Gas Prices

Published by at 6:17 pm under Economics

a) Reply to Ron Turley’s Response (below) June 3, 2008

Thanks for your assessments. They are appreciated.

Re banning speculators – I agreed in advance there’d be “can’t do it” reactions and that the key questions were how and by whom. But it seems to me to be a fundamental wrong that a few hundred can cause serious hardship for a few billion – only because they can at this time.

Re oil – sure it’ll run out, but in a time frame measured in centuries, not years or decades. Why? Because of technology advances such as you cite and others, including turning heavy oil into light, which will extend the life of existing stocks, and, the exploration and exploitation of blocked fields and new finds of which we’re told the estimates range in the multi-billions of barrels.

But yes, electricity is the better way of the near future. Nuclear generation is extremely expensive and has to be subsidized. It needs a lot of TLC just to keep running and has a lot of downtime. Its output is constant 24/7/365 unlike hydro and steam generated power which can be ramped up or down in response to demand. And it does have some super-serious waste disposal problems. I believe nuclear generation of electricity will go the way of the wood-burning stove as hydro and steam generated electricity generation is greatly expanded and dramatically new sources of stationery power are discovered.

Hydro and steam generated electricity is the cheapest we know, and the cleanest! Burning hard coal or gas or garbage in plants with scrubbers in their stacks not only produces cheap electricity reliably and flexibly, it also produces revenue-earning byproducts such as sulphur. And steam plants can be located anywhere. While hydro is the cleanest and cheapest, it does have to be situated where water falls.

However, I’m certain that long before the need, mankind will invent new energy sources from things like cold fusion or magnetic pulsars or something from the space programmes or ???? Just reflect that prior to 1878 nobody had any idea about the internal combustion engine and prior to 1705 nobody had any idea about the steam engine – or any engine for that matter! Look how far we’ve come in just 200 years!

Our real problem is politicians kowtowing to grant-sucking swindlers thereby blocking invention and innovation. How do we solve that one!?

4. b) Response from Ron Turley re “Gas Prices” (below) June 3, 2008.

I have a lot to say about your thoughts, but will try to focus on a few main points.

Any time a bubble appears, the call to eliminate speculation arises. But it is a completely unworkable solution. How, for example, does one identify a speculator? How does one identify a legitimate producer? a legitimate attempt to stabilise a price and one that is merely betting on a price shift.

In a legitimate future trade, we have a corn farmer who wants to secure a price for his crop in Aug. Green Giant may want to ensure a price in Aug for its input. One fears a decline in price, the other, an increase. The farmer and the manufacturer make a deal at some price. Turns out, however, that there are more farmers than canners. The canners have the upper hand and can drive down the future price. One needs the speculators to make a market, to balance the power of the canners over the farmers.

No doubt the presence of speculators can and will magnify the ups and downs in the market. We have seen plenty of examples in the last few years: Internet companies, residential real estate in the US and commodities.

Trying to eliminate speculation would be a huge regulatory mess. You would need an army of regulators to examine every trade and speculators would find away around it any way. If you like the free market with a minimum of regulation, you have to accept that there will be times when the “true” price of an asset is inflated or deflated by speculation.

The solution to high energy prices is not creating a greater supply of oil. Clearly, it IS running out this time, This is not the 1960’s when “experts” were predicting that we would be out of oil by the 1980s. This time it is for real. Yes, there are oil sands that can be developed and other expensive-to-get-at oil, but we really are near the end.

Larry Kudlow has recommended a Manhattan Project like program to develop non-oil sources of energy. A form of oil can be extracted from coal and the US has huge amounts of the stuff. We need to pour money into building oil-from-coal extracting plants. The technology is already well developed. During the trading sanction days of Apartheid, South Africa was force to turn coal into oil as it had great quantities of the former and none of the latter.

Electricity is clearly the energy of the more distant future when we have used up all of the fossil fuels. With electricity we can produce hydrogen to power aircraft, the one form of transportation which has no alternative to burning fuel. We need to go on a rapid program of increasing the number of nuclear power plants and have to develop and build nuclear powered freighters and tankers.

We also need to conserve what we have. We need HIGHER, not lower, prices of gasoline, home heating fuel and natural gas so that people will seek alternatives and use less of the stuff.

To stem the increase in food prices, we need to abandon ALL food based bio fuels and even then have to look carefully at the energy input to energy output ratio of bio-fuels created from agricultural waste. I am not adverse to solar and wind energy, however, as these will not provide a long term solution, I am not in favour of subsidies for them. We need to concentrate on nuclear power and oil from coal.

4. c) Gas prices

There seem to be as many opinions about the causes of soaring gasoline and food prices as there are writers on the subject.

These high and rising costs are hurting people around the globe and are shaping into a human tragedy of massive proportions.

The causes of the tragedy are man-made and therefore correctable. I’m no expert, but I can read and it seems to me there are four clusters of causes. My hope is that competent persons like yourselves can move the discussion beyond analyses of causes to prescriptions for solutions.

The energy from carbon-based fuels – wood, coal, gasoline, natural gas, propane – drives most everything in the world. Their prices affect all others, but let’s focus mainly on oil and Canada and the U.S.

Cause #1 – Speculation. One report stated that the dollars sloshing around the commodities markets as of March 2008 had increased to $260 Billion from #13 Billion in a little over four years. Orange juice, pork bellies, grains and OIL, you name it. All this new cash had fled from speculative paper in world financial markets to what seemed to be more solid, real products in commodity exchanges. Twenty times more money chasing basically the same amount of product = mania = price explosion.

