Message to Congress: "DRILL HERE, DRILL NOW! PAY LESS!"
Monday, July 28, 2008
Queen Nancy: "Let them eat cake."
As "Queen" Nancy Pelosi presides over the 110th session of the "do-nothing" Congress, citizens across America continue to suffer from the high price of gasoline. Last week's average for the country was $4.06/gallon, representing a nearly 75% increase in price since the Democrats took over the House in January 2006.
Message to Congress: "DRILL HERE, DRILL NOW! PAY LESS!"
Message to Congress: "DRILL HERE, DRILL NOW! PAY LESS!"
Tuesday, July 15, 2008
Answering Leftist Myths on Oil
I'm increasingly frustrated by our Democrat-led, do-nothing Congress. The price of gasoline at retail has doubled in the roughly 18 months that they've controlled both the House and the Senate. And their solution to this problem that is wrecking our economy and devastating working Americans? Do-nothing!
I'm going to take on and destroy the currently popular Democrat talking points (a.k.a. "lies"):
Lie #1: "Big-oil doesn't need to drill on the outer continental shelf, or in the ANWR. They already have leases on 68 million acres of Federal lands, and aren't producing oil there."
This is misleading at best, and outright false at worst. Yes, oil producers do currently have 68 million acres leased that are currently classified as "not producing". That does not mean there isn't exploration and development activity under way. The false premise underlying this cynical talking point is that there is abundant oil everywhere you could erect a derrick, and that all these companies need to do is drill wherever.
The fact is that oil and natural gas is spread around, and different and often difficult to extract depending on location. The factors are many, but include terrain, depth, size of deposit, production-rate potential, etc. The oil companies have every motivation and reason to produce oil, wherever it is profitable. That's how they make their money. They make no money when they sit idle.
But here's the larger point: the Democrats want the oil companies to drill where oil MIGHT be located. The Republicans want oil companies to be able to drill where oil IS KNOWN to be located. We know, from previous exploration activities, that there are PROVEN reserves of oil in both the outer continental shelf AND in the ANWR. The Democrats are blocking development there.
Lie #2: "It will take 10 years for any new oil-drilling to reduce oil and gasoline prices, and then only by pennies."
Again, multiple lies buried in a single sound-bite. Firstly, oil-producing companies have already come out and stated that by additional drilling in areas of proven reserves, AND where these fields are close enough to leverage existing infrastructure and pipelines, new oil could come into our national supply in only 3 to 4 years. Even "virgin" areas could be on-line in 7 years, including the ANWR.
Second, the price of oil in the open market is determined by supply, demand, and the expectations of the market of future supply and demand (see my earlier blog on Speculators). As soon as participants in the futures markets are confident that the U.S. policy is to increase supply to meet our needs, as well as to increase the overall global supply, then oil futures will trade markedly lower. This will result in a near-immediate drop in oil prices, and gasoline in turn.
Third, the same folks that say "no" because of an imaginary 10-year oil production gap, are instead touting alternative energy solutions that WILL take 5-10 years, including wind, fuel-cells, bio-fuels, and nuclear. That is not to say we shouldn't pursue these alternatives - we should, because they are a critical part of a comprehensive plan of independence. But why is one 10-year time-horizon investment bad, while another is good? And don't try the "green" angle on me ... ever hear of U.L.E.V. (Ultra-Low Emissions Vehicle) designations on autos? We have the technology for this today, including expanding the use of hybrid technology.
And a last point ... even if you DO believe this "10-year" nonsense, do you think our situation will become better or worse if we don't act? Only a fool would lock themselves into this no-drill posture.
Lie #3: "If we drill for more oil, the OPEC nations will reduce their production rates to offset our own increases."
First, this assumes that the OPEC nations would act against their own interests. Cutting their own production will lower their own revenues, harming their own countries' economies. There are few examples of OPEC acting in such a manner.
Second, this Democrat sound-bite is as much a lie as it is a description of the actual problem we face. With imported oil now accounting for more than 70% of our consumption, we are beholden to the producers of that oil. Therefore, we have to act and play nice with countries that we'd otherwise not care to. Many of these countries are openly hostile to the U.S.A., yet we're held as economic hostages by their refusal to increase supplies on their own. Only through our own policy change, one dedicated to achieving energy independence, can we break the grip these countries have on us.
