Say what you will about Ron Paul’s idiosyncrasies on foreign policy – and I have – but his efforts to continue driving home foolhardy Fed policies that tank the US dollar and out of control spending need to be heard all day, and every day, until the GOP Convention.
Tag teaming the Paul consistent messaging on monetary policies, Newt’s out of the gate opening remarks at the most recent Republican debate in Arizona zeroed in on another Achilles heel for the WH … the prices at the gas pump, and securing the nation with a self-sufficient American energy policy.
You go back and look at the founding fathers, they’d have had very clear messages. Hamilton would have said you have to have jobs and economic growth to get back to a balanced budget. You’re never going to balance the budget on the back of a highly unemployed country. And so I would be committed, first of all, to a program of jobs and economic growth.
Second, the energy issue is enormous. The leading developer of North Dakota oil estimated recently that, if we would open up federal land and open up offshore, you would have $16 trillion to $18 trillion — not billion — trillion dollars in royalties to the federal government in the next generation, an enormous flow which would drive down prices to $2.50 a gallon, would help us balance the budget and would create millions of jobs.
~~~We have enough energy in the United States that we would be the largest producer of oil in the world by the end of this decade. We would be capable of saying to the Middle East, “We frankly don’t care what you do.
Both of these candidates have their fingers on the pulse of electorate sensibilities. Whether they were privy to James Carville and Stanley Greenberg’s latest Democrat internal polling at Democracy Corps released the day after the debate or not, their focus could not have been more timely.
The President and the Democrats are indeed doing very well at the outset of 2012, and the Republicans are doing pitifully. They are not unrelated. Republicans in Congress and in the primary battles are driving independents into the Democrats’ camp and consolidating and energizing parts of the progressive base. There is improved optimism about the macro economy and the President’s approval rating is up to 50 percent.1
But Democrats should keep their wits. Nearly all the gains have been produced by the Republican slide, not Democratic gains. Both parties and politicians are reviled. And most important, the voter has not seen personal economic gains and Democrats are no more trusted on handling the economy – the heart of this election.
Some of the emerging Democratic messages are on target, but others miss what is really happening and pose considerable risks. The on-target messages set up an effective electoral choice around the middle class, but the off-target ones could give the Republican nominee a platform for challenging the President’s economic record.
The bad news for the WH? No amount of messaging from the bully pulpit is convincing the poll responders that the economy is moving in the right direction, there is progress on job growth, or that “America is Back”. Another party shaker is that the Republicans still enjoy a four point lead over the Democrats on who is the party viewed more favorably for dealing with the economy.
But the good news is that Obama won’t have to significantly change his campaign materials, because the polling results showed the strongest messaging that appealed to voters – including the coveted swing voters – was perpetuating the “middle class warfare” rhetoric. As I pointed out in my December post, Obama Campaign Strategy: Crystal Ball, Unicorns and Houdini Economics, since Obama cannot effectively point to his economic record without using crystal ball “it would have been worse” trajectories, and Houdini economics for the invisible economic recovery, he was going to have to rely on good ol’ Alinsky tried and true approaches… keep the masses who consider themselves “middle class” disgruntled.
This is where Paul’s monetary policy, and Newt’s focus on gas prices and energy reform come into play. And apparently, even Obama isn’t blind to this potential carpet bomb to his campaign strategy. Because out of all of the GOP candidates following the debate, Obama chose to zero in on “also ran”, Newt and his promises about gas prices.
President Barack Obama hit back on Thursday at election-year Republican criticism of his energy policies, offering a staunch defense of his attempts to wean Americans off foreign oil and saying there is no “silver bullet” for high gasoline prices.
Obama sought to deflect growing Republican attacks over rising prices at the pump, blaming recent increases on a mix of factors beyond his control, including tensions with Iran, hot demand from China, India and other emerging economies, and Wall Street speculators taking advantage of the uncertainty.
~~~“It’s the easiest thing in the world (to) make phony election-year promises about lower gas prices,” Obama said, offering his most comprehensive rebuttal yet of the intensifying Republican criticism.
“What’s harder is to make a serious, sustained commitment to tackle a problem that may not be solved in one year or one term or even one decade,” he said.
