Washington, DC – Offshore energy exploration and production in the United States is safe and environmentally sound. Over the past 50 years, the U.S. oil and gas industry has developed innovative, 21^st century technologies and exploration techniques that are efficient, pose little threat to the environment, and ensure worker safety.

According to the National Academies of Science, less than 1 percent of the oil found in the North American marine environment comes from oil and gas development. Nearly 60 percent, however, is the result of natural seeps.

Thomas J. Pyle, president of the market-oriented Institute for Energy Research (IER), issued this statement in response to today’s Senate Energy Committee hearing on environmental stewardship and offshore energy production:

“Technology and innovation remains key to delivering more homegrown, job-creating American energy, both onshore and off. The facts and history demonstrate that offshore energy production, with today’s 21^st century technologies, poses little to no threat to our marine environment. In fact, marine life actually flourishes in waters shared with energy infrastructure.

“Unfortunately, a de-facto ban on safe, responsible offshore domestic energy development remains in place today, despite the fact that a clear majority of American people want access to the energy that is rightfully theirs. Advanced technologies currently deployed throughout the western Gulf of Mexico – which help deliver huge amounts of energy to keep our economy fueled and moving each day – are testament to the strides made to ensure environmental safety.

“Last summer the American people spoke, and Congress responded when it retired the nearly 30-year ban. It’s time for this administration to unchain the federal government’s stranglehold on so much of our nation’s job-creating energy resources offshore. Slow-walking this commonsense action could make the next energy crisis pale in comparison to the pain of $4 gasoline working families and small businesses felt during the summer of 2008.”

NOTE: Here is brief overview of some of the advanced, 21^st century offshore energy exploration technologies:

Advanced 3-D seismic and 4-D time imaging technologies: enable offshore operators to locate oil and gas resources far more accurately to necessitate less drilling and allow greater resource recovery.

Storm chokes: placed on all offshore wells to detect damage to surface valves and shut down production during an emergency.

Blowout preventers: continuously monitor the subsurface and subsea-bed conditions to prepare for unexpected changes in well pressure.

Waste product reuse technology: transforms drill cuttings, a waste product of rock pieces and drilling fluids produced when drilling a well, into raw material for bricks, roads, and even rebuilding Louisiana’s wetlands.

For additional information, please contact Patrick Creighton, 202-621-2947, or Laura Henderson, 202-621-2951.

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“It doesn’t take an advanced legal mind to interpret what Congress meant in the Deep Water Royalty Relief Act – it’s right there in black and white. Unfortunately, now that this case has officially come to a close, it will likely be used by those who oppose responsible energy development as a cudgel to beat Congress into passing bad legislation that would otherwise have no legitimate place in the energy debate.

“Make no mistake. Oil and gas revenues from federal lands and waters contributed more than $23 billion dollars to the Treasury in 2008 – making this the single largest revenue raiser after federal income tax receipts. And with scarcely three percent of the outer continental shelf currently leased for energy exploration, it’s fair to say we haven’t even scratched the surface of what could be a multi-trillion-dollar resource.

“Today’s court ruling represents a clear victory for the rule of law, and an unambiguous rebuke to those in the administration who believe they have the unilateral power to make law, instead of the faithful obligation to enforce it.”

Note: According to an economic analysis commissioned by the American Energy Alliance, robust offshore energy exploration and production would generate $8 trillion in additional economic output (GDP); $2.2 trillion in total tax receipts; 1.2 million new, well-paying jobs annually across the country; and $70 billion in additional wages each year.

For additional information, please contact Patrick Creighton, 202-621-2947, or Laura Henderson, 202-621-2951.

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FOR IMMEDIATE RELEASE
September 16, 2009
Contact:
Patrick Creighton, 202.870.0850
Laura Henderson, 202.621.2951

IER: Rahall Bill a Continuation of Failed Energy Policies From Washington

‘Energy’ hearing to focus on extending de facto offshore energy production ban,

New bill will increase foreign energy dependence

Washington, DC – Prior to part one of a two-day hearing on H.R. 3534, The Consolidated Land, Energy, and Aquatic Resources (CLEAR) Act of 2009, Thomas J. Pyle, president of the Institute for Energy Research (IER), a free market energy think tank, issued this statement:

“It’s been over a year since Washington responded to the will of the American people and finally put to rest restrictions on responsible offshore energy exploration. While this action was long overdue, and was certainly a positive first step toward restoring proper balance in our national energy policy, unfortunately, one year later, it seems as though last year’s actions were merely a gesture.

