There is No Gas Shortage

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Viewpoint April 1, 2008

 

There is No Gas Shortage

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But Washington, Wall Street, and ethanol and oil and gas companies want you

to think there is, says automotive expert Ed Wallace:

 

" They see speculation in the market, I see decline in global inventories. I

don't think this is a big surprise, that we've had a jump in price when there

has been a decrease in crude inventories. " ? Energy Secretary Sam Bodman,

Bloomberg News, Mar. 5, 2008

 

" It should be obvious to you all that the [gasoline] demand is outstripping

supply, which causes prices to go up. " ? President George W. Bush, Associated

Press, Mar. 5, 2008

 

One wonders if verifiable facts ever get in the way of this administration's

statements on issues that are critical to the average American's wellbeing.

After all, last time I checked, when politicians are elected to public

office, or appointed, as is Energy Secretary Samuel W. Bodman, they must take

an

oath to the American people before assuming their new positions. How can they

forget a sacred oath so quickly? Were they daydreaming when they took it, so

it never meant anything to begin with? Maybe it's just another promise you

have to make to get into office: When you're securely incumbent you can ignore

even solemn oaths you took.

 

Obviously, the two quotes that led this article came from discussions

concerning the current high price for oil on the futures market. Bodman appears

to

be protecting the speculators in oil, as opposed to looking after the

interests of all Americans. President Bush, apparently, has never talked to the

Energy Dept.'s Energy Information Agency to see whether gasoline demand is

actually up. More troubling, the writer of that particular Associated Press

article

obviously didn't look up the EIA's numbers to verify the President's

assertions. They weren't accurate.

 

1. There Is No Shortage

 

Gasoline reserves on hand are at the highest levels since the early 1990s,

which is remarkable considering the nation's refineries have been cutting back

on the production of gasoline because their margins have declined. In fact,

average gasoline reserves on hand have risen since this past October, while

oil reserves in this country have gone up virtually every week this year?and

only fog in the Houston Ship Channel that kept oil tankers from unloading

their crude one week kept it from being every week.

 

In the same Bloomberg article that quotes from Bodman's CNBC appearance on

Mar.

4, he also said that it was thanks to ethanol that the gasoline problem

isn't even worse. He then added that the fact that making ethanol is forcing up

prices of other farm commodities, including hog and chicken feed, is " nowhere

near as important as trying to relieve pressure on [gasoline] supplies. "

 

Of course, there is no pressure on gasoline supplies in this country as of

today, but Bodman's statement must have made eyes roll among the executives at

Pilgrim's Pride PPC; the Pittsburg, (Tex.) poultry producer announced 1,100

layoffs on Mar. 13, closing one processing plant and 6 of their 13

distribution centers because their company's outlay for chicken feed went up

$600

million last fiscal year and was on track to increase by another $700 million

this

year.

 

Here's the scorecard, in case you missed it. There's no shortage of gasoline

or oil in the U.S. today, and we have near-record reserves on hand.

Meanwhile the Congressional mandate for ethanol has jacked up the price of

chicken

feed for Pilgrim's Pride, which is the U.S.'s largest processor of chickens and

turkeys?by $1.3 billion. And that's for just one company processing chicken.

This is what passes for acceptable to our Energy Secretary?

2. Demand Is DOWN, Yet Prices Are UP

 

Just so we can all get on the same page, here are the verifiable facts on

oil supplies, production, and gasoline demand.

 

In January of this year, the U.S. used 4% less petroleum than we did a year

ago. (Oil demand was down 3.2% in February.) Furthermore, demand has been

falling slowly since July of last year. Ronald Bailey of Reason Online has

pointed out that worldwide production of oil has risen 2.5% in the first

quarter,

while worldwide demand has grown by only 2%.

 

Production is expected to increase by 3.3% in the second quarter, and by as

much as 4.1% by the third quarter. The net result is that the U.S. daily

buffer for oil production against demand, which was a paltry 1.5 million

barrels

as recently as 2005, is now up to 3 million barrels in excess capacity today.

 

So what is going on here? Why would our Energy Secretary say there's a

supply and demand problem when none exists? Why would he say that speculators

have

little or nothing to do with the incredibly high price of oil and gasoline,

when it's clear they do? President Bush?a former oilman?gives the

ever-growing demand for gasoline as the primary reason prices are so high, yet

that

notion can be dispelled with one minute of research. That's the problem with

rhetoric; it rarely matches the facts.