~~~“You can bet that since it’s an election year, they’re already dusting off their three-point plans for $2 gas,” Obama said. “I’ll save you the suspense: Step one is drill, step two is drill and step three is keep drilling.”
Odd, don’t you think? Most tend to toss a token “atta boy, Newt” out after debates, and casually move on – wasting little time giving serious consideration to a candidate considered political road kill. Obviously, Gingrich struck a nerve.
The wise GOP candidate will recognize that Obama’s community organizer strategy approach is easily rendered impotent by realistic and specific policies that improve the economy. Jobs, more affordable energy, and American independence from Middle East oil, and then watch the “middle class” woes and whining dissipate.
Outside of addressing spending and entitlement reform, one answer to a hefty amount of concerns – jobs, the economy, gas prices, national security and the “middle class” – comes neatly down to the solution with immediate results – our energy policy.
Certainly Romney, Santorum and Gingrich all have vowed increased energy exploration and production. Gingrich has probably been the only one to have tied the production to the economy and national security in such a specific manner – from the money that will be gained from the increased lease revenues, increased consumer spending and business opportunities because of more affordable energy, to foreign policy intervention no longer tied to our national interests for crude from a volatile Middle East. He’s also tied it to infrastructure that pays off when looking towards the future of the Panama Canal, and improving the deep water ports in both SC and FL.
And, of course, most everyone is aware of the positive effects with not only Canadian crude via the Keystone Pipeline, but the added benefits of that transport to Gulf refineries that will be extended to facilitate the Bakken fields resources in North Dakota, and from Cushing, OK.
This is about the time where the perpetual naysayers need to be addressed. i.e. the predictable meme that increased US domestic production will not affect prices at the pump because oil is traded on the world market, or that US crude will not stay in the country.
Before the second point can be addressed, some historic education about the first must be applied. And I’ve found no better single-stop-shopping document than provided by James L. Williams of the energy analysis firm, WTRG Economics – “Oil Price History and Analysis”. It’s impossible to summarize the entire history of the effect on production supply and price controls… pre and post OPEC… in any condensed manner, but I’ll give it my utmost. And it comes down to this…
Throughout history, and with some caveats of events on the world stage and US economic monetary policy, the manipulation and control of production flow to the market and spare production capacity is undeniably entwined with the price per barrel, and has been used for years by oil export nations to raise and lower those prices. Put more simply, supply/demand/competition, and it’s effect on prices, is a historical fact. When the supply is prolific, most especially when the players are non OPEC countries, prices are driven down.
As history shows, when prices would rise to unsustainable levels and demand would diminish, the oil tap would be ratcheted up to crash the prices. This was not always accomplished just by increasing production in the existing states that are oil exporters, because the high prices also spurred on more exploration and production by non OPEC players – contributing to the future benefit of more competition on the world market. It was also a time when private energy investors would tackle energy efficient alternatives… not on the taxpayers’ dime.
Conversely, when the prices were too low, the taps were turned down to stabilize the prices.
Another factor that affects the oil prices and production flow is the status of any of the oil producing nation’s “spare capacity”… or the amount of emergency crude supply that can be turned on tomorrow, should world events disrupt supply. As Euan Mearns observed in a June 2011 post on The Oil Drum, the notable increase in the oil nations’ collective rig counts in Feb 2011 indicated that spare capacities were low. This was also circa Arab Spring uprisings in the oil rich region.
A month before, the Institute for Energy Research also noticed that the OPEC nations’ spare capacity was on another decline.. OPEC’s spare capacity effectively reflects the global condition, since most non OPEC nations, and all OPEC nations but Saudi Arabia, are generally functioning at max capacity.
With a Middle East on the verge of literal explosion, it’s insane to be praying for an uninterrupted supply amidst dangerously fluctuating spare capacity that is not necessarily due to lack of oil field reserve output, but the existing rigs pumping those fields.
As the IER notes:
The inexorable rise in the world demand for oil, coupled with the political upheavals in the Middle East, underscore the narrow margin of spare production capacity. If policymakers want to ease this situation—and thereby take pressure off of oil prices—they should remove legal and regulatory obstacles to further oil production.
