Category Archives: Oil

Drill Baby Drill?

(What ever happened to that war cry?)

Note: I am back blogging by popular demand…. Actually one person suggested I climb back on the horse. Seemed sufficient. A lot of stuff going on right now so there are plenty of subjects to write about. Here’s a start.

Oil prices hit $104 per barrel today up from the 80s a few weeks ago. Speculators are nervous about all the protests in the Middle East. A weakening US dollar isn’t helping either. A popular uprising that started in Egypt and Tunisia and has now spread to Libya, Yemen and a number of other ME countries has folks worried that oil supplies may be disrupted. Even Saudi Arabia, Bahrain and Algeria, all major oil producers, are potentially lined up for conflict with the same poisonous formula of a Sunni elite historically dominating a Shi’ite majority. A disruption of supply from Saudi Arabia could easily push oil prices beyond $200 per barrel. Naturally, Iran wants to stick its long nose into these conflicts and stir up as much trouble as possible.

Gas prices escalate quickly as oil futures rise and gas is now at around $3.60 nationally and creeping upward. Before the blow up in the ME, analysts were already predicting that gas prices would rise to $4.00 pg this year and hit $5.00 next year as the world-wide recovery gained momentum and demand grew, especially in China and India.

The rule of thumb on gas prices relative to oil prices is, if you divide the oil price per barrel by 30 you get an approximation of what the gas price will be. Steven Chu, Energy Secretary, once opined that he would like to see US gas prices as high as European gas prices. At the time gas in Europe cost $8.00 a gallon. At $250 pb ol’ Stevie would get his wish. His opinion on how US voters would feel about $8 gas has not been reported.

The Obama Administration has done everything they can to make conventional carbon based energy more expensive. They claim they want to “reduce dependence on foreign oil” which to them does not mean drilling for oil on US soil or waters, but expanding use of corn, wind, solar and electric cars. Speaking of the Chevy Volt…. GM quietly released sales figures on the Volt for February. They sold 281 vs. 321 in January. Not to worry, Nissan sold 87 of their electric “Leaf” models. In other words, this electric car thing is really catching on. Yeah, right.

If a $40,000 compact that gets 30 miles on a charge is not enough to move you to buy one to save the planet, how about this? The state of Washington is considering an extra tax on electric cars because (drum roll please)… the electric cars are not paying their “fair share” of the gasoline tax that maintains the highways. That should do the trick.

According to Nick Loris and John Ligon of the Heritage Foundation, Obama’s energy policy cannot possibly succeed. Wind and solar only generate 1% of the electrical need in the US and the ethanol initiatives costs taxpayers $4 billion to produce 2% of the gasoline requirements. Furthermore, turning corn into gas drives up food prices worldwide. Part of the unrest in the Middle East results from rising and painful food price increases. On top of all that, it may even be worse for the environment than regular gasoline.

Since Obama took over he and his Interior Secretary, Ken Salazar, have been doing everything possible to cut domestic energy supplies. (Stats courtesy of Heritage)

· Salazar cancelled 77 leases for drilling in Utah in his first month in office. It is estimated that 800 billion barrels of recoverable oil exists in this oil shale deposit called the Green River Basin. That’s three times greater than the reserves in Saudi Arabia.

· In April Obama exploited the blow out of the Deepwater Horizon well in the Gulf to shut down all drilling there. They modified a report by a commission of experts from the National Academy of Engineers to make it sound like the commission supported the Administration’s moratorium on drilling. The engineers did not support such a ban and were more than a little pissed that Czar Browner had rewritten their report.

· In June LA Federal Judge Martin Feldman overturned the Obama Admin moratorium on drilling. So the Interior Department simply cancelled that one and issued another essentially identical ban. An annoyed Judge Feldman in February ruled the Obama Administration in contempt of court for ignoring his ruling. Last week the Administration issued the first drilling permit for the Gulf since April. Experts predict that the offshore moratorium will reduce domestic output by 13% this year.

