Back to Basics

Higher petroleum prices back up Barack Obama’s argument that renewable energy is urgently needed.

Oil at more than $100 per barrel is far too expensive. Despite President Barack Obama’s recent protestations that oil speculators are to blame for expensive petroleum, the truth is that most of the blame rests on his shoulders.

There is plenty of oil in North America. Yet Obama and his Green lobby are happy to see gasoline prices go even higher just as we hit the busy summer driving season. The reason is that higher petroleum prices back up Obama’s argument that renewable energy is urgently needed.

President Franklin Delano Roosevelt made the famous pronouncement that “the only thing we have to fear is fear itself.”

Nearly 80 years later, a Democratic President is not playing down public fears but actually fanning them. If you don’t believe me, consider the facts about North America’s vast petroleum reserves and surging production.

Canadian oil production rose to 1.6 million barrels per day (mb/d) last year. That was an increase of more than 13 percent from the year before. According to the Canadian Energy Research Institute, Alberta and Saskatchewan oil sands production will more than double to 4 mb/d in the next seven years and will reach 6.2 mb/d by 2045.

Add that in with the expected increase in both U.S. and Mexican oil production, and North America will be producing 11 mb/d by the end of this decade. That is about the same amount of oil that Saudi Arabia can produce if it opens its spigots all the way.

The 11 mb/d of oil production is a conservative estimate. Mitt Romney promises that if he is elected, he will vastly open up offshore drilling. If ever fully tapped, North America has the potential reserves to produce 14 mb/d of oil by 2020.

“North America is becoming the new Middle East,” recently wrote Ed Morse, the managing director and head of global commodities research at Citigroup.

Of course, much of North America’s energy independence will depend on who is in the Oval Office. If it is someone like Romney, who believes in free markets, I believe gasoline will be affordable again within a couple of years.

However, if Obama is re-elected and he continues to object to the import of Canada’s oil sands as well as expanded drilling within U.S. borders, petroleum prices might hit new records by the end of 2013. That will be more bad news for a shaky U.S. economy and will only further weaken America and the greenback.

After all, shortages and panics happen all the time. They certainly don’t require a U.S. President to get them going.

My First Lesson In Fear Economics

In the autumn of 1972, Alberta’s bitter cold was settling in. The engine to my mother’s Mercury was idling hard when the gasoline pump clunked to a halt. I pulled the nozzle out of the tank and pushed it back into its cradle.

I fished $10 from my wallet, enough to buy the gas and still have change left over for a coffee.

After paying, I headed for the door. Before I reached it, I was called back.

The manager asked: “Do you know about the antifreeze shortage?”

“What antifreeze shortage?”

“The one that’s coming this fall,” said the manager.

With gas prices continuing to climb,there is an ever-increasing quest for ways to find a culprit that can carry the blame. More and more, the finger pointing is focused on the overseas sale of US petroleum product—with the belief being that selling American resources to the highest bidder increases the price of gasoline at the pump. This idea has made strange bedfellows of Fox News host Bill O’Reilly and Congressman Ed Markey (D-MA).

Addressing gas prices,O’Reilly claims:“They are much higher because the oil companies are shipping their products overseas.” Representative Markey (of the Waxman-Markey cap and trade fame) has “introduced legislation that would end the exportation of oil extracted from taxpayer-owned lands, and the exportation of refined fuels like gasoline produced from America’s oil.” Markey’s bill is called the “Keep America’s Oil Here Act.”

The idea has gained traction. It sounds good. Letters to the editor have popped up echoing the sentiments—with one even proposing “a massive letter-writing campaign to Congress insisting it creates a law that prevents the export of our gasoline and fuel oil.”

I was alerted to the trend by “Chip” who wrote the following in response to one of my columns:“So why is no one suggesting a tax on domestically produced oil, natural gas, or coal being taxed if sold overseas. With all of our natural energy resources, why let it count for so little if global demand will dictate that we pay the same general rates for oil, coal, and gas as anywhere else…”

Whether we have a bill like Markey’s that mandates that resources extracted from federal lands be sold in the US or a tax as Chip suggested, the idea that selling domestically produced resources overseas is driving up prices is being propagated from someone, somewhere and is accepted as fact.

