March Madness: Heller’s Repackaging of Old Oil Ideas

Got Gas? Anointed Senator Dean Heller (R-NV) has an idea to lower gas prices…which he will attach to some bill…which may or may not address the global market forces or the pure speculation built into the oil market.  He describes it thusly, with commentary points  inserted:

(1) “Raising taxes and extending failed stimulus programs will do nothing to lower gas prices.  (2) I support closing tax loopholes and reforming the tax code, but most Americans would agree that simply raising taxes will not lower gas prices.  (3) Unlike some in Washington, I believe lower gas prices are a good thing for the American people, and that is what Congress should be working toward.

(4) “My amendment is a commonsense compromise that closes tax loopholes, provides tax relief for every American that drives a car, and allows for the responsible development of our nation’s natural resources to increase supply.  Instead of partisan gridlock, both sides should be working together to find solutions that deliver results for the American people,” said Senator Dean Heller.”  [Heller]

Note to Senator Heller about point number one, only on Planet Norquist does closing off a subsidy for major oil companies count as a “tax increase.”  Yes, the oil giants would have to pay more of their own expenses, but the taxes themselves don’t increase — it’s the taxpayer funded subsidy for major oil firms that gets whacked.  Secondly, Republicans announced that “The Stimulus Failed” even before the ARRA was implemented.  This talking point has moved beyond mere repetition and into the Land of Mantra.  And, how do we know that the ARRA (Stimulus Bill) did some good?  The Wall Street Journal told us: Government efforts to funnel hundreds of billions of dollars into the U.S. economy appear to be helping the U.S. climb out of the worst recession in decades.” (9/2/09)

As to point number two, who said raising taxes would reduce gas prices? Simply inserting a straw man contention doesn’t necessarily improve the argument.  The original bill, S. 2204, isn’t about gas prices — it’s about the questionable use of tax credits and gimmicks which are of benefit to an industry that is highly profitable without government subsidies, and the repeal thereof.   When an American family can end up paying a 28% tax bill while Exxon-Mobil is paying 13.5% something’s amiss.

Senator Heller, as mentioned yesterday, is “all for closing tax loopholes,” IF the plan is part of His Big Picture — which if he follows the Americans for Tax Reform’s lead means enacting the inane Balanced Budget Amendment and the equally improbably Flat Tax that shifts the major tax burden from the exceedingly wealthy to the exceedingly hard working.

Point Three is yet another Straw Man.  The radical right has adopted a line about the Obama Administration and the Secretary of Energy not “concerned about gas prices.”  Some strategic re-interpretations of the Administration’s policy on the development of alternative sources of energy can’t be clipped and re-stated to make it look as though Secretary Chu isn’t primarily concerned about gasoline prices, but it’s a real stretch.  This won’t prevent presidential candidate Newt Gingrich, and his tag-a-longs like Senator Heller from repeating the spurious charges.  The President made his position very clear in a March, 2012 press conference. [MarketWatch]

OK, let’s move along to Point Four, Senator Heller’s actual proposal. [pdf file]  Section 101 reduces the Federal gas tax from 18.3 cents to 17.3 cents.  Aviation fuel is set at 24.3 cents, and ‘other’ diesel is set at 23.3 cents per gallon.  What reducing aviation fuel taxes has to do with what I pay at the gasoline pump escapes me, but this would make the major airlines happy.

Interestingly enough, scrolling down further in Section 101 we find: “EXCEPTION FOR FUEL HELD IN RETAIL STOCKS.—No credit or refund shall be allowed under this subsection with respect to any 1 highway motor fuel in retail stocks held at the 2 place where intended to be sold at retail.” So, how does the Heller Amendment directly benefit immediate stocks of retail gasoline?

Title II of Heller’s Amendment is the Swiss Cheese section — Drill Baby Drill — or whatever one wishes to call it.  Drill in the continental shelf – Fine. Drill in the Alaska National Wildlife Reserve – Fine.  Speed up the permitting process – Fine. I think we’ve heard all this before.  We could easily move along because this section of the Amendment is nothing we’ve not heard many times before from Republican members of Congress.  The reality is that even if we drilled ourselves into Swiss Cheese we still have only a small percentage of the world’s oil reserves and we’re still using some 25% of the world’s supply.  Another reality is that exploration today doesn’t automatically translate into low prices at the pump because — How Many Times Do We Have To Say It? — oil prices are set on the GLOBAL MARKET and if larger supplies from the U.S. or lower demand in the U.S. are offset by higher demand from China, India, or other nations, then drilling here doesn’t necessarily mean lower prices.

There are enough insertions into this amendment concerning EPA reviews and over-rides of Clean Water regulations in coastal areas to make anyone who drinks water or bathes the baby from his or her local sources very concerned. (page 10+)  If you happen to be a fish, this amendment is highly problematic.

