Wednesday, May 14, 2008

Increasing Supply Of Oil Rejected


The following email and news article may give you an idea of what we are facing when politicians decide that the government should fiddle with the economic law of supply and demand.

From Sen. Carl Levin:

I want to share with you a speech I gave in the Senate today regarding soaring energy prices. Record high gas and diesel prices have reverberated throughout our economy, hitting the pocketbooks of ordinary Americans and inflating the price of everything from food to manufactured goods. Action is clearly needed to combat these skyrocketing energy prices which are a threat to our economic and national security.

During the past few years, both as Chairman and as Ranking Member and of the Senate Permanent Subcommittee on Investigations (PSI), I have led a number of investigations examining U.S. energy markets and rapidly rising oil and gasoline prices. As a result of these investigations, I have been advocating a number of measures to address the rampant speculation and lack of regulation of energy markets, which have greatly contributed to the recent run-up in fuel prices.
Four specific policies should be immediately adopted to combat the absurd prices Americans are paying at the pump. These policies are contained in the Consumer-First Energy Act of 2008 (S.2991), which was introduced by Senator Harry Reid (D-NV) on May 7, 2008. I am an original cosponsor of this important legislation.

First, we need to put a cop back on the beat in all energy markets that affect the U.S. in order to prevent the excessive speculation and price manipulation that drives up the price of a barrel of oil. The trading of contracts for the future delivery of oil and gas has increased six-fold since 2001. Much of this increase can be attributed to speculators, who buy and sell futures contracts for crude oil and leverage them just to make a profit, creating an artificial “paper demand” that does not accurately reflect actual market conditions. While the Commodity Futures Trading Commission (CFTC), the main federal regulator charged with policing U.S. energy commodity markets, has the authority to regulate certain commodity markets, it cannot police one of the biggest energy markets due to the “Enron loophole,” a provision in law that exempts electronic energy exchanges from government oversight. In September 2007, I introduced legislation (S.2058) that would close the Enron loophole and regulate electronic energy markets. In December 2007, I was able to successfully work with my colleagues to insert language from S.2058 into the Farm Bill that was passed by the Senate on December 14, 2007 (H.R.2419). Last week, the House and Senate conferees on the Farm Bill reached agreement to include our legislation in the final Farm Bill. I am hopeful that Congress will finally pass this important legislation – and the President will sign it – shortly.

The Consumer-First Energy Act contains a provision to close another loophole in the regulation of our energy markets. One of the key energy commodity markets for U.S. crude oil, gasoline, and heating oil is now located in London, outside the reach of U.S. regulators. This means that traders can avoid our government’s limits on speculation and reporting requirements by using the London exchange. The Consumer-First Energy Act includes a provision to stop rampant speculation and increase our access to timely and important trading information and ensure that there is adequate market oversight of the trading of U.S. energy commodities no matter where the trading occurs. This provision is so important that I have introduced this provision as a separate bill, S. 2995.

Another policy that should be implemented to help alleviate some of the upward pressure on oil prices is
the suspension of the filling of the Strategic Petroleum Reserve (SPR). In 2003, the Permanent Subcommittee on Investigations released a report showing that the Bush Administration’s policy of placing large deposits of oil into the SPR was increasing prices but not overall U.S. energy security. For the past few years, over repeated objections from its own experts at the Department of Energy (DOE), the Administration has continued to fill the SPR regardless of the price of oil or market conditions. Given the fact that the SPR is more than 95 percent full, it makes little sense to be filling the SPR when the price of a barrel of oil is hitting record highs on a daily basis. That is why I have co-sponsored a bill (S.2598) to suspend the SPR fill for one year, or until prices fall to more acceptable levels, whichever comes first. Passing this legislation will save the taxpayers money and relieve some of the pressure on the oil markets that is driving prices relentlessly higher.

While closing the Enron loophole and temporarily stopping the filling of the SPR will help lower energy prices in the near-term, we need to develop a long-term, comprehensive energy plan to decrease our reliance on oil. By
investing in new technologies and alternative energy sources, we will significantly reduce our dependence on foreign oil. I have long been a supporter of advanced automotive technologies such as hybrid electric, advanced batteries, hydrogen and fuel cells and promoted development of these technologies through federal research and development and through joint government-industry partnerships. The federal government must do its part first to develop these technologies so that they will then in turn be within reach of the American public.

Finally, while the American consumer is increasingly burdened by record prices at the pump, major oil companies have been reporting record-breaking profits. Instead of utilizing these windfall profits to develop new technologies or boost production, these companies have been buying back shares to inflate their earnings and reap further profits.
I have supported windfall profits taxes in the past, and I will continue to support them in order to encourage the sensible use of oil company resources.

These four common sense policies could do a great deal to lower energy prices and alleviate some of the pressure the average American is feeling in this difficult economy. If you would like to learn more about the Consumer-First Energy Act, or view my statement on actions we should take to lower oil and gas prices, I encourage you to click on the following link <>.

Carl Levin

Let me summarize the four policy points proposed by the senator:
  1. Increase regulation on oil trading
  2. Suspend filling the Strategic Petroleum Reserve
  3. Focus on alternative energy
  4. Implement a windfall profits tax
Now let's look at a UPI article:
WASHINGTON, May 13 (UPI) -- The U.S. Senate Tuesday rejected an attempt to expand offshore oil and gas drilling to allow the states to generate revenue.

The Republican-backed proposal would have allowed states to drill off their coasts and share revenues with the federal government, the (Newport News, Va.) Daily Press reported.

The amendment would have amended a federal ban prohibiting offshore drilling along most coastal states, the newspaper said.