· Secretary Salazar also placed the eastern Gulf and the coasts of the Atlantic and Pacific, including Alaska, off limits for any drilling for oil. That puts an estimated 19 billion barrels out of reach.

· Of course, ANWAR can never be exploited under this Administration. That’s another 10 billion barrels.

· Interior also stopped the development of the Keystone XL pipeline. The first two phases of this 4 phase project are complete and pump oil from the rich Alberta oil sands to refineries in Cushing, OK. The next two phases were to pump 500,000 barrels per day to the refineries located on the Texas Gulf coast. Together these two pipelines would reduce dependence on Venezuelan and Middle Eastern oil by 40%. Gee, that seems way too sensible… get a reliable delivery of oil over land instead of by tanker and from a friendly neighbor?

I guess what surprises me is that as we rapidly approach $4/ gallon gas nationally (already achieved in some places), where’s the outcry? Where are the chants of “Drill Baby Drill”? Four dollar gas is supposed to be the tipping point but we seem on a path to blow right through that and hit $5.00 soon. At the moment no one seems to be raising much of a fuss, even as the cost of fuel will soon put a big damper on a slow economic recovery. It may also trigger a dreaded round of inflation. Obama does not seem worried. They are still talking about increasing taxes on oil companies. They must figure the voters don’t give a damn. Do you?

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Filed under Obama, Oil, Politics

Another Perfect Storm

The fall of 1991 saw the confluence of two massive storm systems off the NE coast: a classic nor’easter and Hurricane Grace arriving from the south. It created what meteorologists called “The Perfect Storm”. Sebastian Younger wrote a book in 1997 using that title and in 2000 a very successful movie of the same name was released. It seems to me that another “perfect storm” is developing on the economic front that could be every bit as devastating and affect more than the east coast of North America.

The first of these “storms” is the so-called “sub-prime” problem. Loose credit and easy mortgages fueled a massive expansion in the US housing market. Some Wall Street wizard figured out that these shaky mortgages could be repackaged as bonds and sold Worldwide to banks eager for high yield. Like the dot COM bubble of recent memory and the tulip mania of the 17th century, the sub prime market unraveled like a poorly knit sweater. Banks lost billions and the Fed responded by throwing money into the system and dropping interest rates as a recession loomed.

At the same time another storm arrived on the scene in the form of rapidly increasing oil prices. With expanding demand in the fast growing economies of China, India and other emerging economies and questionable supplies, prices have skyrocketed. Exacerbating this problem was the dramatic decline of the US dollar and the concurrent speculation in oil futures. (Countless billions have flowed into oil futures with supplies tight and political unrest in many oil-producing countries.)

The confluence of these two storms is likely to give us the ugly twins reminiscent of the Carter Administration: recession and inflation. Those of you old enough to remember those days of 12.4% inflation and 21.5% interest rates may also recall that in that miserable period we also had an oil shortage and gas lines around the block.

Let’s look at these two storms and see what is likely to evolve as a result of the actions of our politicians in this election year. As they say, “Opinions are like assholes: Everybody has one.” Here’s mine.

Storm #1, the sub-prime thing: With actions by the Fed to infuse massive amounts into the system and bailouts, including capital from offshore, this storm would blow itself out. Sure, there would be misery along the way and were it not for Storm #2, would not plague us overmuch.

Storm #2, the oil crisis: This is basically an issue of supply and demand with speculation adding fuel (no pun) to the fire. I agree with Charles Krauthammer that a psychological tipping point for Americans was reached when gasoline prices reached $4.00 per gallon. At the tipping point people start to change their behavior. The evidence coming in suggests people are driving less, using mass transport more and buying fuel-efficient cars. While this is a good trend, it’s not enough to seriously impact demand. Many people remain stuck with long commutes and no mass transit alternative and the Suburban or Escalade in the driveway is now worth less in trade-in than the payments due.

