Hey, Obama Administration! The evil speculators are moving oil prices again. Time to get after them. Hello? Anyone there? Where did everyone go?
Posts tagged ‘oil’
I don't really want to ridicule Kevin Drum here for thinking out loud. I really hate partisan Conservative and Liberal team-politics blogs, but I read a few to stay out of the echo chamber, and Drum is smarter and incrementally more objective (a relative thing) than most.
These two things together reminded me about an energy factoid that's always struck me as slightly odd: virtually every form of energy seems to be almost as efficient as burning oil, but not quite.
For example, on either a power/weight basis or a cost basis, batteries are maybe 2x or 3x bigger and less efficient than an internal combustion engine. Not 50x or 100x. Just barely less efficient. And you see the same thing in electricity generation. Depending on how you do the accounting, nuclear power is maybe about as efficient as an oil-fired plant, or maybe 2x or 3x less efficient. Ditto for solar. And for wind. And geothermal. And tidal power.
I'm just noodling vaguely here. Maybe there's an obvious thermodynamic explanation that I'm missing. It's just that I wouldn't be surprised if there were lots of ways of generating energy that were all over the map efficiency-wise. But why are there lots of ways of generating energy that are all surprisingly similar efficiency-wise? In the great scheme of things, a difference of 2x or 3x is practically invisible.
First, we have to translate a bit. He mentions power to weight ratios for batteries in the second paragraph. In fact, batteries have terrible power (actually energy storage) to weight ratios vs. fossil fuels, much worse than 2-3x for energy storage per unit of weight or volume. That is why gasoline is still the transportation energy source of choice, because very few things short of plutonium have so much potential energy locked up in so little volume. But I will assume he is comparing an entire electric drive system compared to a gasoline drive system (including not just energy storage but the drive itself) and in this case the power to weight ratios are indeed closer.
But here is the problem: in engineering, a 2-3x difference in most anything -- strength, energy efficiency, whatever -- is a really big deal. It's the difference between 15 and 45 MPG. Perhaps this is Moore's Law corrupting our intuition. We see electronic equipment becoming twice as powerful every 18 months, and we start to assume that 2x is not that much of a difference.
But this is why Moore's Law is so much discussed, because of its very uniqueness. In most fields, engineers tinker for decades for incremental improvements, sometimes in the single digit percentages.
The fact that alternative energy supporters feel like their preferred technologies are just so close, meaning they are only 2x-3x less efficient than current technologies, explains a lot about why we skeptics of these technologies have a hard time getting through to them.
I have written a number of times on the silliness of food miles and the locavore movement (here and here and here). For some reason the energy and resource intensity of foods is being judged merely on one component - transportation of the end product - which actually is only a tiny competent of food costs (and thus their resource use). Is it really more environmentally sensitive for us Phoenicians to grow our corn in the Arizona desert, where soils are unproductive and water must be imported from hundreds of miles away, rather than have it grown in the fertile soils of Iowa and trucked in?
TWO brands of olive oil, one from Australia, the other shipped 16,000 kilometres from Italy, sit on a supermarket shelf.
Most eco-friendly shoppers would reach for the Australian oil. But despite burning less fossil fuel to get here, it may not be better for the planet.
Contrary to popular belief, ''food miles'', or the distance food has travelled before we buy it, is a poor indicator of our food's total greenhouse gas emissions, or ''carbon footprint''.
More important is the way our food is farmed and produced, and how far we drive to buy it....
It turns out that stuff like economies of scale really matter
''Local food can often have a higher carbon footprint than food from afar,'' says principal researcher Brad Ridoutt.
He says even home-grown vegetables, with ''zero food miles'', do not necessarily have a smaller carbon footprint than those bought in the supermarket.
''With my veggies, I drive to Bunnings to buy fertiliser, and I go away for the weekend and forget to water them, and in the end I only harvest a few things that I can actually eat.
''By contrast, big producers, who can invest in the latest energy-efficient, water-efficient technology, and make use of all the parts of food, can be much more efficient,'' he says.
Of course, transporting food from producer to retailer still burns fossil fuels that release greenhouse gas emissions, in turn accelerating global warming. But freight emissions are only a fraction of those released during production, meaning even imported food, sustainably produced, can have a smaller carbon footprint than local alternatives.
Even the most rudimentary reading of economics should have given greenies a clue. In commodity products like most foods, prices tend to be driven down to a point that they reflect resources (and their relative scarcity) that went into the product. The cheapest foods tend to be those that use the least, and least scarce, resources in production. So buying locally grown food, which often tends to carry a price premium, should have been a flashing red light that maybe this was not the least-resource-intensive choice.
My Forbes article is up for this week, and discusses 10 reasons why legislation frequently fails. A buffet of Austrian economics, Bastiat, and public choice theory that I wrote for the high school economics class I teach each year.
Here is an example:
3. Overriding Price Signals
The importance of prices is frequently underestimated. Prices are the primary means by which literally billions of people (most of whom will never meet or even know of each others' existence) coordinate their actions, without any top-down planning. With rising oil prices, for example, consumers around the world are telling oil companies: "Go find more!"
For a business person, prices (of raw materials, labor, their products, and competitive products) are his or her primary navigation system, like the compass of an explorer or the GPS of a ship. And just as disaster could well result from corrupting the readings of the explorer's compass while he is trekking across the Amazon, so too economic damage can result from government overriding price signals in the market. Messing with the pricing mechanisms of markets turns the economy into a hall of mirrors that is almost impossible to navigate. For example:
- In the best case, corrupting market prices tends to result in gluts or shortages of individual products. For example, price floors on labor (minimum wages) have created a huge glut of young and unskilled workers unable to find work. On the other side, in the 1970s, caps on oil prices resulted in huge shortages in the US and those famous lines at gas stations. These shortages and gas lines were repeated several times in the 1970's, but never have returned since the price caps were phased out.
- In the worst case, overriding market price mechanisms can create enormous problems for the entire economy. For example, it is quite likely that the artificially low interest rates promoted by the Federal Reserve over the last decade and higher housing prices driven by a myriad of US laws, organizations, and tax subsidies helped to drive the recent housing and financial bubble and subsequent crash. Many will counter that it was the exuberance of private bankers that drove the bubble, but many bankers were like ship captains who drove their ships onto the rocks because their GPS signal had been altered
The arch-corporate-statist -- and official manufacturing company of the Obama Administration is feeding at the trough again. Apparently a perfectly profitable company cannot buy assets from another profitable company without a large subsidized loan from taxpayers. In this case, the Obama Administration is funding the KCS in its purchase of 30 new locomotives from GE. The Obama Administration has recently doubled-down on its backing of the US Ex-Im bank, which has been helping to fund Boeing aircraft sales to foreign airlines (each of which, surprise!, has a couple of GE engines on it).
