CAN WE REDUCE OIL PRICES?- WHO DO WE BELIEVE?

My research for this discussion was very difficult because everyone giving information has some type of self interest. I have to admit to some bias and yet I would really like to know the truth. I have the advantage of years of experience, formal training in economics, took a second major and job training in business management, a little experience trading oil futures and even some experience in politics. Let me see if I can add to your knowledge and tell you the several sides of each issue affecting oil prices. I apologize for the length of this article but there are many factors affecting oil prices and the length is necessary.

There are a number of things that will affect oil prices and you better be ready to accept part of the blame. If we do not realize that we are the main problem we are never going to resolve the issue.
The main cause of high oil and high gas prices is the law of supply and demand. We use too much and other parts of the world are using more so we have to recognize the problem.

High demand causes high prices because more people are bidding on the product, the world is not producing enough to meet demand and reduce prices and we will not allow drilling or construction of refineries. The suppliers of oil are holding back and maintaining a reduced supply so the price stays high. So first I will discuss how we can reduce demand.
Then I will talk about increasing supply. Then I will discuss finding alternatives. We will also look at the speculators. In the end I hope you will better understand that we have to do many things, cut back, develop mass transportation, find alternatives and for awhile increase our production and supply to help reduce prices.
There are forces at work trying to keep the price of gas high so we will use alternative sources. The alternatives have to be experimented with more to make them reach their potential so you and I are going to suffer while others play with pricing. If you want to do something about it you are going to have to study this article and maybe do some additional investigation. If you learn more that will help all of us please pass it on. Let us begin:

First there is the effect that you and I have. We are addicted to automobiles. A recent study of major addiction shows that we are most addicted to cell phones, then automobiles and then cigarettes and so on. Our addiction to the auto developed with the Model T Ford when it made most families a part of the success of the US by giving them independence and transportation at a price they could manage. We had arrived. Since 1909 we have been bombarded by the allure of the auto, right up to the current ad by Cadillac for the sexy gal asking if your car turns you on. I remember an article in the Portland, Oregon newspaper about how the car interests bought up the well operated trolley system and ran it badly until it went bankrupt.

We, you and I, need to support mass transportation. We need to push for it and we need to use it whenever possible, especially mass transit fueled by alternative power such as wind, sun, tide, nuclear power and standard electrical power. I have to place this as a high priority item because we can do things to lower the price of gas but the expansion of population around the world will continue to increase our need for gas and until we can develop alternative power we will continue to be short of production of fuel. We will also be expanding our highways and the dangers connected with them. We can expect to see massive enlargement of highway sizes in the near future. The efficient development of mass transportation and the efficient distribution of power to these transportation methods through electrical wires will be an advantage.

This is a long term solution but we must push for it now and we must start educating our children to pull them away from the worshipping of cars. It is reported there are 3 cars for every resident of Los Angeles, the average American Family owes a whole years salary in car payments, we are killing many people on the highways and we are destroying many pristine areas to make room for the highways.
You and I can also affect the price of oil by reducing our dependence on the automobile.

Second.
The cost of oil is controlled by many factors. OPEC Nations control production to maintain the longest and highest value of its finite supply of crude oil. One of our former national officials went to the oil producing nations and earned millions by showing them how to organize into OPEC and maintain maximum income. If we show we are serious about drilling and becoming self sufficient it will cause OPEC to reduce the costs of crude to where you and I will stop worrying about the cost of oil and worry more about a green earth. We are already causing concern because OPEC is considering some adjustments to production to reduce prices by increasing supply.
J. Boone Pickens who has made billions in oil and is considered to be the smartest man in the oil business recently told Neal Cavuto that world production of oil is about 20% below demand and that will continue to keep the oil prices high for a long time period.

