Populist grandstanding

President Obama announced today that U.S. Attorney General Eric Holder will assemble a “Financial Fraud Enforcement Working Group” to investigate oil market manipulation. The price of gas — approaching $4/gallon nationwide and around $4.20 in California — is surely the fault of cheating Wall Street dirtbags, right? Upstanding, middle class, salt-of-the-earth American citizens such as you and I could never be responsible for such a horrible thing!

Energy analyst Phil Flynn responded to Obama’s announcement:

This is political cover for a failed energy policy. People are angry at the prospect of $4 gasoline and Obama needs a scapegoat. Oil companies have been blamed too many times so now it’s the turn of the speculators.

Rather than searching for a boogeyman I can tell the President why oil prices are so high. There are obvious fundamental reasons for it: We’ve got the biggest threat to oil supplies since the Arab oil embargo while the U.S. dollar has plummeted as a result of the budget deficit and Federal Reserve policy.

Libya’s exports are down over one million barrels per day. Saudi Arabia claims they beefed up their own production to make up for Libya’s shortfall and all of our major media outlets parroted these claims. If you look at the actual export data available from the US Energy Information Administration (EIA) and the International Energy Agency (IEA), however, we see Saudi Arabia increased production by about 400,000 barrels/day.

Why does U.S. gas cost around $4 per gallon?

  • Turmoil in Middle East and Nigeria add risk, which translates into higher prices for futures markets.
  • Libya crude exports dropped abruptly by 1.3 million barrels per day.
  • In spite of claims that they would increase production to make up for Libya shortfall, Saudi Arabia increased production only by about 400,000 bbl per day.
  • Chinese domestic shortages forced authorities to halt exports from China and increase imports.
  • Japanese bookings sharply up for reconstruction and power generation needs to replace lost nuclear capacity.
  • U.S. gasoline stocks decline larger than expected as American consumption remains unabated in spite of higher prices.

In the meantime, China has completely halted oil and distillate exports because of domestic shortages, which further tightens the global oil market. While the tsunami drastically cut Japan’s oil imports by about a third, bookings to Japanese ports are already sharply up over last year as Japan will need liquid fuels for reconstruction and to replace the electrical power generation capacity lost with their nuclear power disasters.

Analysts expected U.S. gasoline supplies to drop by a million barrels last week and were shocked when the US EIA reported a seven million barrel decline — the largest one week drop since 1999. That immediately led to an 8 cent increase in gas prices. Gas stocks dropped another two million barrels this week. As of yet, U.S. demand remains unabated as we continue to consume 9 million barrels of gasoline per day, so expect gas prices to creep up even more over the coming weeks.

Lest you believe environmental regulations and a hostile regulatory environment are to blame for restricting domestic fossil fuel production, we have the highest drilling rigs in operation in the U.S. since 1987, many of them in North Dakota boomtowns working the Bakken formation. The American Petroleum Institute will continue whining about their high cost of doing business in the USA. They’re in a high risk business with huge cash outlays required, but when they strike it rich, they strike it really rich, while the local communities can just suck it up.

Friday, April 22 2011 is Earth Day. I generally try to avoid preaching (too much) about the environmental and financial benefits of riding your bike, but Obama’s announcement just makes it too easy. Ride your bike to work and save a few bucks, okay? Besides that, it’s kind of exhilarating fun.



7 Comments

  • April 21, 2011 - 11:03 pm | Permalink

    If President Obama resorts to scapegoating, I will have to take back every good word I ever said about him.

  • April 22, 2011 - 1:22 am | Permalink

    Glad to see that WWF video making the rounds after I pulled it out of the archives last week. I love that commercial.

    I also like that table that explains why gas prices are so high. But there’s one bullet I’d like to add to it:

    “Why does U.S. gas cost around $4 per gallon?”

    “Because Americans (and us Canadians) want to live in big houses with big yards, so we move as far away from civilization where land is cheap, but we need to rely on our automobiles even just to pick up a carton of milk, so we consume way more gas than we need to in order to sustain this lifestyle, and because we consume so much oil, we rely on countries in the Middle East (and Canada) to supply us enough oil because we have already tapped all of the oil out of our country, but any time there is turmoil in one of those countries that we are exploiting to support our lifestyle, our prices go up, and then we try to drill deeper to find any oil so that we can rely less on those countries, but as a result of pushing further and deeper for oil we end up spilling it into our rivers and oceans – just so that we can have cheap gasoline”.

    I think that might be the longest sentence I have ever written ;)

    And $4 a gallon is extremely inexpensive compared to the rest of the world (excluding Saudi Arabia, UAE and Venezuela), and even cheaper when you consider the external costs of driving automombiles and when you consider how much government money is subsidizing the entire industry to keep the costs down for Americans (while creating unheard of government deficits).

    “Gas was $3 a gallon last month, so $4 must be price gouging”. Trust me, Americans will be dreaming of $4 a gallon once they start paying the true costs of driving and when oil becomes even more scarce.

    Happy pedaling!

  • April 22, 2011 - 11:05 am | Permalink

    trackstanding not grandstanding. #thatisall

  • Jack
    April 22, 2011 - 1:46 pm | Permalink

    Delivering the truth to addicts is political suicide. That is basically the reason we can’t elect our way to solutions and therefore don’t expect elected addicts to behave responsibly and raise the price. These leaders are the same people who are converting our food into fuel and ride in long large-SUV caravans (paid for by you and me).

  • Clever-title
    April 22, 2011 - 3:25 pm | Permalink

    American “environmentally-friendly” politicians simultaneously push two conflicting goals: less oil usage, and cheap oil. Usage will never go down unless prices go up. Others don’t even pay lip service to the environment, and just push for “cheap energy at any cost” (strangely, ususally the same ones who complain about “socialist” subsidies to everything except the military contractors & highway/fuel industries)

    It would have been nice if thw WWF ad showed a better bike for commuting (rack for the briefase, maybe fenders)

  • James Schwartz
    April 22, 2011 - 3:53 pm | Permalink

    Lol, great point. It’s “scary” socialism if you are subsidizing health care, bicycle infrastructure, clean energy, education or helping the poor. But subsidizing oil companies, auto manufacturers, banks, and wars is completely acceptable.

    It’s sad really…

  • April 22, 2011 - 5:38 pm | Permalink

    I focused on the ‘proximate’ causes i.e. the reasons prices have shot up 50% over the past few months, but everything in your rant is right on the money.

    While the rest of the developed world paid attention and took action after the 70s oil crunch, the United States voted out the president who declared the “moral equivalent of war” and urged Americans to sacrifice for the sake of our future and our children. The party was great while it lasted, but we’re not willing to pay the piper.

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