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Skyrocketing Energy Prices

by: CarlLevin

Mon May 12, 2008 at 15:59:32 PM EDT


(Welcome, Senator! - promoted by PerfectStormer)

This afternoon, I’m speaking on the Senate floor about high energy prices. Unless something is done to make energy more affordable, the record-high prices will continue to reverberate throughout our economy, increasing the prices of transportation, food, manufacturing and everything in between. Skyrocketing energy prices are a threat to our economic and national security, and the time for action is long past.  

One of the major causes of our energy crisis is the failed policies of the current Administration. In January 2001, when President Bush took office, the price of oil was about $30 per barrel.  The average price for a gallon of gasoline was about $1.50.  Since President Bush took office, crude oil prices have nearly quadrupled, natural gas prices to heat our homes have almost doubled, gasoline prices have more than doubled, and diesel fuel prices have nearly tripled.

One key factor in price spikes of energy is rampant speculation in the energy markets. 
CarlLevin :: Skyrocketing Energy Prices
Traders are trading contracts for future delivery of oil in record amounts, creating a paper demand that is driving up prices and increasing price volatility solely to take a profit.  Overall, the amount of trading of futures and options in oil on the New York Mercantile Exchange (NYMEX) has risen six-fold in recent years, from 500,000 outstanding contracts in 2001, to about 3 million contracts now.  

Speculators in the oil market do not intend to use crude oil; instead they buy and sell contracts for crude oil just to make a profit from the changing prices. Many speculators simply buy and hold whole baskets of commodities including energy commodities, just like other speculators hold a variety of stocks in a mutual fund, in the expectation that prices will continue to rise.   The number of futures and options contracts held by speculators has gone from around 100,000 contracts in 2001, which was 20% of the total number of outstanding contracts, to 1.2 million contracts currently held by speculators, which represents almost 40% of the outstanding futures and options contracts in oil on NYMEX.

In January of this year, as oil hit $100 barrel, Mr. Tim Evans, oil analyst for Citigroup, wrote “the larger supply and demand fundamentals do not support a further rise and are, in fact, more consistent with lower price levels.”  The President and CEO of Marathon Oil recently said, “$100 oil isn’t justified by the physical demand in the market.  It has to be speculation on the futures market that is fueling this.”

My Senate Permanent Subcommittee on Investigations has conducted four separate investigations into how our energy markets can be made to work better.  Last December, we had a joint hearing with the Senate Energy Subcommittee on the role of speculation in rising energy prices.  As a result of these investigations and hearings, for several years I have been advocating a variety of measures to address rising energy costs and the rampant speculation and lack of regulation of energy markets which have led to sky high energy prices:

•    Put a cop back on the beat in the energy markets to ensure these markets are free from excessive speculation and manipulation;
•    Stop filling the Strategic Petroleum Reserve until prices are lower;
•    Develop alternatives to fossil fuels to lessen our dependence on oil; and
•    Impose a windfall profits tax on oil companies that have profited from the unjustified price increases.

Because the Administration has proved itself unable and unwilling to take the necessary steps to provide affordable energy supplies to the American people, it is up to the Congress to try to jumpstart a comprehensive solution to skyrocketing energy prices.

Click here to read the Senator's floor statement and to see the charts he referred to when he spoke.
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Excellent proposals Senator (4.00 / 1)
Surely even the Republicans realize we need to stop this madness!

Julie--ever hopeful

To prepare for when your life flashes before your eyes, make sure it's fun to watch.


Welcome Senator, thank you, but not to beat a dead horse... (4.00 / 1)
All of your points are fundamentally valid, logical and true to the points.  But we talking about a very pliable water balloon here.  As long as we import 60% of our main energy source, oil, this problem will never go away or mitigate.  

The entire mindset of the American public has to change.  Sure, we put a cop on the beat to keep gas prices 'low' but then we give the consumer the incentive to consume to what they can afford.  This offers no incentive to drive less, buy a more fuel efficient vehicle or change life style habits.  Legislative action is needed that fundamentally alters America's consumption of energy.  

