Some Democrats and even Republicans would have us believe that speculators are to blame for higher gasoline prices. A bill has been introduced to close the so-called Enron loophole that allowed some energy trading on unregulated "dark" markets. That and other "dark market" loopholes should be closed. But the affect on gas prices will be minimal.
Americans have often railed against speculators -- the Revolution and Civil War come to mind -- and sometimes with good reason. Unfortunately, you can't have capitalism without speculation. The key is sound regulation. But the idea that speculation is the major cause of higher oil prices is evidence of the magical thinking going on in much of America. It's deep denial about the real reasons for more expensive oil.
Thus, a war against speculators will be useless at best and could do real harm, both by gumming up the efficient mechanisms of the market -- of which speculators are an important part -- and distracting us from the real tasks at hand.
Bubble speculation typically produces one of two phenomena: hoarding or surplus, the latter seen in catastrophic abundance in the stock crash of 2001 and the housing crash we continue to endure. Neither are evident in the rise of oil prices. That isn't to say there isn't some speculation adding some price hikes to the daily and weekly movement of the commodity. But it's not the bulk of the reason. I expect any moment a significant drop in prices that will be hailed as the end of the "oil bubble," so we can go back to SUVs and sprawl. That drop will merely be the temporary downslope of a long-term chart showing ever more expensive oil.
Why? Many oil experts argue that the world has now hit its peak in oil, something that happened in the U.S. in the early 1970s. This means half of all the oil in the world has been extracted and burned off, and this was the half that was easy to extract and cheap to refine. It fueled the American lifestyle and economy as it evolved in the 20th century. The remaining half will be harder to get, much of it is located, as President Bush admits, in places where the people don't like us. And it will be more costly to refine. Production has stagnated. Many of the big "elephant" fields are in decline. Many oil-rich nations are holding back oil they once exported to cover their domestic needs. Meanwhile, world demand continues to grow exponentially, while the U.S. continues to consume one-quarter of world oil production.
No wonder, then, that OPEC and the Saudis say they are doing all they can, even as the Kingdom refuses to release data on the true state of its oil reserves. No wonder executives of big oil companies refuse to invest heavily in new refineries or offshore drilling rigs -- they know they are in a mature industry on the downward slope. Virtually all alternative energy sources cost more than light sweet crude, and many of them take more energy to create than they actually produce. These inexorable trends inform the speculators, who, by their nature, make bets based on future expectations.
None of this will happen immediately. Supply and demand will rise and fall, tease us and terrorize us. One big oil company noted in its marketing campaign that it took us 150 years to use half of the world's oil and we're on track to use the rest in another 30 years. Some peak oil skeptics say peak is 15 years away. These are blinks of the eye. The cheap oil era is over, done.
The markets appear to be working fairly well, considering that Americans are bidding with everyone on the planet for this precious commodity. There have been no shortages, no gas lines. The price mechanism has worked. Dumb regulatory moves might undo this. Worse, they distract Americans from the real immediate and long-term steps we must take. Among them: mandate significantly higher fuel economy standards; assess and use the best off-the-shelf alt-energy and invest in research for the most effective, cost-efficient alternatives; invest heavily in transit and trains, and stop sprawl while retrofitting suburbia for a high-cost energy future (more about this in a future post).
It would be fascinating to know what was discussed at Vice President Cheney's secret energy task force meetings early in the administration. The White House has refused even to say who attended, although it is said to have been a who's who of oil industry luminaries. I think they discussed impending peak oil and what to do about it. Considering that Cheney has said conservation is a "personal virtue" and the American lifestyle of endless driving was "non-negotiable," we can guess that the remedies mentioned above got zero attention.
What I suspect did get attention was using military power to ensure that oil from the Middle East would continue to flow at market prices -- as opposed, say, to being monopolized by Saddam Hussein, Iran or even China. Because they knew the coming global destabilization and great power confrontations that would come because of declining oil production. And the men in the room knew they would become fabulously rich, and be gone from this Earth by the time the feces really hit the wind-moving machine. Once again, future generations would be left holding the tab for the selfishness of our current leaders.
This is a more realistic assessment of what went on than the simplistic "we invaded to take their oil" mantra. But the end result may be the same. Oil colonialism. The American military as global oil police force. Of course Bush/Cheney couldn't level with the American people. They no more wanted to be a new British Empire than they wanted to give up their suburban assault vehicles, McMansions and hundred-mile-a-day commutes.
Jim Kunstler has mentioned that the administration, by invading Iraq, decided to put a police station in the "toughest neighborhood" on the planet, to ensure that the world's petroleum-based economy could keep going. I think he's right. It's too bad the invasion was overseen by neocon Keystone Kops.
