The Weekly Carboholic: anti-oil speculator resolution useless political theater

Posted on July 2, 2008

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carboholic

On June 26, the United States House of Representatives passed HR 6377, a resolution that requires the Commodity Futures Trading Commission (CFTC) to use all of its authority, including emergency powers if appropriate, to manage energy commodities. The resolution passed the House 402-19.

This resolution is political theater. Not only are resolutions in general effectively meaningless, this resolution tells the CFTC to use its regulatory powers to stop illegal activities it’s already supposed to be blocking (“excessive speculation, price distortion, sudden or unreasonable fluctuations or unwarranted changes in prices, or other unlawful activity…”). In addition, if the House wanted to implement real reform, they could have pulled HR 6273, the “Commodity Futures Restoration Act”, out of the Agriculture Committee and voted on it instead. Instead, the House members got exactly what they wanted – free press from any number of national and international media outlets that showed their districts’ voters that they were “doing something” about those evil commodity speculators driving up oil prices – during an election year, and right before the July 4 recess.

Unfortunately, the media bought it and failed to call the House on their manipulation of the news.

What’s worse, though, is that there’s precious little evidence that oil prices have anything to do with commodity speculators. Paul Krugman, economist and commentator for the New York Times, wrote last week that Congress has allowed itself to be deceived (or worse, has colluded in the deception of the American people) by so-called experts who are telling it what it wants to hear – that high oil prices could be cut back to $2 per gallon if only speculators betting on the price of oil six months from now were stopped. Robert J. Samuelson’s commentary on the same topic put it more succinctly: “Leading politicians either don’t understand what’s happening [with high oil prices] or don’t want to acknowledge their own complicity.”

Krugman and Samuelson seem to have different political approaches to economics – Krugman representing the New Deal liberals and Samuelson the traditional libertarians – but they have both hit on the same basic facts:

  1. Speculators aren’t the problem. Buying and selling commodity futures is a zero-sum business, with one speculator selling futures at a price that other speculators are buying at.
  2. Speculators aren’t hoarding oil and driving up the prices that way, because they don’t actually own any oil.
  3. The prices of other commodities are mostly up too, and those commodities are up because of good, old fashioned supply and demand. The economies of China, India, Brazil, et al are growing in the double digits year over year, percentage wise, and they’re using massive amounts of oil, copper, aluminum, steel, coal, etc.
  4. Iron ore, a commodity that isn’t traded and is thus immune to any supposed manipulation by commodity speculators, yet prices per ton of ore are up 80-100% over last year’s prices, and all based on the relative scarcity of iron due to insufficient supplies.

The solutions that Krugman and Samuelson propose are different – Samuelson wants Congress to permit more drilling in ANWR and on the continental shelf in order to produce more domestic oil while Krugman wants Congress to develop an energy policy strong on mass transit, alternative energy, and conservation. But they both agree that Congress, far from being our savior from high oil prices, is at least part of the cause.

What was the vote on that resolution, again?

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Oil closed today at a record $141 per barrel on the New York Mercantile Exchange (NYMEX). There are a number of economists who believe that it will close above $200 a barrel this year or next. If that occurs, there will be precious little that any of us can do about it – new supplies of oil are getting rarer all the time and even if Congress voted tomorrow to expand oil shale production, start construction on coal-to-liquid conversion plants, drill in the Arctic National Wildlife Refuge, and turn the entire outer continental shelf in to one massive drilling platform, none of that production would be online in less than 3-5 years, and most of it wouldn’t be available for 10 years. Since we can’t supply enough oil to drop prices via the supply-side, the only thing we could do to mitigate the economic damage of $7.00 per gallon gasoline prices is to cut down our demand for fuel.

The LATimes last week ran an in-depth story entitled “Envisioning a world of $200-a-barrel oil”. In it, Martin Zimmerman lays out the effects that $200 per barrel oil would have on our national economy, from small changes like increased cosmetics prices to huge changes like a near complete collapse in consumer purchasing and the associated collapse in the U.S. (and likely global) economy. Some of the other likely changes (some of which are already occurring at $4.00 per gallon gasoline) would be as follows:

  • an increase in gasoline theft from automobiles
  • falling home prices in suburbs with long commutes
  • mass transit systems that couldn’t handle the additional riders
  • more expensive airplane tickets on fewer operational airlines with fewer flights per day
  • more expensive goods from overseas due to rising oceanic container shipping fuel costs and a transfer of manufacturing back from Asia to the Americas
  • more expensive everything as truck and rail freight costs rise with the price of diesel
  • a long-term bear market as high oil prices depress the economy and erase many workers’ retirement plans

The U.S. economy, and indeed much of the world economy, is based on cheap oil. When oil isn’t cheap any more, it will force a massive evolution of the American way of life. Consumer spending supposedly accounts for about 70% of the U.S. economy, so when all the money that used to go toward restaurants, new computers, CDs, and vacations suddenly disappears into the gas tank, it won’t do the U.S. economy any good at all.

