for the increased costs of food and fuel. But I have a hard time imagining any politician supporting something like this.

  5. It’s appears to me that Hillary’s plan would:
    1. Cut “Big Oil” profitability
    2. Force down crude price
    3. Lower US gas price
    4. Increase US demand
    5. Give me a reason to summer holiday in the US, because we are paying $1.28/L in Canada ($4.88/USGAL)

    Forcing down crude price while removing oil subsidies would put a halt to exploration and expensive off-shore projects and possibly even things like horizontal wells in the Bakken play.

    This all looks good to me. Peak Oil is inevitable and Hillary’s plan prettymuch ensures it will happen within my lifetime rather than my kid’s.

    Any sort of plan that does the opposite and raises gas and diesel prices will just put the US economy into a full depression, curtail total world demand and delay the end of the oil era indefinitely. On the positive side, the constant self-congratulation since the end of the USSR that unbridled capitalism was a better idea than communism will abruptly stop.

    See Great Depression

    On the opposite note, a plan to increase gas tax to curtail consumption doesn’t work very well. In Canada we basically have your plan implemented and our consumption per capita is just as high as the US. Increasing gas tax won’t change the behavior of people who can afford to pay more, it just changes the behavior of the poor that really can’t afford it.

  6. Her tax changes discourage production and encourage consumption. How dumb is that?

    Percent refinery utilization, which is currently running in the low 80’s (normal for this time of year, when margins are usually better, is upper 80’s or lower 90’s) will fall into the 70’s.

    You should eliminate this specious logic from an otherwise fine essay. Tax changes which apply equally to all lines of business do not incent shifts from one line toward another. Furthermore, reduced investment in refinery capacity tends to increase utilization over time, not decrease it.

    Your argument is stronger (and simpler) if you focus on the fact that higher taxes provide disincentive to invest in new production. Avoid the distracting side trip into refinery vs. E&P.

    Use the WTO to Challenge OPEC’s Production Quotas

    This may have some merit. It’s quite possible WTO allows you to impose tariffs only after establishing anti-competitive behavior. Filing a claim with WTO could be the first step in this process.

    If speculation was responsible for $50 of the price as Clinton implies above, shouldn’t we see gross disparities in crude pricing?

    No. The speculative market is just as global as the physical market.

    Besides, you’re not in her league when it comes to understanding commodities markets. After all, did you ever turn $1000 into $100,000 with a few cattle futures trades? I think not!

    There isn’t a single proposal there that suggests consumers need to cut back

    You’ll never get anywhere making sweater speeches. You have to offer a path to something better.

  7. (Try again) The New York Times agrees with me (nice picture of cars in India, BTW):
    Oil price rise fails to open tap

    “According to normal economic theory, and the history of oil, rising prices have two major effects,” said Fatih Birol, the chief economist at the International Energy Agency in Paris. “They reduce demand and they induce oil supplies. Not this time.”

    We aren’t running out of fossil fuels or even running out of places to look for fossil fuels. We are running out of free market access to places.

    If Senator Clinton really wanted to make oil prices come down she would promise on day 1 to sign an executive order to begin seismic exploration of the 1002 area with a lease sale to follow as long as the price exceeded some amount, say $75 per barrel. The market would need to factor the potential new source of crude coming on the market, even if it were 10 years away.

  8. Tax changes which apply equally to all lines of business do not incent shifts from one line toward another. Furthermore, reduced investment in refinery capacity tends to increase utilization over time, not decrease it.

    After that first sentence, you anticipated where I was headed. Those taxes will come out of the least profitable area. That is the refining sector, and it will affect investment there. Reduced investment may in fact increase utilization – but by decreasing the overall amount of available capacity (or at least making it lag demand).

    That’s why we got into the situation recently that utilization was high; low investments in refining due to historically low margins have resulted in insufficient capacity. Thus, when demand picks up, margins pick up, and utilization picks up.