With the Obama re-election campaign being staked on raising taxes, it may well be coming straight from the White House. Markey’s “Keep America’s Oil Here Act” tells us that the Democrats have bought into the theme of discouraging exports of US product—whether through regulation or tariff.

Wherever this “protectionism” idea is coming from, it is wrong on many counts. While keeping American oil here sounds like it would lower prices, it will not impact the price and could hurt the overall economy.

In essence, we are keeping American product here as, at present,we use far more than comes out of the ground domestically. Yes, it is true that some of the barrels of oil that come from Texas or North Dakota or the Gulf of Mexico may be sold as gasoline to Argentina or Peru, but we use far more in the US than we extract. Once in the refinery, the barrels of oil may well be merged and the refined product that comes out may, in fact, be interracial—with the gallon of gas’ lineage being a combination of Africa, Brazil, the Middle East, Mexico, Canada, and the US. Since we need the crude oil from some of the very same countries to which we sell the refined product,such as gasoline, is it wise to start adding a tariff to what they buy from us and incite a possible trade war? Here in the US we get many,many products from other countries and adding barriers to trade is likely to hurt the bigger picture.

It’s just a matter of time until Jay Carney claims Republicans are now responsible for high gas prices because they refused to raise taxes on Big Oil so the government could spend that revenue fast-tracking algae research and funding more Solyndras.

From The Hill:

The Senate on Thursday thwarted Democratic plans to strip billions of dollars in tax breaks from the largest oil companies, just an hour or so after President Obama urged the chamber to kill off the deductions.

Lawmakers voted 51-47 to block Sen. Robert Menendez’s (D-N.J.) bill. Sixty votes were needed to advance the measure.

Two Republicans — Sens. Susan Collins and Olympia Snowe, both from Maine — crossed party lines and voted to repeal the tax breaks. Four Democrats — Sens. Mark Begich (Alaska), Mary Landrieu (La.), Ben Nelson (Neb.) and Jim Webb (Va.) — voted against the bill.

It sounds as if Democrats could have gotten their dream of ending Big Oil tax breaks if they’d have accepted a Republican deal sweetener, but Harry Reid made a quick kick-save to keep it out of the net:

The vote Thursday followed several days of tactical maneuvering on both sides of the aisle. Republicans oppose the Menendez plan but unexpectedly voted Monday to allow debate on the bill, saying they welcomed the chance to pit their energy plans against those of Democrats.

But Senate Majority Leader Harry Reid (D-Nev.) cut debate on the bill short, blocking consideration of a handful of GOP amendments, including a proposal to dramatically expand offshore oil-and-gas leasing.

Why would Reid have a problem with expanding offshore leasing considering his friend in the White House recently vowed to drill wherever we can?

Update: Jay Carney can’t explain why Obama voted for oil company tax breaks in 2005.

The President’s trip last week to Cushing, Oklahoma, was nothing more than the opportunity to stand in front of a stack of oil pipeline sections and lie some more about the Keystone pipeline. His contempt for the intelligences of Americans was on full display.

A pipeline section that did not require his approval or involvement was touted as “a priority.” His delay of the Keystone pipeline from Canada was passed off as based on his concern for “the health and safety of the American people.”

The safety of oil pipelines is well established. There is an extensive network; 55,000 miles of crude oil trunk lines in the U.S. and another estimated 40,000 miles of small gathering lines located mostly in Texas, Oklahoma, Louisiana, and Wyoming that gather oil from wells both online and offshore and connect to the larger trunk lines.

Obama thinks most Americans are so dumb that a photo and a short televised news report in front of pipeline sections will convince them he and his administration have been leading the effort to ensure domestic oil is available.

He is wrong. He is the stupid one.

By the end of the week, Rasmussen Reports released the results of a poll in which “Voters continue to believe the United States is not doing enough to develop its gas and oil resources, and strongly support offshore drilling. Most also still think going ahead with offshore drilling is likely to bring down the price of gasoline at the pump.” Of those polled, 62% favored offshore drilling.

The Governor of Oklahoma, Mary Fallin, when asked about Obama’s speech, said, “President Obama’s rhetoric is matched with a policy record that is aggressively anti-energy and continues to stifle economic growth in Oklahoma and throughout the nation.” Gov. Fallin said Obama should “reexamine his polices, not deliver more speeches taking credit for the accomplishments of others.”