Prepare to adapt, or prepare to perish. If, or rather when, oil hits $200 per barrel, there will be no other options.

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Air travel is said to account for about 5% of all global carbon dioxide (CO2) emissions. Turbofan aircraft engine manufacturer Pratt and Whitney has developed a new geared turbofan engine that will cut CO2 emissions by 12-15% when the engine is first rolled out sometime in the next five years. This is a significant improvement, but whether it will be enough to save an air travel industry facing rising jet fuel costs is yet to be determined.

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You read the Carboholic on an electronic device that is connected to the Internet somehow, either by a mobile device, a laptop with WiFi, or an Ethernet connection, but ultimately you’re reading something that’s stored on a computer hard drive somewhere in a data center that could be nearly anywhere in the world. That data center requires massive amounts of electricity, not only to drive the thousands of individual servers that host sites like this one, but also to air condition the building so that the servers don’t overheat as a result of their own power consumption. Some large data centers can consume the entire output of a small to moderate sized coal power plant (1-20 megawatts). The San Jose Mercury News last week reported that new research by Sun Microsystems indicates that the amount of electricity required, and the economic costs of the electricity, to run data centers globally could increase by 13x from 2005 to 2012.

There’s a reason that hardware development companies like IBM, AMD, Sun, Intel, and even software makers like Microsoft are working to reduce the power consumption of their products – with the cost of electricity alone for data centers rising from $18.5 billion in 2005 to $250 billion by 2012, reducing power consumption saves the customer twice, one with the power consumed by the hardware and again with the reduction of necessary air conditioning.

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Sea level rise is expected to eat into coastlines around the globe, and the Wall Street Journal reports that some insurers are dramatically increasing their insurance rates for coastal homes, or refusing to insure them at all. The rationale used by the insurers is that their computerized catastrophe (cat) models, which include hurricane losses as well as global heating-driven sea level rise, predict that the losses to coastal properties will increase in both frequency and severity, exposing the insurance companies to more insurance liability.

According to the article, while insurers have the support of large reinsurance companies (companies that insure insurance companies) in their use of the new cat models, state regulators are starting to push back on the insurance providers. This puts the companies in a tough spot – their reinsurers require that they use certain cat models that demand higher insurance rates for property owners, but state regulators won’t permit the insurers to raise their rates enough to cover the reinsurance rates. This leaves insurers with two choices – lose money, or drop the policies.

Ultimately, though, decisions like this will be vital. People move to hurricane and flood-prone regions because they want to be close to the coast or along a river. But if insurance rates are too high, or if insurance is simply unavailable, then coastlines will either remain undeveloped or be gradually abandoned in favor of cheaper inland areas where people can get insurance. And while this process will certainly be painful for coastal communities and states with burgeoning coastal cities, it will ultimately ease the transition should the significant sea level rise predicted by the IPCC (~ 3 feet) and more recent scientific studies (up to 33 feet) become reality.

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According to both the Telegraph and the Economist, the Bureau of Land Management (BLM) has stopped all new solar power plants on federal land until the results of a new 22 month environmental impact study are released.

According to the Telegraph story, the BLM believes that the thousands of acres required for every new development represent a “potentially significant” environmental impact. In addition, the Telegraph pointed out that this moratorium applies only to new solar programs, not to the 100 or so programs that the BLM is already working through.

The Economist story added some valuable information, such as the fact that this delay, combined with Congress’ delay in extending federal tax credits for solar developments past the end of this year, could kill some prospective solar-thermal developments. In addition, while the American Solar Energy Society and the Solar Energy Industries Association are against the BLM study, there are environmentalist groups that support the moratorium and delay, such as the Wilderness Society.

If humanity is going to decarbonize civilization, many unfortunate tradeoffs will be necessary. In some places, alternative energy development will have to take priority over other traditional environmental concerns, such as maintaining unspoiled wilderness or the continued existence of critical habitat for endangered species. The question will not be whether these tradeoffs will occur, but rather how activists, governments, corporations, and the general population choose to react to them when the inevitably happen. A 22-month study, fast-tracked as the Telegraph story claimed, may give the disparate groups involved time to understand just what the tradeoffs in large-scale solar thermal power generation will be for the desert southwest.

Image Credits:
House Chambers during a State of the Union Address
LA Times
The Planet (see others here)

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