Drilling for profit in all the wrong places

John McCain and Bush are calling for a grand solution to our energy woes: tapping the billions of gallons of crude that lie off our coasts and in our wilderness areas. Less obvious is just how easily the oil can be extracted, refined, and brought to market--here. Some of the reserves on the Continental Shelf lie within eyesight of some of Florida's internationally renowned beaches. Other areas out farther in the Gulf are now accessible to drillers but lie up to five miles underwater, which will test the limits of engineering. Even if the oil can be brought up, it will take billions of dollars and years of time.

Drilling concessions to Big Oil need to be tempered by environmental standards and limits on oil company profiteering. Unfortunately, the spiralling cost of oil encourages producers not to produce, but to rather sit back and wait to sell into higher prices in the future, a practice which tends to run prices up even further. Democrats claimed that oil companies already "have under lease 68 millions acres on federal lands and waters--outside the ban area--that are not being developed." (link).

Allowing those who control the drilling and manage our supplies to lease more lands allows them to sit on the reserves. They could sublease the fields and make huge sums simply acting as intermediaries between the government--every successive regime sees itself as uncontested "owner" of all public lands--and the actual drillers and refiners.

As margins shrink, distributors have been squeezed out of the industry as the costs of petroleum go up almost daily. Gas retailing is extremely low margin, less than 4%, to the point some outfits have gone to cash only to avoid credit card surcharges (link). One oil producer, Exxon Mobil, just sold all its distributorships. More profitable it is to ride out the higher prices than to compete on the distribution end, where higher fuel costs mean constantly shrinking profit margins. Like inflation, it can takes several days for higher prices to result in higher prices at the pump --distributors eat the difference.

Fruit falls near the tree

One would think that the public would grow suspicious of the motives of long-time incumbents with ties to the oil and natural gas industries. Bush, who hailed from Big Oil, has presided over a regime that has seen the price of crude oil go up almost ten-fold.

I'd cited a few posts back a CNBC poll that placed blame for the higher cost of oil on a number of different players. Bush finished well back in the poll, behind Congress even, for his role in bringing higher oil prices. Many CNBC viewers are "free-market capitalist" Republicans, so they might have a hard time believing that the actions of our government could account for such a huge swing on prices set in what is a supposedly open market. For years this group has blamed government regulation, a Chicago School of Economic hobgoblin for some time now, as the chief source of problems in what are otherwise perfectly functioning markets.

Given the predilection to demand government get off our backs, it should come as no surprise then that Republicans would tend to blame a domestic drilling moratorium for the higher prices. Much harder to confront would be the reality that continuing military intervention in the world's largest oil-producing region could be to blame. Yet as has become the norm under the Bush years, disconnnecting causes with their effect has become a way of coping with a world that simply won't cooperate, and a world that won't give us what we want, no matter how much we deserve it, or how righteous our cause in the War on Terror.

If one looks closely at the price of oil and its trailing indicator, oil company profits, the run-up in oil prices came well into Bush's term, after 9/11, so terror wasn't the cause--the reaction, the wild lashing out, was. The spike upward began almost precisely as US tanks rolled across the Iraqi border from Kuwait. Coincidence? Impossible. Bush and two million share Halliburton sharehold Dick Cheney are intimately tied to Big Oil. How can we separate their commitment to increase profits for their cronies from their actions? Can we really believe that the President was invading Iraq to spread democracy and secure the world from the spread of terror as he claimed? Or can those of us who dare to think for ourselves consider the connection between the rising oil prices and the actions of our President? Cause and effect are quite pronounced in regard to the price of oil--one need only consult the charts showing oil's steady march up.

Of course other factors have pushed the price of oil up. For one thing, China's economy has grown and generated much more demand for petroleum. India and a host of nations have a growing middle class which emulates an American standard of living built around cars and suburbs. Demand in the US has increased, due mostly to the inability of Washington to redirect national priorities. We consume 25% of the world's energy though we make up but 5% of its population.