GE knows how this political game is played, with resources allocated based on quid pro quo. Just the other day, GE announced that it would help bail out Obama and Government Motors buy mandating that all its company vehicles be Chevy Volts, in effect committing to buy more Volts than Chevy sold to consumers all last year. Of course, the circle has no end, so in turn GE will be rewarded with $90,000,000 in government subsidies for its 12,000 Chevy Volts, a number that could increase to $120 million if Obama's proposal to increase the per car subsidy is accepted.
By the way, the Obama Administration has criticized oil companies like Exxon-Mobil for earning excessive profits and getting overly large tax breaks. In 2010, Exxon paid a whopping 40.7% of its income in taxes ($21.6 billion in taxes on $53 billion in profits). In the same year, Obama subsidiary General Electric paid 7.4% of profits in taxes.
A few weeks ago, I wrote that opposition to the Keystone was never about the Ogallala Aquifer. Polluting the water was a simply a convenient talking point that might play better with the American public than the true goal, which is to shut down the development of new sources of North American oil. I got a lot of comments and email that I was making this up, but in fact its pretty clear that opposition to the pipeline pre-dated knowledge even of its route. Here is a environmental group's presentation from 2008 which advocates opposition to all pipelines (without any reference to their routes) out of the Canadian tar sands as a strategy to halt their development.
Postscript: I really have little use for discussions about funding amounts and sources of various causes. I find it largely irrelevent. So I post this only because this week we are talking about the Heartland Institute's funding of climate skeptics as revealed by hero (if you are an environmentalist blog) or thief Peter Gleick. Heartland sends a portion of its $6 million budget to support various climate skeptics, and somehow this "revelation" has environmentalists running in circles screaming rape. But Heartland's pitiful few millions seem a joke in comparison to the environmental funding torrent. Take this example from the Canadian tar sands issue, just a single one of a myriad of climate-related issues getting millions, even billions of dollars of funding.
Northrop’s presentation promised funding from the Rockefeller Brothers Fund and the William & Flora Hewlett Foundation in the amount of $7 million per year. Named in the presentation were 12 participating environmental pressure groups, including the Natural Resources Defense Council, Greenpeace, the World Wildlife Fund and the Sierra Club.
According to Canadian writer and researcher Vivian Krause, U.S. foundations have poured more than $300 million into Canadian environmental groups since 2000. One foundation, endowed by Intel co-founder Gordon Moore, has been single-handedly responsible for $92 million of that total, Krause wrote Jan. 17 in Canada’s Financial Post. Foundations flush with the wealth of computer pioneers William Hewlett and David Packard, she added, sent another $90 million to wage green-politics wars in the Great White North....
Tax records from the Rockefeller Brothers Fund indicate that it sent $1.25 million to Michael Marx’s organization, Corporate Ethics International, between December 2007 and November 2010. The money was earmarked “to coordinate the initial steps of a markets campaign to stem demand for tar sands derived fuels in the United States.” The Fund has not yet filed its tax return for 2011.
Among other initiatives, Corporate Ethics International launched a campaign in July 2010 to persuade American and British travelers to avoid visiting Alberta while tar sands exploration was underway. Tourism brings $5 billion to Alberta, making it one of the Canadian province’s biggest industries.
The William and Flora Hewlett Foundation, the second philanthropy Northrop mentioned in 2008 as a partner in the concerted effort to stop tar sands oil development, contributed far more.
Its tax returns indicate expenditures of more than $17.5 million targeted at tar sands oil development, including more than $15.4 million to the left-wing Tides Foundation and the affiliated Tides Canada Foundation. At the time, Tides was led by progressive millionaire Drummond Pike, and by ACORN co-founder and AFL-CIO organizer Wade Rathke.
A newer philanthropy, the Sea Change Foundation, also sent Tides $2 million in 2009, all of it to “promote awareness of an opposition to tar sands.” Another $3.75 million to Tides followed in 2010.
Funded by Renaissance Technologies hedge fund founder James Simons and his son, Nathaniel, Sea Change gave away $120 million between 2008 and 2010 in connection with energy-related issue activism. More than $18 million more of the Simons’ philanthropic funding in 2009 and 2010 went to organizations named in Northrop’s 2008 presentations, including the Natural Resources Defense Council, the Sierra Club, the World Wildlife Fund and Ceres, Inc., although Sea Change did not disclose the specific purpose of those grants.
Smaller tar sands-related contributions to Tides came from the Oak Foundation, endowed by Duty Free Shoppers tycoon Alan Parker; the New York Community Trust; and the Schmidt Family Foundation, whose millions come from Google CEO Eric Schmidt and his wife Wendy.
Tides, in turn, made at least $8.6 million in grants to 44 different organizations, each time specifically mentioning its “tar sands campaign.” Funds went to Greenpeace, the Natural Resources Defense Council, the Sierra Club, Forest Ethics, the Rainforest Action Network and dozens of others. Fully $2.2 million of that total went to Michael Marx’s Corporate Ethics International.
I have no problem with private people spending money however they want, but after throwing around sums of this magnitude, it seems amazing they feel the need to stop Heartland from spending a couple of million dollars in opposition. It's like a rich guy telling you that your Chevy Nova is in the way of his Ferrari and could you please get it off the road.
My column for this week is up at Forbes, and inevitably, deals with the State of the Union address last night.
But the portion that really floored me was Obama’s taking credit for the increase in US oil and gas production over the last several years. It is certainly true that, against all predictions of peak oil, new technologies have helped drive a surge in US hydrocarbon production. Combined with a recession-driven drop in demand, America’s oil imports as a percentage of its total use has dropped to 45.6%, the lowest level in over 15 years.
This surge in energy production is a fabulous reminder of how markets work. For years I have written that the peak oil folks were missing something fundamental by performing an overly static analysis. They looked at current “proven” reserves of oil and gas and projected forward how many years it would take for these to run out. But oil and gas reserve numbers only make sense in the context of a particular set of technologies and pricing levels. As hydrocarbons run short, rising prices tend to spur both innovation and new, more expensive exploration activity. Oil and gas companies are once again proving Julian Simon’s addage that the only true scarcity is human brain power, and they should be given a lot of credit for the recent production boom.
The one person who deserves no credit for this boom is Barack Obama....
One thing that many green energy advocates fail to understand is the very scale of US energy demand in relation to the output of various green sources.
Let's consider wind.
The Keystone XL pipeline would have provided 900,000 barrels of oil per day, roughly equivalent to 1.53 billion kw-hr per day. A typical wind turbine is 2MW nameplate capacity, but at best actually produces about 30% of this on average. This means that in a day it produces 2,000*.3*24 = 14,400 kw-hr of electricity. This means that the Keystone XL pipeline would have transported an amount of energy to the US equal to the output of 106,250 of those big utility-size wind turbines.
Looked at another way, the entire annual output of the US wind energy sector was about 75 terra-watt-hours per year or about 260 million kw-hr per day. This means that the Keystone XL pipeline would have carried energy equal to over 5 times the total output of wind power in the US.
Of course, this is just based on the potential energy in the fuel, and actual electricity production would be 50-65% less. But even so, this one single pipeline, out of many, is several times larger than the entire wind power sector.
