Wednesday, October 17, 2012

"I Can't, and Neither Can He"

Watching a presidential debate is painful to me, no matter if "my guy" is winning or losing.  It's just frustrating to hear the candidates repeating talking points rather than directly answering questions.

But there was one question that could have been answered quickly with near perfect agreement between the candidates, "what are you going to do about high gasoline prices?" (paraphrasing, of course)  I wish one candidate had the guts to say:
"Oil is commodity that is priced on a world market, and there is little to nothing that we as a country or I as the president can do about it.  Period.  If we want lower gas prices, we need to reverse the urbanization of China and India and achieve a peaceful Middle East.  But both of those goals are unachievable, so we should all get used to higher gas prices if we want continued economic growth."
Both candidates know this, but for some reason nobody has the guts to say they are powerless to change the situation.  Instead we get a bunch of B.S. about the fiction of "energy independence" and the quantity of oil drilled on federal lands over the past several years.  There was a little talk of conservation (which lowers consumption, not prices), but no mention of CNG, which is an actual alternative to gasoline.

We've had an absolute boom in oil production in the past couple of years and even if we build the Keystone XL pipeline (or two), it isn't going to make a difference in gas prices precisely because crude oil and gasoline are internationally traded, and commodities follow the money to the extent they can travel.  One thing all that extra oil production has done is 1) made the U.S. a net exporter of finished motor gasoline (see chart below) and 2) made Midwestern refineries extremely profitable.


Higher oil supplies and a massive spread between the West Texas Intermediate (U.S. benchmark) and Brent Crude (international benchmark) - $21.65 this morning - have led to high profits for refiners, not lower gas prices.  Remember the adage, "buy low, sell high."  The price of Brent Crude has nothing to do with increased U.S. production, which is a proverbial drop in the world supply barrel.

Next time someone asks a presidential candidate, "how are you going to lower gas prices?" I hope they say, "I can't, and neither can he.  Next question."

5 comments:

Anonymous said...

Robert--excellent post. One reason why politicians don't give this answer is that it requires rational explanation to minds that can understand the big picture. Instead, we get sound bites and slogans, which are easier to digest and don't clutter the mind.

Anonymous said...

Conservation would help a little to lower gas prices as tight refinery capacity has helped keep pump prices high, see Calf.
The problem is that most Americans don't understand globalazation and how large China and India are. Wilbur Ross on CNBC was talking about the difficulty of finding water to frac wells in China and said that there is not enough fresh water in the world for every Chinese to bath every day.

Robert Hutchinson said...

Anon2 -

It puts things in some kind of bizarre perspective that the quantities of water involved in the fracking conversation in China can be compared to the number of people taking a bath as a reference point, while here in the U.S. we talk about water for fracking in comparison to the amount of water used on a golf course. Bathing vs. golfing - sometimes we don't realize how good we have it in the U.S.

I think desalinization plants are going to be absolutely necessary in the 21st century.

Bill Mendenhall said...

Outstanding analysis Robert. I agree completely. The question I have is which candidate will do the lesser damage to the nat gas industry? Obama with additional regulations and pressure from the environmental lobby, or Romney who is pressured to support the big oil and manufacturing status quo?

Robert Hutchinson said...

Thanks, Bill. Very good question. This might be a bit counterintuitive, but I think Obama is actually better for the natural gas industry. Hear me out:

People quickly forget that Obama is responsible for the single best thing to happen to natural gas since hydraulic fracturing: increased regulation of pollution from coal-fired power plants. Power generation is the single best way to grow near-term and long-term natural gas demand in large quantities.

Obama should view natural gas as a big winner for him: 1) increased oil and gas production = more jobs; 2) greater gas supply = more domestic manufacturing = more jobs; 3) LNG exports bolster his agenda to boost exports and reduce the trade deficit. Rhetorically, he makes these points (less so about LNG export), but I don’t think it sinks in for most people who are predisposed to dislike him.

On the negative side, I think his EPA is antsy to try to apply an overarching regulation scheme on fracturing. (Personally, I think this should be regulated by the states, but the EPA should have the right represent the federal government on federal lands.) The biggest unknown is how he would perform as a lame duck president. The greens have been unhappy with them – probably because their expectations were set too high from the beginning after eight years of GW Bush – so will he respond to that pressure? I don’t know. The good thing about being lame duck is that you can tell people to buzz off with few repercussions. Right now economy trumps environment.

Romney is more of an unknown commodity. He likely will stand on the less regulation side. Industry will favor that, but I’m not convinced that federal regulation on the land-based gas industry is that intense, certainly compared to other forms of mining. I’m not sure what federal regulation he would roll back, outside of restrictions on public lands. He certainly wouldn’t add any.

I think the biggest negative for Romney is the flipside of the positive for Obama. As governor of Massachusetts, Romney took a firm stand against coal pollution. He has since waffled on that position with his “war on coal” rhetoric. In office, he likely would reverse Obama’s environmental regulation on air pollution from coal. The coal lobby would love that, but it would crush natural gas, as power generation is the single best and biggest opportunity for increasing natural gas demand.

Obama gets a lot of flak for being on the same side of the table as environmentalists, but ironically, his pro-environmental actions to improve air quality by reducing coal emissions will be the savior from our sudden abundance of natural gas and the low prices it has brought.