 

3. Speculation is Up, and the Dollar Is Down

 

On the same day the President and our Energy Secretary made those foolish

comments, no less an authority than ExxonMobil (XOM) Chief Executive Officer

Rex Tillerson was quoted by Marketwatch as saying, " The record run in oil

prices is related more to speculation and a weakening dollar than supply and

demand in the market. " He added, " In terms of fundamentals, fear of supply

reliability is overblown. "

 

As for the speculators, in 2000 approximately $9 billion was invested in oil

futures, while today that number has gone up to $250 billion. Now, if any

publicly traded company had an additional $241 billion put into its stock in

the same period, its stock would rise out of sight too?even if the company was

not worth anywhere near that amount of market capitalization.

 

Moving on to the weak U.S. dollar as a primary cause for skyrocketing oil

prices?there is " some " truth in that statement. But consider this: The dollar

has depreciated 30% against the world's currencies since 2002, while the price

of oil has gone up 500%. So is it the weak dollar that has caused a 500%

increase in the price of oil, or is it the extra $241 billion worth of

speculation? You can make the call on that one.

 

Possibly just to ensure oil prices don't respond to real-world market

conditions, Goldman Sachs (GS) forecast on Mar. 7 that turbulence in the oil

market

could cause oil to spike as high as $200 a barrel. This flies in the face of

all known information?but then again, Goldman Sachs is the world's biggest

trader of energy derivatives, and its Goldman Sachs Commodities Index is a

widely watched barometer of energy and commodities prices.

 

What Is Washington Thinking?

 

Rounding out the list of experts discussing our oil and gasoline situation

is Bill Klesse, head of San Antonio (Tex.) Valero Energy (VLO). He spoke in

San Diego a week after those comments from Goldman Sachs, the President, and

Secretary Bodman. Believe it or not, Klesse said poor margins may cause Valero

to sell one-third of its refinery operations; he stated that poor margins in

recent months had caused planned refinery expansions?which would have

produced 500,000 more barrels per day?to be canceled. Moreover, according to a

report from Reuters on Mar. 11, 2008, Klesse recently released the information

that gasoline production has been curtailed in response to slowing demand.

 

Imagine that: Refiners cut gasoline production, yet gasoline reserves have

grown to their largest since late 1992. So much for " surging demand. "

 

Klesse also called for the government to start imposing a tariff on imported

gasoline to protect U.S. refiners' profits. Protectionism? As famed

economist John Kenneth Galbraith correctly said, " In America, the only

respectable

form of socialism is socialism for the rich. "

 

Which takes us back to the original question: Why is Washington doing

everything it can to convince us there is a shortage when there isn't one?

After

all, the only people they're protecting are those heavily invested in oil

futures?and that's to the detriment of all other Americans.

 

We're Paying for What?

 

When it became undeniable that poor decision-making by company executives

had put a respected 85-year-old U.S. institution in financial peril, why did

the Federal Reserve rush in to save investment bank Bear Stearns (BSC)? Of

course, we need to restore confidence in our financial institutions, but why

protect the personal assets of those who were responsible for the mess? Both the

corporation's officers and its board members should contribute their personal

assets toward saving the bank they put in the ditch?the bank all of us are

going to pay to bail out.

 

Instead, the Bush administration is protecting those responsible for

creating yet another speculative bubble in oil futures, and is protecting

investors

in the ethanol industry?much to the detriment of food-processing companies

such as Pilgrim's Pride. And the net result of all this is that the prices of

crude and gasoline rise ever higher thanks to a " shortage " that does not

exist, while food costs are soaring thanks in part to the ethanol mandate.

 

The Federal Reserve lowers interest rates, but the cost of mortgages goes up

six weeks in a row--and last month Bank of America (BAC) credit-card holders

started being charged more than 24% interest on new purchases.

 

This is what they call " Republican Prosperity? " Ronald Reagan was both

right and wrong when he said, " Government is not the solution, government is

the

problem. " And government is still the problem. Instead of a fair and open

market they gave us a free-for-all marketplace with no regulations at all,

which

lately these " bubble boys " have sent south for all of us.

 

One would guess that Washington missed the obvious: Protect all U.S.

consumers and you're also protecting business expansion.

 

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_Ed Wallace_ (wheels570) holds a Gerald R. Loeb Award

for business journalism, bestowed by the Anderson School of Business at UCLA.

His column heads the Sunday Drive section of the Fort Worth Star-Telegram,

and he is a member of the American Historical Society. The automotive expert

for KDFW Fox 4 in Dallas, Wallace hosts the top-rated talk show Wheels,

Saturdays from 8 a.m. to 1 p.m. on 570 KLIF AM in Dallas.

 

 

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