That, however, is standard operating procedure for Obama. Either he blames anything and everything that goes wrong on someone or something else, or he takes credit where none is due. What is one to expect from a President he was given a Nobel Peace Prize within months of taking office in order to pump up a virtually invisible resume? No doubt the Nobel committee will be giving out free pizzas to all who attend future ceremonies.

In January, when Obama announced the delay of permits to the Keystone XL pipeline from Canada—a major trading partner and ally—Tom Pyle, the president of the Institute on Energy Research, called the decision “unconscionable.”

“With more than 1.7 trillion barrels of recoverable oil under our soil,” said Pyle, “we have enough oil to fuel our present needs for the next 250 years.” The addition of the Canadian oil will further ensure future energy requirements will be met.

It isn’t just the President who lies. Members of his administration do so all the time. During a White House press conference in March Interior Secretary Ken Salazar said that oil and gas production had increased on federal lands.

It has declined and increases in oil production have come primarily from privately owned land. On federally controlled lands, oil production since 2010 has dropped by eleven percent and gas by six percent.

If Japan buys less Iranian oil and more oil from some place else, another country will buy more Iranian oil and less from that other place. There very little effect on anything. Possibly the only loss is presumably the oil went where it did to begin with because it minimized transportation costs.

On the other hand exempting 11 major countries from penalties for dealing with Iran’s central bank means that any international transactions will be taken care of through those countries (in addition to China or Russia that would ignore the sanctions anyway). From Foreign Policy:

The State Department announced on Tuesday that it would exempt 10 European countries and Japan from penalties for doing business with Iran’s central bank, because those countries are making significant progress toward weaning themselves off of Iranian oil.

“I am pleased to announce that an initial group of eleven countries has significantly reduced their volume of crude oil purchases from Iran — Belgium, the Czech Republic, France, Germany, Greece, Italy, Japan, the Netherlands, Poland, Spain, and the United Kingdom. As a result, I will report to the Congress that sanctions pursuant to Section 1245 of the National Defense Authorization Act for 2012 (NDAA) will not apply to the financial institutions based in these countries, for a renewable period of 180 days,” Secretary of State Hillary Clinton said in a Tuesday statement. “The actions taken by these countries were not easy. They had to rethink their energy needs at a critical time for the world economy and quickly begin to find alternatives to Iranian oil, which many had been reliant on for their energy needs.”

The European Union banned all new purchases of Iranian crude oil as of Jan. 23 and will phase out existing contracts by July 1, Clinton said. Japan was able to reduce its dependence on Iranian oil even despite energy shortages created by the Fukushima nuclear disaster.

“We commend these countries for their actions and urge other nations that import oil from Iran to follow their example,” said Clinton. “Diplomacy coupled with strong pressure can achieve the long-term solutions we seek and we will continue to work with our international partners to increase the pressure on Iran to meet its international obligations.” . . .

President Obama always says there’s “no silver bullet” for gas prices, but he’s going to go pan for some in Oklahoma anyway just in case.

According to a fairly recent Pew Research poll, 66% of Americans who have heard about the Keystone XL pipeline say the project should be approved (some of those who disagree are pictured above), and the national average of a gallon of gas is pushing $4.

These factors mean that the president who as a candidate vowed to rid America of the tyranny of oil will be morphing into JR Ewing right before our eyes for the foreseeable future. The transformation picks up speed on Thursday:

President Obama will visit Cushing, Oklahoma, on Thursday, where he will visit the southern part of the Keystone Pipeline project – the portion that is proceeding with Obama administration support, as opposed to the northern section that the president blocked out of environmental concerns.

The Obama administration has been playing defense on energy issues, with skyrocketing gas prices threatening to hurt the fragile economic recovery and undermine consumer confidence. Accused by Republicans of not doing enough to encourage domestic oil production, the president has given three speeches on energy in the last three weeks. The president has heralded how domestic oil production has increased, and domestic consumption has decreased, during his administration, but energy experts say his policies have little to do with those developments.
[...]
White House officials hope this trip to Cushing, Oklahoma, will erase political damage done to the president by his opposition to the larger Keystone project by heralding his support for part of it.