In summary, America can literally not afford to continue with the failed policies of the left that have dominated the energy discussion for 30+ years. The impact is felt most directly by America's working families, who will spend an increasingly larger portion of their take-home pay on fuel. Further, as soon as you get out of the liberal-elite havens in the northeast, major cities (LA, SF, Chicago, Detroit), you'll find no mass-transit alternatives, longer average commutes, and a greater propensity to own (less efficient) "family sized" vehicles like SUV's. The greatest harm is coming to those the Democrats purport to defend.
So the Democrats have a choice to make: do what's good for all of America, or kow-tow to their anti-capitalist, environmental-wacko fringe. To-date, they've chosen the latter - and we all pay the price each day.
I'm going to take on and destroy the currently popular Democrat talking points (a.k.a. "lies"):
Lie #1: "Big-oil doesn't need to drill on the outer continental shelf, or in the ANWR. They already have leases on 68 million acres of Federal lands, and aren't producing oil there."
This is misleading at best, and outright false at worst. Yes, oil producers do currently have 68 million acres leased that are currently classified as "not producing". That does not mean there isn't exploration and development activity under way. The false premise underlying this cynical talking point is that there is abundant oil everywhere you could erect a derrick, and that all these companies need to do is drill wherever.
The fact is that oil and natural gas is spread around, and different and often difficult to extract depending on location. The factors are many, but include terrain, depth, size of deposit, production-rate potential, etc. The oil companies have every motivation and reason to produce oil, wherever it is profitable. That's how they make their money. They make no money when they sit idle.
But here's the larger point: the Democrats want the oil companies to drill where oil MIGHT be located. The Republicans want oil companies to be able to drill where oil IS KNOWN to be located. We know, from previous exploration activities, that there are PROVEN reserves of oil in both the outer continental shelf AND in the ANWR. The Democrats are blocking development there.
Lie #2: "It will take 10 years for any new oil-drilling to reduce oil and gasoline prices, and then only by pennies."
Again, multiple lies buried in a single sound-bite. Firstly, oil-producing companies have already come out and stated that by additional drilling in areas of proven reserves, AND where these fields are close enough to leverage existing infrastructure and pipelines, new oil could come into our national supply in only 3 to 4 years. Even "virgin" areas could be on-line in 7 years, including the ANWR.
Second, the price of oil in the open market is determined by supply, demand, and the expectations of the market of future supply and demand (see my earlier blog on Speculators). As soon as participants in the futures markets are confident that the U.S. policy is to increase supply to meet our needs, as well as to increase the overall global supply, then oil futures will trade markedly lower. This will result in a near-immediate drop in oil prices, and gasoline in turn.
Third, the same folks that say "no" because of an imaginary 10-year oil production gap, are instead touting alternative energy solutions that WILL take 5-10 years, including wind, fuel-cells, bio-fuels, and nuclear. That is not to say we shouldn't pursue these alternatives - we should, because they are a critical part of a comprehensive plan of independence. But why is one 10-year time-horizon investment bad, while another is good? And don't try the "green" angle on me ... ever hear of U.L.E.V. (Ultra-Low Emissions Vehicle) designations on autos? We have the technology for this today, including expanding the use of hybrid technology.
And a last point ... even if you DO believe this "10-year" nonsense, do you think our situation will become better or worse if we don't act? Only a fool would lock themselves into this no-drill posture.
Lie #3: "If we drill for more oil, the OPEC nations will reduce their production rates to offset our own increases."
First, this assumes that the OPEC nations would act against their own interests. Cutting their own production will lower their own revenues, harming their own countries' economies. There are few examples of OPEC acting in such a manner.
Second, this Democrat sound-bite is as much a lie as it is a description of the actual problem we face. With imported oil now accounting for more than 70% of our consumption, we are beholden to the producers of that oil. Therefore, we have to act and play nice with countries that we'd otherwise not care to. Many of these countries are openly hostile to the U.S.A., yet we're held as economic hostages by their refusal to increase supplies on their own. Only through our own policy change, one dedicated to achieving energy independence, can we break the grip these countries have on us.