This country has made great progress in cleaning up its waterways over the last four decades. Conservatives like to pretend it's not true, but there is absolutely nothing wrong from a strong property rights perspective in stopping both public and private actors from dumping their waste in waterways that don't belong to them.
The problem today with the EPA is not the fact that they protect the quality of the commons (e.g. air and water) but that
- New detection technologies at the parts per billion resolution have allowed them to identify and obsess over threats that are essentially non-existent
- Goals have changed such that many folks use air and water protection as a cover or excuse for their real goal, which is halting development and sabotaging capitalism and property rights
What might surprise Brougham and many other New Yorkers who were appalled by last summer’s sewage discharge is that there’s nothing particularly unusual about it. Almost every big rainstorm causes raw sewage to flow into the city’s rivers. New York is one in a handful of older American cities — Baltimore, Philadelphia and Washington, D.C., are others — that suffer from poor sewer infrastructure leading to Combined Sewer Overflows, or CSOs. New York City has spent $1.6 billion over the last decade trying to curb CSOs, but the problem is so pervasive in the city that no one is sure whether these efforts will make much of a difference.
CSOs occur because the structure of New York City’s sewage system often can’t cope with the volume of sewage flowing through it. Under the city’s streets, thousands of drains, manholes and plumbing systems converge into a few sewage mains. These pipes can handle the 1.3 billion gallons of wastewater that the five boroughs produce on a typical day — about as much water as would be generated by a 350-year-long shower. But whenever the pipes gather more water than usual — such as during a rain- or snowstorm — the pumps at the city’s 14 wastewater treatment plants can’t keep up with the flow. Rather than backing up into streets and homes, untreated sewage systematically bypasses the plants and heads straight into the waterways.*
In this way, 27 to 30 billion gallons of untreated sewage enter New York City waterways each year via hundreds of CSO outfalls, says Phillip Musegaas of Riverkeeper, a New York clean water advocacy group. Musegaas says he finds it especially upsetting that city officials don’t effectively warn the thousands of people like Brougham who use the waterways and could encounter harmful bacteria during overflow events.
I thought this correction was funny:
This story originally read that New York City’s sewage system could “barely” handle the city’s wastewater, an untrue statement. As long as there’s little surplus stormwater entering the system, it’s adequate to handle the flow.
Oh, so everything is OK, as long as it does not rain. Which it does 96 days a year. I am just sure this reporter would say that BP's offshore safety systems were "adequate" if it only spilled oil 96 days of the year.
I have zero desire to be a farmer. But that would seem to be the logical end result if we take Obama's recent statement to its logical conclusion. He said in his Kansas "OK, I really am a socialist after all" speech:
Factories where people thought they would retire suddenly picked up and went overseas, where workers were cheaper. Steel mills that needed 100—or 1,000 employees are now able to do the same work with 100 employees, so layoffs too often became permanent, not just a temporary part of the business cycle. And these changes didn’t just affect blue-collar workers. If you were a bank teller or a phone operator or a travel agent, you saw many in your profession replaced by ATMs and the Internet.
As has been pointed out by economists everywhere since the speech, Obama is fighting against the very roots of wealth creation and growth and our economy. Productivity improvement has always been the main engine of a better life for Americans, but here Obama is decrying it.
This reduction in employment in major industries due to productivity is not new. It began with the agriculture. Check this out from the always awesome Mark Perry
This is exactly what Obama is criticizing. Without productivity improvements of the type Obama seems to hate, nine out of ten of you would be laboring in a field rather than reading this on the Internet. Are you poorer because you don't have to grow your own food? Of course not. Every time we increase productivity in a major industry, we fee up labor for the next big thing. We couldn't have had the steel or auto or oil industries if agricultural productivity improvements had not feed up labor for them. The computer revolution would be impossible if we all were working in steel mills.
PS- of course this does not work if the next big thing, say domestic gas productions through fracking, is blocked by the government and private investment capital is diverted by the government to cronies with a solar panel factory.
I was going to leave this topic behind, but I just couldn't resist after Krugman's bit of snark on the topic. Please see my new Forbes column here. One bit, actually off topic from the rest of the article, that I added as a postscript:
Perhaps the worst Administration decision of the entire Solyndra affair has yet to receive adequate scrutiny. Just 6 months before Solyndra failed, the Administration allowed Argonaut, the largest shareholder, to grab the senior debtor position from the US taxpayer in exchange for $75 million in new financing. The Administration’s argument was the loan was needed to buy time, but buy time for what? Solyndra’s relative cost position was getting worse, and it was experiencing a huge loss on every unit sold. No one involved has been able to say what the company was counting on to save it in the 6 months this loan bought it, except perhaps the opportunity to cajole another half billion out of the US taxpayer.
But the loan did accomplish two things. First, it gave Solyndra time to sell every liquid asset it owned that might have been of value to…. Argonaut. And once this bit of self-dealing was complete and the company was cleaned out, the bankruptcy process could be entirely controlled by Argonaut such that it will likely end up with all the assets, most important of which seems to be a $500 million dollar tax loss carryforward. If Argonaut can take advantage of these tax shelters, it will end up costing the US taxpayer an additional $150 million or so.
In short, the taxpayer got rolled. Again.
Update: Marc Morano:
'When we had (Gulf) oil spill, we immediately had moratorium on off shore drilling. The oil industry was demonized & literally shut down'
'But after the green energy debacle, they are being feted and rewarded -- $9 billion more is being sent out to 14 more companies...Solar power is less than 1% of our electricity, yet this is being feted'
"Today, about 40 percent of all U.S. corn -- that's 15 percent of global corn production or 5 percent of all global grain -- is diverted into the corn ethanol scam in order to produce the energy equivalent of about 0.6 percent of global oil needs.Corn prices, now close to $7 per bushel, have more than doubled over the past two years (see chart above). And recent harsh weather, including floods in the Midwest and drought in the South, will likely mean a subpar U.S. corn harvest. That, in turn, will mean yet higher prices for corn, which will translate into higher prices for meat, milk, eggs, cheese and other commodities.
When the Left has talked about oil and gas subsidies, I have generally nodded my head and agreed that any such things should be eliminated, just as they should be eliminated for all industries. They have in the past thrown out huge numbers for such subsidies that seemed high, but I have not really questioned them. But then I see this chart at Kevin Drum's site
Seriously, nearly half the "subsidy" number is the ability of a company to use LIFO accounting on inventory for their taxes? Since the proposition is to eliminate these only for oil and gas, what is the logic that somehow LIFO accounting is wrong in Oil and Gas but OK in every other industry? In fact, at least the first two largest items are both accounting rules that apply to all manufacturing industry. So, rather than advocating for the elimination of special status for oil and gas, as I thought the argument was, they are in fact arguing that oil and gas going forward be treated in a unique and special way by the tax code, separate from every other manufacturing industry.