I applaud your four main points but they still tinker around the edges.  The oil companies have the financial fire power to manipulate the public at will.  Once they feel sufficiently threatened, prices will fall in conjuction with the threat of the alternative.  We can't stop once that happens.  Targets must be set that mandate America can not import more than half of it's main energy, not just as an economic threat but as a national security threat.  The economic and political structure that currently allows the dominance by the oil and gas industry must be shattered.  The exploitation of these commodities especially during a time of great financial uncertainty is a disgraceful betrayal to the American public.  A tax increase has not passed through the American taxpayer by way of his income but a tax has attacked the American consumer by way of his energy usage. Worse yet, that transfer of wealth from the American consumer's income has passed directly to one tiny, small sector of the economy.  The oil and gas industry has profitted greatly from this gross manipulation of the people's government.  
The American people shall no longer ask, we will demand more fuel efficient vehicles, we will demand vehicles powered by sources other than gas refined from oil, we will demand fairness and cooperation.  We will not beg the oil companies to lower their prices, we will not beg OPEC, we will demand fundamental change that will reduce and eventually eliminate the consumption of fossil fuels.  


Will you be supportive of Governor Granholm's (4.00 / 5)
green technologies initiative, Senator Levin?

I personally am extremely interested in the development of wind technologies as I think this would:

A. Be good for the environment.
B. Produce a lot of jobs for both our State and our Nation as whole, in the production of the turbines themselves and the construction jobs that would be created for installation.

It also seems to me that there could be additional jobs created for the maintenance and upkeep for the turbines.


I have come to the conclusion that politics are too serious a matter to be left to the politicians. Charles De Gaulle (1890 - 1970)


Great idea, Lisa! (4.00 / 2)
Wind turbines are becoming more popular for individual household use. And other states (including fellow Midwesterner Illinois) offer rebates to homeowners who purchase wind turbines. It would great if Michigan could also do this, and even better if this could be enacted at the federal level.

[ Parent ]
Sorry, bad link (4.00 / 2)
This link should take you to the MLive story on wind turbines for individual household use.

[ Parent ]
Thanks liberalmomma. (4.00 / 2)
It just seems to me that wind technology is the way of the future, both environmentally and economically.

If we can decrease our dependence on foreign oil and fossil fuels, lower energy costs and create a ton of jobs all at the same time, why aren't we doing it?  

I have come to the conclusion that politics are too serious a matter to be left to the politicians. Charles De Gaulle (1890 - 1970)


[ Parent ]
Sorry Senator, but you forgot one major thing (4.00 / 1)
....CONSERVATION

Increased fuel efficiency standards must also be part of the package.

For one, we are using too much oil in inefficient gas guzzlers because GM, FORD, and Chrysler have been, and continue to be, taking the lazy route in innovation. They argue they can't be profitable with increased standards the Japanese reached years ago. They've forsaken the small car market for the higher margin and lower mpg SUV and truck market.

Switching to alternative fuels is only part of the solution. Biofuels threaten the food supply, hydrogen is a ways off, and  even then would we be able to produce enough hydrogen fuel at today's engine efficiencies?

A complete package, not a selective one that favors the Big Three's suicidal short term strategy, is needed.


Dingell's initiative (4.00 / 1)
While I can't see the 50-cent gas tax increase he proposed going anywhere, I really liked the part of Congressman Dingell's proposal that rolls back the mortgage interest deduction for homes over 3000 square feet.  We talk a lot here in Michigan about fuel economy, of course, but that only makes up a portion of energy use.  5000sf vinyl McHouses in former farmland subdivisions use up quite a bit too.  Let's stop subsidizing them by allowing tens of thousands to be written off in mortgage interest.  That'll encourage some conservation.  Not to mention, use less gas to drive within existing developed areas, not out to the sticks.

Did you exchange a walk-on part in the war for a lead role in a cage?
The PhiKapBlog


[ Parent ]
Thanks, Senator. (4.00 / 1)
NOW GET US OUT OF IRAQ!  Don't waste time waiting for another President!  Hundreds more of our troops will be dead by then!  GET THEM OUT NOW!

Back to reality (0.00 / 0)
I agree with some of that, but Senator, you're cherry-picking your Wall Street commentaries on speculation ...

Some things we know for sure ...
1) There is some speculation in commodities markets right now
2) There is an increasing demand for petroleum as the standards of living and development increase in highly populated Asian and South American countries
3) Several airlines have gone out of business due to increased fuel prices and other industries are lowering their expectations for earnings
4) The Republicans (and maybe some Democrats) badly want to go into Alaska and start drilling for oil
5) The planet cannot wait for us to decide whether or not we want to give up our addictions to fossil fuels