In summary, America can literally not afford to continue with the failed policies of the left that have dominated the energy discussion for 30+ years. The impact is felt most directly by America's working families, who will spend an increasingly larger portion of their take-home pay on fuel. Further, as soon as you get out of the liberal-elite havens in the northeast, major cities (LA, SF, Chicago, Detroit), you'll find no mass-transit alternatives, longer average commutes, and a greater propensity to own (less efficient) "family sized" vehicles like SUV's. The greatest harm is coming to those the Democrats purport to defend.
So the Democrats have a choice to make: do what's good for all of America, or kow-tow to their anti-capitalist, environmental-wacko fringe. To-date, they've chosen the latter - and we all pay the price each day.
Monday, June 16, 2008
Speculating about Speculators
This past Sunday morning (June 15), I took in Fox News Sunday with Chris Wallace. His lead-off segment had Wallace moderating Senators Kay Bailey Hutchison (R-TX) & Byron Dorgan (D-ND), along with Red Cavaney, President of the American Petroleum Institute. The full transcript can be found here.
The questions and answers took the twists and turns one might expect, including Wallace pointing out that long-proposed drilling in the Alaska National Wildlife Refuge (ANWR) would impact upon an area smaller than Reagan National Airport, in an overall area roughly the size of South Carolina. Senator Dorgan seemed to be supportive of increased drilling in the Gulf of Mexico, and extraction from the oil shales of Montana and the Dakotas. True to the Democrat playbook, of course, the ANWR remains off-limits.
However, what struck me most was the demonization by Dorgan of oil "speculators" in the futures markets, and the effect they're having on oil prices. Sadly, Chris Wallace either suffers from a lack of curiousity, or is ignorant to the machinations of the futures markets themselves. Consequently, an opportunity to confront the latest illogic from the Left was lost. See how the following exchange veered from a question regarding the arrogance of governments deciding what is a fair profit (in relation to taxing any wind-fall), into an answer about speculation:
To take their side of this bet, the speculators make certain assumptions, which would result in a winning bet. Based on popular commentary, the following are key motivators:
Just as an increase in demand can lead to higher prices, an increase in supply will lead to lower prices. If the community of futures speculators believe that the politicians will act to increase supply (say, by opening up the ANWR), then they'll have a negative price-trend to factor in, which would diminish their odds of their winning their bet. It's no coincidence then, that the largest portion of the increase in oil prices coincides with the Democrats winning control of the House and the Senate, and that they're now positioned to also win the White House this fall. With this political reality as the backdrop, the likelihood of increased drilling is just about nil. So long as the Dems kow-tow to their environmental and anti-capitalist special-interest groups, there will be no new exploration; no new refineries; and no increase in domestic production. No increase in supply? Higher prices!
Finally, the idea of regulating the futures markets in some way may sound like an interesting idea to the ill-informed, but the reality is that oil is a global commodity, and futures are traded globally, not just in the markets we can regulate here at home. Restricting futures trading in the U.S.A. will only drive trading to other global venues, resulting in no impact at all.
As it has been for years, the only practical solution to our current energy woes is the act now to increase supplies, and in support of a policy that will immunize us from the whims of the OPEC cartel and other oil-suppliers that aren't friendly to the U.S.A.
The questions and answers took the twists and turns one might expect, including Wallace pointing out that long-proposed drilling in the Alaska National Wildlife Refuge (ANWR) would impact upon an area smaller than Reagan National Airport, in an overall area roughly the size of South Carolina. Senator Dorgan seemed to be supportive of increased drilling in the Gulf of Mexico, and extraction from the oil shales of Montana and the Dakotas. True to the Democrat playbook, of course, the ANWR remains off-limits.
However, what struck me most was the demonization by Dorgan of oil "speculators" in the futures markets, and the effect they're having on oil prices. Sadly, Chris Wallace either suffers from a lack of curiousity, or is ignorant to the machinations of the futures markets themselves. Consequently, an opportunity to confront the latest illogic from the Left was lost. See how the following exchange veered from a question regarding the arrogance of governments deciding what is a fair profit (in relation to taxing any wind-fall), into an answer about speculation:
I added the bold emphasis to show how and where Dorgan is now off-topic, and into his talking points. Unfortunately here, Wallace takes the bait and takes the interview deeper into this area:WALLACE: Senator Dorgan, let me bring in another part of this equation, because the Democrats' big idea in this area is a windfall profits tax on Mr. Cavaney's employers, the big oil companies, to finance alternative energy as well as more conservation.
