10.01.2008 0

Demagoguery over the Price of Oil

  • On: 10/14/2008 10:59:24
  • In: Energy Crisis, Global Warming Fraud, and the Environment
  • The Greens—and their defenders in Big Government—really won’t give up. As the prices of commodities have been soaring—hurting all Americans as they shop at the grocery store and go to fill up the gas tank—they have sought to blame everyone but themselves for the price spikes.

    In truth, they are becoming increasingly desperate to save face, as public attitudes have significantly shifted in particular on energy issues—and out of favor is Big Government’s restrictions on oil drilling. Rasmussen’s recent poll finds that 67 percent of Americans are in favor of increased off-shore oil drilling, including 85 percent of Republicans, 57 percent of Democrats, and 60 percent of independents.

    Currently, some 60 percent of Federal land, 85 percent of the outer-continental shelf, and most of the east and west coasts are sealed off from oil exploration.

    Sensing a public relations disaster—despite investing billions of dollars into advertising geared toward promoting cap-and-trade, alternative energy, and other global warming hysteria—the Greens and their puppets in Congress have brought forth a full-court press this week to shift away the increasing blame that is rightly being directed at government.

    Their two most recent arguments—which surely you have not missed—are: 1) the oil companies are refusing to increase production on the land that they do have leased from the Federal government; and 2) commodities futures market speculators are manipulating the price of oil.

    Of course, like all of the other propaganda the Greens have foisted upon the American people, these claims are bogus. First, take Congressman Chris Van Hollen (D-MD), who on CNN’s “Late Edition with Wolf Blitzer” claimed:

    “[I]n fact there are 60 million acres of federal lands that are currently leased to the oil and gas companies that are sitting idle. They’re not drilling. They like the status quo. They like the way things are going.”

    Of course! That explains why Exxon is selling off its gas stations—it has simply become too “profitable.” In fact, the American oil giant is making far less on these stations because of the high prices:

    “Exxon Mobil Corp (XOM.N) said on Thursday it is getting out of the retail gas business in the United States as sky-high crude oil prices squeeze margins… In the current environment, the company’s profits from its retail unit are ‘somewhere close to a rounding error,’ said Mark Gilman, an analyst at the Benchmark Co.

    “‘The retail gasoline business is a highly volatile and typically low return kind of business and thus the decision,’ Gilman said.”

    In addition, to address Representative Van Hollen’s argument that the leased lands are “sitting idle”, the truth is that oil companies have been exploring the lands that are open and there’s only “very few cases” of commercially viable land available, according to Red Cavaney:

    “[T]he problem isn’t that oil companies ‘like the status quo.’ It’s that lands where drilling is currently allowed don’t offer enough oil or gas to make extraction efficient, according to Red Cavaney, president of the industry-representing American Petroleum Institute (API)… According to Cavaney, oil companies can’t just sit on them to maintain the status quo as Van Hollen claimed – they do eventually go back to the government if they aren’t used. The problem is there is no oil or gas on the land to be recovered.

    “‘We have to pay annual lease fees on those particular leases,” Cavaney explained. “And at the end of the lease term – five years, six years, whatever it may be – if we haven’t done anything on those leases, they go back to the government to be bid again. What’s going on is they – the first step in our industry is called exploration. In other words, the Creator didn’t put oil and gas on every plot of land, so we have to go and explore.’

    “‘There’s in very few cases where there is oil and gas in amounts that are commercially usable and those are the ones that you can develop,” Cavaney said. ‘The rest of them, why drill where you know there’s no oil or gas and let those things go back to the government?’ [emphasis added]”

    In other words, the oil companies are developing America’s production capabilities with the land that is available by law, and they’re reaching capacity. If Americans want to increase oil production significantly—and public opinions polls clearly indicate that—that means that the lands that the Federal government has prohibited from production need to be explored as well. And that means those bans need to be lifted.

    To make matters worse, there is the Greens’ baseless speculation that futures market speculators are somehow driving up the price of oil, as Senator Dick Durbin (D-IL) has proclaimed, “Increasing evidence shows that the run-up in crude oil prices and gasoline is being driven by larger trader banks, pension and hedge funds. Speculation may have as much, if not more, to do with high gas prices than any Saudi Sheik.”

