Will Pumping More American Oil Lower Gas Price?
Robert Pollin: Speculation and manipulation key factors in price spike
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Washington.
As the 2012 elections draw ever nearer, the rhetoric about the cost of gasoline gets ever louder. In fact, it’s emerging, apparently, as one of the major issues in the election campaign. The Republicans, led by Mr. Romney, are suggesting that if more oil was produced/drilled in the United States and more pipelines built, the cost of gas would come down. President Obama answers, well, we’re already doing a lot of drilling and we are expanding the domestic supply. So what is the truth to all of this? What are the alternatives? And why is the cost of oil so high?
And joining us to talk about all this now is Bob Pollin. Bob is the cofounder/codirector of the PERI institute in Amherst, Massachusetts, and he joins us now from there. Thanks for joining us again, Bob.
ROBERT POLLIN, PROF. ECONOMICS, UMASS AMHERST: Thank you very much for having me, Paul.
JAY: So let’s start first of all with this issue of if there was more domestic drilling and production and more pipelines, the price of gas would come down. Is there some truth to that?
POLLIN: No. The price of oil is spiking again, just like it spiked last summer and just like it spiked in 2008 right before the recession, and those spikes didn’t have anything to do with supply and demand imbalances. The price spikes had to do with the role of speculation on the commodities futures market, which has expanded by about 400 percent relative to ten years ago. And because of the high level of speculation in the market, any small changes in supply and demand get hugely magnified.
So, yes, we do have right now a small-blip reduction in supply, less than 1 percent of total oil supply, due to the embargo with Iranian oil. But that less than 1 percent decrease in supply cannot itself explain this spike up in price, which is heading again towards $4 at the pump. So what happens is you have this tiny effect on supply, and then you have the oil traders trading on the expectation of the upward movement in supply, and that becomes an upward momentum that the speculators hope to see prices keeping going up, and then that feeds back in today’s price. That’s the same dynamic that we have experienced the last two months, that we experienced last spring, and then in 2008.
JAY: One thing I don’t get why this isn’t being more unpacked in the mainstream media is that if you increase the supply of oil production in the United States by more drilling and you get more of the Canadian tar sands oil down to American refineries and all the rest, I have not heard the Republicans suggest that they’re going to have a special American price for American-produced oil. I mean, unless I’m missing something here, it’s still all going to be at competitive world global prices. They’re not going to create a special American market for American oil, are they?
POLLIN: No, of course not. So the American oil, ifâ€”let’s say it’s roughly 10 percent of total global supply. So that means the other 90 percent is going to be set by everything else that goes on in the world, including especially the increasing significance of speculation on the commodities market, which overwhelms any small impacts relative to supply and demand adjustments.
JAY: Now, this whole thing, too, about supply and demand like there’s some natural force at work here, we’re talking about a faucet that the Saudis say over and over again they could easily make up for any loss of Iranian oil. I mean, all the OPEC producers and all the other oil producers on the whole could actually just increase their output if they wanted to.
POLLIN: Well, of course they could. I mean, the oil reserves now, at 42 years of proven reserves, are at its peak relative to the last 40 or 50 years. So the oil is there.
There are, you know, short-term issues, yes. If the Iranians say, we’re going to block the Strait of Hormuz, okay, so that could create some disruption in the oil coming out of the Middle East. They have not done that, by the way. But nevertheless we’ve got a price spike.
And the price spike is based on what’s goingâ€”how this news gets digested via the speculation on the markets, which pushes up price. Okay. And then, when the price goes up, then speculators think the price is going to go up even further. That pushes up the futures price even more. And then today’s price, the price in the market today, the spot price, follows the futures price. That’s a pretty well-established pattern.
And thisâ€”people have to understand that there has always been an oil futures market. It just that the size of this oil futures speculation is fourfold greater than it was just a decade ago. So these effects from the futures markets, the speculative market, the financialization of commodities, of oil in particular, is a new phenomenon.
JAY: And the other part of this supposed supply and demandâ€”I say supposed because of course it’s real, but how manipulated it getsâ€”is that you have oil traders buying oil and then sticking it in oil tankers floating at sea, dozens, perhaps hundreds. I mean, I have yet to have been able to find an exact number, because I talked to a guy who ran this operation for Texaco, and it’s a big secret how many oil tankers are at seaâ€”at least a secret from the general public. I suppose people in the business know how to find out about it. But they just let the oil sit in tankers waiting for future contract dates, and they know that these future contract dates are a higher price than today’s spot market, and then they deliver the boats then.
POLLIN: Yeah. So, of course, I mean, why wouldn’t you do that? If the price today is $100 a barrel and we already have futures contracts at $105, that’s a 5 percent return just by letting the oil sit in the tanker for a month. So that’s the kind of thing that’s going on, and those are the things that areâ€”those effects are being pulled by the fact that we have this hyperspeculative oils futures market.
JAY: And what do you make of President Obama’s response? Because I know he’s mentioned speculation. He sort of had a few nods in the direction that it should be investigated even by Eric Holder, but nothing has happened. But on the whole he seems to kind of accept the logic, yes, we need to produce more domestic oil. He adds to that, and alternative energy sources, which the Republicans don’t say much of. But he doesn’t actually talk, really, about the issue of speculation, about position limits, the whole financialization, as you say. We don’t hear much of any of that from him.