How does the government decide what's a reasonable profit and what is a windfall profit? And how do you answer the fact that back when this tax was imposed in the '80s, domestic production dropped and foreign imports increased?
DORGAN: Yeah. Well, let me talk about Exxon just for a moment. Last year, Exxon used $31 billion of profits to buy back their stock and only half as much for drilling and exploration.
I mean, you know, look. With respect to a windfall profits tax, it's constructed so if they're using that money to expand supply by drilling, they wouldn't pay it. I mean, that's the approach that makes sense to me.
But I want to talk about one other thing. This issue of production is a canard. We're producing more in this country. Some Democrats, including myself, have supported additional production as well.
But let me say this. There is nothing at this point that justifies the price of oil or gas in this country with respect to supply and demand. Every month since January our domestic crude supply has gone up. Demand is going down because the economy is slowing. And yet the price of oil and gas are going through the roof.
Why? Because there's an orgy of speculation going on in the futures markets, an unbelievable amount of speculation by hedge funds, investment banks and others, that are driving up prices for the American people.
And that ought to be one area at least where Democrats and Republicans can work together to say let's wring this speculation out of...
With that as the backdrop, to my point: What are the "speculators" actually speculating upon? What motivates them to risk their investment capital? As it turns out, the answer is fairly simple: they are speculating that the future price of oil will be higher than it is today. They do this by buying and selling futures "contracts", that commit the "seller" to deliver to the "buyer" a certain quantity of the underlying commodity (in this case, oil), at a certain price, and on a certain future-date. Collectively, these global speculators are placing a bet on the continuation of the uptrend in oil prices.WALLACE: Well, let me just follow up directly on that, because there is talk you're blocked on — you want a windfall profits. They want more drilling. You're not going to be able to pass either of those, it appears.
Are you willing to separate out some federal action to stop oil speculation?
DORGAN: Absolutely. Absolutely. I proposed that. I think others have proposed it. We ought to get at this. There's nothing with respect to supply and demand that justifies the current price. This is all about a lot of speculators.
Will Rogers talked about that eight decades ago, people buying things they'll never get from people that never had it, making money on both sides. These are people that don't want to take delivery of oil. They want to speculate in the market, and they've driven up prices in a dramatic way.
WALLACE: Senator Hutchison, how big a problem is oil speculation? And maybe we can work out a deal right here in this studio. Are Republicans willing to agree with Democrats, separate out and go after the oil speculators?
HUTCHISON: Well, let me say that I think all of us would agree that we need transparency. We need to understand this.
But the way that we can stop the speculation is to show that we are going to do what we can, using our own natural resources and our own creativity, to increase the supply of oil and gas and renewables in our country.
And all of the Democratic proposals don't produce one ounce of a barrel of oil.
WALLACE: But to answer my direct question, would you agree to — legislation on oil speculation, separating it out.
HUTCHISON: Well, I think if you are talking about a cartel that speculates and fixes the prices, that is absolutely something that Republicans and Democrats would agree on.
But if you're talking about people going into the market of their own free will, not controlling anything, then it is a market issue. And I think transparency would be a good add, and I would work with Senator Dorgan on that.
I think we need to look at the whole issue and understand it. But if we bring up supply, we will bring down the price.
To take their side of this bet, the speculators make certain assumptions, which would result in a winning bet. Based on popular commentary, the following are key motivators:
- An expected increase in global demand for oil, due to the the explosive growth in China, India, and other areas of the developing world. An increase in demand, with all else being equal, will lead to an increase in prices;
- A down-dollar (for dollar-based futures trading) will result in a relative increase in the price of oil. That is, if the dollar falls in value relative to other major currencies, global commodities will cost more in dollars. Actually, some economists believe that up to one-half on the increase we've seen in the U.S.A. is related to the steady decline of the dollar since 2004;
- Continued political unrest, particularly in the oil-rich Mid-East. Sometimes referred to as a "fear" premium, any instability in this region (whether it's unrest in Iraq, Iran, Lebanon, Syria, or the collective threats against Israel) has a negative impact on oil prices, as investors need to be "rewarded" for taking risk associated with future deliveries.