J. Michael Sharman at Culpepper, VA’s Star Exponent agreed in his editorial in October, 2011 – “Spare Capacity is the Key to Oil and Gas Prices. At that writing, oil was trading at $88 per barrel.
Oil’s current price is $88 per barrel, which is at least $30 higher than it should be.
The demand for oil in the U.S. has been declining since 2005, and global demand has grown less than 4%. Global oil prices in 2005 ranged from $42 to $58 per barrel. So, under a natural demand-and-supply analysis, the cost of gasoline should not have increased any more than 4% since 2005, for a current price of $60 per barrel, not $88.
And when the future availability of oil is factored into the speculative value of oil today, then oil should be priced even lower than $60 per barrel because global oil reserves have been growing faster than consumption and the ratio of known oil reserves to oil consumption is at a higher level than it has been since 1986.
Instead, reports Reuters news service, investment bank JP Morgan declares, “Our analysis suggests that supply constraints will again be reached by the end of 2013, driving a quarterly rise in our [oil] price forecast to $130 per barrel.”
The “supply constraints” noted by JP Morgan are not a lack of oil or oil reserves, they are an artificial reduction in available supply intentionally created by the OPEC oil producers, primarily Saudi Arabia.
This intentional reduction is often quantified by what is known as “spare capacity,” the petroleum industry’s term for an oil producer’s ability to increase oil production within 30 days and to sustain that increased level for at least 90 days.
~~~David Fyfe, of the International Energy Agency, says the spare capacity for OPEC is just over 3 million barrels per day (“b/d”), on current OPEC production levels of around 30.1 million b/d.
The Wall Street Journal says the Saudi Arabian Oil Co., known as Saudi Aramco, is currently producing about 9 million barrels of oil a day and has the immediate capacity to produce at least 12 million barrels a day. Thus, the spare capacity for just Saudi Aramco is 3 million barrels per day.
The other members of OPEC, says The Wall Street Journal, are already producing at their full capacity. In other words, OPEC’s entire spare capacity is Saudi Aramco’s spare capacity.
The Oil and Gas Journal reports, “In the 1970s, Saudi Arabia considered an increase in capacity to 20 million b/d, but dropped the idea due to US support of Israel against Palestine.” Then, when oil prices shot up in 2008 to $147 per barrel, Saudi Arabian oil minister Ali al-Naimi said the kingdom was preparing plans to raise the country’s production capacity to 15 million barrels a day.
Now, with oil hovering around the $80 per barrel price, Saudi Aramco chief executive Khalid Al Falih has released a statement that “There is no reason” to increase spare capacity.
Again the US consumer finds themselves “over a barrel”, so to speak… held hostage by a single country’s grip on their oil to control the price merely by turning the tap – and the defined levels of spare capacity – down. But with US domestic sources, effectively countering these policies with their own spare capacity volume, the power wielded by the Saudis is significantly diminished merely by the presence of competition.
Needless to say, Obama and the Democrats resistance to US resources adding to the world’s supply – which would force prices downward and strip away most of the pricing power from nations in an unstable region – can only be described as self destructive.
Now that it’s been shown that the world’s collective supply does indeed affect pricing, as demonstrated by history, the second naysayers talking point can be addressed…the false claim that US domestic crude would be sold elsewhere, and our nation wouldn’t benefit.
This, of course, makes not a whit of sense. Refiners are going to purchase their oil required to meet US demands at the best price possible. With all prices driven down by the increased competition, the savings on transport, and not being subject to any interruptions by Middle East despots, or penchant for violence, why would they not first opt for stable US domestic sources?
It is also a fact that the US prices for oil have always been traditionally lower than the world market. Again, per the WTGR Economics historical analysis, since 1970, the US average price was $34.77 per barrel compared to the world average of $37.93.
Are these prices of a long ago era? Not at all, as WTRG’s Mr. Williams points out:
Prices in the mid $30s seem exceptionally low by today’s standards. However, when the current President of the United States [Obama] took office the price was $35.00 per barrel. By the end of 2009 prices had doubled bringing the average for 2009 to $56.35 or $57.00 in 2010$.
Speculators, dealing with futures, could also be reined in simply by moving the Keystone Pipeline forward, which connects Cushing, OK to the Gulf refineries.