Let's step back and ask what would be very easy and smart to do .... ta da, let's eliminate any pork we're providing to the big oil companies ... the welfare checks from U.S. taxpayers that they receive in addition to their profits from operations.  Next, let's stop this stupid discussion from McCain and Clinton about eliminating the gas tax for the summer because it is those funds that will be used to build high-speed rail and other public transit systems that will eventually decrease our impact on the environment and demand on foreign oil. If you do the politically convenient thing to save Americans about $28, you hurt them in the long run by delaying progress on mass transit projects in our highly populated mega regions around the USA.  Finally, let's cut off a work day ... one less commuter day.  How about a Monday through Thursday work week for the summer?  Also, let's motivate working folks to move back into the cities so that they can walk, bicycle, or ride public transit to work instead of driving a car or truck by themselves.  Finally, let's come up with new fuels and new cars.  I'm going to go take a look at the Tesla company's vehicles tonight in my neighborhood ... http://sfgreenmay.eventbrite.com/  that's the future, and I hope GM gets on the wagon before it becomes extinct with the Dinosaurs.  


Thank you, Senator Levin (0.00 / 0)
One of the fundamental problems you've mentioned is speculation in the markets driving up oil prices.  Unfortunately, it's a larger problem as you'll see by looking at other commodities.  In short, because of the burst housing bubble  and the subprime mortgage crisis, there's no place to put money.  Bear with me while I explain this logic for readers who aren't investors.

Investors can't put money in real estate, long a refuge for money, because they believe the bottom has not yet been reached. (George Soros said in a conference call several weeks ago that he believed another 5 million foreclosures could happen over the next two years -- depending on what if any action was taken by government.)  

Nor can investors put money in any corporate stocks that rely on American domestic consumption, as the same consumers who'd buoy those stocks are now struggling to keep a roof over their head (not to mention struggling to put gas in the tank).

But everybody now expects the price of oil to go up, hence what is now perceived as a safer haven for money.  

What's likely to curb speculation is modification to margins required for futures trading; higher margins would decrease speculation, although it won't stop it.  

For this reason I firmly support Senator Dorgan's proposal to increase margins on futures trading, along with the other efforts to halt purchases for the strategic reserve, along with a windfall tax on petroleum producers.  I also believe that highly targeted tax incentives to encourage consumers to migrate to green products along with tax incentives to firms for R&D on alternative energy products would also be appropriate.

But the other neglected component in this picture that is entwined with the speculation in oil is the crisis in the financial industry in the credit market.  Until we take effort to ease suffering of homeowners at risk, they are going to be forced to juggle between making house payments and putting gas in the tank to get to work -- and investors will continue to be reluctant to invest money in real estate rather than commodities.  Messy stuff, but the impact is huge and stagflationary until we find a way to draw the line on the risks to homeowners and investors.  Further, something must be done about CDO's and similar instruments, to improve transparency since much of the market's risk ended up bundled in such instruments, else investors will continue to be jittery and choose to invest in what they believe are surer things like our consumption of oil.

Thanks again, Senator.  And welcome to the blogosphere!


Thank you, Senator, but... (0.00 / 0)
I have three points/questions in rebuttal:

1) Who gets to define those terms?  What exactly is "excessive" or "unjustified"?

2) Just because an alternative is offered, doesn't mean that there is a market for it.  For example, there is recent large push for E85 to consider.  Notwithstanding all the third world problems this causes (Mexicans not being able to afford staples such as tortillas, the Amazon being cut down to plant corn, etc.) nor all the domestic problems (higher prices for meat staples, higher milk prices, etc.), E85 may be a viable alternative, excepting that it costs more per gallon than gasoline, and there isn't a distribution network for it, and therefore, nobody is buying it.  Simple economics 101 stuff.

3) I have a hard time accepting "windfall" profits tax on any private company when the US and State governments take more money per gallon of gas than Exxon does.  Why is it that our elected representatives are quick to punish private enterprise for alleged transgressions, but simply refuse to police their own overregulation and taxation?  

Thank you for your input, Senator.


Additional questions Senator (4.00 / 1)
First, thank you for your thoughts on the rapidly rising oil prices.  I too, agree that this is a problem to deal with in coming years.  However, I am skeptical that refraining from filling the SPR will make any meaningful difference in the world price of oil.  For example, the US uses about 20 million barrels of oil per day, of which we import 14 million and produce the remaining 6 ourselves.  The SPR currently holds approximately 700 million barrels of oil, which is about 50 days' worth of imported oil.  Can you estimate how much you would expect oil prices to decline if we stopped adding approximately 70,000 barrels per day to the SPR, as we are currently doing?  By my math, the 70,000 per day that we put into the SPR equates to about one half of one percent of our daily imported amount of crude.  Based on $125 oil, we would see a price reduction of about $0.63, all else equal.  Given the intent of the SPR to serve as a buffer against short-term supply disruptions, is it worth $0.63 a barrel to put the economy at a longer-term risk?