Just as an increase in demand can lead to higher prices, an increase in supply will lead to lower prices. If the community of futures speculators believe that the politicians will act to increase supply (say, by opening up the ANWR), then they'll have a negative price-trend to factor in, which would diminish their odds of their winning their bet. It's no coincidence then, that the largest portion of the increase in oil prices coincides with the Democrats winning control of the House and the Senate, and that they're now positioned to also win the White House this fall. With this political reality as the backdrop, the likelihood of increased drilling is just about nil. So long as the Dems kow-tow to their environmental and anti-capitalist special-interest groups, there will be no new exploration; no new refineries; and no increase in domestic production. No increase in supply? Higher prices!
Finally, the idea of regulating the futures markets in some way may sound like an interesting idea to the ill-informed, but the reality is that oil is a global commodity, and futures are traded globally, not just in the markets we can regulate here at home. Restricting futures trading in the U.S.A. will only drive trading to other global venues, resulting in no impact at all.
As it has been for years, the only practical solution to our current energy woes is the act now to increase supplies, and in support of a policy that will immunize us from the whims of the OPEC cartel and other oil-suppliers that aren't friendly to the U.S.A.
Thursday, May 22, 2008
Mirror, Mirror
"Is there anybody here that has any concerns about what you’re doing to this country with the prices that you’re charging and the profits that you’re taking?" Richard Durbin (D-IL) asked.
"People we represent are hurting, the companies you represent are profiting." said Sen. Patrick Leahy (D-VT).
"Yet you rack up record profits, record profits, quarter after quarter after quarter, and apparently have no ethical compass about the price of gasoline." - Diane Feinstein (D-CA).
These are actual, direct quotes from our elected leaders as they grilled oil-company executives in Washington yesterday. I don't know what's more appalling: their obvious contempt for, and derision of public companies actually making a profit; or their lack of humility, when it is the very policies they pursue that have us paying record prices for gasoline today.
First, anyone with even a smidgen of economics course-work in their educational background understands clearly the relationship of supply and demand. In economics, this relationship is a much a certainty as physical "laws", such as gravity. In reality, there are only three things that impact on oil, and derivative product prices: supply, demand, and (in the case of futures markets) investor expectations of future supply and demand. With the booming economies of China and India (China's people, alone, are putting 5,000 new cars on their roads PER-DAY!), global demand for oil, as a global resource, has never been higher. Unless and until the world's emerging economies stop, or reverse their growth, then future demand will be even greater. All other things being equal, these facts will push oil prices up.
Second, the dollar has been on a multi-year decline relative to other currencies. As oil IS a global commodity, the price-per-barrel in U.S. Dollars would increase REGARDLESS of the increase in demand. This economic fact is reflected in virtually every other imported good we consume. Why would oil be any different.
Third, supply is not keeping up with demand. And this is where we have our politicians to blame. Bowing to pressures from environmentalists (who often moonlight as anti-capitalists), Congress has imposed a moratorium on new oil exploration and development; they have blocked development of known oil reserves off our own shores, and in the ANWR; they gleefully cash donor checks from trial-lawyers and environmental "advocacy" groups who use the US courts to block, or at least drive up the costs, of nuclear energy alternatives, clean-coal initiatives, and even new oil refineries.
Regarding the profits of oil companies, our distinguished Senators need a course in finance. There is a huge difference between profit, and profit-margin. Yes, $10 billion in quarterly profits sounds large. However, in the case of ExxonMobil, it is less than a 9% margin. That is, they make only 9-cents for every dollar of revenue. One should also note that during the same quarter, the imperial US Federal government exacted $30 billion in taxes from ExxonMobil, 3-times the profit amount. Note that this tax-receipt windfall does not include the additional taxes levied at the federal and state levels on each gallon of gasoline sold at retail.
This low profit margin indicates abundant competition in the industry. Microsoft, by way of example, enjoys profit margins in excess of 40%. Or, think about it this way: what other business has, as their normal practice, the display of pricing on huge signs as a way to lure customers? Or this: if oil companies are gouging, and charging more than market-forces would indicate as reasonable, why don't they just charge $5.00/gallon? Or $10.00/gallon? If "big oil" has us at their mercy, as these Senators would have you believe, why stop at $3.80/gallon?