In fact, many of these are merely changes to the amortization and depreciation rate for up-front investments. Typically, politicians of both parties have advocated for the current rules to encourage investment. Now I suppose we are fine-tuning the rules, so that we encourage investment in the tax code in everything but oil and gas. I will say this does seem to be consistent with Obama Administration jobs policy, which has been to try to stimulate businesses that are going nowhere and hold back the one business (oil and gas drilling) that is actually trying to grow. I am fine with stopping the use of the tax code to try to channel private investment in politician-preferred directions. But changing the decision rule from "using the tax code to encourage all manufacturing investment" to "using the tax code to encourage investment only in the industries we are personally sympathetic to" is just making the interventionism worse.
This is really weak. Not to mention flawed. Unless I am missing something, a change from LIFO to FIFO or some other inventory valuation rules will create a one-time change in income (and thus taxes) when the change is made. LIFO only creates sustained reductions in taxable income, and thus taxes, if your raw materials prices are consistently rising (it actually increases taxes vs. FIFO if input prices are falling). Given that oil and gas prices are volatile, its hard to see how this does much except extract a one-time tax payment from oil companies at the changeover.
By the way, I am pretty sure I would be all for ending government spending on "ultra-deepwater and unconventional natural gas and other petroleum research," though ironically this is exactly the kind of basic research the Left loves the government to perform.
At least that is the only conclusion I can draw. All the talk in this administration about job creation, yet they stand staunchly athwart the only only major industry that is really trying to grow, hire, and invest right now. Just letting off the brakes the Administration has set on oil and gas drilling would lead to the creation of a ton of jobs, and better jobs than we will get with a new WPA paying workers to dig holes and fill them back in again.
Brad DeLong and Arnold Kling have been going back and forth on Fannie Mae and its culpability, or lack thereof, for worsening the recent bubble and financial crisis. DeLong originally argued, if I remember right, that the default rate for Fannie Mae conforming loans were not worse than those being bought by other groups. Kling argued that even their based default rate of 7% was awful (How do you make money on a pool of debt paying 5% if there is a 7% default rate). DeLong countered
Arnold Kling's response is simply not good. It is silly enough to make me think he has not thought the issues through. a 7% delinquency rate on a mortgage portfolio is horrible in normal times, but is actually very good if you are in a depression--ever our Lesser Depression. For an investment with a 15-year duration that's a cost of less than 50 basis points in a "black swan" near worst case scenario. A portfolio that does that well under such conditions is a solid gold one.
I may not be thinking about this right, but I think DeLong is making a mistake in this analysis. In the comments I wrote
First, I have no clue what a "reasonable" default rate is in a black swan event, and my guess is that, almost by definition, no one else does either.
However, it strikes me that DeLong's argument is a bit off. If mortgage default rates went up in an economic crisis that was wholly unrelated to mortgages, ie due to an oil shock or something, that would be one thing. But in this case, the black swan is in large part due to the mortgages issued. I guess it is sort of a chicken and egg problem, but the mortgages started defaulting before the depression, not the other way around, and helped precipitate the depression.
Remember, we are not talking about how well a portfolio survived the economic downturn. We are talking about if a portfolio contributed to the economic downturn.
I still contend that wind is, except in a few niche applications, probably the worst alternate energy source. Other forms of energy like solar have issues, but there is a lot of reason to believe these a fixable over time with better technology. Wind is just a plain dog.
One of the biggest problems with wind is the need for backup power. Because wind's lapses are hard to predict, a lot of fossil fuels have to be burned in spinning, hot backup capacity ready at a moment's notice to take over. In Germany, the net effect has been very little substitution of fossil fuel burning despite an enormous wind investment
As wind power capacity rises, the lower availability of the wind farms determines the reliability of the system as a whole to an ever increasing extent. Consequently the greater reliability of traditional power stations becomes increasingly eclipsed.
As a result, the relative contribution of wind power to the guaranteed capacity of our supply system up to the year 2020 will fall continuously to around 4% (FIGURE 7). In concrete terms, this means that in 2020, with a forecast wind power capacity of over 48,000MW (Source: dena grid study), 2,000MW of traditional power production can be replaced by these wind farms.
Natural gas makes this situation a little better, as natural gas turbines can be brought up much faster than, say, an oil or coal-powered plant. But the duplicate investment is still necesary
Britain's richest energy companies want homeowners to subsidise billions of pounds worth of gas-powered stations that will stand idle for most of the time.
Talks have taken place between the Government, Centrica, owner of British Gas, and other energy companies on incentives to build the power stations needed as back-ups for the wind farms now being built around the country.
It is understood 17 gas-fired plants worth about £10 billion will be needed by 2020.
The Energy Department has been warned that without this massive back-up for the new generation of heavily subsidised giant wind farms, the lights could go out when the wind dies down.
Sam Laidlaw, chief executive of Centrica, said renewables, such as large-scale wind energy, were intermittent and required back-up generation, a role gas was uniquely qualified to fill.
But as power stations that operate only intermittently would not be financially viable, Laidlaw said: 'The building of new gas-fired capacity must be incentivised so that gas can fulfil its role as a bridging fuel.'
Great. So we have wind power, which is not financially viable so it must be subsidized, that required backup power plants to be constructed, which will not be financially viable so gas plants must be subsidized.
I have an idea, why not have gas plants which are financially viable serving the base load and just get rid of wind and this double subsidy all together?
I have often described this statist feedback loop:
- Create government program
- Government programs messes up certain aspects of the market
- Blame such messes on "failure of markets" or capitalism or even the rich, rather than the government program
- Create new government program to fix problem created by last program
Obama's new political strategy seems to be even more brazen
- Democrats pass new program over Republican objections
- New program has unseemly subsidies for rich people
- Blame subsidies on Republicans, to the point of using subsidies as example of bankruptcy of Republican party
The chief economic culprit of President Obama’s Wednesday press conference was undoubtedly “corporate jets.” He mentioned them on at least six occasions, each time offering their owners as an example of a group that should be paying more in taxes.
“I think it’s only fair to ask an oil company or a corporate jet owner that has done so well,” the president stated at one point, “to give up that tax break that no other business enjoys.”
But the corporate jet tax break to which Obama was referring – called “accelerated depreciation,” and a popular Democratic foil of late – was created by his own stimulus package.
Which is not to say that the losers in the Republican party would not likely have supported the same plan had it been their idea.
By the way, this is nearly exactly what Obama has been doing with those so-called special subsidies for oil companies. This subsidies are in fact the identical tax breaks that all manufacturers receive that allow them to accelerate expensing of capital investment. This is a tax policy that has enjoyed bipartisan support and no one is suggesting should be eliminated in general -- just eliminated for industries that have bad PR.
My new column is up at Forbes, and it is one of my favorites I have written for a while (at least it seems so with my current scorpion-induced double vision). It begins with Krugman's recent statement that the Left understands the Right and libertarian positions better than the Right and libertarians understand the Left.
I first demolish this as a pretentious crock, but then wander to more important topics
But I do understand the leftish position well enough to identify its key mistake. As I mentioned earlier, we libertarians are similarly concerned with aggregations of power. We have, at best, a love-hate relationship with large corporations, for example, enjoying the bounties they can bring us but fearing their size and power.