What do the political wizards have in mind in response to the crisis? And, it is a crisis. The cost of oil threatens airlines and trucking companies with ruin and the inflationary pressure will ripple through the economy forcing the Fed to increase interest rates just as we teeter on recession. Well, first you send George Bush off to Saudi Arabia hat in hand to beg them to pump more oil. They must have laughed in his face. They know the US sits on more oil than the Saudis could ever hope for. (They have about 55 billion barrels). The Democrats in Congress have just refused to allow anyone to drill for it for the last 30 years. ANWR is estimated at 10.4 billion barrels. The 85% of restricted continental shelf guess is 87 bb and the 97% of restricted Federal lands? Who knows? Although they do estimate the oil shales of Utah, Colorado and Wyoming hold about 1 trillion barrels of recoverable oil. This, of course, does not include the zillions of cubic feet of natural gas. We don’t have a supply problem. We have a political problem. The Democrats are afraid of the environmentalists and to be fair, some Republicans too. That means drilling is off the table for the near term. Since McCain is against drilling too, a Republican revolt remains unlikely.

Two years ago Congress decided they would get a “twofer” by mandating the use of ethanol. They could please the environmentalists and the farmers at the same time. The law of unintended consequences reared its ugly head and we saw the price of gas go up along with skyrocketing food prices worldwide.

Recently Congress decided that in the midst of the oil crisis it would be an excellent time to introduce a global warming bill called the Warner-Libermann cap and trade program. This 3.2 trillion dollar behemoth was estimated to raise gas prices to $6 to $8 per gallon and represent the largest tax increase in history. Fortunately, cooler heads prevailed and it got trashed… this time. Expect this turkey to be resurrected in the coming veto proof Democrat Congress. This sop to the global warming zealots comes despite recent reports that global temperatures have not increased since 1998, and 2007 recorded a 1.4-degree decline. Go figure.

In another typical move by Congress they herded the heads of the US oil companies to Washington and grilled them about their “excess profits”. For the record, oil companies average 8.3% profit compared with tobacco and beverage companies’ 19.1%, pharmaceutical and media at 18.4% and technology companies at maybe 40%. Of course, untroubled by facts, the Democrats immediately proposed a windfall tax on these profits. They are seemingly ignorant of history. This was tried during the aforementioned Carter Administration. The result? Domestic production fell some 5% and imports increased by 10%. Gas prices went up by 60% and overall inflation hit 12.4%. This too fell to the threat of a Bush veto, but next time around…?

Still more recently 97 Senators voted to stop putting oil in the Strategic Petroleum Reserve, so they know it’s a supply problem. Strangely, 71 voted shortly thereafter not to approve drilling in ANWR. (I still think some Republican Congressman should introduce a bill to rename the place the “National Artic Wasteland”. I like the acronym too… NAW.)

With Congress likely to seed the clouds of this two headed storm and make it worse, it seems the US is determined to select as the Captain of the ship someone as oblivious to the fury of Mother Nature as George Clooney’s character in the movie. Mr. Obama has promised to raise numerous taxes, the equivalent of steering the ship into the heart of the storm. Just increasing the capital gains and dividend taxes as he has promised will shed another 2000 points off the Dow according to John Rutledge, a wise economist. Americans–especially middle class Americans–have already seen their wealth greatly diminished by the deflation of the US dollar (down 33% against the Euro), the decline in the value of their IRAs and 401Ks due to the drop in the stock market of nearly 2000 points and the loss in equity in their homes and SUVs. Obama’s supposed concern for the middle class is a sad joke. His other promises add up to damaging domestic corporations and driving them off shore with a concurrent loss of jobs. So much for punishing the wealthy and helping the middle class.

OK. I’m pessimistic, but if I were holding a ticket for this cruise I would strap on a life jacket and cinch up my jock. It’s going to be a rough voyage.

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Filed under Economy, Oil