Furthermore, the price of oil two years ago was $72, which means we have witnessed a 73% increase in price to $125 over that time.  However, using Euros, the price of oil has gone from EUR56.30 to EUR81.18, a 44% increase.  If we look back 5 years, the price in dollars has gone from $49 to $125 (a 155% increase!) in dollars, but only a 108% increase from EUR39 to EUR81.18 in that same time.  Is it not quite likely, Senator, that a significant part of the runup in crude oil prices is as a direct result of the weakening dollar?  While even a 100% increase in the price of crude over 5 years is not much of an "improvement", per se, we cannot disregard the effects of China/India demand and a weak currency.

Regarding a windfall profits tax, we have tried this idea before, and it quite clearly created disincentives for oil companies to not produce as much oil.  You see, Senator, what most people do not realize is that major oil companies such as Exxon and Chevron are limited in how much oil they can produce themselves (we have not built a new oil refinery in this country since 1976, we've only expanded capacity on exisiting infrastructure and this does not keep up with increased demand), and they purchase the difference on the world market in order to fulfill demand.  Therefore, if a windfall profits tax were imposed, wouldn't the cagey oil CEOs simply decide not to produce as much oil and then purchase more (foreign oil) to make up the difference?  After all, why go through all the costs of producing a barrel of oil (i.e., finding it, getting it out of the ground, refining it, shipping it, storing it, etc.) if the government is just going to impose a higher tax on those revenues.  It's a safer bet to simply buy more of the oil you need from other countries and fill demand that way.  The result, of course is a lower global supply of oil.  Unless demand decreases at least as much as supply does, the result will actually be higher oil prices.  So I ask you, Senator: is the goal of a windfall profits tax to lower oil prices or to punish the oil companies?  What is the course of action when Exxon or Chevron decides to move their headquarters to a country with less stringent tax laws?  And what is to stop oil companies from passing that tax along to consumers?  

Senator, much of the problems of higher crude prices lie in the supply/demand dynamic that little of your proposal meaningfully addresses.  Granted the speculators in the futures market and have some impact, but I have yet to see any investor overcome the laws of Econ 101.  The goal, Senator, should be to fix the root of the problem by either addressing the supply or demand side of the equation.  Alternatives such as Nuclear Power are available, yet are saddled with an onerous regulatory procedure to even get started, much less approved.  We sit on large pockets of untapped reserves that could meaningfully reduce the amount of oil we need to import and add to the global supply.  Yet companies are not allowed to tap those reserves.  These are examples of things that will truly result in a fundamental shift in energy prices.  Of course, we must continue the investment into alternatives such as wind and solar, but we must be realistic that unless a dramatic technological breakthrough occurs, these will never be more than fringe participants to our energy use.

Finally, while I am no Bush apologist (although many who actually read this comment may disagree), can you describe specifically what of his administration's policies have failed since 2001 (aside from the SPR policies, which I have already shown to be essentially a non-issue)?  Many of the things that you and your colleagues have done in the Senate are significantly responsible for the rise in energy and gasoline prices.  I am specifically referring to the elimination of MTBE as an additive and the federal mandate of ethanol, the level of federal gas taxes imposed, as an earlier poster pointed out, the allowance for different states to have different blends of gasoline for different seasons, and the restrictions on building additional sources of refining in this country despite a population increase of 30% since 1980.  All of these are factors, Senator.

I know I said 'Finally,' in the prior paragraph, but if anyone is still reading, I would make one final point:  We need to decide what our goal is.  Do we want to be substantiall off oil altogether or do we want cheap energy?  Because if the goal is to be off oil, then the only way to effectively do that quickly is get used to high energy prices (much higher than today) through taxes, cap and trade, overregulation, and conservation, etc.  Until that point, there is little economic incentive to develop an alternative.  Think back to when gas was $1 a gallon; were there this many resources being devoted to alternative fuels?  Hardly.  If we want cheap oil until an alternative comes along, (which could be years, depending on technology), then we need to strip out the regulations, allow for the development of oil and alternatives infrastructure, and become a player in the world energy market.  There are problems with both scenarios, but it's a situation we find ourselves in today.  We elect people like you, Senator to make the tough choices for us.  Are you willing to do so?


Tigerfan (0.00 / 0)
You are a delight.  We should hang out.

[ Parent ]

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