But what the Left ignores is that there is absolutely no power imbalance as large as that between the government and its citizens. After all, you may get ticked off when Exxon charges you $4.00 a gallon for gas for reasons that aren't transparent to you, but you can always tell Exxon to kiss off and buy from someone else, or ride a bike, or stay home. Because Exxon does not have armies and police and guns and prisons.
Every single time we give the government the power to right a perceived imbalance, we give the government more power than the private entity we are trying to contain. In effect, we make things worse. Because we want the government to counter-act the power of oil companies, Congress now has the power to dump large portions of our food supply into motor fuel, to the benefit of just a few politically connected ethanol companies.
One of the reasons the Left often cannot adequately articulate the libertarian position is that the notion of bottom-up emergent order tends to be difficult for many to understand or accept (this is mildly ironic, since the Left tends to defend the emergent order of Darwinian evolution against the top-down Christian creation vision).
The key to much of libertarian economics is not that libertarians trust private actors, but that libertarians trust natural correction mechanisms in free markets far more than it trusts authoritarian power of the government. When, for example, large corporations become sloppy and abusive and senescent, markets will eventually bring them down.
In fact, when government is given power, nominally to correct such imbalances, they tend to use it to protect those in power as often as they do to protect the disenfranchised. Government restrictive licensing of hair dressers, interior designers, and morticians; bailouts of GM, Chrysler, and AIG; corporate welfare to GE and ADM; and use of imminent domain to hand private property to favored real estate developpers -- all are examples of finding government cures for perceived private power imbalances that are worse than the disease.
Isacc Asimov, in a book called Foundation that Paul Krugman recently rated as one of the most influential on his life, related this fable: Once there was a man and a horse, who were both imperiled by a wolf. The man approached the horse, and said that if the horse would put its superior speed at his disposal, he could kill the wolf. And so the horse agreed to take the man's saddle and bridle, and helped the man kill the wolf. The horse said, "great job, now remove your saddle and we can both be free," and the man said "never!"
I hope the moral of the story is clear. In trying to deal with the threat of the wolf, the horse gave the man so much power he became an even bigger threat. So too when we look to government to solve our problems.
Read the whole thing, as they say
This year, US oil refiners will pay more than $6 million in fines to the EPA for not using a product that doesn't exist. Refiners are required to blend at least 6.6 million gallons of cellulosic ethanol this year, or pay a fine to the EPA of $1 per gallon of this target not met.
But here is the funny part - no cellulosic ethanol exists for refiners to buy, even by the EPA's own analysis. The product simply does not exist in any more than pilot plant / experimental volumes. But that is not stopping the EPA from imposing the fines, which will get passed on into gasoline prices.
Here is the saddest part, from a defender of the cellulosic mandates:
Next-generation ethanol advocates say that small-scale commercial production of the fuel is just around the corner. When the EPA proposal was released yesterday, one advocate blamed the oil and gas industry for slow progress.
“America’s advanced and cellulosic ethanol industry is rapidly progressing with many technologies proven and biorefinery projects shovel-ready. Yet, advanced biofuel producers continue to sail into a head wind created by tax policy favoring oil and gas,” said Brooke Coleman, executive director of the Advanced Ethanol Council, in a statement.
What in the hell are they talking about? Their plants get their construction subsidized with public financing, the oil industry is required to buy their product, trade barriers exist to limit foreign competition. These guys are not fighting a headwind, they are trying to hit a golf ball downwind in a hurricane and they still can't clear the lady's tee.
This is a bit old, but Powerline had a good analysis on oil speculation. The short answer: Think Progress confused, either accidentally or on purpose, the notion of a risk premium with speculation excess.
I was thinking this weekend that one reason the US recovery may be slow is related to labor and capital mobility.
One substantial avenue to recovery in a recession has always been labor and capital mobility. The fast labor and capital can be redeployed from losing industries to improving ones, the faster a recovery occurs. One reasons Japan and certain European countries have had slower recoveries in the past than the US is that our mobility was higher and barriers to entrepreneurship lower.
But it strikes me that two things are going on in the US to endanger this advantage we have always enjoyed
- The government push for home ownership has turned out to be a trap. Not only did it help create the bubble, whose bursting destroyed a lot of real and paper wealth, but it has greatly reduced labor mobility. Home ownership makes labor mobility much harder even in a good housing market when one can sell his or her home easily. In a bad market like today, very few feel they can pick up and move. I might want to give up on the construction industry in Michigan and move to the oil patch of North Dakota, but how can I do that if I own a home that I can't sell? A number of other actions, most notably the repeated extension of unemployment benefits, contributes to the lack of mobility.
- The government seems hell bent on doing everything it can to prevent, even reverse the tide, of capital mobility. The government shifted tends of billions of capital into auto industry hands that had destroyed value for decades. It continues to put the brakes on what should be an oil and gas exploration and production boom. It kills health industries like light bulbs and shifts billions into useless politically powerful hands making ethanol. The NLRB is preventing major American manufacturers from making factory investments in southern states.
In the late 1970's, the auto industry was in trouble but the oil patch was booming. The Houston newspapers sold well in Michigan, popular for their help wanted ads. From space, the Interstate highways between the Detroit and Texas probably looked orange from all the U-haul trailers.
The exact same dynamics could and should be occurring today. Capital and labor should be shifting from, for example, the failing auto industry to the growing energy sector. But the government today stands to block this reallocation. It is raising taxes on oil companies and placing barriers to their growth, while giving tax money to the auto industry and using every bit of power it can to sustain it. Combine this type of barrier to capital flows (and auto/energy is but a couple of examples) with rising barriers to entrepreneurship, and it should be no surprise that growth is abysmal.
This is what happens in a corporate state. Past winners retain huge amounts of power in the government long after their companies have become senescent in the marketplace. Politicians argue for the power to pick winners and losers in the economy but generally use it only to protect current competitors and stand in the way of progress.
Kevin Drum doesn't buy the regime uncertainty argument as a partial explanation of the slow recovery.
Here's what's remarkable: Carter, a law professor at Yale, apparently never once bothered to ask this guy just what regulations he's talking about. Is he concerned with general stuff like the healthcare law? Or something highly specific to his industry? Or what?
Regardless, I've heard this kind of blowhard conversation too often to take it seriously. Sure, it's possible this guy manufactures canisters for nuclear waste or something, and there's a big regulatory change for nuclear waste storage that's been in the works for years and has been causing everyone in the industry heartburn for as long as they can remember. But the simple fact is that regulatory uncertainty is no greater today than it's ever been. Financialuncertainty is high, but the Obama adminstration just hasn't been overhauling regs that affect the cost of new workers any more than usual. The only substantial exception is the new healthcare law, and if you oppose it that's fine. But it was passed over a year ago and its effects are pretty easy to project.
First, the costs of the health care law are NOT easy to project, and are made even harder when your company might or might not get waivers from certain provisions. Second, he seems to forget cap and trade, first by law and then by executive fiat; the NLRB's new veto power over corporate relocations it exercised with Boeing; the absurdly turbulent tax/regulatory/permitting regime in the energy field, and particularly oil and gas. How about trillion dollar stimulus projects, that until very recently Obama was still talking about replicating (and Krugman begs for to this day). I could go on and on. This is spoke just like a person who never had to run a business.
