Moonage Political Webdream

Sometimes, a great idea evolves through conversation. That’s the beauty of discussion boards. This series of posts follows the conversation of several Motley Fool SISU Board members. Each one takes the previous thoughts and expands on them in such a way that the sum is greater than the parts. Therefore, this series of posts is LONG. But, please, do follow the entire thread, as it is enlightening, and addresses current urgent issues and interprets them into easily understood logic. This thread was compiled by Kentm401, he went to great trouble to assure permission from all the authors involved. I am merely the messenger on this one.

Calpinist -

I’ll try to address several posts at once, starting with this from T. (BTW — any hints on the origin of your screen name?)

A decade is a long time and IMHO not really relevant in trying to estimate the effect of the 2003 war on oil production/pricing. It would be better to compare with the period since the oil-for-food program was installed. I don’t think one can then claim there is a “substantial increase” in oil output from Iraq compared to pre-war levels.

Two things: first, perhaps I’m misunderstanding you, or vice versa, but my original point was that the imports into the US of oil are higher in the last two months than at any point in the past decade. It is a long time, therefore, to determine whether problems in Iraq have a causality to the supply/demand imbalance and thus prices, and as such it is ahorribly relevant period of time.

Further, we’re not talking about Iraqi output. The question here is prices of oil and oil products in the United States, and as such the question is how much Iraqi oil reaches our shore. Given the above statistic, even with disruptions in Iraq the overall impact of Iraq should be a net positive on pricing on spot.

Now to Calpinist-

You have created a list of 6 items that you believe cause high oil prices, 4 of which President Bush has influence upon.

Let’s stipulate two things: first, beating butterfly wings in China can have influence upon oil prices, so insomuch as your premises are accurate, they are on some level defensible. But I don’t think that any of them, with the exception of the fact that no resources have gone toward drilling in the last 20 years due to the ineconomy of doing so come close to approaching the severe supply issues that I enumerated in that post (plus a few more, which I’ll spell out here).

Just the same, the thing about economics is that we can be dead sure that it doesn’t work the way it does because a few extraordinarily smart people are managing it. Economics is a study of cause-and effect relationships. The study of things like prices and demand issues has nothing to do with intent and values, and everything to do with consequences and incentives. Consequence of doing one thing, incentive to do another. What policymakers want to achieve is ultimately a heck of a lot less important than what incentives their policies create.

I’ll give you an example, and it is directly relevant. In the US there hasn’t been a refinery of any substantial capacity built in the last 20 years, due to a quiltwork of local and state siting and environmental strictures. At present the demand for oil products — what’s being discussed here — stands at 101% of refining capacity. The remaining products are imported at enormous added cost, and the refining industry has never had it so good. Look at a pick of mine, Valero, and how it has performed over the last three years. If the fuel slate price was REALLY the issue, our refiners would have been slaughtered over the last two years. Not so much. Each municipality had the intent of protecting their own environments, and keeping refineries out. But in an oil economy, refining capacity is necessary. There is no federal solution that can be impressed upon municipalities — one or more has to decide that a refinery can be built there. Until which time, our oil products will be more expensive by virtue of refining capacity exceeding supply. Who gets credit or blame for this? You can’t lay it on the federal government. This is a direct, real, enormous economic cost as a result of a patchwork of decisions with completely different intents and goals.

I do need to point this out:

Based on the findings presented above, I would disagree with Bill Mann’s opinion that the high oil price is purely a supply and demand issue. The low elasticity of supply is definitely important. The lack of investment in exploration and of significant energy conservation in the U.S., combined with high economic growth in Asia and elsewhere, have led to a situation of demand growing faster than supply. The Bush administration has some influence over these factors but not enough to lower the world oil prices.

You state that this isn’t a supply and demand issue, and then list a number of things that are solely supply or demand driven. The most important sentence is the last one — you are saying something that reflects EXACTLY my position. If he can’t change the prices, then why would he be blamed for them (the premise of the original post)?

On high demand from growing Asian economies, I think you perhaps made a blunder in your explanation. The response to the recession in the US hasn’t been to encourage saving, rather to encourage spending by consumers and by businesses. The fiscal component of these policies aren’t set by the federal government, rather by the Federal Reserve. These are blunt instruments — the government cannot control how consumers spend, except with their infernal behavior (excise) taxes. It should be noted that the US government has beat on China to float the yuan, to no avail. Maybe that’s a failure.

