White House Chronicle

News Analysis With a Sense of Humor

Oil Prices Could Affect Presidential Politics

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Like death and taxes, the price if oil is always with us. And like taxes, it may be President Obama’s worst nightmare at election time next year.

Among forecasters, there is a sharp division between those who see an inexorable rise in the price of oil and those who believe it will stabilize about where it is now.

The hawks see gasoline streaking ahead to $4-a-gallon this year and $5-a-gallon in 2012.

Others say demand will collapse and it won’t go that high. The federal Energy Information Administration is very conservative in its forecasts and it gives very high prices only a 10-percent chance of coming about.

Adding to the confusion is a nasty little spat between the International Energy Agency in Paris and the Organization of Petroleum Exporting Countries over price, inventory and what OPEC calls “technical factors,” such as pipelines down for repair or the loss of the Deepwater Horizon rig in the Gulf of Mexico last April 20.

The IEA is saying that OPEC is keeping its production quotas low to jack up the price—currently just under $90 a barrel and the highest grade Brent crude from the North Sea as high as $99 a barrel—and it is endangering the global recovery with its actions.

But OPEC Secretary General Abdalla Salem el-Badri has taken issue with the IEA for roiling the markets with weak data and speculation. “Supplying the world’s media with unrealistic assumptions and forecasts will serve only to confuse matters and create unnecessary fear in the markets,” he said.
OPEC, which drastically cut back its targets for production in 2008 with the collapse of the global economy, has, in fact, increased its production by 2.3 million barrels a day while formally not changing its declared targets. OPEC controls about 42 percent of the world’s oil production.

What is certain is that world is slurping up more oil than ever. The latest IEA prediction is that daily consumption is increasing and will reach 89.1 million barrels a day as the recovery proceeds. Emerging markets and China in particular are held responsible for the surge, though that could change if Beijing takes steps to slow its booming economy.

With the exception of two of the savants of the oil industry, the legendary T. Boone Pickens and former Shell Oil Company chief John Hofmeister, comment in the United States has been muted. When asked why the price of oil was so high despite the recession, White House Press Secretary Robert Gibbs brushed aside the question, recommending the reporter ask the secretary of the Department of Energy, a physicist who has not spoken on oil pricing. Jack Gerard, president of the American Petroleum Institute, did not offer an explanation when he was asked the same question at a meeting in Washington.

The fact is that the price of oil is not determined only by simple supply and demand but by complex premiums and market sensitivities. It is a market that is roiled by wars and rumors of wars and, because oil was the first truly globalized commodity, the premiums can have their genesis far from the futures markets of New York and London.

Uncertainty in Russia, turmoil in Central Asia, the ongoing suspense of Iran’s nuclear plans and even corrosion in the Trans Alaska Pipeline System are cranked into the price. No wonder so many hedge funds are involved in oil. Instability is mothers’ milk to hedge funds.

One way or another, two things stand out: The chances are that the summer- driving season will put pressure on gasoline prices this year, after an extremely cold winter all over the Northern Hemisphere. The conservative (10-percent chance of happening) scenario by the federal Energy Information Administration says $4-a-gallon gas would come at the end of the summer.

The second reality is that the world thirst for oil has not been slaked; as the world prospers, the greater that thirst.

In 1974, the heads of 23 democracies lost their jobs because of surging energy prices. Obama, beware.

 

It Won’t Be the End of the World, but $5 Gas Is Coming

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May 21, 2011, according to a loosely-organized apocalyptic Christian movement, will be the “end of days.”

On or about that same date, the price of oil in the United States will begin to climb to $4 a gallon, according to two savants of the oil industry.

The former is highly unlikely but the latter is very probable.

The escalation in the price of oil is predicted by the legendary oil man T. Boone Pickens, known for his financial acuity as well as his oil expertise, and John Hofmeister, who retired as president of Shell Oil Company, to sound the alarm about the rate of U.S. consumption of oil.

In an interview with a trade publication, Hofmeister predicted that oil would rise to $4 a gallon this year and to $5 a gallon in the election year 2012. Separately, Pickens—who has been leaning on Congress to enact an energy policy that would switch large trucks and other commercial vehicles from imported oil to domestic natural gas—predicts that oil currently selling for just over $90 a barrel will go to $120 a barrel, with a concomitant price per gallon of $4 or more.

The Obama administration appears to have been slow to grasp the political implications of an escalation in the price of oil. When asked about it, outgoing White House Press Secretary Robert Gibbs referred the questioner to the Department of Energy.

Not everyone is alarmed by the incipient rise in the price oil. Republicans, who are especially close to the oil industry and its Washington lobby, orchestrated by the American Petroleum Institute, think that a great deal of hay can be made while this particular sun shines. They plan to attack the administration for spending too many resources on alternative fuels, over-regulating the industry, and keeping too many federal lands away from oil prospecting. They also accuse the administration of being too frugal with its release of drilling areas in the Gulf of Mexico and on the two coasts, as well as Alaska.

The Republicans have unlikely bedfellows in their quest to politicize the price of oil. They are joined by environmentalists who have long believed that only high prices will break America’s passion for the automobile.

Environmentalists have long advocated European-style taxation to drive motorists out of their cars and onto buses and trains.