Subtitle C, page 40,  is the Keystone Pipeline approval section.  Why is this perfectly predictable?   Talk about not having any immediate impact on gasoline prices!  There are sections of the pipeline unbuilt, and anyone waiting at the pump for a price reduction based on Keystone’s transportation of oil should probably make arrangements with the station owner for bed space — for several years.  Remember, Senator Heller said that the Administration should be concerned about the immediate impact of gasoline prices on the Nevada and nation economies, but this project is far into the future.

We also might want to remember where the Keystone Pipeline goes.   The one essential point to keep in mind about the Keystone project is that it is an EXPORT PIPELINE.   Oil from Canada is to be shipped to the pipeline terminals in the midwest and the gulf coast. [TransCan] The part about the Gulf Coast is important. Oil transported to Houston and Port Arthur, TX goes to worldwide refineries.  A quick look at the little  map below  shows the ultimate destination of the Keystone Pipeline:

The terminals, shown in the red circle, at Houston and Port Arthur, leave little doubt that the ultimate utility of the Keystone Pipeline project is to facilitate the transportation of  Canadian oil to world markets.

Title III (page 46+) concerns closing loopholes for dual capacity tax payers (read major oil companies.)   Out of 51 total pages of cut the gasoline tax,  Drill Baby Drill, Drill Everywhere, and help the Canadians ship oil to China and India — the Loopholes are closed, sort of, in five quick pages.

What was that definition of madness? Doing the same thing over and over again expecting a different result?  There is nothing new in Heller’s proposal. It’s the same Drill Now, Drill Everywhere scheme the oil companies have been promoting for the last several years, always being careful to avoid telling us that the oil is sold on the GLOBAL MARKET, and no matter how much we pump into the market if the Saudi’s cut production, or the Iranians and Israelis get into a fight, or there’s increased demand in India, or whatever moves the speculators — the price of oil won’t necessarily get any cheaper in the United States of America.  Oil is a global game.

And about the losses to the Highway Trust Fund created by the reduction in the gasoline and fuel taxes?  Senator Heller assures us that these will be replenished from the proceeds of the closure of the tax loopholes.  The CBO doesn’t seem to have scored the bill in this regard.

In short, Heller’s “Gas Price Relief Act” seems to be about everything BUT gas price relief.  It’s more like the American Petroleum Institute Relief Act of 2012.

Got Gas? Factors affecting gasoline prices

Cable news channels are buzzing about the third leg of the GOP focus group recipe for Campaign 2012, Gas Prices*, which brings the usual onslaught of LTE’s from Nevadans concerned about “OMG there’s pain at the pump…” that must be proof beyond doubt that the current administration is at least ineffective with regard to energy policy.   There is room to discuss Administration energy policy, any administration’s energy policy, but all such discourse has to acknowledge one crucial point: Oil prices are set in a global market.   In less academic terms, we could drill the North American continent into something that looks like a miniature golf course inhabited by a  large pack of gophers, but if the oil is ultimately sold to higher bidders in Brazil, China, India, or where-ever, then domestic prices are not going to  decrease.

Factors in Pump Pain

The U.S. Energy Information Administration reports that approximately 68% of the gasoline price at the pump is driven by the price of crude oil, complete with a graphic gas pump to illustrate the components of gasoline pricing:

The factors illustrated above inform the prices paid by consumers at retail outlets: Distribution/Marketing; Refining; Taxes; and the price of crude oil.

Thus we know what goes into the prices shown on a 48 month average retail price graph for gasoline in Nevada:

And, if we want to take an even longer view there are gas prices for the past 6 years:

If crude oil prices inform approximately 68% of these prices, then what informs the price of crude oil?

#1. The Supply and Demand Factor:  Here’s a hint about who’s demanding (buying) the crude oil – “China is the world’s second-largest oil consumer and its demand growth is one of the biggest drivers for global crude markets. Its implied oil demand matched record levels in February, when customs data showed China imported a record 5.95 million barrels per day of crude oil, up 18.5 percent on the year.”  [Reuters] Then there’s this nugget about other sources of demand: “Ten million barrels of Nigerian crude was placed into India and Indonesian end-consumers via buying tenders for delivery from May onwards, underpinning values for the key Nigerian benchmarks, Qua Iboe and Bonny Light. Spot cargoes have also been mopped up by traders and Asian buyers, leaving far fewer Nigerian April liftings for key grades, traders said. Angolan spot cargoes are already almost entirely placed with end-users. ” [Reuters]  Translation: Buyers from Asia are “mopping” up all the crude oil they can purchase in the West African market.