Congress can be blamed to some extent for caving in to the influence of the now-not-so-Big Three automakers (Chrysler's stock is now valued at under $1billion, making it a mid-cap.) Detroit was content to push massive SUVs and stave off new CAFE standards as long as possible. That plan is proving unsustainable with higher gass prices--it'll be a miracle if US automakers can catch up with the Japanese and Koreans, who've made fuel efficiency key to automobile design for years.

Time for real change

It is the job of a real leader to push for changes where momentum to keep doing as before is so strong, as it is in America's gluttonous use of oil. A President is elected to lead and to force change even where it's not welcome, like in the corporate boardrooms of Big Oil and the automakers. Now if the President is no more than a corporate shrill beholden to these industries, he'd be less likely to exercise his leadership. Leadership failures are therefore not failures at all, but rather grand deceptions meant to benefit the few at the expense of the many.

Large entities do tend to drift into complacency--leaders who can bring change represent a threat to the status quo rather than the means to create a better future. In a style favored by the Washington establishment, rhetoric is fashioned to appeal to the populace, whether or not the candidate really believes in the things they say. The difference between leading and pretending to lead is a willingness to confront the need for change and the constituencies which oppose it. The benefits to our society have to matter more than the corporate sponsorship offered to politicians in exchange for serving the interest of the few. Washington becomes particularly monolithic at the end of a numbing eight-years under a single President, the capital seems more averse to change the more it needs to change.

Nothing Bush has done would indicate any commitment to change. Yes, there have been rhetorical pronouncements, but little of substance has been achieved in regard to energy policy. Most glaring is the complete absence of any conservation program whatsoever.

I'm old enough to remember the Carter years, during which we Americans experienced what I believe was the second major oil shock of the 1970's. Starting at federal offices--which were supposed to start a trend--thermostats were turned down. The speed limit on the entire interstate highway system was brought down to 55 miles per hour. Executive orders were used to force government departments to save on energy. Acting on the President's example, private corporations and individuals all across the nation joined in by reducing costs, commuting, doing whatever it took. Where is that conservation effort now?

Surely turning down the thermostat a few degrees is not such a great sacrifice, nor is signing an Executive order forcing better fuel economy standards on federally owned vehicles that big of an effort. Therefore it's something other than the effort to change that is missing--it is the lack of a desire to change. In short, the White House doesn't want to change, despite the fact it could through no great hardship bring conservation to the forefront, where it most deservedly belongs in this time of crisis.

One could suspect that the lack of leadership on this issue is not the product of happenstance, but rather the absence of leadership is perhaps the willful desire of a regime wedded to its cronies in the oil and energy businesses.

Now we are told that the windfall profits of these companies shouldn't be taxed. To go a step farther in their prostrations at the feet of Big Oil, McCain and Bush vow to make every orifice available for drilling and exploration, to solve America's energy crisis, a crisis that would likely never have been so severe if energy conservation had begun, or if US forces weren't still threatening the stability of the world's most important oil-producing region.

Could the higher oil prices and the actions of the Executive be related? How could they not be? Looking now at the consequences of inaction on energy, and the giant hole that higher energy prices have created in our economy, it's hard to believe that the damage could have been intentional. Then again, if there's anything that Bush's time in office has shown us, it's that we are truly on our own. If it's a YOYO (your on your own world), the first objective is to get your own piece, then build a bunker, or escape, and let the weak and vulnerable reap the consequences of whatever may come after.

"Apres moi, le deluge," the French King Louis the 15th said. This in English means "after me, the flood." The King knew what would come, the French Revolution, largely because he had done so much to bring it on, by overspending and constant war-making with other European nations. Perhaps Louis got off on his grand legacy, knowing that whatever would befall France, would be as the result of his excesses. In this regard, the King would be the last of his dynasty, part of an unsustainable system of government by a French nobility that had little concern for the lower classes or the consequences of their leadership (or absence of it.)

Just how much flooding is there to come in the wake of Bush/Cheney's eight year reign? As the Mississippi river floods town after town along its banks, we're left to wonder just how big of an impact higher gas prices will have. There will most certainly be a ripple effect, despite the best effort of government statisticians who separate food and energy from the core rate of inflation, as if food and energy didn't matter.

