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No Free Oil for Democrats

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The House of Representatives failed on Thursday to pass legislation intended t cool off gasoline prices by requiring the government to sell 70 million barrels of light sweet crude oil from the Strategic Petroleum Reserve. That would have been the equivalent of 10% of the strategic stockpile. The White House threatened to veto the measure if passed saying Congress should focus on increasing supply rather than depleting strategic reserves.

The house voted 268 to 157 in favor of the legislation but fell short of the two-thirds "yes" votes needed to act quickly on a bill. Republicans argued to increase domestic production by lifting bans on offshore drilling, the Artic National Wildlife Refuge and on oil shale development in the Midwest.  Democrats pushed for rules requiring oil companies to drill faster on land already under lease.

Rep. Joe Barton called the bill a gimmick that would only provide short-term relief from high gasoline costs. Of course the Democrats disagreed saying it would be the fastest way to cut costs. Neither appears to truly understand the problem. Cutting costs artificially only stimulates more driving and higher oil consumption. The higher prices are actually doing us a favor by changing our driving habits and forcing us to reduce consumption and that will bring down prices in the long-term.

 

Last May Congress passed a law preventing the administration from adding oil to the reserve until crude prices fall below $75 per barrel. Since that may never happen again the government should fight to keep the reserve at the present level. When we do have an emergency it will not do us any good if we drained it just for cheap gas. The stockpile was created in the 1970s after the Arab oil embargo in order to get through future crisis events. We are moving closer every day to that next event that could be something to do with Iran. We could easily see 40% of the world's oil halt overnight if fighting broke out in Iran over their nuclear program. What would the strategic reserves be worth to us then?

 

Oil prices rose today to $125.50 after this bill was voted down. Today there are no storms on the horizon for the Gulf and eastern Caribbean.

 

The CFTC charged Optiver Holding BV and two of its subsidiaries of manipulating energy futures contracts on the NYMEX exchange. The firms were charged with 19 separate instances of attempted manipulation and five attempts where contracts were successfully manipulated leading to artificial price hikes and declines. Reportedly they engineered profits of more than $1 million. They used a scheme called "banging" or "marking the close" where large numbers of contracts were accumulated leading up to the close then dumped in mass at the close to artificially push prices lower. Let's say you owned 1,000 contracts to start and you bought another 1,000 in rapid succession leading up to the close. The value of all 2000 would be the highest right at the close when you sold everything and shorted another 1000 at the close. The price would plummet on the spike in volume and the market would over react as trailing stops were hit forcing other sales. You cover your shorts at the bottom and start over. This scheme would require perfect timing on a low volume day but it is one that has been around for years.

 

I am sure there are plenty of schemes with a lot more complexity that are played every day and we never know it. Still, when the smoke clears it always boils down to supply and demand setting the price.

 

Jim Brown

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