It is patently obvious that the cost of pumping a barrel of oil out of the ground hasn’t quadrupled in the last four years, but its N.Y. landed base price has.

Why should there be just one price for a barrel of this or a bushel of that when its price is whipped up or down on the flimsiest of rumours by gamblers who have zero interest in the commodity itself.

Solution #1 – Ban Speculators. Restore the original purpose of commodity markets to meeting places of producers and processors able and willing to negotiate a price acceptable to both. Prices would vary over time and by location but only for real cause.

“What! You can’t mess with the free market!” would be the objection. But, isn’t a “free commodity market”, by definition, one in which the price is determined by supply and demand, by agreement between the producer of a commodity and the processor thereof? What’s free or competitive about a single price controlled by people other than the producer or processor? What place is there for a speculator in that model?

If this is a good place to start, how does it get done and by whom?

Cause # 2 – Raw material shortages. The most frequently seen explanation is that the exploding economies of China and India are driving demand way ahead of supply.

But there’s still lots of petroleum in the ground.

One reads that now that 93% of oil production is in the hands of government-owned companies, production is a much bigger problem than when 80% was in the hands of private companies. This is not an explanation. Surely whoever “owns” the stuff wants to find and pump and sell as much of it as they can in order to make money!

One also reads that “unfriendly” governments who own producing companies are a problem. Again, bogus. No government, no matter how alien, would refuse to sell the one product they have for which there is clamoring demand, particularly when some speculators in New York are jacking the price up so high!

Finally, one reads that OPEC consciously holds back releasing production in order to keep prices high. This might have been a factor in the 70’s, but OPEC produces only 30% of the world supply of oil – big, but not controlling – and again the notion of them willingly foregoing cash at current prices does not seem sensible.

There are other factors such as fields nearing exhaustion and/or being operated with obsolete equipment. These are small potatoes in the global scheme of things.

The major challenge to the supply is that Global Warming Swindlers and their fellow-travelling Environuts have cowed Canadian, U.S. and North Sea governments into adopting a hugely hostile attitude toward oil companies’ exploration and exploitation of untapped reserves – which are huge. Regulatory and taxation barriers are monstrous impediments to private enterprises, big and small, finding and bringing to production the vast reserves of petroleum that still exist in North America and the Arctic. Furthermore, government spending of Billions on wacky, economy-killing, “green” initiatives reduces its ability to support the legitimate activities of companies that have proven to be successful suppliers of energy to power the modern world.

Solution # 2 – Governments need to turn 180 degrees in treatment of oil producers. BIG job! But somehow governments have to be convinced that keeping the lights on will be far more politically rewarding than collapsing their economies.

Massive subsidies for windmills, solar farms, ethanol production and other completely useless schemes have to stop. Regulatory burdens have to be made sensible. Taxation and royalty regimes have to encourage, not discourage, exploration and exploitation. Blocked lands have to be released. There are probably other initiatives that would signal government recognition that the Crazy Years are over.

Cause # 3 – Shortage of gasoline and other refined products. North American refineries are reported to be operating at about 95% capacity. This means there is little capacity to compensate when natural or manmade disruptions to operations occur. Shortages of finished product cause prices for available product to rise.

Here again, the usual suspects are engaged in a war against automobiles and other forms of carbon-fuelled transport and have successfully blocked the building of any new refineries in North America for 30 years. (I’m not sure 30 years is true.)

Solution #3 – Much the same as #2. Obstacles to the building of new refining capacity have to be removed.

Cause # 4 – Vertical integration of the industry. It’s a simple observable fact that all gas stations sell their gasoline for exactly the same price. It often varies through the day, certainly by the day, and moves in knee jerk reaction to the N.Y. landed spot price of oil on the commodities exchange. Led by the “Four Sisters”, followed by all the players in the business, the world’s largest and strongest oligopoly has consumers at its mercy.

Oil is pumped out of the ground by a host of big and small producers. It is transported to refineries owned and operated by a few (very big) refiners. Finished product is sold to wholesalers, and, to the retail outlets of the few (very big) refiners. Markups are applied all the way through the chain, starting on the cost of the crude to the refiner and ending on the cost of the finished product to the retailer. Thus, the “Four Sisters” and other Bigs like Petrocan, Sunoco, Irving, etc., earn profit margins on all the steps. There is zero incentive to compete on price in an industry where “orderly marketing” is gospel.

Solution #4 – Do a Bell/At&T. For years, the telephone monopolies successfully repelled every effort to break them up and enjoyed obscene rates of return on their investments. They claimed that they had put up the infrastructure and therefore deserved the reward for doing so. When governments finally screwed up the courage to strip them of their retail monopoly wonderful things happened. Competition of widely different kinds flooded in, prices went way down – particularly for long distance, and service/quality went way up. Everybody’s making money, and, amazingly, the former monopolies are also doing better than they ever did before.

The same principle should be applied to the “Four Sisters” and the other Bigs. They should be forced to sell their retail outlets to bidders in an open market. It could be done in conjunction with the positives in Solutions #2 and #3 above. Competition at the retail level would be restored and would rapidly evolve into a host of independents, groups and chains – national and regional.

The oil industry would then assume the character of the grocery business where a lot of big and small farm operations sell their raw material to a few (very big) processors who then have to market their finished brands through a lot of wholesalers and retailers to consumers. Now that’s s free, competitive market!

Charles W. Conn, Mississauga.
June 2, 2008.