Further, I wrote this in the comments section:
I think you are both right and wrong. I am sure the discussion about this is to some extent overblown. But you are thinking about business and hiring much too narrowly.
You seem to have a mental model of business showing up at the door, and someone turning that business down because they don't want to hire an employee to serve it (or out of sheer petulance because Fox News told them to sit on their hands, lol). You find it unlikely anyone would refuse the business, and so do I.
But I run a small to medium size business, and a lot of hiring decisions don't work that way. I do have some situations that fit your model - I have a campground that is really busy this year, so we hired more people to serve the volume. No problem.
But most of my hiring decisions are effectively investments. I am going to create a new position, pay money to train that person, and pay their wage for a while in advance of demand. Or I am going to open a new site or department or location and make a lot of investment, and the return on investment may be very sensitive to small changes in labor or regulatory costs.
For our business, with labor costs over 50% of costs, the issue is definitely labor costs. Our pre-tax margins are in the 6-7% range. So if labor costs are 60% of revenues, then a 10% change in labor costs might wipe out the margin entirely, and a much smaller change in costs might flip the investment from making sense to not making sense.
We run a seasonal business with part-time workers who are older and on Medicare. Regulations about exactly how much we will have to pay under Obamacare have not been written, so we have no idea how much our employment costs will go up in 2014, so we sit and wait. I have cancelled two planned campground construction projects in the last 6 months because we have no freaking idea if they will make money.
If I am having trouble with just this one law figuring out whether to make investments, what are, say, oil companies doing in evaluating investments when they have absolutely no idea what their taxes will be, whether they will be permitted or not to drill, or whether they will be subject to cap and trade?
One other thought, it strikes me that there is a lot of good scholarship that suggests that the Great Depression was extended by just this kind of regime uncertainty. Now, of course, the proposed structural changes to the economy being proposed at the time were more radical than anything on the table today. The National Industrial Recovery Act was essentially an experiment in Mussolini-style economic corporatism, until most of it was struck down by the Supreme Court. Nothing so radical is being proposed (unless you work in health care).
Look, I know the Left has convinced itself that only consumer demand matters in an economy, but business investment has simply got to matter in a recovery. If the returns on future investments are harder to predict, and therefore riskier, businesses are going to apply a higher hurdle rate to new investments, meaning they don't stop entirely, but do invest less.
One interesting may to confirm this some day would be to look back and see if larger corporations with political access invested more than smaller ones or ones with less access. Did GE, who clearly can get whatever it wants right now from the government, invest more than a small company or even than Exxon, which is on the political outs? If so, this in my mind would confirm the regime uncertainty hypothesis, because it means that the companies doing most of the investing were the ones confident that they could shape the mandates coming out of the government in their favor.
Beyond regime uncertainty, if you want to talk about Obama and the recovery, you have to mention that a trillion dollars was diverted from private hands to public hands. Does anyone believe that taking a trillion dollars out of whatever investments private actors would have used the money for and diverting most of it to help maintain government payrolls is really the way to increase the strength and productivity of the economy?
For years I have resisted the meme that environmentalists were anti-energy and anti-industrialists. However, the current strong and growing environmental opposition to natural gas production in the US, probably the cleanest, sanest source of energy that we have, is quickly changing my opinion. Texas and New Mexico residents fear that the dune sagebrush lizard will get endangered species status specifically as a lever to reduce oil production.
My new column is up at Forbes, and discusses the absurdity of blaming sustained higher oil and gas prices on speculators.
Is there a crime in the current oil prices? Yes, but it’s not one of speculation. Prices are a form of communication. Higher prices tell consumers to use less oil, and producers to go find more. The real crime today is that while the signal is flashing today to oil companies to go find more crude, the Obama administration has bent over backwards to make such efforts all but impossible. In fact, the Obama Administration desperately tried and failed to increase oil and gas prices via cap and trade last year. President Obama is not really against higher oil prices, he just wants them driven higher by the state, not by the markets.
Apparently, the leftish-progressive talking point du jour is that oil speculators (and wouldn't you know it, those apparently include new libertarian uber-villains the Koch brothers) are artificially raising prices above what a "natural" market clearing price would be.
I have always presumed this to be possible for short periods of time - probably hours, perhaps days. But if, for any longer period of time, market prices (I am talking here about prices for current oil and immediate delivery, not futures prices) stay above the market clearing price one would normally expect from current supply and demand, then oil has to be building up somewhere. People would be bending over backwards to sell oil into the market, and customers would be using less.
If futures speculation has somehow unanaturally driven up current prices, where is the oil building up? I understand the price can go up for future oil, because in futures the inventory is just paper. But the argument is that futures trading is driving up current oil prices. When the Hunt brothers tried to corner the silver market, they had to buy and buy and keep buying to sop up the inventory.
Sure, some folks may be storing oil on speculation (and by the way most oil companies are inventorying oil and gasoline this time of year in the annual build up between heating oil season and summer driving season) -- but storing physical oil is really expensive. And the total capacity to do so incrementally is trivial compared to world daily demand. A few tanker loads sitting offshore is not going to mean squat (total world crude inventory is something like 350 million barrels at any one time, so adding a million barrels into storage only increases inventory by 0.3% or about. Another way to look at it is that storing a million barrels of oil represents about 17 minutes of daily demand. If the price is really being held above the market clearing price, then we are talking about the necessity of buying millions of barrels of oil each and every day and storing them, and to keep doing so day after day after day to keep the price up. And then once you stop, the price is just going to crash before you can sell it because of the very fact that word got out you are selling it.
I dealt with this in a lot more depth here. I want to repost it in full. It's a bit dated (different prices) but still relevant. Note in particular the irony of my friends point #5 -- this was a real view held by many on the progressive Left. Ironic, huh?
I had an odd and slightly depressing conversation with a friend the other night. He is quite intelligent and well-educated, and in business is probably substantially more successful, at least financially, than I.
Somehow we got in a discussion of oil markets, and he seemed to find my position suggesting that oil prices are generally set by supply and demand laughable, so much so he eventually gave up with me as one might give up and change the subject on someone who insists the Apollo moon landings were faked. I found the conversation odd, like having a discussion with a fellow
chemistry PHD and suddenly having them start defending the phlogiston
theory of combustion. His core position, as best I could follow, was this:
- Limitations on supply in the US, specifically limitations on new oil field development and refinery construction, are engineered by oil companies attempting to keep prices high.
- Oil prices are set at the whim of oil traders in London and New York, who are controlled by US oil companies. The natural price of oil today should be $30 or $40, but oil traders keep it up at $60. While players upstream and downstream may have limited market shares, these traders act as a choke point that controls the whole market. All commodity markets are manipulated, or at least manipulatable, in this manner
- Oil supply and demand is nearly perfectly inelastic.