A third interest group that will take some pleasure in rising oil prices are those who are invested in alternatives such as ethanol, oil from algae and electric vehicles.

Meanwhile, the International Monetary Fund is keeping an eye on the price of oil, according to Caroline Atkinson, director of external relations at the IMF. She told a Washington press briefing that the IMF is particularly concerned with food and other commodities that are directly affected by the price of oil.

Hofmeister, who now heads the non-profit Citizens for Affordable Energy that advocates energy development in all forms, believes that the United States could increase oil production from the current 7 million barrels per day to 10 million, half of its consumption. He told an interviewer from Platt’s, an energy publisher and broadcaster, that we were “essentially frittering at the edges of renewable energy, stifling production in hydrocarbon energy,” which he said could lead to blackouts, brownouts, gas lines and rationing.

There are already signs that the Republican-controlled House of Representatives is planning a big push for hydrocarbon energy. An indication of this comes from Rep. Fred Upton (R-Mich.), a one-time global-warming believer who has dropped that issue from his agenda. He is the new chairman of the House Energy and Commerce Committee.

In periods of high gasoline prices in the past, presidents have found there is very little that they can do. Their options are to reduce the tax on gasoline, sell oil from the Strategic Petroleum Reserve or the Naval Petroleum Reserve. President George W. Bush went a step further: He went to Saudi Arabia twice to ask the Saudis to increase their rate of production. Twice he came back empty-handed.

All of this would be good news for the oil producers and especially those troublesome players, Russia and Venezuela.

Of course, if you believe the human endeavor ends on May 21, better fuel the SUV and hit the road.

The Pity of Earth Day–It Brings Out the Crazies

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The trouble with Earth Day, which we mark this week (April 22), is that it has a powerful hold on crazies. Crazies on the left and crazies on the right.

That certainly is not what Sen. Gaylord Nelson had in mind when he inaugurated the first Earth Day in 1970. The senator, and others, hoped that Earth Day would attract a serious examination of the stresses on the Earth. Instead, it seems to attract stressed people.

From the left come the neo-agrarians, the anti-capitalists, the no-growth proselytizers, and the blame-America-first crowd. From the right come the supporters of the Competitive Enterprise Institute, a pro-business phalanx that is in deep denial about man’s impact on the environment, and libertarians who refuse to believe that governments can ever get anything right, or that government standards can be beneficial.

The fact is that a great majority of Americans are deeply concerned about the environment and maintaining the quality of life that has been a hallmark of progress in the 20th and 21st centuries. This majority includes electric utility executives, oil company CEOs, and the trade associations to which these industrial captains belong.

It is notable the extent to which the energy industries have signed onto the concept of global warming and other environmental degradation. They know that their activities often collide directly with the environment and they are, often to the surprise of the environmental community, keen to help. British Petroleum is pouring millions of dollars into solar power and hydrogen. John Hofmeister, president of Shell Oil Company, the U.S. division of Royal Dutch Shell, is retiring early to devote himself to the task of alerting Americans to their energy vulnerability and to the environmental story.

Sure, it took industry a long time to get on the environmental bandwagon. It is the way of industry that it initially resists any innovation that might cost money or involve difficulty. Later it buys television advertising, pointing to its own virtue when it has capitulated.

The introduction of double-hulled oil tankers in domestic waters is a clear example of this: conversion in the face of necessity. After the Exxon Valdez disaster in 1989, the government mandated double-hulling, the tanker industry moaned, and oil spills in domestic waters declined by 70 percent. The cost of double-hulling is balanced out by the lack of payouts for spills. Double-hulling ships, like removing lead from gasoline, introducing the catalytic converter, and banning hydrofluorocarbons in propellants and refrigerants, are major American environmental successes. We led the world.

But if you listen to the critics, you would think that the United States was always on the wrong side of the environmental ledger.

The problem is we live well and we consumer a lot of energy and a lot of goods in our routine lives. There are about 21 gallons of gasoline in a 42-gallon barrel of oil. If you calculate your own daily gasoline usage, you will come up with a pretty frightening number over your lifetime. Likewise, coal burned for lighting, heating and cooling. Residents of New York City, who live on top of each other and do not drive very much, use about half of the energy of suburban households.

For a serious improvement in the environment, just from an energy consumption standpoint, we need to generate electricity by means other than burning fossil fuels (nuclear and wind), introduce more electric-powered public transportation, and substitute electric vehicles for hydrocarbon-powered vehicles. The technology is in sight for all of these. The problem is that the political will is distracted by the pressure groups on the left and the right.

Human impact on the environment can be disastrous or benign, and even beneficial. The towpath along the Chesapeake & Ohio Canal in Washington, D.C. started out as a purely commercial intrusion on a river bank, but now it is a recreational magnet. The dams along the Colorado River have boosted growth in the West, but the river has paid a price. Seattle City Light, the utility that serves the Seattle area, is now carbon-neutral because of the large amount of generation it gets from wind and hydro. There is a debate whether damming rivers is justified; but compared with other ways of producing large quantities of electricity, it is relatively benign.

Farming is an intrusion into nature—a constructive one. The challenge for the Earth Day advocates is to find other constructive intrusions.