Historically, the price of NYMEX crude typically traded near the Brent price with a small premium. Since late 2010, Brent and NYMEX prices have diverged with West Texas Intermediate at Cushing, Oklahoma selling often selling more than $20 below Brent and other comparable crude oil. While continually quoted in the U.S. media as the oil price, oil at Cushing is not currently representative of world oil prices. The reason for the discount is high stocks of oil at Cushing with a limited number of refiners that can be served by pipelines out of Cushing.
Additional oil from Canada and the Bakken formation in North Dakota caused the local supply to exceed demand of the refiners served by pipelines out of Cushing. This resulted in oil stocks to building to 1.5 – 2.0 times the normal level. High stocks at Cushing depressed the local price, but not the price internationally. A return to the normal price relationship with WTI at a modest premium to Brent awaits improved pipeline access between Cushing and the refineries on the gulf of Mexico.
Oh yes.. while we’re debunking the professional “greenies” amongst us, it seems that Alberta’s reserves, once written off as on their imminent deathbed, are booming once again. That ought to sufficiently pique the ire of the Peakniks… LOL
The last large influence (although these aren’t the only factors) on prices is where Ron Paul’s outspoken criticism of the Federal Reserve comes in, as well as the uncontrolled spending of an irresponsible Congress. Because oil is traded based on the value of the US dollar, even if they purchase in Euros, a stronger dollar translates to lower oil prices. And while it doesn’t effect supply and demand, it most definitely affects futures and speculators.
This means we, as a nation, have two major problems. The first is that the debt and spending that our Congress refuses to address with any modicum of serious intent requires a Federal Reserve policy that encourages a weaker dollar so that the debt is repaid with cheaper currency.
The Federal Reserve Open Market Committee (FOMC) has made it official: After its latest two day meeting, it announced its goal to devalue the dollar by 33% over the next 20 years. The debauch of the dollar will be even greater if the Fed exceeds its goal of a 2 percent per year increase in the price level.
~~~But, an increase of 2% a year over a period of 20 years will lead to a 50% increase in the price level. It will take 150 (2032) dollars to purchase the same basket of goods 100 (2012) dollars can buy today. What will be called the “dollar” in 2032 will be worth one-third less (100/150) than what we call a dollar today.
The Fed’s zero interest rate policy accentuates the negative consequences of this steady erosion in the dollar’s buying power by imposing a negative return on short-term bonds and bank deposits. In effect, the Fed has announced a course of action that will steal — there is no better word for it — nearly 10 percent of the value of American’s hard earned savings over the next 4 years.
Not only stealing 10% of the value of American’s savings, but think of it’s effect on oil prices.. and with no US energy self-sufficient policy on the horizon?
Thus it becomes even more frustrating to hear Obama, scoffing at the suggesting of drilling and utilizing US oil supplies, when he doesn’t seem to possess the intelligence to put two and two together. In fact, a weak dollar was defended by Obama’s former Chair of the Council of Economic Advisers, Christina Romer, in her May 2011 op-ed in the NYTs. Her reasoning? A weak economy is not conducive to a strong dollar. Yet she seems unable to comprehend the carousel that happens when the weak dollar only contributes to making a weak economy, weaker.
All said, is Newt’s promise of $2.50 per gallon gas at the pump possible? Or is it “the phony election-year promise” as Obama claims? It is most certainly possible – and with headroom. As pointed out above, the price per barrel when Obama took office was about $35. The average price of a gallon of gas in those same “good ol’ days”? $1.84 for regular, $2.24 for diesel.
What it would take would be a plan that Newt specifically lays out for consideration… develop the areas that can be done without changing existing laws within the regulatory agencies, increase the leases, put the Keystone pipeline on the move to benefit crude coming from ND, OK and Canadian sources, and immediately reverse the restrictions that oil executives have claim have brought the US to the “energy abyss”.
The immediate result would be shovel ready jobs, a different speculation on oil futures, and the “middle class warfare” argument that even Michelle Obama says is nothing new evaporates with an economy genuinely rebounding.
Vietnam era Navy wife, indy/conservative, and an official California escapee now residing as a red speck in the sea of Oregon blue.