This item (like so many you post) is quite interesting. However, I myself wouldn't dare comment on the question of oil pricing, since I don't understand it -- and judging from conflicting statements offered by a number of high-level policy makers, perhaps they don't either.
I would, however, like to add a few observations regarding oil as a possible contributing factor to the invasion of Iraq, and these are consistent with what you have written.
One thing to remember is that the sanctions placed on Iraq beginning in 1990 placed severe limitations on Iraq's oil exports. Though amendments to the sanctions subsequently permitted increased exports through the Oil-for-Food program, Iraqi oil exports were still restricted.
As you know, it was hoped that sanctions would encourage an internal coup which would permit the Baathist leadership of the country to remain in power, thus avoiding a new government dominated by the Shiite majority (which, unlike the Sunni Baathists, might choose to align Iraq with Iran, thereby altering geopolitical realities in the Middle East in a way that was unacceptable to U.S. policy makers).
Instead, Hussein's control of the security apparatus allowed him to remain in power.
Since the sanctions were effectively tied to the removal of Saddam Hussein, but thirteen years of sanctions (and no doubt behind the scenes intelligence schemes) had failed to accomplish this, it may have appeared that the only viable option to restore Iraq's oil output to pre-sanctions levels, was Hussein's forcible removal from power.
However, there are additional, intriguing oil-related factors to consider.
According to a 2003 report by the Energy Information Administration (a U.S. Government statistical agency), Iraq's proven oil reserves (112 billion barrels) are second only to Saudi Arabia.
However, Iraq has the lowest reserve to production ratio of the oil producing countries: that is to say, it has tapped very little of its known reserves. The same report mentions that only 15 of 73 discovered fields have been drilled, with few deep wells drilled. Furthermore, it mentions that Iraq's oil production costs are among the lowest in the world. Additionally, it is thought that Iraq's unexplored western desert region may contain 45 to 100 billion additional barrels of oil reserves.
All of this makes Iraq a highly attractive prospect to those who are in a position to develop it, as well as to oil consuming countries like the United States. This might have made the idea of an invasion more appealing, under the assumption that it could install a stable government favorable to U.S. interests, since this would then have allowed the U.S. to provide the technical expertise for additional drilling, refinery capacity, and oil exploration, as well as obtaining oil purchase contracts on a favorable basis.
It may be that the Bush administration held views more sanguine than were warranted by the facts, though I suspect that if the U.S. had, in the first months following the invasion, arranged for an early withdrawal and U.N. supervised free elections, while spending massively to restore public services such as electricity and water, so that the average Iraqi had both a decent quality of life and a sense that occupation was temporary rather than open-ended, the U.S. might have done fairly well out of it, increased Iranian influence or not. Instead, it looks like Iran is going to be the major regional beneficiary anyway, while the U.S. government has once again fumbled its way into a foreign relations debacle.
http://www.eia.doe.gov/emeu/security/esar/infrastructure.html
Posted by: Emil Pulsifer | June 27, 2008 at 01:07 PM
Even though I favor solar as an alternative energy source, while researching the petroleum issue I came across some intriguing information about France.
In 1973, France relied on fossil fuels for 65 percent of its gross power output. In response to the "oil shock" of the period the French government, using taxpayer dollars, built 56 nuclear power plants over the next 15 years. Today, about 80 percent of France's electricity is generated by nuclear plants, with most of the rest produced by thermal and hydroelectric methods. France is now the largest net exporter of electricity in the European Union.
According to the Energy Information Administration, a statistical/analytical agency of the U.S. Government, "French nuclear power is efficient and low cost, and French electricity tariffs are therefore the lowest in Europe. Central planning is crucial to France's nuclear industry, as there are only a few different reactor designs and common industry methods, practices which contribute to nuclear's relatively low cost. Government-owned Areva controls all aspects of the nuclear power sector in France, including the mining of nuclear fuels, construction and operation of reactors, and the disposal of nuclear waste and decommissioned plants."
http://www.eia.doe.gov/emeu/cabs/France/Electricity.html
France is currently in the process of expanding its nuclear power industry. However, the French government's monopoly role has brought criticism and pressure from the European Commission, in response to which the French have begun to privatize the power generation and distribution system. It remains to be seen whether low-cost, efficiency and safety will remain hallmarks of the French system, if it transitions to a private-profit driven "free market" in which executive compensation, stock prices, the bottom line, and an insistence on insularity and uncoordinated business ventures are the dominant features.
Obviously, problems such as nuclear waste disposal, the risk of serious accidents or terrorist attacks, and, in the U.S., such problems as major cost-overruns and regulatory delays, all cast a shadow over the idea of converting to nuclear power as the primary alternative to fossil fuel use. Still, it does show what an empowered, properly funded, determined government can accomplish in a relatively short period (less than 20 years).
Posted by: Emil Pulsifer | June 28, 2008 at 11:24 AM