Try as they might to minimize the impact, le deluge will likely flood virtually everyone's home, with a force and fury mightier even than the Mississippi's. We've built a suburban lifestyle here in America that requires huge amounts of energy. Our homes are too big, as are our cars. And worst of all, Americans are woefully ignorant of how much energy we use. TVs are left running; car motors are revved even where a stoplight ahead is clearly red. It's as if not knowing how much we use allows us to keep on wasting energy--as if so many wasteful choices won't add up or hurt us if we simply don't acknowledge the problem. Denial it's called--sooner or later the pain of higher energy prices will cause the addict's inevitable bottoming out that brings to the mind's fore the scale of the problem and desperate need for change.

Much talk of a second depression is rooted in Peak Oil. There is however plenty of oil, except that it's not as easily extracted. Much of the oil off our coast is likewise hard to obtain. Available, yes, cheap, no.

Yes, we can produce billions of gallons, but at what cost to our tourist economy? Bush has authorized coastal exploration at the federal level, which means that it will be up to the states to drill or not. Some states might go ahead, despite the risk of beach contamination.

We can't drill our way out of this--an approach that the Republicans are tossing around as if it were possible to reverse the reliance on imported oil--which now provides something like 60% of our petroleum needs. I've heard that the Alaska National Wildlife Reserve (ANWR) holds about 2% of the US' annual needs, and will only pump out for 20 years. What then? We'll still face the same predicament, and by then our government will likely be even more indebted.

A pipeline is very vulnerable to sabotage; a single rifle shot in late 2001 shut down the main Alaskan pipeline. There is also the highly ironic quandary posed by melting permafrost, which makes the construction of pipelines very expensive as they must be built above ground on elevated platforms. BP was fined for massively polluting an Alaskan oil area as their inadequately maintained, corroded pipes burst. As with Exxon Valdez--whose damages to the victims have yet to be paid by Exxon--shows, the oil and natural gas industries are neither efficient nor especially careful. And should they make a mistake, they will most assuredly use whatever political influence they have and the best lawyers available to avoid legal and fiscal accountability.

Polls have put a narrow majority of Americans in favor of drilling in wilderness areas; these results are brought forward by pro-drilling groups and their media allies. The connection between new drilling and lower gas prices is hardly convincing, yet our commitment to protect and preserve our national heritage, the raison d'etre for creating these places, is under constant pressure by those who would exploit these resources for their profit. Signing drill rights away depreciates past efforts to protect these lands-they were set aside for a purpose that is neither economic nor the selfish domain of this generation to deny to others. Permanent disfiguring of these places marginalizes their value as wilderness areas in which future Americans can recreate, in effect denying their use and the purpose for which they were created.

Now if Bush and his cohorts could simply auction off every national park, reserve, forest, and wildlife management area to their cronies in Big Energy, they would. And no thought would be given to the environmental devastation, which could well assume massive financial consequences to affected regions, if the Valdez is an example. An oil leak off the coast of Florida, to give just one example, could decimate that state's economy for years. Besides, the benefit of oil leases to the general public is a small fraction of the benefit to the developer. Oil and natural gas developers do have to contend with massive start-up costs. We are of course routinely reminded by their lobbyists in Congress that lower government regulation would make things less expensive and therefore cheaper for the consumer. This despite recent testimony before the Senate Commerce Committee that attributed approximately 1/3 of a barrel of oil's cost to speculation.

During the June 3rd meeting, Michael Greenberger, a former Director at the Commodities Futures Trading Commission, linked the activities of speculators with the higher price of oil. This idea in itself is controversial to many of the corporate interests which want to seize on the "oil crisis" by expanding drilling, typically through absurdly low lease rates on federal lands. I'm trying to dig out the video from that hearing, as I'd been surprised by its candor and Greenberger's highly persuasive commentary. I wonder if the challenge I'm having getting a link might be precisely because the hearings were so direct, which flies in the face of Washington's obstructionist and byzantine functionings which seem to avoid scrutiny and transparency, in an effort to limit accountability.

