All blogs filed under Gas Prices
  • The Fallacy of Blaming the Market as the Sole Cause of High Gas Prices

    In his May 3, 2012 column, Robert Samuelson claims “We should exorcise the politically convenient notion that high oil prices result from the market maneuvers of greedy “speculators.” But it’s hard to do that without ignoring the facts.

    In an effort to disprove the role that speculation is playing in driving gas prices, Mr. Samuelson points to the following recent testimony before the Senate Energy and Natural Resources Committee by Howard Gruenspecht, acting administrator of the nonpartisan U.S. Energy Information Administration:

    “The increases in crude oil prices since the beginning of 2011 appear to be related to a tightening world supply-demand balance and concerns over geopolitical issues that have impacted, or have the potential to impact, supply flows from the Middle East and North Africa.”

    But just two weeks after that hearing, the Wall Street Journal reported in an article entitled “Pressure on Oil Supply Eases” that “two years of oil market tightening reversed in the first quarter as supply exceeded demand and inventories grew.”  In fact, the tightening supply/demand balance had already reversed by the beginning of 2012.  As the article reported “Global oil inventories grew by as much as 1.2 million barrels a day in the first quarter.”  The most recent EIA National Defense Authorization Act report also confirms that a number of countries were actually producing at above average rates in the first quarter, including the U.S. Canada, Brazil, China, and Columbia substantially offsetting unplanned global production outages and reductions in exports from Iran.

    When demand is declining and supply is increasing, it is textbook economics that prices are supposed to come down.

    But that’s not what happened. As the graph accompanying the Wall Street Journal article makes clear, in the 1st quarter of 2012, the price of oil skyrocketed by more than 20 percent.  And this occurred despite the fact that the supply/demand balance was actually loosening, not tightening.  Clearly, more was at work in oil markets at the beginning of the year than supply and demand alone.

    Mr. Samuelson also attributes higher gas prices to “shrinking spare capacity” and cites the testimony of another witness at the hearing, Dr. Daniel Yergin, chairman of the consulting firm IHS CERA.  Here again, the facts are at odds with the testimony.   

    Just days before the hearing, Saudi Arabia announced plans to increase spare capacity by 2.5 million barrels per day – at least doubling the estimate of 1.8 to 2.5 million barrels per day of spare capacity Dr. Yergin had provided in his testimony.

    Mr. Samuelson does acknowledge that “outside investors (a.k.a. “speculators”) have dramatically shifted money into commodities — raw materials” and that “Commodity index funds,” which invest in a basket of commodities (oil, wheat, corn), have attracted hundreds of billions of dollars.

    But he doesn’t seem to appreciate how fundamentally this has changed the commodities markets.  Four years ago, speculative traders held less than half of the futures contracts for crude oil.  Today, according to the Chairman of the Commodities Futures Trading Commission, these traders now account for 85% of the crude oil futures market.

    Because of this fundamental change in the commodities market, industry experts from the CEO of Exxon Mobil to Goldman-Sachs, the firm that practically invented the commodity index fund, have estimated the impact on oil markets from speculation at upwards of $20 a barrel, which translates to more than 50 cents a gallon at the pump.

    Delta’s recent announcement that it is buying an oil refinery in Pennsylvania to protect itself against the risks of price spikes and potential fuel shortages is further evidence that the crude oil commodity market is no longer filling its traditional role of hedging risks for commodity users.

    Certainly, speculation is not the only cause of high oil and gasoline prices.  As Mr. Samuelson correctly points out, our dependence on a global market for oil is clearly a major factor.  But it is far from the only factor driving up current prices at the pump.   If speculation were not an issue, Mr. Samuelson’s prescription of “Use less, and produce more” should already have lowered prices significantly.  Because that’s what occurred during the first quarter of 2012 and prices still soared to the highest level ever for that time of the year. 

    Courtesy of The Wall Street Journal:

    20120412-wsj-oil-turning-tide

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    Gas Prices
    Wall Street
  • Factchecking the Oil Companies' Defense of Taxpayer Subsidies

    (Note: This blog was originally posted by Senator Wyden on Huffington Post.)

    Just one week ago the American people heard executives from the top five oil companies stand-up and explain why - despite record profits - they need the federal government to give them a break on their taxes.

    We're talking about the billions of dollars in tax incentives and assistance that oil companies get for drilling in the United States. These incentives were put in place decades ago when the oil industry was just getting started and the government stepped in to ensure that Americans would have a domestic supply of oil. Back then, drilling for oil was much more of a guessing game and drilling and exploration costs were a major cost of doing business. In order to ensure that our country would have gasoline, the federal government helped cover those costs.

    That hasn't been the case for awhile. In fact, in 2005, representatives of the country's major oil companies told me that they no longer needed tax incentives to keep drilling in the U.S. because oil was selling for $55 a barrel and that price gave them more than enough financial incentive to keep drilling. Well, if the oil companies thought that $55 a barrel oil was enough to keep them drilling in 2005, it would seem safe to assume that with oil hovering around $100 a barrel today, they would no longer be asking for their tax incentives to keep drilling. That wasn't the case at last week's hearing.

    So what's changed since 2005? Why are some of the largest and most profitable companies in the world still telling Congress that they still need government assistance? Let's break it down.

    Claim #1: Oil is getting harder and harder to find.

    The truth about oil supplies: 

    If anything, U.S. oil supplies and prices are less tied to the global market now, and new oil supplies are easier to find, than they were in 2005. The location and technology for getting oil and gas, especially from on-shore shale formations, have not only dramatically increased U.S. oil and gas reserves, but the technology is now so well established that U.S. oil and gas production is rising rapidly as a result.

    According to a recent analysis by the U.S. Energy Information Administration, oil production from the Barnett shale formation in Texas - literally in the backyards of the headquarters of these same companies--has tripled since 2005. In fact, total U.S. oil production has increased over 10% since hitting its low point in 2008 and EIA projects that because of increased production in oil shale and in the Gulf of Mexico and other sources that it will continue to grow.

    On top of that, the CEO of Exxon Mobil said on CNBC in March 2011, "I am not aware of anyone who is having difficulty securing supplies of oil...there is no shortage of supply in the market."


    Claim #2: Oil companies face global competition.

    The truth about global competition:

    U.S. oil prices are also less tied to global markets and competition now than they were in 2005, because of increased U.S. production and increased Canadian tar sands production flooding into the U.S. market. This should be of no surprise to the five major oil companies who testified last week, because every single one of them has made major investments in Canadian tar sands projects.


    Claim #3: The loss of tax breaks will drive up the price at the pump.

    The truth about the price at the pump:

    Recalling that hearing in 2005, I also asked the CEOs about ending these tax breaks on their companies and several of them said it wouldn't affect them or would only minimally affect them. Exxon Mobil CEO Lee Raymond said "As for my company, it doesn't make any difference." Chevron CEO David O'Reilly said ending these tax breaks would have "minimal impact on our company." And, BP's US CEO Ross Pillari agreed, saying "it's a minimal impact on us."

    So if taking away the tax breaks won't have much of an impact on the oil companies, why would it have much of an impact on price?

    The American people should not be held hostage to the false claims that without the billions in taxpayer subsidies they currently receive, they will produce less oil and that will raise the price at the pump. It's time for the oil companies to own up to what they said in 2005: they did not need taxpayer subsidies then, and they do not need subsidies now.

    Tags:
    Gas Prices