    Well, at least the Greens have figured out that OPEC only controls about one-third of the world’s oil production, and that they do not make for the same boogeyman they did in the 1970’s. But that being stated, Mr. Durbin is simply demagoguing the issue by putting up the Left’s next big boogeymen—investors.

    Again, they’ve got it wrong. And as usual, now the Left wants to heavily regulate commodities futures markets, which a coalition of trade groups urgently wrote a letter to Congress warning that these will predictably lead to further increases in commodities prices:

    “[L]iquid and efficient energy and commodities markets are essential to the economy, and speculators play a crucial role in these markets. As discussed in more detail below, speculators take the risks hedgers want to avoid. Without speculation, consumers would likely pay more for energy and commodities.

    “Second, some of the drastic proposals to revamp futures market regulation now being discussed would be counter-productive. Those proposals range from an outright ban on speculation in commodities and energy futures markets to higher margin requirements to revocation of important international agreements on cooperation with foreign regulators. They would drive needed speculative capital from our markets to other trading venues that are less accessible to U.S. regulators or generally less transparent. These proposals do not offer realistic responses to markets that are global and linked more and more everyday by nano-second trading technology.

    “Commodities and energy derivatives markets (including both over-the-counter and exchange traded) provide a valuable means by which businesses and individuals can hedge the risk of adverse movements in commodity prices. America’s derivatives exchanges are the largest in the world, and, in recent years, both on and off exchange derivative activity in the U.S. has seen tremendous growth.

    “These markets are composed of both ‘hedgers,’ who are persons seeking to hedge some sort of financial or other risk, and ‘speculators,’ who are persons willing to take on that risk in the hope of making a profit. Some hedgers seek to mitigate the risk of price increases and others seek protection from prices falling. Thus hedgers can be found on both sides of the market. Similarly, speculators are not uniformly buyers or sellers in the market, but can also be found on both sides of the market. Speculators perform a very important market function in providing liquidity to the market, making it possible for hedgers to efficiently enter and exit the market and reducing the bid-offer spreads and the transaction costs of all market participants. Both hedgers and speculators are needed for a market to serve its price-discovery function.”

    In other words, the futures markets are essential to keeping lots of money invested in commodities markets thus helping to keep prices stable, and allow businesses—like airlines—to buy oil contracts months in advance at a particular price. This is a part of the normal functioning of the free market—and futures markets have been historically used for commodities markets precisely because of price stability issues. Take out this aspect of the market, and already volatile prices will become increasingly so. The letter goes on to warn of mistaking free market practices with price manipulation:

    “Unfortunately, some have confused speculation with manipulation or other abusive market practices. Blaming speculation or any specific trading practice for rising or falling commodity and energy prices without real evidence of wrongdoing is misguided. Those kinds of charges create the very real possibility that speculators will choose to abandon these markets and use their investment dollars elsewhere. Such an exodus threatens the healthy functioning of the markets and the economy.”


    Wonderful. There really is nothing Big Government can’t muck up. Fortunately, the letter also provides a hint at the other factor that has been driving up commodities prices—inflation:

    “In addition to allegations of excess speculation, some have focused on the role of institutional investors in commodity and energy prices. These include investors such as public and private pension funds, investment companies, and commodity index tracking funds. These investors allow average middle class Americans to hedge the risk of rising prices by giving them exposure to commodities, which serves as a hedge against inflation risk [emphasis added]. Because of the ability, for example, to protect persons such as retirees or prospective retirees from seeing their assets decline, these types of investments have increased in popularity in recent years.”

    In other words, when inflation is on the rise, commodities become a very attractive investment because that is when they really rise in value. Therefore, to bring the prices of commodities down, something governments around the world ought to be focused on is bringing inflation under control.

    It is time for Big Government take responsibility for America’s price problems, and to adjust accordingly. It should allow free markets to operate. It should increase energy production here domestically by lifting bans and restrictions on drilling, nuclear reprocessing, nuclear plant construction, and the building of new refineries. And finally, it should roll back inflation by strengthening the dollar.

    Instead of looking to assert blame and engage in demagoguery with dog-and-pony Congressional hearings and short-sighted, wrong-headed new regulations of free market practices, the Federal government just needs to do what is necessary to bring down prices that hurt all Americans.


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