In addition to the price created by supply and demand we have price increases caused by speculation. This comes under the discussion of futures trading. There are two factors you will hear about, one is the low margin required for trading and the other is the so-called Enron Loophole.
At the present time you can control the future price of oil by buying a futures contract at a market price. You must have good credit with a commodities broker dealing in the correct exchange location and place on deposit about 5% of the futures market value of 1000 barrels of oil. When oil was at $100 per barrel a market value of 1000 barrels would be $100,000. You could buy this unit and control it for a deposit of $8,000 (Includes 5% deposit and fees). As the price increased you could sell that unit for the market so when the price reached $130 per barrel you could sell that unit for $130,000 and would therefore earn $30,000 on an investment of $8,000. It looks easy but hindsight is wonderful so consider if that price had dropped to $90 your broker would be looking for an additional payment to cover the $10,000 loss. The risk is high and the losses can be staggering so keep in mind that if the market perceives that the price will drop owners of these futures units will start selling fast and the drop in price will be fast and many losses will occur. This is one of the reasons that starting to open more drilling locations will drive the nervous investors away and prices will drop. OPEC nations also point to the futures price and will price their commodity accordingly because they feel they should not get less than the futures price is willing to pay. The futures market usually evens out wide swings in prices and can be beneficial to the public. However, the margin should be increased from 5% and gradually increased to a rate between 30 % to 50%. This would reduce the number of traders who get involved for a quick profit during difficult times such as we are having now.

Also keep in mind that many prudent investors have stock investment programs and 401 K retirement programs that invest in these commodity futures. It tends to even out wide swings in the market except at certain times like we are having now and that could be controlled by higher fees.

We also have to look at the Enron loophole which allowed the commodity market to deal without federal controls. We really get involved in politics here because the bulk of the information explaining the procedure is encouraged by the election process. I relied upon Wikipedia and tried to get a non biased view but I also read the descriptions of some of those that have a political agenda and I must admit it is difficult to get a clear viewpoint. Better control is a legitimate argument that needs to be considered but is the control set up so that politicians can hold more hearings just to gain publicity? It might be better to require higher margins and let it go at that. If there are wrong doings by individuals investigate their activities but enlarging the power of our congress over areas they are not familiar with to gain political advantage is dangerous. I would like to see more information and clarity about this subject and possibly an investigative group of experts could study this and clarify the regulations and their procedures to the public. The Enron loophole came about when congress passed a bill restricting some investments practiced by Enron. The bill was studied by investors who soon learned it allowed them to switch futures trading to uncontrolled futures trading boards that were not controlled or open to inspection of the Commodities Board of Trade. Some very large groups began dealing in huge amounts of futures contracts and found they could control the price of many futures markets including oil. Recently the Congress passed another bill that would grant subsidies to farmers and the administration was opposed to this bill and wanted to veto it. Inserted in this bill was a patch to bring the futures markets back under some control. Congress had enough votes to override a veto but because there were several features in the bill you will see game playing and grandstanding before the public claiming who voted for and against the bill. It is cheap maneuvering which is used to confuse the public and gain votes at election time. We will see if this change in the law helps. Nothing has happened yet to the price of oil so maybe the new bill has some flaws in it also.

Another subject of heated discussion is the existing oil and gas leases that are not being utilized. I see estimates of 40 to 90 thousand acres of leases now in effect that are not being utilized. When I tried to find the reasons for this under utilization I had real difficulties. One side says they are not being used in order to drive prices up. The other side says the leases are in areas where there is limited gas or oil. Some have suggested swapping leases for new and more promising leases, others suggest fines for non use or cancellations. These discussions are troubling. In a time of concern for good business ethics our government has a made a contract and if it is a bad contract we have to honor it. But we have to find out why the leases are not being used. One study said most of the leases were purchased by oil companies because they were cheap and help build a better looking balance sheet showing valuable reserves. This helped with financing and stock sales. In another commentary I found statements by an economist with the oil industry that sounded plausible. He stated the leases were not considered productive enough to be profitable unless the price is high like now but there is fear the price will be reduced soon and that would make them unprofitable again so there is reluctance to invest in their development.
If there were some non political studies we might find a solution. It is very hard to solve a problem without a true definition of the problem. Certainly the ability to exchange leases for more profitable leases would seem in order with a stipulation in the new lease that development must take place within an agreed time period.

Should we drill in some of our pristine areas of the country? Most Americans feel we should. Others feel we should not and should wait until we have developed alternative forms of energy. I feel we must take some immediate corrective action to increase supply and reduce prices. We should also work on alternative fuel sources and new forms of energy. We should also support mass transportation for a longer term solution. If we use a stop gap procedure of bringing new oil supplies on line while we develop other forms of energy we will intimidate our present suppliers who will reduce their costs to keep us from having the need to develop our own resources.