The White House is bracing for the arrival of a strongly worded letter from Daryl Hannah.

Republicans were quick to respond:

“Interesting choice for a President who just successfully lobbied Senate Democrats to defeat the Keystone XL pipeline jobs bill. Will he be touting the fact that his plan to raise taxes on energy manufacturers will increase the price of gas, disadvantage the smaller independent companies, and send American jobs overseas?” a spokesman for Republican Senate Minority Leader Mitch McConnell, Don Stewart, said by email.

According to the White House, the Keystone delay is the fault of the GOP, something we may hear more of on Thursday (darn those anti-oil Republicans).

Obama’s “bringing down gas prices one presidential address at a time” strategy is expected to prompt the Department of Energy to sponsor another contest — one that would award top dollar to the first auto company that can invent a car that runs on speeches. Algae would also be acceptable, of course.

For those of you keeping score at home, Obama’s four state, two-day swing this week will burn roughly 5,000 gallons of fuel, not including C-17 support aircraft.

When President Obama took office, regular gasoline cost $1.85 a gallon. Now it’s hit $4.00 per gallon in many cities, and some analysts predict it could reach $5.00 or more this summer. Filling your tank could soon slam you for $75-$90.

Winter was warm. Our economy remains weak. People are driving less, in cars that get better mileage, even with mandatory 10% low-mileage ethanol. Gasoline is plentiful.

Misinformed politicians and pundits say prices should be falling. Our pain at the pump is due to greedy speculators, they claim, and greedier oil companies that are exporting oil and refined products.

Their explanation is superficially plausible – but wrong.

Energy Information Administration (EIA) data show that 76% of what we pay for gasoline is determined by world crude oil prices; 12% is federal and state taxes; 6% is refining; and 6% is marketing and distribution. The price that refiners pay for crude is set by global markets.

World prices are driven by supply and demand, and unstable global politics. That means today’s prices are significantly affected by expectations and fears about tomorrow.

A major factor is Asia’s growing appetite for oil – coupled with America’s refusal to produce more of its own petroleum. Prices are also whipsawed by uncertainty over potential supply disruptions, due to drilling accidents and warfare in Nigeria; disputes over Syria, Yemen and Israeli-Palestinian territories; erroneous reports of a pipeline explosion in Saudi Arabia; concern about attacks on Middle East oil pipelines and processing centers; and new Western sanctions on Iran over its nuclear program and the mullahs’ threats to close the Straits of Hormuz.

Moreover, oil is priced in US dollars, and the Federal Reserve’s easy money, low interest policies – combined with massive US indebtedness – have weakened the dollar’s value. It now costs refineries more dollars to buy a barrel of crude than it did three years ago.

Amid this uncertainty and unrest, speculators try to forecast future prices and price shocks, pay less today for crude oil that could cost more four weeks hence, and get the best possible price for clients who need reliable supplies. When they’re wrong, speculators end up buying high, selling low and losing money.

Oil speculators play a vital role, just as they do in corn and other commodities futures markets.

Basic chemistry dictates that a barrel of crude (42 gallons) cannot be converted entirely into gasoline. Depending on the type of crude, some 140 refineries across the USA transform each barrel into gasoline, diesel, jet fuel, heating oil, asphalt, waxes, petrochemicals and other essential products.

This manufacturing process leaves them with excess diesel fuel, because American vehicles consume less diesel than refineries produce – due to air pollution laws that limit diesel use. US refineries export that excess diesel to Europe, which uses more diesel than gasoline, and Europeans ship their surplus gasoline to mostly East Coast consumers. US refineries also sell excess inventories of other manufactured products to overseas markets, but diesel is by far their principal export.

America exports $180 billion in finished products every month – $2.2 trillion annually in corn, wheat, cars, tractors, appliances, airplanes, pharmaceuticals and much more.

Last year, for the first time since 1949, America was a net exporter of fuel and other petroleum products.

The Republicans have yet to choose a nominee, but we already know that Obama’s other opponent will be oil companies.

As we’re often told, President Obama doesn’t have a “silver bullet” to control gas prices. There hasn’t been a presidential gas-price reducing silver bullet since George W. Bush left office. He must have taken it with him back to Crawford. But Obama does have some ideas on how to bring the price of gas down, and of them is to end government subsidies to Big Oil:

In his weekly address to the nation Saturday, Obama sought to redirect consumers’ anger with his administration to anger with Congress for allowing companies like Exxon Mobil and Chevron to receive $4 billion from the federal government every year.