The state proposal was packaged with other controversial measures, including drilling in the Arctic National Wildlife Refuge.

The amendment was rejected on a mostly party-line vote of 42 to 56.

Sen. David Vitter, R-La., urged his colleagues to support the measure, noting that his home state of Louisiana has profited from offshore drilling in the Gulf of Mexico.

"We need to expand on that policy to dramatically increase our domestic energy production," he said.

But Democrats said an expansion of offshore drilling would do little to reduce Americans' dependence on foreign oil.

"We can't drill our way out of this problem," said Sen. Richard Durbin, D-Ill. "We can't drill our way to lower gas prices."

[HT Redneck's Revenge]

Let me summarize that for you:
  1. A proposal to increase the supply of domestic oil and allowing states to benefit from that was rejected along political party lines.
  2. Democrats view increasing the supply of oil as irrelevant to the price of gasoline.
Now, let me interpret that for you:
  1. The government must rigidly control the actions of the marketplace
  2. The government must rigidly control supply
I seem to recall a similar statement of political philosophy from the past.


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There is always an easy solution to every human problem—neat, plausible, and wrong.
Henry Louis Mencken (1880–1956)
“The Divine Afflatus,” A Mencken Chrestomathy, chapter 25, p. 443 (1949)
... and one could add "not all human problems really are."
It was beautiful and simple, as truly great swindles are.
- O. Henry
... The Government is on course for an embarrassing showdown with the European Union, business groups and environmental charities after refusing to guarantee that billions of pounds of revenue it stands to earn from carbon-permit trading will be spent on combating climate change.
The Independent (UK)

Tracking Interest Rates

Tracking Interest Rates


SEARCH BLOG: FEDERAL RESERVE for full versions... or use the Blog Archive pulldown menu.

February 3, 2006
Go back to 1999-2000 and see what the Fed did. They are following the same pattern for 2005-06. If it ain't broke, the Fed will fix it... and good!
August 29, 2006 The Federal Reserve always acts on old information... and is the only cause of U.S. recessions.
December 5, 2006 Last spring I wrote about what I saw to be a sharp downturn in the economy in the "rustbelt" states, particularly Michigan.
March 28, 2007
The Federal Reserve sees no need to cut interest rates in the light of adverse recent economic data, Ben Bernanke said on Wednesday.
The Fed chairman said ”to date, the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing in core inflation”.

July 21, 2007 My guess is that if there is an interest rate change, a cut is more likely than an increase. The key variables to be watching at this point are real estate prices and the inventory of unsold homes.
August 11, 2007 I suspect that within 6 months the Federal Reserve will be forced to lower interest rates before housing becomes a black hole.
September 11, 2007 It only means that the overall process has flaws guaranteeing it will be slow in responding to changes in the economy... and tend to over-react as a result.
September 18, 2007 I think a 4% rate is really what is needed to turn the economy back on the right course. The rate may not get there, but more cuts will be needed with employment rates down and foreclosure rates up.
October 25, 2007 How long will it be before I will be able to write: "The Federal Reserve lowered its lending rate to 4% in response to the collapse of the U.S. housing market and massive numbers of foreclosures that threaten the banking and mortgage sectors."
"Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses," he said.

"Uncertainties about the economic outlook are unusually high right now," he said. "These uncertainties require flexible and pragmatic policymaking -- nimble is the adjective I used a few weeks ago."

December 11, 2007 Somehow the Fed misses the obvious.
[Image from:]
December 13, 2007 [from The Christian Science Monitor]
"The odds of a recession are now above 50 percent," says Mark Zandi, chief economist at Moody's "We are right on the edge of a recession in part because of the Fed's reluctance to reduce interest rates more aggressively." [see my comments of September 11]
January 7, 2008 The real problem now is that consumers can't rescue the economy and manufacturing, which is already weakening, will continue to weaken. We've gutted the forces that could avoid a downturn. The question is not whether there will be a recession, but can it be dampened sufficiently so that it is very short.
January 11, 2008 This is death by a thousand cuts.
January 13, 2008 [N.Y. Times]
“The question is not whether we will have a recession, but how deep and prolonged it will be,” said David Rosenberg, the chief North American economist at Merrill Lynch. “Even if the Fed’s moves are going to work, it will not show up until the later part of 2008 or 2009.
January 17, 2008 A few days ago, Anna Schwartz, nonagenarian economist, implicated the Federal Reserve as the cause of the present lending crisis [from the Telegraph - UK]:
The high priestess of US monetarism - a revered figure at the Fed - says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. "The new group at the Fed is not equal to the problem that faces it," she says, daring to utter a thought that fellow critics mostly utter sotto voce.
January 22, 2008 The cut has become infected and a limb is in danger. Ben Bernanke is panicking and the Fed has its emergency triage team cutting rates... this time by 3/4%. ...

What should the Federal Reserve do now? Step back... and don't be so anxious to raise rates at the first sign of economic improvement.
Individuals and businesses need stability in their financial cost structures so that they can plan effectively and keep their ships afloat. Wildly fluctuating rates... regardless of what the absolute levels are... create problems. Either too much spending or too much fear. It's just not that difficult to comprehend. Why has it been so difficult for the Fed?

About Me

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Michigan, United States
Air Force (SAC) captain 1968-72. Retired after 35 years of business and logistical planning, including running a small business. Two sons with advanced degrees; one with a business and pre-law degree. Beautiful wife who has put up with me for 4 decades. Education: B.A. (Sociology major; minors in philosopy, English literature, and German) M.S. Operations Management (like a mixture of an MBA with logistical planning)