As to your policy discussions, again, economics demand that you look not at policy intents, but rather the incentives they create. Higher gas standards (CAFE) created the incentive for SUV’s in the first place, as anything on a truck chassis was exempted. Whatever non-market decisions that are made now will inevitably create new, unintended incentives — that stupid $100,000 tax break applicable to SUVs being a prime example. The Prius and its ULEV brethren are selling like crazy at this point in no small part due to the ineconomy of running a gas guzzler. Wanna see some pain? Check your local papers for the used SUV’s for sale and check the prices.

As for the terrorism premium, the question must be posed as to whether it is higher or lower than it otherwise would have been absent the policies of this administration.

Your statement on the fact that prices have risen from the mid-20’s since the Fall of 2003 belies the difficulty in capturing this amount.
Terrorism, middle eastern terrorism, predated GWB, and I don’t buy for an instant the thought that the risk of terrorism has changed dramatically since 2003, or 2001 for that matter. It should be consistent. Further, if the terrorism premium had much to do with the spikes, one would think that it actually had some direct, immediate correlation with major attacks on global supply.

So, did GWB’s policies increase terrorism, or is the premium (at whatever level) just another market insurance policy on the reality of new, ongoing risks to supply?

You see, that Fall 2003 point in time is significant, but not for any increase in terrorist activity ex-Iraq. As I’ve stated, any impact on the US industry from Iraq is minor. But coincident to the time of the rise in prices were the following: strikes in Nigeria, strikes in Venezuela, the arrest of Khodorkovsky and beginning of the Russian assault on Yukos, decisions to curtail supply from OPEC, and (this is important) the increase of terrorist attacks in Saudi Arabia directed at the Saudi government.

In fact, if you take Osama bin Laden at his word, there is something that GWB has done that should have had a direct reduction in terrorist activity: he removed US troops from Saudi Arabia, which was OBL’s key demand.

Now a lot of people think that OBL’s drive came from some sort of Wahhabi puritanism that determined that these infidels were treading on holy land. That’s why it is so important to people that 15 of the September 11 hijackers were Saudi. This, I believe, is incorrect.

Oh, they were Saudi, all right. But “Saudi” is a fairly modern construct in the same way that “Pakistani” is. There is a great deal of evidence to suggest that the terrorist attacks weren’t Wahhabi-inspired, but anti-Wahhabi. Most of these 15 hijackers didn’t come from throughout Saudi Arabia — they came from Asir. They aren’t of the same ethnicity as the Saud ruling families — they were Yemeni, as is Osama bin Laden. This ethnic group of Saudi citizens is the most disenfranchised in the entire country. And this is also important — they don’t tend to buy into the Wahhabi doctrine. 5 or 6 of the hijackers came from a single Asiri tribe, the Ghamdi, which also produced all of the terrorists who attacked Riyadh in May 2003.

Asir was a theocracy prior to being overrun by ibn Saud — many of its citizens resent being dominated by the Najdi-Saudis, and think that the ruling fmaily aren’t particularly good muslims. They don’t have great shakes for the Wahhabi domination of the faith in Saudi Arabia, either. But getting rid of the House of Saud requires getting rid of the Americans, their protectors. And so, in a cave in Afghanistan, incidentally also called al-Ghamdi, the decision to launch terrorist attacks on the US as part of a plan to get them out of Saudi Arabia hatched. Why not? We fled and/or done little every other time they’ve attacked us.

The Saudi government has spit upon and oppressed its Yemeni minorities for years. It has not stopped doing so. Perhaps, if there is a terrorism premium on oil prices, the world’s leading exporter of oil, being also the antagonist in this case, ought to have the terrorist premium laid at *its* feet. (This of course brings up some extraordinarily Macchiavellian scenarios, staring the Saudi government).

So a reasonable question, then: if our policy of containment and appeasement were inputs that increased the likelihood for terrorism from (specifically) al Qaeda, how much of any terrorism premium should be laid upon the man who a)inherited these policies and b) has ended them? A second reasonable question is: if the terrorism premium is real, and more importantly large, what changed to make the price of oil futures drop 18% in this past week?

I’ll grant you this: it is a very contentious point. I don’t necessarily think the above is a definitive answer, just another question wrapped up in a pretty plausible theory. And I doubt that anyone would have reasonably expected there to be geopolitical dividends on a war on terrorism just yet.

Best regards-
Bill Mann

Technorati Tags: Oil Supply

Tags: Oil Supply

No Comments »

Trackback This Post | Subscribe to the comments through RSS Feed