POLLIN: Well, the reason, of course, is because there’s a lot of money being made on Wall Street doing the kind of oil speculation that we’re talking about. So it is an extremely volatile political issue. It is beingâ€”we’ve talked about it beforeâ€”it’s been fought over. You know, the Doddâ€“Frank financial regulatory law that was put in place in 2010 on paper has some fairly decent, strong regulations as regards the commodities futures market.
But what has been fought over ever since the thing got passed in June or July 2010 is how exactly we implement these laws. And that is still being fought over. And Wall Street, of course, is not going to go down without a big fight, because they don’t want to have this extremely lucrative market regulated, and Obama is trying to stay out of that fight. And most people don’t understand what’s going on. That’s why it’s very important that you all have been covering this almost alone among independent journalistic outlets. So that’sâ€”I mean, these are extremely important issues.
And the impact of the speculative market far swamps what could actually happen as result of drilling in Alaska for building the pipeline. The effects of those things, of course, in any case, are only going to occur over a matter of several years, and meanwhile we don’t see any significant supply and demand imbalances.
And, also, the thing that we should be doing, if we really are concerned about disruptive oil supplies, is start thinking about building a more energy-efficient economy. That’s the biggest source of control that we can develop over the problems with the oil market.
JAY: Well, that’s another piece of this that rarely gets talked about, which is: what is the real cost of oil? I mean, we know there’s this speculative influence, we know the manipulation of markets through supply and demand and manipulation of supply and demand, but there’s a whole another piece to this, which is the cost of a carbon oil based economy that isn’t taken into account, because the rest of society pays in many other ways, but not directly in how it affects the price of oil. So what is that all about?
POLLIN: Well, what it’s really all about isâ€”obviously, this is extremely unpopular position, and Romney has already said he’s going to pounce on Obama on this point, which is: the price of oil should be higher. The price of oil should be higher to reflect the social costs, the environmental costs of consuming oil and emitting greenhouse gas emissions and creating global warming. So that needs to happen.
Now, it isâ€”I mean, Romney has already said this is one of his top five issues running against Obama, that he’s going to say that Obama wants the price of oil to be higher.
Now, I don’t really know what Obama wants. I do know that over time the price of oil in the United States should be higher. But at the same time that the price of oil should be higher, it shouldn’t be higher as a result of the power of Wall Street, of the financialization of the commodities market. It should be higher as a result of trying to control for greenhouse gas emissions, so at the same time that we are raising the price of oil and other fossil fuels, we also need to be much more aggressive in terms of building out much more energy efficiency measures that are easy to do, that are at our fingertips, and investing increasingly in renewable energy.
JAY: I mean, if you took out the superprofits being made through speculation and manipulation, maybe you don’t even need a higher price of oil; you just need that difference to go into developing alternative energy sources, if you could eliminate this skinning the cat two and three times that takes place now.
POLLIN: Well, okay. We should eliminate the skinning the cat. But we also should have a price of oilâ€”. I mean, you know, in Europe and the rest of the world, people payâ€”I mean, we’re paying $4 a gallon now, and the rest of the world, it’s probably in the range of $5 to $6, and most of that is the tax that reflects the fact that theyâ€”countries, other countries, don’t want to have people consuming so much petroleum. They’re not suppliers themselves, and they recognize the social costs embedded in burning fossil fuels much more than we do.
JAY: But it’s a fairly regressive tax, isn’t it? I mean, ordinary people that have to get to work, in terms of the percentage of their income they spend on transportationâ€”.
POLLIN: Yes, obviously. So we would have to have some compensation. I mean, my colleague here at UMass, Jim Boyce, has actually developed agenda for having a tax on fossil fuels, and more generally on carbon emissions, but then having the money that is earned by the tax rebated back to people on a per capita basis, which would then make it actually very progressive, and it would not be very hard to implement. That’s one idea.
The other idea, you know, when the price of oil goes up, you do get some adjustment in terms of efficiency. People do start using public transportation more. The trouble is that for the most part our public transportation systems aren’t any good. And the argument about that is, oh, yes, yes, it’ll take forever to build, you know, another great subway system like New York. Maybe. But, you know, buying buses and putting more buses on the road is actually something that we could do very quickly. And if you have decent bus lines, more people would use public transportation.
I mean, in Japan last year, as a result of the embargoing of Iranian oil, they actually cut oil consumption by about 20 percent, even though they had actually also had to cut their nuclear power because of the disaster there.
So there are a lot of opportunities for increasing energy efficiency in a pretty rapid way if we would just kind of get focused on it and see it as the first solution within the framework of problems that we have.
JAY: Of course, the fossil fuel industry ain’t so keen on efforts in that direction, and they seem to have been quite successful up till now to slowing it down.
POLLIN: Yeah. Well, they’re there. That’s for sure. So that’sâ€”we have to fight that. And, you know, I mean, they, obviously, the fossil fuel industryâ€”. The fossil fuel industry, by the way, the oil companies don’t particularly like the Wall Street traders skimming off what they deem is their proper profits and them getting portrayed as the bad guys alone, the oil companies, when in fact some of it is coming out of the speculators. So there may be opportunities to find fractures between various segments of business on this point. After all, Ben Bernanke has said that, you know, he desperately doesn’t want to see another oil spike. And neither does Obama. So maybe this is something that, you know, we can get focused on, at least for the short term, is recognizing the centrality of oil speculators in spiking the price of oil now.
JAY: Thanks for joining us, Bob.
POLLIN: Okay. Thank you very much, Paul.
JAY: And thank you for joining us on The Real News Network.
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