“Your member of Congress should be fighting for you. Not for big financial firms. Not for big oil companies,” Obama claimed.

“In the next few weeks, I expect Congress to vote on ending these subsidies,” he continued. “And when they do, we’re going to put every single Member of Congress on record: They can either stand up for oil companies, or they can stand up for the American people.”

I’m not advised by brilliant economists like the president is, so maybe I’m unwisely straying above my pay grade here, but if we eliminated these tax breaks to oil companies right now, might that make the price at the pump go up? “No” say Democrats, arguing that Big Oil already reaps huge profits. In that case the government should also end subsidies to Goldman Sachs and Google. If eliminating government subsidies for oil companies might make gas less expensive, why wouldn’t eliminating government subsidies for General Electric make, say, refrigerators cheaper? Wait, the latter subsidies are for “green” projects so they’re okay.

According to the CBO (PDF), there were $2.5 billion in government subsidies — that is to say “tax breaks” — for all fossil fuels in 2011. That’s roughly the same amount of money that could go down the drain on “clean energy loans.” Maybe that’s what is meant by a “balanced approach.”

My piece at Fox News discusses the high energy prices starts this way:

On Friday, President Obama announced that he was “making sure that my Attorney General is paying attention to potential speculation in the oil markets.” 23 Senators and 45 congressmen, all Democrats except for one independent, are calling for urgent action against the “speculators” they hold responsible.
These members of congress want the Commodity Futures Trading Commission to use its new regulatory powers under a law Obama signed two years ago to limit the amount of oil that speculators can buy.
This isn’t a new concern.
During the 2008 presidential campaign, Obama campaigned against “the special interest politics that put the interests of Big Oil and speculators ahead of the interests of working people,” and surely implied that an Obama administration would end these high prices by clamping down on speculation.
Possibly that is why a new Washington Post/ABC News survey released on Monday shows that soaring gas prices have taken a toll on Obama, with 50 percent of American’s strongly disapproving of Obama’s economic performance — the highest in the poll’s history. . . .

Interestingly, Energy Secretary Steven Chu walks away from his past support for higher energy prices, though is it a political conversion? Or is he just qualifying it so much that he is only walking away from it temporarily. It seems pretty clear that it is the later.

“Let me first respond to your first statement, Senator,” Chu said. “Since I walked in the door as Secretary of Energy, I have been doing everything in my powers to do what we can to reduce — as we see these gas prices spike — to reduce these prices. And the administration, the president, and I personally, yes we do acknowledge and feel the pain of not only American consumers, but American businesses when they see these prices increase.”

“Are you saying that you no longer share the view that we need to figure out how to boost gasoline prices in America?” Lee asked

“I no longer share that view,” Chu said.

“You did then, but don’t now?” asked Lee.

“When I became Secretary of Energy, I represented the U.S. government and I think that right now, in this economic very slow but — you know, return that we need to have these prices … will effect the comeback of our economy and we’re very worried about that. So of course we don’t want the price of gasoline to go up, we want it to go down.” . . .

My new piece with Grover Norquist in the Philadelphia Inquirer starts this way:

With regular gas prices topping $3.70 last weekend, angry politicians are blaming the higher prices on speculators and greedy oil companies. On Monday, The Hill newspaper reported that 23 senators and 45 congressmen, all Democrats except for one independent, called for urgent action against the “speculators” they hold responsible. Sen. Bob Casey of Pennsylvania demanded, “Consumers shouldn’t be forced to pay higher prices at the pump because of speculative bets on Wall Street.”

These politicians want the Commodity Futures Trading Commission to use its new regulatory powers under a law signed by President Obama two years ago to limit the amount of oil that speculators can buy.

This isn’t a new concern. Last April, when regular gas prices hit $4 a gallon, the president launched a Department of Justice investigation into what he called “manipulation in the oil markets that might affect gas prices.”

Unfortunately, neither the Democrats in Congress nor Obama appear to have a clue how markets work. The policy reminds one of Richard Nixon’s attacks on speculators during the 1970s. . . .