With India becoming the 5th largest petroleum refining nation on the planet [IBEF] the nation is poised to surpass both Russia and Japan as the third largest consumer of petroleum products by 2030. [IBEF] This, in itself, is enough to amplify the pressure on crude oil prices.

Increasing demand from China, India, Indonesia, along with consumption demands from the United States, Russia, and western Europe, means more upward pressure on crude oil prices, and thence to your neighborhood gasoline pump.  What’s happening on the supply side of the equation?

Here’s the official version: “Non-OPEC supply fell by 0.2 mb/d to 53.2 mb/d in January, on lower global biofuels output, an escalation of conflict in Syria and between Sudan and South Sudan, and continuing outages in the North Sea. North American light tight oil production and NGLs, as well as increasing production in Latin America, offset declines elsewhere, supporting an expected 0.9 mb/d rebound in non-OPEC supply in 2012.” [IEA]  The summary might read as follows — Non-OPEC supplies of crude oil were off because of problems in Syria, Sudan, and South Sudan, along with problems with North Sea sources.  More oil production in North America and Latin America offset some of the scarcity created by these issues.  And, we’d better be watching what’s happening in Nigeria.  Statistics for oil production by nation are available from Nationmaster.  The following graph shows oil production from non-OPEC sources:

To make a very long story a little shorter — yes, there is increased production of crude oil for the global market, BUT there is also increased demand from developing nations and from China and India.   Making the point even shorter — yes, U.S. production has increased, BUT we don’t have the reserves to make a major dent in the global market, and that is where the prices are set.

#2. The Speculation Factor:  The McClatchy papers report the increasing amount of speculation in global oil markets as follows: “Historically, financial speculators accounted for about 30 percent of oil trading in commodity markets, while producers and end users made up about 70 percent. Today it’s almost the reverse.”  This is not a good trend.   The Commitment of Traders Report reveals more.  Producers and traders made up about 36% of the CFTC trades for the week ending last February 14th, meaning that speculators composed the remaining 64% of the trades.  Efforts to curtail pure speculation, and worse still market manipulation are tough rows to hoe.  Witness the continuing drama surrounding the manipulation of four traders and trading firms who attempted to squeeze some ill gotten gains out of the 2008 oil price skyrocket. [LATimes]  The gory details of this suit launched in 2011 are available in the complaint issued by the CFTC. (pdf)

It’s also difficult for the CFTC to get a grip on the speculators. “The Commodity Futures Trading Commission (CFTC) is charged with creating new rules to reign in the effect of speculation on the price of oil and other commodities. Part of its job is expanded supervision of the highly complicated $600 trillion “swaps” markets.” [Heating.com]  So, the Commission is tasked with writing rules to curb speculation, but what’s been the outcome thus far?

Those infamous “swaps” are supposed to be curbed by new CFTC rules pertaining to those financial instruments [Bloomberg] which a Reuter’s article further explained: “The bulk of existing swap products and transactions would be defined as swaps under the proposals issued by the CFTC and the Securities and Exchange Commission. Products designated as swaps are subject to clearing requirements and must trade on exchanges or swap execution facilities.”   OK, the rules are up, and here come the speculators’ lawyers.  It take some time for litigation on limiting the oil positions to wind its way through the courts, but there are some hints.

On February 27, 2012 McClatchy reported:

A federal judge on Monday refused to halt efforts by a key regulator to limit excessive speculation in the trading of oil contracts — which is driving up oil and gasoline prices — but hinted that he might soon rule in favor of Wall Street and let speculation go unchecked.

Robert Wilkins, a judge on the U.S. District Court for the District of Columbia, declined a request for a preliminary injunction to halt the Commodity Futures Trading Commission from implementing a congressional mandate to limit how many oil contracts any single financial speculator or company can control.

What we have now is the unpleasant situation in which there is an historically high level of speculation in crude oil which is not controlled by either the producers or traders, but by those engaged in pure speculation.  There are rules in place to limit the number of positions these speculators may control, but the rules could very likely be tossed depending on current litigation.

There may be other factors at play here such as the intent of Wall Street speculators to chip away at the provisions of the Dodd-Frank Act.

Dennis Kelleher, president of the advocacy group Better Markets, sat through the court hearing and emerged concerned that the financial sector was chipping away at the intention of Congress.