    RR

  9. By the way, Robert Bryce e-mailed me and pointed out an article that he wrote for Sunday’s Chicago Tribune on the presidential candidates:

    Ethanol betraying its promises

    Sens. John McCain, Hillary Clinton and Barack Obama all have come out in favor of ethanol and biofuels. But the candidate who renounces the corn ethanol business would gain traction among U.S. voters and foreign leaders for doing the right thing on food and greenhouse gases.

    McCain and Clinton would have an easier time switching sides. Doing so would merely require them to re-reverse themselves. Before they set their eyes on the White House, the two politicos were among the Senate’s most ardent ethanol critics.

    In 2002, Clinton told colleagues that it was “impossible to understand why any pro-consumer, pro-health, pro-environment, anti-government mandate” member of the Senate would vote for the then-pending bill that was going to boost ethanol mandates from 1.7 billion gallons to 5 billion gallons.

    In 2003, McCain said, “Plain and simple, the ethanol program is highway robbery perpetrated on the American public by Congress.”But since declaring for the White House, both McCain and Clinton have become ethanol boosters. (McCain now says he no longer opposes ethanol, he only opposes the subsidies.)

    And at the end, he hits something I have said before:

    Unfortunately, even if McCain, Clinton and Obama change their views on ethanol, it may not matter. Whoever gets to the White House will likely find that it is far easier for Congress to create mandates and subsidies than to repeal them. In the meantime, food prices will continue to rise and the greenhouse gas issue will continue to fester.

    RR

  10. I’d like to ask a possibly dumb question about oil company profits. I feel like a lot of people want a scapegoat for high pump prices, so obviously they look at oil company earnings for a scapegoat. You make the excellent point in many posts that if we have windfall profits taxes, we lose investments in supply. But we also don’t build supply if profits are given as executive bonuses or shareholder dividends, do we?

    From an energy policy perspective, is there a way to drive those profits into greater investment in energy exploration and infrastructure that will help give us energy security?

    Just as an illustration, what if they passed a windfall profits tax that exempted money re-invested in the business?

  11. Cracking down on speculation by energy traders and market manipulation in oil and gas markets that are driving up the price of oil by at least $20 a barrel. and In early April, an Exxon Mobil executive testified under oath before a House committee that the price of oil should be $50 to $55 per barrel based on supply and demand fundamentals.
    That Exxon-Mobil executive is going to get himself in trouble. There is no way to determine what the “fair market” price of oil should be. Lots of people happen to agree with him. But the fact the remain: there is no scientific way of calculating what the price should be based on supply and demand. If only!

    Likewise, blaming the speculators is a convenient game. But nobody knows how much these guys are adding (if anything) to the price of oil. If the markets weren’t nervous to begin with, the speculators would not be able to lift the price one penny. Where did the nervousness come from? Could it be supply and demand?

    Pressuring OPEC to increase oil production, including by filing a WTO complaint against OPEC countries
    Hillary’s going to stand up to the Saudis? Now there is a flight of fantasy! More likely, Hillary will be going (cap in hand) to ask the Saudis to use some of that oil revenues to bail out American financial institutions (again).

    But other than the realities of life, it’s a great fantasy. I still like King’s proposal of taxing OPEC countries that don’t allow direct foreign investment.

    Total oil company profits are currently a result of very high oil prices – and most of that is flowing right out of the U.S.
    So why is (US) Big Oil still making record profits? Good long term planning? 😉 From what little oil they themselves still pump? I’m a bit confused on that.

    Historically, low margins are the very reason that underinvestment has taken place in the refining sector.
    Underinvestment has taken place? Says who? Low refining margins would suggest there is too much refining capacity, rather than too little. Refining expansion projects are getting cancelled. Refinery utilization is low (as mentioned) for this time of year. Why would that happen if underinvestment was such a big problem?

    Perhaps we need to consider that OPEC may be lying when they tell us that low refinery capacity is the reason for high oil prices. How would that work anyway? Too few crude buyers should lead to lower (not higher) oil prices.

