Thursday, July 17, 2008

"9 Percent" Congress: You Can't Legislate Your Way Out of This!

Did you see what happened to the stock market when President Bush stood tall, lifted the executive restrictions on off-shore drilling and called on the "9 Percent" Congress to do the same?

You bet. The price of oil dropped like a rock and the stock market rebounded like a rocket! As Bush said in announcing his decision earlier this week it won't mean more oil tomorrow, but it will change the "psychology" of oil trading.

As long as futures traders, speculators if you will, see the supply of oil as outstripping the demand, the price will stay low. Just the hint that new supplies will finally be opened was enough to turn the skyrocketing prices around.

Bush also is calling on Congressional Democrats to end their blockade of new drilling for shale oil, and in the Arctic National Wildlife Reserve, a misnomer if ever there was one. Have you seen the photos of the section of ANWR where the oil companies want to drill?

A more desolate and barren piece of uninhabited wasteland would be hard to find.

Bush has been very clear in previous statements that he sees the United States as being in a transition period moving away from fossil fuels to alternative forms energy. But there still has to be oil for fuel, whether it is gasoline, diesel or home heating oil, until that transition is complete.

Democrats in Congress meanwhile, led by Connecticut representative John Larson, are responding to the crisis in the same way they always do - by coming up with new legislation that won't have any impact whatsoever, and new taxes to further strap the American people who already are taxed beyond our ability to pay.

Larson is pushing new regulations on the stock market targeting oil speculators. That this type of regulation is unnecessary was shown quite dramatically by Wednesday's quick turnaround in both stock value and oil prices when even the hint of opening up the supply made its way to the ears of futures traders.

The New York Stock Exchange opened its first permanent headquarters near Wall Street in New York City in 1865. But it traces its origins to the Buttonwood Agreement of 1792, when 24 New York City stockbrokers and merchants first got together to do some trading. In 1817 the New York Stock & Exchange Board (NYS&EB) was formally established and operated out of rented rooms at 40 Wall Street.

Can someone tell me what possible regulation the government could have missed implementing in the two centuries that people have been buying and selling stocks, securities, bonds, futures, and commodities considering especially that the country has been through recessions, depressions, bull markets, bear markets and scandals galore in that time?

America does not need more knee-jerk, feel-good Congressional legislation to address a problem that Congress created in the first place.

Do you want to strike back at "speculators" who you believe are responsible for the spike in energy costs? Fine! Open up the supply of oil, which will drive down the prices through the time tested laws of supply and demand.

As long as the United States continues to seriously work on development of alternative energy supplies - hydrogen is my #1 choice, but we also should work on solar, vegetable oil derived from algae, and to a limited extent wind - we CAN in fact drill our way out of the current situation.

But we can NOT legislate our way out of it. All that will be accomplished by the current calls for new legislation - including another Larson favorite, taxing Internet poker winnings - is the creation of another diversion to shift attention away from the fact that Congress created this imbroglio by curtailing drilling offshore, in ANWR and for Rocky Mountain shale oil in the first place.

New England's Congressional Democrats, again led by Larson, Wednesday proposed another whopping oil-related tax increase - of course they didn't portray it that way. New England's Democratic delegation members revealed they just want to spend another $10 billion, supposedly to fund emergency low-income heating fuel assistance and weatherization assistance.

That figure is triple last year's budget, meaning that we must have seen quite a spike in low income Americans, as well as in oil prices.

Where the $10 billion is to come from wasn't exactly worked out, which of course means when no one is looking there will be another fee, another tax, another cost on top of a cost to pay for a program that isn't necessary in the first place.

Larson's opponent in Connecticut, Republican Joseph Visconti, immediately countered in the media that Congress lift the ban on drilling offshore, in ANWR and for shale oil, which he said would enable President Bush to use oil from the Strategic Petroleum Reserve to go directly to the states for emergency heating oil relief.

Under Visconti's plan there would be no new taxes, and as he pointed out Thursday, American taxpayers have already paid for the oil in the Strategic Reserves once, why should we pay for it again? He also recommended expanding the reserve to give our country a true buffer against foreign interference, and requiring a portion of all new oil sources to go to the reserve to keep it full.

Under the Democrats' proposals, the strategic reserves would be diverted to the marketplace and resold at the pumps, enabling foreign oil cartels to again manipulate the market for their own profit. Also, since the Dems say they would take no more than 10 percent of the reserves, Republican leaders in Congress say it would only last for a few days.

Oh, and before I forget, I learned the other day that there are idle offshore rigs in place off the coast of California that could be up, running and produce new oil supplies in a year if given the go-ahead. Knocks the pins right out from under the Democrats' claim that we wouldn't get any new oil for a decade, doesn't it?

The truth is, we can drill our way out of this situation if the drilling is combined with a comprehensive, non-stop movement away from fossil fuels to alternative sources.

But more legislation? From the very people who created the high prices through manipulation of supply? No, I don't think so.


Fred said...

Ditto Ron. Well said and right on target as always.

David M said...

The Thunder Run has linked to this post in the - Web Reconnaissance for 07/18/2008 A short recon of what’s out there that might draw your attention, updated throughout the check back often.

Doug said...

Can someone tell me what possible regulation the government could have missed implementing in the two centuries that people have been buying and selling stocks, securities, bonds, futures, and commodities considering especially that the country has been through recessions, depressions, bull markets, bear markets and scandals galore in that time?

They didn't miss it. They had it. Commodity trading in oil had once been more or less reserved by the FCTC for people who actually had a stake in oil -- oil companies, airlines, etc. -- and restricted to outside speculators. However, brokerage houses set up an offshore exchange to get around FCTC restrictions, and in response that regulation was removed to prevent domestic exchanges from being disadvantaged. As a result, oil futures trading which totaled about $16 billion in 2003 is now at $260 billion. That's over a 1500% increase in the impact of futures trading on the market.

The "time-tested laws of supply and demand" aren't in play as they should be, and it is due to the outside speculators. You correctly surmise that "as long as futures traders see the supply of oil as outstripping the demand, the price will stay low", but that's exactly the problem - it isn't driven by the actual supply and demand, but by someone else's perception of it. Think about it. Bush's announcement did not increase the supply of oil by a single barrel, yet the market price dropped. And the demand for oil in America has actually decreased by 500,000 barrels per day in the last year (or about 3%), but this has had no effect on the market price that's perceptible to me. Supply and demand does work, but you have to let it. Speculators are the fly in the ointment right now.

The most important thing that this legislation does AFAIC is close the offshore loophole, and put the bulk of the speculation back in the hands of people who actually have a vested interest in the industry - people who will actually take delivery of the oil and do something with it. Taking it out of the hands of people whose best interests are served by convincing each other that the price is only going up will restore natural market forces.

I personally don't think there is a single answer to the problem, and if there was this certainly isn't it, but it is an obstacle to all other answers. When actual supply and actual demand control the price of oil, rather than a bunch of brokers' guesses about what the supply and demand might be at some later date, other measures like expansion of alternative energy to further reduce demand can have an impact.

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