Thursday, June 19, 2008

Star Writer Proves He Knows Nothing About Market Economics

Yael T. Abouhalkah and far too many other free market clueless individuals in the media continue to misinterpret the facts on oil and gasoline prices.

Bad news for President Bush and others in the GOP who recklessly want to open the Arctic National Wildlife Refuge to drilling: That action would have essentially no effect on the price of oil.

Of course Mr. Abouhalkah found some government report to back up his asinine assertions.

Let's look at the facts or rather myths of the price of oil and gas.

Myth: Oil prices are based on supply and demand.

FACT: Oil prices are based on the speculative nature of the commodities market. Currently oil producing nations are meeting and exceeding actual demand. But traders have artificially caused the price of oil to rise because they believe, or would like us to believe they believe, that there are factors in play that will make the cost of oil a year from now more expensive. We'll take a look at those factors in a bit.

Myth: Oil demand is greater than our supply.

FACT: Oil demand currently is at 85 million barrels per day world wide. Oil production is over 85 million barrels per day. Demand, meet supply. How did we arrive at this... T. Boone Pickens doesn't want you to know this, but peak oil is a myth.

Myth: Oil prices will not lower if we open to drilling in Alaska or in off the coastal shelf areas.

FACT: Do you know what happens to a speculative market when news is announced that new sources of that commodity have been found and will be on their way to market? Prices fall.
"strong price increases for all commodities between 1965 and 1980 had led to additional supplies, which after 1980 began to flood the market and depress prices. This was particularly true for oil, which had risen in price from $1.70 per barrel in 1970 to close to $50 per barrel in 1980"

Even though we may not see new barrels from these spots for five years, the announcement means future supply will meet future demand and suddenly the speculators have less reward for their risk and they start selling. Thus, prices go down.

Myth: Gas is high because no new refineries have been built in 30 years.

FACT: Wrong again. While it is a cause for concern that no new refineries have been built in three decades, of greater concern is that nearly 130 have been closed since 1975. [2][3]

Before hurricane Rita hit nearly a year before Katrina, an oil refinery in its path was temporarily closed for precautionary measures. Rita ended up taking a turn and missed the refinery completely. That refinery remains closed today, more than three years later.

On top of that, the last two administrations have dismantled everything the Antitrust Department did when it broke up Standard Oil and the other major oil companies that dominated and manipulated the market in the 70's by allowing those same companies to merge back together (kind of reminds us of what they are doing in the telecom industry, which is doing a fine job of keeping broadband access limited and expensive). Guess what? Now that we are back to a handful of companies, magically the price of gas has ballooned again.
"A congressional investigation uncovered internal memos written by the major oil companies operating in the U.S. discussing their successful strategies to maximize profits by forcing independent refineries out of business, resulting in tighter refinery capacity. From 1995-2002, 97% of the more than 920,000 barrels of oil per day of capacity that have been shut down were owned and operated by smaller, independent refiners. " [1]

Myth: The price of gas is a reflection of the price of oil.

FACT: The only connection the price of gas has with the price of oil is the excuse it gives gas companies to restrict refining capacity in order to raise rates.

There are several sources of information on the web that can show you graphs of the price of gas and graphs of the price of oil at any given day. Do a little experiment, overlay the two. Notice how the price of gas does not directly correlate to the price of oil. That's called manipulation and price fixing not supply and demand.
"[T]he recent spikes are due primarily to a lack of processing capacity. And unfortunately, it won't be fixed soon... what we really need are more refineries" [4]

Myth: We could have cheap gas if the liberals would just let us drill.

FACT: While it is true that drilling in Alaska and off the coastal shelf would lower gases prices, it would not have near the impact that ending the war in Iraq and stopping the war mongering in regards to Iran and Syria would have.

Speculators aren't betting on increased demand, they are betting on a cutoff of supply by the US or Israel attacking Iran. We've already scene a major restriction in supply of oil as a result of the Iraq War and now that we want to give US oil companies exclusive no bid rights to that oil things are going to get worse not better.

Do you remember those past energy manipulations by speculators? You know, like the Enron traders who would have power plants temporarily shut down so that California consumers would have to buy power from plants further away at much higher prices netting them million. The manipulations of energy commodities that landed a lot of those traders in jail. Funny isn't it that those same Enron traders are trading oil futures now.

But don't take our word for it.
BEN STEIN: I was just in a room with a whole bunch of speculators who are former Enron traders that are now trading natural gas and oil. And they're laughing their heads off about how much they're manipulating the price of oil. They couldn't care less.[5]


Nick Sloan said...

Good post.

Another point not brought up nearly enough in terms of gas prices is the weak dollar. Various estimations indicated if the dollar was as strong as it was in 2002-03, gas would be roughly $2.70 a gallon today even with the speculators and world events.

"The D" said...

You should provide links to the web sites that you got your facts from. Otherwise it looks like your just making stuff up if you cant back it up with a good news source.

Ed said...

I definitely agree about the weak dollar. Stronger dollar = cheaper products from overseas, no matter if it's oil or ipods.

I personally have mixed feelings about the price of gas. While it certainly is hurting our wallets, it is forcing the industry to look into alternatives, of which my personal favorite is electric cars.

As of today, I think I can personally withstand another dollard to the current price per gallon (biting my tongue!) if for nothing else than to cattle-prod the auto industry a lttle faster.

And now for something completely different:
Nowhere does the author of this blog say he's a journalist, nor is he writing a History Text Book. He's BLOGGING. If James wants to Blog about little green aliens living in the closets of nuns and girl scouts, then so be it. So don't think that all bloggers are journalists-in-training (although most liberal bloggers and some right-wing nuts wrongly think they are)

James said...

d is right. I should have sourced the info. I got lazy because it's info I sourced before. I will spend some time tomorrow and track down all the links.

The Ben Stein quote is from a transcript of his appearence on the O'reailly Factor radio show yesterday.

James said...

There you go. All updated with source materials and even some direct quotes.

I even went through the rouble of finding new material as opposed to the old links from past posts. It was interesting to see how much easier it was to find this data today versus 6 months ago.

Old Prospector said...

Perhaps the speculators and oil companies have shot themselves in the foot, by causeing a real search for alternative energies.