  12. Just as an illustration, what if they passed a windfall profits tax that exempted money re-invested in the business?

    You are getting close to the heart of my problem. Are you going to institute that tax across the board, with consistent rules that cover all industries equally? If not, why not?

    How about individuals? I can tell you that no oil company has made the kind of returns on investment that many homeowners in California did over the past few years. Can we agree that this is a windfall, and tax it accordingly?

    Of course this opens up a fairness aspect; when profits are down or actually negative, do you then lend a helping hand?

    My issue is not with taxes. It is with singling out and demonizing an industry. I get tired of the scapegoating.

    RR

  13. So why is (US) Big Oil still making record profits? Good long term planning? 😉 From what little oil they themselves still pump? I’m a bit confused on that.

    It’s the oil, much of which never makes it to the U.S.

    Underinvestment has taken place? Says who? Low refining margins would suggest there is too much refining capacity, rather than too little.

    It’s all dependent upon 1). Demand; and 2). Imports. Last year, when refinery capacity was running all out, we could have used some cushion. This year, with prices much higher and imports strong, looks like too much capacity. But it is true that refining capacity has grown more slowly than gasoline demand. Then again, oil companies don’t have crystal balls to determine gasoline demand.

    RR

  14. As RR points out, the Hillary energy plan is too stupid to bother with. This is leadership?
    Shale oil. We have 2 trillion barrels of it, and Shell says they can extract it at $30 a barel. Couple that with solar, wind, geothermal and PHEVs — and a $50 a barrel tax on imported oil — and suddenly (well in seven years) we are a long, long way to energy independence and a cleaner, more-prosperous future.
    I think we RR fans have a challenge — we have to sell our message to the public as a positive. The way to prosperity and good times is through conservation and development. If we talk about pain, we will be ignored.
    We have to sell a smart energy program as a huge jobs-maker for fellow Americans.

  15. “Likewise, blaming the speculators is a convenient game. But nobody knows how much these guys are adding (if anything) to the price of oil.”

    Take away their ability to trade on margin,or make them accept delivery of that paper oil occasionally,and we may just find out what it’s really worth.

  16. So Hillary wants to drop the gas tax, then apply windfall profits taxes to oil companies, then the oil companies will pass the tax onto gasoline dealers and then consumers (as gasoline demand is fairly inelastic, gasoline prices are local versus oil prices that are global).

    So basically, it does nothing.

  17. Thought today’s Bush press conference was rather fun.

    According to him, increasing global oil demand by a fraction of 1%, will not significantly increase the market price of oil.

    On the flipside, increasing global oil supplies by a fraction of 1%, will significantly decrease the market price of oil.

    _____________

    He was of course referring to filling the Strategic Petroleum Reserve.

    Versus Drilling in the Alaska National Wildlife Preserve.zqnlfop

  18. A reporter should ask Hillary at her next press conference, “So, I am guessing from these proposals that you think we should be consuming more gasoline?”

  19. Take away their ability to trade on margin,or make them accept delivery of that paper oil occasionally,and we may just find out what it’s really worth.

    This is also one of my ideas to rid the market of purely paper speculators. The trading margin is as low as 3% of the underlying commodity. In other words, with oil at $120 / barrel you need only put up $3.60 to bet on which way the oil contract will go. You have no obligation to buy the crude oil at the price you set.

    Two ways to reduce the speculation, you could raise the margin substantially, to say 30%. Producers and consumers (hedgers) of petroleum would be unaffected since they have to buy and sell the real commodity. Only the largest trading houses would have the financial capital to speculate on petroleum contracts.

    Secondly, you could institute a lottery system by which some option trades would be selected at random and would be required to purchase the commodity at the price they set for the entire contract. Betting wrong on price now costs you 100% of the difference, not 3%. This would markedly change the behavior of speculators and should make commodities trade closer to their fundamental values.

