Tuesday, July 08, 2008

The Problem With Politics

With all due respect to my wife, the biggest problem with politics is not the amount of time I spend devoted to it. It is that when there are complex issues facing our great state and Republic, solutions cannot be reduced to a slogan. Unfortunately, slogans, gimmicks and sound bites are what sell well and can influence elections.

One example of this is the rising price of oil and the corresponding increase in gas prices. Unfortunately, there is no easy answer. In a truly free market economy, prices are set by the forces of supply and demand. However, even with rising demand from emerging economies like China, India and Brazil, there is enough oil being produced to satisfy worldwide demand. I’m too young to remember the last major supply shortage, but last time I checked, there are not long lines to get gas (unless you go to Costco on a Saturday.)

So if global supply and demand is generally in balance, why is the price of oil so high? It has to be speculators. That’s got to be it. There is a little bit of truth to this – speculators have artificially inflated the price of oil by reacting to global events and looking ahead to the prospects of a more limited supply. Yes, there is the Enron Loophole that has allowed the US Commodities Futures Trading Commission (CFTC) to go along, unregulated and unsupervised with no transparency since the early 1990s. While Congress is now closing the Enron Loophole, it will really only apply to domestic traders.

But what about all this talk about offshore drilling and using domestic reserves in Alaska and the Rockies? Wouldn’t this help reduce American demand while making us self-reliant on our own supply? There are a number of problems with this solution. First, what isn’t well known is that there are currently 90 million acres open to oil companies, of which only 20 is being actively drilled on. The oil companies do not want to invest the money to further drill and explore because they are hedging their bets. They don’t want to risk creating excess supply and setting their organizations to fail down the road. They are simply pursuing offshore leases and Alaska because it is popular, and cheaper. But again, who is to say they will actually invest in the necessary infrastructure. Also, you won’t see a drop of oil from any new exploration for seven to 10 years.

The national security piece (relying on our own reserves versus importing) is also problematic. Currently, the United States consumes 21 million barrels of oil PER DAY. Our current domestic production is about 5 million barrels per day. Even if Alaska and more coastal areas are opened up, it will only net an additional 8 million barrels per day. So, by my math, that leaves an additional 8 million barrels per day that we need to get from somewhere. Plus, why would an oil company take less money on domestic oil than what oil is trading for globally? OPEC and other oil-producing nations would most likely reduce production to account for the reduction in global demand.

The answer to rising gas prices is not a simple one. We need a multifaceted approach. How else are going to address this when you consumer 25% of the worlds oil, but can only possess 3% of the world’s oil reserves?

First, we need to kill all tax breaks for the integrated petroleum companies. Tax incentives should be reserved to help protect fledgling industries that are in our national interests. To this end, we need to provide additional tax incentives for renewal energy sources and engineering to reduce our need for fossil fuels. The oil companies can not be rewarded for not investing in their own businesses. Second, we need to encourage conservation and privately-driven alternative fuel development at home. See the example of T. Boone Pickens who announced today that he will build a wind farm in Texas. We need increased transparency and oversight at the CFTC. I mean really – why wasn’t the Enron loophole closed after the electricity crisis of the late 1990s?

Unfortunately, our country has developed based on the availability of cheap oil, and there is no easy solution in sight. Find me a politician that will come up with a sensible plan, and we can talk.


Fred said...

I've seen the commercials from T. Boone Pickens with a promise of more of his details to come. He may be the one who lays out a sensible plan.

I think he's got it right when he mentions that the current situation is leading to the biggest "wealth transfer" ever seen. Just the other day, a Middle East investment firm bought the Chrysler Building in NY. They're going to use our money to buy more and more.

And, think of where that wealth is going - Iran, Venezuela, Sudan, Saudi Arabia, etc.

With gas at $4.00 a gallon, I think Washington has finally woken up to the problem. Now, we'll see what they do about it.

Matt Guerino said...

So, let me see: I blog about religion and you blog about politics - the two big "no no" topics. Interesting that we haven't spontaneously exploded yet! Maybe they're not such bad subjects to talk about... :)

As far as oil/gas issues go, I agree that the problem is multifaceted, as are most. I do think we're getting to the point that some additonal domestic drilling is in our best interest, though I realize that's not a panacea and some other things are going to have to change too if the wealth transfer you mention is going to slow significantly.

And while I'm on the subject of black gold, I will say that Garuda makes an outstanding press pot. How's THAT for a segue!?!

Ken said...

Fred - Even though I love politics, I don't particularly trust politicians to solve it. Even worse, I just heard that Boone Pickens may not be as magnanimous as he was made out to be. Turns out, he owns a vast number of natural gas rights in the Dallas-Ft. Worth area. His motivations are to drive people to Natural Gas, before cashing in on wind. I guess the proverbial devil is in the details.

Matt - Yeah...we basically both address pretty weighty subjects that are typical hot buttons. However, I believe that if presented appropriately, I think the discussions can be healthy. As far as the other black gold, I definitely need to break out my press pot again. I have a travel-sized one that is great for a single serving, but we just aren't home enough on weekend mornings to truly enjoy it. However, with football season coming up, that may all change.

David said...

Ken, I'm not sure I can agree with you... any more than I do. I don't know when the tax structure was created to favor the oil companies, but I can only assume it was when the country was in desperate need for oil and the infrastructure to supply it.

Our world is different now than it was back then (obviously, or we wouldn't be having this conversation). The modern world now needs renewable energy and clean technology far more than it needs any more drilling for oil. We should shift the tax structure to favor newer, more modern sources of energy.

If nothing else, there's one positive benefit to skyrocketing oil prices- it forces people to think about alternatives.