In a Senate Democratic Policy Commitee Hearing in May, 2006, Greenberger traced many of the problems we face to speculation. In that testimony (.pdf), Greenberger separates the distinct objectives of one group of companies--those that pay for the higher price--from the "oil industry, the banks and the hedge funds, and free market-oriented financial regulators who contend that market manipulation plays no role in this price run up" {Footnotes omitted.}

Greenberger goes on to link Enron's price manipulation schemes with higher energy prices in California in 2001-2. It should be noted that those higher prices were brought on by de-regulation. Enron--it should be remembered--was the #1 donor to George W. Bush. In return for this financial support, federal regulators were held at bay in a quid pro quo that might be repeating itself for the benefit of oil speculation. Of course California had some serious energy issues at the time, but it was the combination of a weakened regulatory environment, coupled with predatory practices by greedy corporations, that led to a worsening energy crisis. In this sense, California's energy woes then acted as precedent for what's happening on a natural level now. Led by mostly GOP partisans, our elected representatives might view the oil and gas companies as the solution to the problem and simply give them what they want, as we see happening with unconditional funding for Iraq. This despite the clear mandate the Democrats received during the 2006 election to end the war. In both cases, the popular will is subverted.

The same people who advocated abandoning so many of the regulatory and environmental standards are the same people speculating on the higher prices. According to Greenberger, limits on speculative activities that stood in place for over 70 years in the commodities market were recently removed. Investors in energy companies, meanwhile, have the most to gain in the short-term from de-regulation, which allows them to raise prices in exchange for opening up their markets to competition (which unless you have a few billion lying around most likely won't mean you.) Even today, we can hear the constant bleat of market mavens who advocate drilling more of less everywhere, as if these speculators had the best interest of the American public at heart. While lower gas prices may have a stimulative effect, lower prices may be quite some time in coming, as the reserves located off our coasts will take years and billions to develop. Many of the speculators will help invest, but they won't do so for free, or for a rate of return which is lower than that they can get abroad.

This article in smirkingchimp notes how Morgan Stanley now owns more oil than any oil company. Through the derivatives market, huge quantities of futures are bought and sold, often without any link to the underlying commodity. Securitization--the use of sophisticated financial contracts--overshadows the buying and selling of actual oil. Like bundles of mortgage-backed securities, Wall Street pounced on commodity contracts as the natural consequence of easy credit and too much capital available for speculative purposes from hedge funds and banks. With excess capital to invest, real assets like oil become more attractive. As more and more money flows into those assets they appreciate, further increasing their demand and price.

In reality, the rising asset bubble we saw in real estate has found a new bubble: commodities. Money likes to follow money; once the consensus that oil is headed up gathers momentum (CNBC's oil price ticker refers "America's oil crisis"), then further price gains become almost certain.

Government regulation is here for a reason, and where markets de-regulate, we are made painfully aware of the reason for the existence of regulations--to protect consumers from the inevitable greed of the capitalist system, whose mantra is "greed is good." In the constant effort to attain higher profits, sacrifices are willingly made to the environment, and short-cuts taken, even in some cases to the detriment of the companies themselves. Sustainability is not a virtue; more attractive to these investors are the corporate raider-style tactics of a Carl Icahn, who come in and plunder a company's name and desert its stakeholders. Looking at the companies where Icahn and others like him have had their say, very little or nothing is left over. TWA and Enron are great examples.

We can't afford to let Big Oil control our energy future. The public lands belong to us, not our government, and therefore we retain exclusive control over their use. Leases must be fair, and the lessees held accountable for the efficiency of their operations, as well as the environmental impacts. Above all we need to reduce energy consumption, which will reduce our demand on imported energy, much of which comes from nations who are either hostile to us, or are our strategic competitors, like Russia and Venezuela. Yes, we need domestic energy production, and we can do it more effectively through renewable, low emission resources than through oil, which through the combustion engine guarantees increasing levels of CO2 and greenhouse gases which will further radicalize our climate.

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