  20. Greyfalcon – were not Schumer and Clinton making the OPPOSITE argument to stop filling the SPR?

    Big difference, the SPR is nearly full. The market has taken this into account. ANWR would be new production likely NOT factored into pricing.

  21. You know, things like this make me positively nostalgic for the old-fashioned socialists. They thought they could do a better job of running the economy, and wanted to give it a shot…their theory was wrong, but they were eager to get their hands on the factories, mines, and refineries and try it out.

    Today’s “progressives” don’t want to run the productive economy: they just want to hog-tie the people who *do* run it, and then blame these people when things go wrong.

  22. “Refinery utilization is low (as mentioned) for this time of year. Why would that happen if underinvestment was such a big problem?”

    As the conspiracy theorists will tell you, low utilization is meant to reduce supply and drive price down, sufficient capacity or not! 🙂

    “were not Schumer and Clinton making the OPPOSITE argument to stop filling the SPR?”

    The feds were taking heat a few months ago for adding to the SPR when prices were around $90. Some of those same folks are now dishing out more heat at $115.

  23. in politics it’s important to match rhetorical content with the understanding and mental acuity of the audience upon which it is foisted. for this the Clinton staff used all the proper words, inuendos and hot buttons. it matches all the tripe used in prior panderings. the public hears the familiar echoes, does not have to think anew, and returns to their “cultural passtime activities”.

    the rhetoric will not be remembered, no analysis of promise vs results will be performed, a new computer game/situation show will be available, life will return to normal levels of gripes for the same subjects.

    Nero fiddles, Senate haggles, public watches circus and Fate takes its course.

    how can we fault the end we brought upon ourselves–whatever it is.

    fran

  24. See Paul Krugman:

    John McCain has a really bad idea on gasoline, Hillary Clinton is emulating him (but with a twist that makes her plan pointless rather than evil), and Barack Obama, to his credit, says no.

    Why doesn’t cutting the gas tax this summer make sense? It’s Econ 101 tax incidence theory: if the supply of a good is more or less unresponsive to the price, the price to consumers will always rise until the quantity demanded falls to match the quantity supplied. Cut taxes, and all that happens is that the pretax price rises by the same amount. The McCain gas tax plan is a giveaway to oil companies, disguised as a gift to consumers.

  25. Two ways to reduce the speculation, you could raise the margin substantially, to say 30%. Producers and consumers (hedgers) of petroleum would be unaffected since they have to buy and sell the real commodity. Only the largest trading houses would have the financial capital to speculate on petroleum contracts.

    I’m not sure about that. There’ve been some reports in the press about operators of grain elevators getting burned by the margin requirements even now. As the price goes up, the amount of cash they need to backstop their hedges goes up too. I’m not quite sure of the mechanics but there you are. Also, the futures markets exist at least in part to allow people to transfer price risk – there really can’t be a requirement that the people accepting the risk be “in the business”.

  26. Doug – there are two kinds of investors in futures contracts: hedgers and speculators.

    Hedgers are in the business of producing or consuming the underlying commodity. For example look at an airline. The airline sells tickets months in advance. One of their biggest expenses is fuel. They may wish to buy futures contracts to reduce their price exposure to rising fuel. I consider this to be a good use of the futures contract.

    Speculators have no need for either airline tickets or jet fuel. They are simply betting on whether the price is going to go up or down. In a well functioning market the speculators take a share of the price risk.

    The problem as I see it is that the speculators have overwhelmed the market. Huge amounts of speculative money have left the capital markets and entered commodities. These people don’t really have an interest in the business they are investing in. If in the course of their transactions they burn the house down – so what. They will just trade another commodity.

    Some guy sitting at his trading desk in London could care less whether a family in Oxnard can afford to fill up their minivan. The trader has plopped down a $3 bet on a barrel of oil hoping it will go up 50 cts.