- If there really was a supply and demand reason for oil prices to shoot up to $60, then why aren’t we seeing any shortages?
- Oil prices only rise when Texas Republicans are in office. They will fall back to $30 as soon as there is a Democratic president. On the day oil executives were called to testify in front of the Democratic Congress recently, oil prices fell from $60 to $45 on that day, and then went right back up.
Ignoring the Laws of Economics (Price caps and floors)
While everyone (mostly) knows that we are suspending disbelief when the James Bond villain seems to be violating the laws of physics, there is a large cadre of folks that do believe that our economic overlords can suspend the laws of supply and demand. As it turns out, these laws cannot be suspended, but they can certainly be ignored. Individuals who ignore supply and demand in their investment and economic decision making are generally called "bankrupt," at least eventually, so we don’t always hear their stories (the Hunt brothers attempt to corner the silver market is probably the best example I can think of). However, the US government has provided us with countless examples of actions that ignore economic reality.
The most typical example is in placing price caps. The most visible example was probably the 1970′s era caps on oil, gasoline, and natural gas prices and later "windfall profit" taxes. The result was gasoline lines and outright shortages. With prices suppressed below the market clearing price, demand was higher and supply was lower than they would be in balance.
The my friend raised is different, one where price floors are imposed by industry participants or the government or more likely both working in concert. The crux of my argument was not that government would shy away from protecting an industry by limiting supply, because they do this all the time. The real problem with the example at hand is that, by the laws of supply and demand, a price floor above the market clearing price should yield a supply glut. As it turns out, supply guts associated with cartel actions to keep prices high tend to require significant, very visible, and often expensive actions to mitigate. Consider two examples:
Realtors and their trade group have worked for years to maintain a tight cartel, demanding a 6% or higher agency fee that appears to be increasingly above the market clearing price. The result of maintaining this price floor has been a huge glut of real estate agents. The US is swimming in agents. In an attempt to manage this supply down, realtors have convinced most state governments to institute onerous licensing requirements, with arcane tests written and administered by… the realtor’s trade group. The tests are hard not because realtors really need to know this stuff, but because they are trying to keep the supply down. And still the supply is in glut. Outsiders who try to discount or sell their own home without a realtor (ie, bring even more cheap capacity into the system) are punished ruthlessly with blackballs. I have moved many times and have had realtors show me over 300 houses — and you know how many For Sale By Owner homes I have been shown? Zero. A HUGE amount of effort is expended by the real estate industry to try to keep supply in check, a supply glut caused by holding rates artificially high.
A second example of price floors is in agriculture. The US Government, for whatever political reasons, maintains price floors in a number of crops. The result, of course, has been a supply glut in these commodities. Sopping up this supply glut costs the US taxpayer billions. In some cases the government pays to keep fields fallow, in others the government buys up extra commodities and either stores them (cheese) or gives them away overseas. In cases like sugar, the government puts up huge tarriff barriers to imports, otherwise the market would be glutted with overseas suppliers attracted by the artificially high prices. In fact, most of the current subsidy programs for ethanol, which makes almost zero environmental or energy policy sense, can be thought of as another government program to sop up excess farm commodity supply so the price floor can be maintained.
I guess my point from these examples is not that producers haven’t tried to impose price floors above the market clearing price, because they have. And it is not even that these floors are not sustainable, because they can be if the government steps in to help with their coercive power and our tax money to back them. My point is, though, that the laws of supply and demand are not suspended in these cases. Price floors above the market clearing price lead to supply gluts, which require very extensive, highly visible, and often expensive efforts to manage. As we turn now to oil markets, we’ll try to see if there is evidence of such actions taking place.
The reasons behind US oil production and refining capacity constraints
As to his first point, that oil companies are conspiring with the government to artificially limit oil production and refining capacity, this certainly would not be unprecedented in industry, as discussed above. However, any historical study of these issues in the oil industry would make it really hard to reach this conclusion here. There is a pretty clear documented record of oil companies pushing to explore more areas (ANWR, offshore) that are kept off-limits due to environmental pressures. While we have trouble imagining the last 30 years without Alaskan oil, the US oil companies had to beg Congress to let them build the pipeline, and the issue was touch and go for a number of years. The same story holds in refining, where environmental pressure and NIMBY concerns have prevented any new refinery construction since the 1970′s (though after years and years, we may be close in Arizona). I know people are willing to credit oil companies with just about unlimited levels of Machiavellianism, but it would truly be a PR coup of unprecedented proportions to have maintained such a strong public stance to allow more capacity in the US while at the same time working in the back room for just the opposite.
The real reason this assertion is not credible is that capacity limitations in the US have very clearly worked against the interests of US oil companies. In production, US companies produce on much better terms from domestic fields than they do when negotiating with totalitarian regimes overseas, and they don’t have to deal with instability issues (e.g. kidnapping in Nigeria) and expropriation concerns. In refining, US companies have seen their market shares in refined products fall since the 1970s. This is because when we stopped allowing refinery construction in this country, producing countries like Saudi Arabia went on a building boom. Today, instead of importing our gasoline as crude to be refined in US refineries, we import gas directly from foreign refineries. If the government is secretly helping oil companies maintain a refining capacity shortage in this country, someone forgot to tell them they need to raise import duties to keep foreign suppliers from taking their place.
What Oil Traders can and cannot do
As to the power of traders, I certainly believe that if the traders could move oil prices for sustained periods as much as 50% above or below the market clearing price, they would do so if it profited them. I also think that speculative actions, and even speculative bubbles, can push commodity prices to short-term extremes that are difficult to explain by market fundamentals. Futures contracts and options, with their built in leverage, allow even smaller players to take market-moving positions. The question on the table, though, is whether oil traders can maintain oil prices 50% over the market clearing prices for years at a time. I think not.
What is often forgotten is that companies like Exxon and Shell control something like 4-5% each of world production (and that number is over-stated, since much of their production is as operator for state-owned oil companies who have the real control over production rates). As a point of comparison, this is roughly the same market Toshiba has in the US computer market and well below Acer’s. As a result, there is not one player, or even several working in tandem, who hold any real power in crude markets. Unless one posits, as my friend does, that NY and London traders somehow sit astride a choke point in the world markets.
But here is the real problem with saying that these traders have kept oil prices 50% above the market clearing price for the last 2-3 years: What do they do with the supply glut? We know from economics, as well as the historic examples reviewed above, that price floors above the clearing price should result in a supply glut. Where is all the oil?
Return to the example of when the Hunt’s tried to corner the silver market. Over six months, they managed to drive the price from the single digits to almost $50 an ounce. Leverage in futures markets allowed them to control a huge chunk of the available world supply. But to profit from it (beyond a paper profit) the Hunts either had to take delivery (which they were financially unable to do, as they were already operating form leveraged positions) or find a buyer who accepted $50 as the new "right" price for silver, which they could not. No one wanted to buy at $50, particularly from the Hunts, since they knew the moment the Hunt’s started selling, the price would crash. As new supplies poured onto the market at the higher prices, the only way the Hunt’s could keep the price up was to pour hundreds of millions of dollars in to buy up this excess supply. Eventually, of course, they went bankrupt. But remember the takeaway: They only could maintain the artificially higher commodity price as long as they kept buying excess capacity, a leveraged Ponzi game that eventually collapsed.
