June 19, 2008--Oily
From two side-by-side stories in today’s New York Times:
First, while politicians scramble to stake out positions on how to reduce the price of gasoline—more important now to voters than the lingering war in Iraq—with McCain reversing himself by calling for states to be allowed to authorize oil exploration along more of America’s coastlines and while Obama continues to advocate ways to wean us from our dependency on oil, the Times writes that even if we were to allow oil companies to drill wherever they want, even in the lakes of Central Park, there is such a lack of offshore oil-drilling capacity, and such a backlog with regard to exploring current sites, that it would take perhaps decades before anyone could turn to any potential new oil fields ones. Drill-ships are booked solid for the next five years. In fact, Brazil, which recently announced the discovery of an immense oil field off its coast, can’t get to it because of the dearth of rigs capable of drilling in waters that exceed 6,000 feet in depth. (Article attached.)
Then, the Times reports, the Iraqi government, such as it is, is about to strike a deal with five of the world’s largest oil companies to service their oil fields. To modernize them so that their spigots can soon be turned on full force. I’ve placed emphasis on “service” because by framing the contracts this way the government can engage them to do this work even before there is an oil deal in Iraq that would define how oil revenues will be split among the Sunni, Shia, and Kurds. Also, by defining this work as service, which all agree would give Exxon, Mobil, Shell, Total, and BP a considerable leg-up when it comes time to turn to full-scale production, the Iraqis were able to make these no-bid contracts. (Article also linked below.)
While these shenanigans continue, consumers still want relief from high energy prices. Some like Tom Friedman are less concerned about the run up in the cost of gasoline, feeling that the only way to get Americas out of their SUVs and into Smart Cars and public transportation is by reducing demand. (He, though, wants to increase taxes, not profits, on gasoline so that the money collected can be used for infrastructural purposes.)
But politically, during a national election, even though Barack Obama is inclined in an alternative-fuel direction, he too has to say something about what might be done to help out right now.
One place to turn is the oil futures market. I am far from an expert here, but it is apparent even to me that the $135 per-barrel price for oil that we hear about daily is actually more a futures price than the actual current cost of a barrel at the wellhead. And that this is the result of deregulating by slight of hand back in 2002 the financial market through which these futures are traded.
Here’s how that got done and some of its current consequences.
At the time the chairman of the Senate Banking Committee was the Texan Phil Gramm and into the 11,000-page Government Reauthorization Act, without debate, he inserted an amendment called the Commodity Futures Modernization Act. In effect, it deregulated the financial services industry. When it surfaced, Warren Buffett called the new financial instruments it enabled “financial weapons of mass destruction.”
These have contributed mightily to the cowboy-market in sub-prime mortgages and have also resulted in the roiling of the oil futures market. This latter effect is in part because of the so-called “Enron Loophole” that was also inserted into the Act by Senator Gramm. It allowed energy trading to escape federal oversight.
This loophole came into being in part at the urging of one member of the Commodity Futures Trading Commission. One Wendy Gramm. Phil’s wife, who after she left the Commission became a paid board member of . . . Enron.
Many claim it is this loophole that is responsible for at least a third of the per-barrel cost of crude oil. Translated to the price of gasoline at the pump, if it weren’t for these financial manipulations, we would be paying no more than $3.00 per gallon.
This might not make Tom Friedman happy, but by closing this loophole and cleaning up the rest of the messes that Gramm made (by the way, he is co-chair of John McCain’s campaign committee) we might get some greed and corruption out of the system, which in itself would also be a good thing.
First, while politicians scramble to stake out positions on how to reduce the price of gasoline—more important now to voters than the lingering war in Iraq—with McCain reversing himself by calling for states to be allowed to authorize oil exploration along more of America’s coastlines and while Obama continues to advocate ways to wean us from our dependency on oil, the Times writes that even if we were to allow oil companies to drill wherever they want, even in the lakes of Central Park, there is such a lack of offshore oil-drilling capacity, and such a backlog with regard to exploring current sites, that it would take perhaps decades before anyone could turn to any potential new oil fields ones. Drill-ships are booked solid for the next five years. In fact, Brazil, which recently announced the discovery of an immense oil field off its coast, can’t get to it because of the dearth of rigs capable of drilling in waters that exceed 6,000 feet in depth. (Article attached.)
Then, the Times reports, the Iraqi government, such as it is, is about to strike a deal with five of the world’s largest oil companies to service their oil fields. To modernize them so that their spigots can soon be turned on full force. I’ve placed emphasis on “service” because by framing the contracts this way the government can engage them to do this work even before there is an oil deal in Iraq that would define how oil revenues will be split among the Sunni, Shia, and Kurds. Also, by defining this work as service, which all agree would give Exxon, Mobil, Shell, Total, and BP a considerable leg-up when it comes time to turn to full-scale production, the Iraqis were able to make these no-bid contracts. (Article also linked below.)
While these shenanigans continue, consumers still want relief from high energy prices. Some like Tom Friedman are less concerned about the run up in the cost of gasoline, feeling that the only way to get Americas out of their SUVs and into Smart Cars and public transportation is by reducing demand. (He, though, wants to increase taxes, not profits, on gasoline so that the money collected can be used for infrastructural purposes.)
But politically, during a national election, even though Barack Obama is inclined in an alternative-fuel direction, he too has to say something about what might be done to help out right now.
One place to turn is the oil futures market. I am far from an expert here, but it is apparent even to me that the $135 per-barrel price for oil that we hear about daily is actually more a futures price than the actual current cost of a barrel at the wellhead. And that this is the result of deregulating by slight of hand back in 2002 the financial market through which these futures are traded.
Here’s how that got done and some of its current consequences.
At the time the chairman of the Senate Banking Committee was the Texan Phil Gramm and into the 11,000-page Government Reauthorization Act, without debate, he inserted an amendment called the Commodity Futures Modernization Act. In effect, it deregulated the financial services industry. When it surfaced, Warren Buffett called the new financial instruments it enabled “financial weapons of mass destruction.”
These have contributed mightily to the cowboy-market in sub-prime mortgages and have also resulted in the roiling of the oil futures market. This latter effect is in part because of the so-called “Enron Loophole” that was also inserted into the Act by Senator Gramm. It allowed energy trading to escape federal oversight.
This loophole came into being in part at the urging of one member of the Commodity Futures Trading Commission. One Wendy Gramm. Phil’s wife, who after she left the Commission became a paid board member of . . . Enron.
Many claim it is this loophole that is responsible for at least a third of the per-barrel cost of crude oil. Translated to the price of gasoline at the pump, if it weren’t for these financial manipulations, we would be paying no more than $3.00 per gallon.
This might not make Tom Friedman happy, but by closing this loophole and cleaning up the rest of the messes that Gramm made (by the way, he is co-chair of John McCain’s campaign committee) we might get some greed and corruption out of the system, which in itself would also be a good thing.
posted by Steven Zwerling at
9:36 AM
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