    I believe the system needs to return some balance between the hedgers and the speculators by limiting the number of contracts. I am not opposed to the speculators, I just don’t believe it is good to let them run the market. My ideas are to turn some of the speculators into hedgers (make them sometimes take physcial delivery) or to restrict the ability to buy speculative contracts (raise the margin).

    The only entity that could do this is the government. The exchanges have no interest in limiting trade, they make money on volume of trades.

    I return to fundamentals. $120 crude is certainly having an impact on demand, but where is the $120 crude supply? What crude was not on being produced a year ago at $60 but now at $120 is suddenly available? If you believe the markets were well functioning last year at $60, then how do you explain $120? Speculation.

  27. King, your 30% margin would force real hedgers to tie up a lot more capital. That’s capital they can’t commit to E&P or buying more efficient planes.

    If you believe the markets were well functioning last year at $60, then how do you explain $120? Speculation.

    I disagree. Speculators can only move long-term prices via hoarding. Every time a speculator opens up a long futures contract someone else goes short an equal amount. It’s like betting on the Super Bowl. The total amount of bets may vastly exceed what the actual players earn, but the outcome is decided on the field.

    Last year markets thought $60 would create enough new supply and destroy enough demand to bring things into balance. They were wrong. That doesn’t mean they “weren’t functioning”, prediction of such things is a continual guessing game. The current guess of $120 may be too high, too low, or just right. Time will tell.

  28. If you believe the markets were well functioning last year at $60, then how do you explain $120? Speculation.
    Wrong! Replace Speculation with Perception.

  29. “Isn’t ANWR actually our Strategic Petroleum Reserve?”

    No. There are no reserves that I know of booked in ANWR. Unless by “reserve” you mean “a place to set aside for future exploration.” A big chunk of the North Slope was so designated some time ago, I think it was the National (or was it Naval) Petroleum Reserve – Alaska, or NPRA. It was explored by the government in I believe the 1940’s through 1960’s but they never found much. Industry has had some recent successes there though.

    Volumes of oil quoted as existing in ANWR (which are thrown around as if they are real numbers) are just estimates coming from geologists and engineers. There could actually be many times those estimates… or there could turn out to be nothing at all.

  30. I did like the suggestion to spend $1.5 billion annually on mass transit.

    Here in Melbourne, Australia (one city roughly the size of Minneapolis), the government is currently considering a proposal to spend roughly 8 billion USD on extending the subway system.

    In Sydney, the state government has proposed a $12 billion light rail system.

    That’s $20 billion across two cities with a total population of around 8 million people.

    What’s the urban population of the United States? 150 million or so? I’d be thinking that, just by extrapolating the figures, the USA could easily spend 300 billion on mass transit upgrades over the next few years. Probably a lot more, given that most US cities have even worse mass transit than we do.

    In that context, $1.5 billion a year is a drop in the bucket. Either make a serious contribution, or get the federal government out of the process entirely…

  31. Hey guys,

    Many of you, on this page, appear to be well informed about the Oil situation and have some good proposals to remedy this issue. You all may want to get together and write a paper on some of your findings and ideas. It appears that you all are more intelligent than some of the experts that the candidates are listening to.

    Keep on using your mind, keep on thinking.

  32. Americans do not have the right to force OPEC to sell us even a single drop of oil. OPEC and Canada can double the price of a barrel of oil and we should be thankful that they’ll even sell it to us. They have the right to choose the price and should not be bullied otherwise. Property rights should be equal among persons as they are among countries. It’s like forcing McDonalds to sell us cheeseburgers at 25 cents each when they really want to charge us 99 cents. Taking McDonalds to court over this price disparity is retarded. Besides price fixing leads to shortages. Why produce something if the price isn’t worth it? I don’t get it, why do people think they have a right to cheap oil? There’s plenty of oil on the Gulf shelf and up in Alaska. Tell your senator to go dig for oil in your own back yard and pray that the price will come down. Its the only control you should legally have.

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