So how do oil traders’ supposedly pull off this feat of keeping oil prices elevated about the market clearing price? Well, there is only one way: It has to be stored, either in tanks or in the ground. The option of storing the extra supplies in tanks is absurd, especially over a period of years – after all, at its peak, $60 of silver would sit on the tip of my finger, but $60 of oil won’t fit in the trunk of my car. The world oil storage capacity is orders of magnitude too low. So the only real option is to store it in the ground, ie don’t allow it to get produced.
How do traders pull this off? I have no idea. Despite people’s image, the oil producer’s market is incredibly fragmented. The biggest companies in the world have less than 5%, and it rapidly steps down from there. It is actually even more fragmented than that, because most oil production is co-owned by royalty holders who get a percentage of the production. These royalty holders are a very fragmented and independent group, and will complain at the first sign of their operator not producing fast and hard enough when prices are high. To keep the extra oil off the market, you would have to send signals to a LOT of people. And it has to be a strong and clear signal, because price is already sending the opposite signal. The main purpose of price is in its communication value — a $60 price tells producers a lot about what and how much oil should be produced (and by the way tells consumers how careful to be with its use). To override this signal, with thousands of producers, to achieve exactly the opposite effect being signaled with price, without a single person breaking the pack, is impossible. Remember our examples and the economics – a sustained effort to keep prices substantially above market clearing prices has to result in visible and extensive efforts to manage excess supply.
Also, the other point that is often forgotten is that private exchanges can only survive when both Sellers AND buyers perceive them to be fair. Buyers are quickly going to find alternatives to exchanges that are perceived to allow sellers to manipulate oil prices 50% above the market price for years at a time. Remember, we think of oil sellers as Machiavellian, but oil buyers are big boys too, and are not unsophisticated dupes. In fact, it was the private silver exchanges, in response to just such pressure, that changed their exchange rules to stop the Hunt family from continuing to try to corner the market. They knew they needed to maintain the perception of fairness for both sellers and buyers.
Supply and Demand Elasticity
From here, the discussion started becoming, if possible, less grounded in economic reality. In response to the supply/demand matching issues I raised, he asserted that oil demand and supply are nearly perfectly inelastic. Well, if both supply and demand are unaffected by price, then I would certainly accept that oil is a very, very different kind of commodity. But in fact, neither assertion is true, as shown by example here and here. In particular, supply is quite elastic. As I have written before, there is a very wide range of investments one can make even in an old existing field to stimulate production as prices rise. And many, many operators are doing so, as evidenced by rig counts, sales at oil field services companies, and even by spam investment pitches arriving in my in box.
I found the statement "if oil prices really belong this high, why have we not seen any shortages" to be particularly depressing. Can anyone who sat in at least one lecture in economics 101 answer this query? Of course, the answer is, that we have not seen shortages precisely because prices have risen, fulfilling their supply-demand matching utility, and in the process demonstrating that both supply and demand curves for oil do indeed have a slope. In fact, shortages (e.g. gas lines or gas stations without gas at all) are typically a result of government-induced breakdowns of the pricing mechanism. In the 1970′s, oil price controls combined with silly government interventions (such as gas distribution rules**) resulted in awful shortages and long gas lines. More recently, fear of "price-gouging" legislation in the Katrina aftermath prevented prices from rising as much as they needed to, leading to shortages and inefficient distribution.
Manipulating Oil Prices for Political Benefit
As to manipulating oil or gas prices timed with political events (say an election or Congressional hearings), well, that is a challenge that comes up all the time. It is possible nearly always to make this claim because there is nearly always a political event going on, so natural volatility in oil markets can always be tied to some concurrent "event." In this specific case, the drop from $60 to $35 just for a Congressional hearing is not even coincidence, it is urban legend. No such drop has occurred since prices hit 60, though prices did drop briefly to 50. (I am no expert, but in this case the pricing pattern seen is fairly common for a commodity that has seen a runup, and then experiences some see-sawing as prices find their level.)
This does not mean that Congressional hearings did not have a hand in helping to drive oil price futures. Futures traders are constantly checking a variety of tarot cards, and indications of government regulatory activity or legislation is certainly part of it. While I guess traders purposely driving down oil prices ahead of the hearing to make oil companies look better is one possible explanation; a more plausible one (short of coincidence, since Congress has hearings on oil and energy about every other month) is that traders might have been anticipating some regulatory outcome in advance of the hearing, that became more less likely once the hearings actually occurred. *Shrug* Readers are welcome to make large short bets in advance of future Congressional energy hearings if they really think the former is what is occurring.
As to a relationship between oil prices and the occupant of the White House, that is just political hubris. As we can see, real oil prices rose during Nixon, fell during Ford, rose during Carter, fell precipitously during Reagan, were flat end to end for Bush 1 (though with a rise in the middle) and flat end to end for Clinton. I can’t see a pattern.
If Oil Companies Arbitrarily Set Prices, Why Aren’t They Making More Money?
A couple of final thoughts. First, in these heady days of "windfall" profits, Exxon-Mobil is making a profit margin of about 9% – 10% of sales, which is a pretty average to low industrial profit margin. So if they really have the power to manipulate oil prices at whim, why aren’t they making more money? In fact, for the two decades from 1983 to 2002, real oil prices languished at levels that put many smaller oil operators out of business and led to years of layoffs and down sizings at oil companies. Profit margins even for the larges players was 6-8% of sales, below the average for industrial companies. In fact, here is the profitability, as a percent of sales, for Exxon-Mobil over the last 5 years:
Before 2001, going back to the early 80′s, Exxon’s profits were a dog. Over the last five years, the best five years they have had in decades, their return on average assets has been 14.58%, which is probably less than most public utility commissions allow their regulated utilities. So who had their hand on the pricing throttle through those years, because they sure weren’t doing a very good job! But if you really want to take these profits away (and in the process nuke all the investment incentives in the industry) you could get yourself a 15 to 20 cent decrease in gas prices. Don’t spend it all in one place.
** One of the odder and forgotten pieces of legislation during and after the 1972 oil embargo was the law that divided the country into zones (I don’t remember how, by counties perhaps). It then said that an oil company had to deliver the same proportion of gas to each zone as it did in the prior year (yes, someone clearly took this right out of directive 10-289). It seemed that every Representative somehow suspected that oil companies in some other district would mysteriously be hoarding gas to their district’s detriment. Whatever the reason, the law ignored the fact that use patterns were always changing, but were particularly different during this shortage. Everyone canceled plans for that long-distance drive to Yellowstone. The rural interstate gas stations saw demand fall way off. However, the law forced oil companies to send just as much gas to these stations (proportionally) as they had the prior year. The result was that rural interstates were awash in gas, while cities had run dry. Thanks again Congress.