The answer is quite simple, and conforms perfectly with the law of supply and demand: an increase in demand without a commensurate increase in supply, will lead to an increase in prices. We can't control global demand, but we certainly can act to increase supply. If these Democrat Senators are serious about identifying the problem, and not just using an issue to demagogue for their sheep/constituents, their first task should be a look in the mirror.
"People we represent are hurting, the companies you represent are profiting." said Sen. Patrick Leahy (D-VT).
"Yet you rack up record profits, record profits, quarter after quarter after quarter, and apparently have no ethical compass about the price of gasoline." - Diane Feinstein (D-CA).
These are actual, direct quotes from our elected leaders as they grilled oil-company executives in Washington yesterday. I don't know what's more appalling: their obvious contempt for, and derision of public companies actually making a profit; or their lack of humility, when it is the very policies they pursue that have us paying record prices for gasoline today.
First, anyone with even a smidgen of economics course-work in their educational background understands clearly the relationship of supply and demand. In economics, this relationship is a much a certainty as physical "laws", such as gravity. In reality, there are only three things that impact on oil, and derivative product prices: supply, demand, and (in the case of futures markets) investor expectations of future supply and demand. With the booming economies of China and India (China's people, alone, are putting 5,000 new cars on their roads PER-DAY!), global demand for oil, as a global resource, has never been higher. Unless and until the world's emerging economies stop, or reverse their growth, then future demand will be even greater. All other things being equal, these facts will push oil prices up.
Second, the dollar has been on a multi-year decline relative to other currencies. As oil IS a global commodity, the price-per-barrel in U.S. Dollars would increase REGARDLESS of the increase in demand. This economic fact is reflected in virtually every other imported good we consume. Why would oil be any different.
Third, supply is not keeping up with demand. And this is where we have our politicians to blame. Bowing to pressures from environmentalists (who often moonlight as anti-capitalists), Congress has imposed a moratorium on new oil exploration and development; they have blocked development of known oil reserves off our own shores, and in the ANWR; they gleefully cash donor checks from trial-lawyers and environmental "advocacy" groups who use the US courts to block, or at least drive up the costs, of nuclear energy alternatives, clean-coal initiatives, and even new oil refineries.
Regarding the profits of oil companies, our distinguished Senators need a course in finance. There is a huge difference between profit, and profit-margin. Yes, $10 billion in quarterly profits sounds large. However, in the case of ExxonMobil, it is less than a 9% margin. That is, they make only 9-cents for every dollar of revenue. One should also note that during the same quarter, the imperial US Federal government exacted $30 billion in taxes from ExxonMobil, 3-times the profit amount. Note that this tax-receipt windfall does not include the additional taxes levied at the federal and state levels on each gallon of gasoline sold at retail.
This low profit margin indicates abundant competition in the industry. Microsoft, by way of example, enjoys profit margins in excess of 40%. Or, think about it this way: what other business has, as their normal practice, the display of pricing on huge signs as a way to lure customers? Or this: if oil companies are gouging, and charging more than market-forces would indicate as reasonable, why don't they just charge $5.00/gallon? Or $10.00/gallon? If "big oil" has us at their mercy, as these Senators would have you believe, why stop at $3.80/gallon?
The answer is quite simple, and conforms perfectly with the law of supply and demand: an increase in demand without a commensurate increase in supply, will lead to an increase in prices. We can't control global demand, but we certainly can act to increase supply. If these Democrat Senators are serious about identifying the problem, and not just using an issue to demagogue for their sheep/constituents, their first task should be a look in the mirror.
Wednesday, July 4, 2007
Random Thoughts Part Deux
OK, can we NOW dispense with the notion that Islamic extremists resort to terror tactics due to either lack of intelligence/education, and/or lack of wealth or access to higher-wage jobs? The failed attacks in London and Glasgow were planned and executed by 8 doctors working in the UK NHS (National Health System).
One day, as a people, we will stop projecting our thought process and moral values on our enemies and realize that this is a cultural and religious war, where radical Muslims are determined to impose their extremist views on all of us, and through whatever means necessary.
One day, as a people, we will stop projecting our thought process and moral values on our enemies and realize that this is a cultural and religious war, where radical Muslims are determined to impose their extremist views on all of us, and through whatever means necessary.
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