One of the suggestions made is that we should tax excess profits of oil companies. Economists have made many studies of this subject and even affirmed it in the independent studies hired out by the Fair Tax group. They have found that corporations do not pay taxes, it is a cost of doing business that is reflected in their product pricing so the consumer ends up paying the tax. We might also look at the excess profits made by the oil companies. The reports are they show a profit of about 8% net taxable profit. Some companies selling high quantities of products work with 2% to 3% of profit, A 6% profit is about average but some companies related to banking and also sales might have profits in the double digits and some go as high as 25%. The oil companies are large and their 8% may be seem excess but talk to some accountants and look up profits for various types of companies and judge for yourself. Excess profits taxes will be passed on to the consumer and I do not find this a worthwhile or dependable system of trying to reduce prices at the pump.
Should we drill in ANWR? I have seen photos of the area to be drilled and it is not very pristine, it is a desolate coastal area as confirmed by satellite maps and photos taken by a former bush pilot in the area. Probably the biggest convincer to me is that if we buy our oil from a foreign company they could be destroying far more pristine areas and with much fewer controls than we use. We owe it to the world to develop resources with our technology and controls.

Should we drill off our coast?
Take Florida for example or Florida and California which controls the bulk of our total coastline mileage. As I ride along the coast my view is usually blocked by ugly condos and they are fighting to control the beach access around them. Now, many of these residents want protection for their view and their beaches from the rest of us who have to pay higher gas prices. You cannot see beyond 15 to 20 miles out to sea anyway so what is the problem? We have shown good control of our pollution and many benefits of tapping the oil reserves off the shore lines so lets do it.

I watched an interview with a person named Eric Bolling (an independent trader on CNBC and Fox Business channel) who called some drilling companies to see what the delay is in drilling and bringing on line additional oil production. He was told that the drilling companies have rigs available right now to go out and drill. He said if it was further out from where they are drilling now much of the infrastructure is in place and additional oil could be flowing in about 3 years and possibly in as little as 1 year.

I also looked into the reports that China is drilling off the coast of Cuba. I found this project had not started, partly because the nearest refineries are in the US and because of our embargo the oil could not be brought here. However, Bolling says there is talk of discussion between Venezuela and China and if this project starts there is fear that Cuba will be drilling a short distance from our southern coast and with new technologies they could be drawing out the oil from the vast reserves we are failing to utilize in the Gulf of Mexico that are near Florida.

Now, lets summarize our findings.
We need to manage transportation better which will help us manage fuel and energy supplies better. With increases in mass transportation, especially electric it allows us to distribute the fuel more efficiently and to have more options for the source of energy including nuclear power.

We can still alleviate the near term cost of energy by exploring new forms of energy which will help convince OPEC to reduce costs and increase production while we still need the commodity.

We can make greater use of our energy resources which will still be used to fuel our new mass transit investments.

One of the new prospects for biofuel is a new plant that grows in dry areas and could be planted and harvested along our southern border by hiring our neighbors. This plant seed will produce 10 times the oil in corn and could expand our resources. India, for example is planning 9,000 acres of the plant.

As you will see we are being misled by many for political purposes. We must bring a stop to this and pay attention to who is using earmarks inserted in bills without disclosure and review for the expenditure.

The main problem with our need for oil is our overuse of cars which are not an efficient means of transportation and requires delivery of fuel to the point of use. We all agree we want to clean up the planet but we cannot be blind to using our resources now as we develop new and better forms of energy. We have many prospects but it will take a few years to improve upon them so we benefit the most from the new innovations. One of the people who have been working constantly to help us see the value of improvements in transportation has been my own member of the House of Representatives, Congressman John Mica. He has been honest and straight forward and has not wavered from his objectives. It is my support of him as a fine individual that has stimulated me to study and try to contribute to your understanding of all the factors in affecting the high price of oil and fuel. I am trying to be non-political and hope you will see past the politics and look for the truth. If you have good knowledge of any of the items I discuss I would encourage you to help all of us by sharing your knowledge. We Americans are proud and resourceful and we can solve any problem we understand.
Thank you for your interest and assistance.