“This is all about the industry trying to protect large dark (unregulated) markets,” he said, referring to the so-called over-the-counter markets, which are much larger than the regulated futures markets. Under Dodd-Frank they are slated for first-ever CFTC regulation. [McClatchy]

The fact that there are rules, doesn’t guarantee that there will be enforced rules:

The CFTC’s rules cannot take effct until the agency defines the over-the-counter products, called swaps, since the private bets involve swapping risk. That is scheduled to happen in April, which means limits on next-month contracts for oil could take place soon after that. Speculative limits on oil futures contracts that go out several months or even a couple of years would take effect somewhere around this December or early in 2013. [McClatchy]

#3.  Production, distribution, and taxes.  If we look back at the little gas pump graphic shown  above it’s obvious that production and distribution costs are relatively stable, and taxes have actually declined.  Thus we can discount these as major factors in the Pain and The Pump felt recently.

The Visible and Invisible Hands

If we want the Not Quite So Invisible Hand of the Market to weigh in then it would be reasonable to call for both increased production and decreased demand — after all a surplus in any market is supposed to have a salutary effect on consumer prices.   We are now exporting more petroleum products than we are importing for the first time in 60 years, [EIA] and U.S. production of crude oil has increased for the last 3 years. [WH, EIA] If we can continue to ease domestic demand, there should be less upward pressure on the price at the pump.

We can also hope that the rules set in place by the CFTC to require greater accountability and transparency in speculative markets aren’t pitched because Wall Street  interests have convinced the judicial branch that more rigorous oversight and more financial sector scrutiny are “onerous burdens” on highly profitable trades, and that “cost/benefits” analyses are the end and be all of regulatory frameworks.   It seems difficult to see how the “cost” of implementing the CFTC regulations are such a burden on the financial sector that they could possibly over-ride the “benefits” of curtailing more pain at the pump for average American consumers.

Finally, no solution which can be reduced to a t-shirt slogan or bumper sticker is going to suffice to bring the prices for petroleum products back to earth.  What would be far better is a national conversation about energy policy that relies on analysis above sloganeering, and a general civil discourse about how to rein in financialist speculation without harming the producers and traders who rely on our futures markets.

*The other two are “deficit/debt,” and “unemployment.” [Examiner]

>Heller makes noise, other members of Congress address oil price manipulation

>Representative Dean Heller (R-NV2) would have us believe that he “can do little more than make noise about gas prices.” [RGJ] He’s managed the noise part, first writing provocative epistles to Speaker Nancy Pelosi (hardly a format designed to enhance his reputation for working across the aisle to find solutions), authoring a going-nowhere ‘demand’ for an energy “plan,” and finally asking the Financial Services Committee to hold hearings on price manipulation and speculation.

Perhaps Representative Heller didn’t get the memo: There have already been hearings concerning price manipulation and speculation, in both houses of Congress.

On the House side – Representative Bart Stupak (D-MI) said that his U.S. House Energy Oversight Committee’s investigation [CNN] hasn’t uncovered illegal practices in oil and gas trading, but that loopholes in current statutes were allowing the biggest traders to ‘game the system.’ Stupak’s committee will hold a second hearing to announce the results of the entire investigation on June 23^rd. [CNN]

On the Senate side – Senator Maria Cantwell chaired a Senate Commerce Committee hearing [McClatchy] (D-WA) on the subject, and is pressing both the FTC and the Commodity Futures Trading Commission to more closely regulate oil and commodity markets, and wants the FTC to issue an interim rule under the provisions of the 2007 Energy Independence and Security Act while the agency completes its ‘formal regulatory rule making process.’ Cantwell is also calling for the CFTC to revoke its ‘no action’ letters issued by its staff that allow electronic exchanges outside U.S. borders to continue trading West Texas Intermediate crude and related commodities. The Washington Senator and 20 other colleagues wrote to the CFTC on May 23^rd demanding the revocation of those “no-action” letters. [OGJ] This exchange prompted the CFTC to admit that it had been ‘investigating’ the trading policies and practices in London (ICE) and Dubai since last December.

Representative Heller also voted against legislation seeking to ameliorate the current situation.

Concerning the Energy Independence and Security Act of 2007, (H.R. 6) cited by Senator Cantwell as offering a means to allow the FTC to address the issues immediately under its interim rule making provisions, Representative Heller voted as follows: [GovTrack]

(1) On consideration of H.R. 6, the Energy Independence and Security Act of 2007: NO (vote 37) January 18, 2007.
(2) On a motion to recommit the bill (to kill it) YES (vote 38) January 18, 2007.
(3) On an appeal of the ruling of the chair (‘yes would sustain the measure) NO (vote 39) January 18, 2007.
(4) On final passage of the bill NO (vote 40) January 18, 2007.
(5) On agreeing to Senate Amendments NO (vote 1140) December 6, 2007.
(6) On agreeing to Senate Amendments NO (vote 1177) December 18, 2007. Representative Heller was the only member of the Nevada delegation to vote against the final passage of the bill as amended.

Thus do we see the difference between making noise and being a ‘grown up’ member of Congress?

Cross posted at Helluva Heller