Tuesday, June 24, 2008

The Saudis know their limitations, why don’t the Democrats?

Led by John Dingell, Congress is proposing to limit the amount of speculation in the oil markets by reducing the incentive to do so. The Wall Street Journal reports that the House Energy and Commerce Committee said that investors of oil futures should be required to pay up to 50% in collateral in order to make a trade in the oil futures market. Some analysts report that this move could reduce oil prices up to $60/barrel. Better put: at the current trading price of roughly $138/barrel, the House believes that under their new bill (code for government intervention), oil would be sitting at just $78/barrel. The Democrats obviously believe that any price above $78/barrel is simply speculation.

Not according to the Energy Information Administration

In their short-term outlook, they forecast that the average price of crude oil in 2008 and 2009 will be $122/barrel and $126/barrel, respectively. And that is all accounted for by supply and demand – you know, too much demand (U.S. and China) chasing a limited supply of oil (Saudi Arabia) – rather than speculation. It is inconceivable to think that the EIA got it so wrong. Don’t they know that the House of Representatives has reported that the price of oil should be $78/barrel?

Compared to the House, the EIA has vast data on oil fields and infrastructure regarding the ability of key economies, like members of OPEC, to supply sharply rising global demand coming from insatiable giants like the U.S. and China. Further, the report is based solely on supply and demand, and not on speculative pressures.

It is so like the Democrats to try and intervene where they should not intervene.

But why not? A related article in the Wall Street Journal, Saudis Promise More Oil
To Curb World-Wide Fears
, reviews some of the goings-on that occurred in Jeddah, Saudi Arabia, over the weekend. The article maps out the inherent supply issues the globe is faced with if Saudi Arabia is to supply the majority of the oil going forward (like it already does). After agreeing to boost oil production by 200k/day in the short term, the King Abdullah agreed to increase capacity to 15million barrels/day by 2018. Some experts believe that this is too lofty a goal, given that most of the Saudi oil fields and infrastructure are old and archaic. More to the point: even if they wanted to produce at the 15mill/day target, new machines and infrastructure must be set in place.

At this point, I see two problems:

  1. Curbing speculation is a short-term fix that doesn’t seem to be a viable fix at all.
  2. In the long term, it is supply that must rise if we are to see energy prices subside at all.

This brings me to my final point: why are the democrats against drilling offshore in the U.S. if that is what we desire? Let’s face it demand is demand. If everybody really wanted to reduce emissions and clean up the environment, then we would. But the fact is that energy is still demanded and customers are willing to pay a high price for it ($4/gas). Going forward, there must be a plan to supply the insatiable demand.

One viable option may be allowing offshore drilling for natural gas and oil. Obama and Bush’s aids are right – offshore drilling will not affect energy prices in the near term, but what about 10 or 20 years from now? If we do not invest in the future of the fossil fuels supply, then we will most certainly pay through the nose in the decades to come. China is not slowing, India is not slowing, and the industrialized economies need energy, too.

Some Californians are against further offshore drilling. Have you ever been to Long Beach? In the NY Times article, Californians Object to McCain’s Drilling Plan, one really sees how short-sited people can be:

“It makes me nervous to think about those who are proposing to drain America’s offshore oil and gas reserves as quickly as possible in the hopes of driving down the price of gasoline,’’ said the panelist, Michael Feeney.

Sure, I don’t want to see a big oil spill off the coast of Florida or California, but I also don’t want to see world growth suffer because we need fossil fuels that are in short supply. Let’s face it, the time to switch to alternative energy has begun, but there is still a lot of technical progress that must be made in order to afford alternative energy sources.

We must bide our time and increase drilling for fossil fuels. It is a matter of survival – if supply does not keep up with demand, then a lot of people across the globe will be really cold in the middle of winter. For now, offshore drilling is a good option for setting in place new supply lines that we can draw on in 10 years or so.

At any rate, the Democrats should allow the offshore drilling simply to provide new frontier for government intervention!

I would like to hear your comments and feedback. Best, Nontruths

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