“In fact, legislation like the CLEAR Act would actually move our nation further away from being able to safely and effectively develop our offshore energy resources, adding even more red tape, costs, and burdensome regulations to the safe practice of producing energy offshore. The creation of new bureaucracies to manage leasing at the Interior Department – which is called for in Mr. Rahall’s bill – is a direct attempt to ensure that a de facto ban on much of America’s energy remains intact. The American people do not want more government – they want more of the energy that is rightfully theirs.

“And while China invests in oil sands projects in Canada, and Russia, Brazil, Venezuela, and Cuba continue to expand energy production offshore, America – the country that discovered oil 150 years ago – remains on the sidelines. The rest of the world gets it, and the American people understand that increasing energy production here at home will create jobs, help stabilize energy prices and drive down imports. And yet, our leaders stand in the way of securing energy and mineral resources at every turn, putting special interests who oppose the energy the fuels our economy in front of the interests of the American people.”

More from IER:

Interactive Dashboard: Where’s our offshore energy production?

Fact Sheet: Offshore Energy Exploration: Myth vs. Fact

Press Release: China, Russia, Cuba, Brazil Advance Robust, Supply-Focused Energy Policy

Blog:Two Energy Futures

The Institute for Energy Research (IER) is a not-for-profit organization that conducts intensive research and analysis on the functions, operations, and government regulation of global energy markets. IER maintains that freely-functioning energy markets provide the most efficient and effective solutions to today’s global energy and environmental challenges and, as such, are critical to the well-being of individuals and society.

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FOR IMMEDIATE RELEASE
August 26, 2009
Contact:
Patrick Creighton, 202.870.0850
Laura Henderson, 202.380.5758

IER: 150th Anniversary of Drake’s Well Should Renew America’s Leadership to Access, Deliver Energy

After world-leading efforts a century and a half ago, U.S. energy priorities must be refocused on increasing supply, stabilizing costs

Washington, DC – One hundred and fifty years ago, “Colonel” Edwin Drake struck oil in Titusville, Pennsylvania, helping to set the nation – and the world – on a path toward economic growth, expansion and prosperity. Thomas J. Pyle, president of the Institute for Energy Research (IER), a free-market energy think-tank, issued the following statement:

“The year was 1859. The town was Titusville. In Pennsylvania’s rural northwestern Crawford County, the economics of the world as we knew it were completely realigned. Oil was found, paving the way for unprecedented economic growth, and helping to improve the quality of life for hundreds of millions across the globe. Without oil – arguably the most critical resource available to us – technological advancements in agricultural, medicine, manufacturing and transportation would not have been realized. From the time of the Roman Empire through the early 1800s, a human could expect to live not longer than 30 years. Thanks to advancements in technology and the affordable energy that helped make them possible, today – just 150 years later – we now live well into our 70s.

“Unfortunately, President Obama and members of Congress in both parties are now working to ration, tax, and slash our most affordable and reliable energy supplies at a time when they are needed most. This milestone in the world’s energy history should serve as a reminder to us all: energy has been, and will continue to be, the driver, protector and linchpin of America’s economic and strategic success. And if we desire to remain competitive in the global economy, and maintain our high quality of life, we must work to remove the government halting energy production – oil and gas offshore, along Alaska’s North Slope, in ANWR, shale in the intermountain-West, coal and Appalachia.

“In today’s interconnected global economy, the demand for oil has never been more competitive. Developing nations are understanding, and accessing, the benefits of affordable energy. And as a result of increased demand, supplies have tightened, and prices have risen accordingly. So as we mark this momentous anniversary, and pay thanks to the ingenuity of Col. Drake, we must also work to continue to safely expand our domestic energy resources, of every form.”

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FOR IMMEDIATE RELEASE
August 6, 2009
Contact:
Patrick Creighton, 202.870.0850
Laura Henderson, 202.621.2951

China, Russia, Cuba, Brazil Advance Robust, Supply-Focused Energy Policy

In Washington, Senate panel looks for new ways to ration, constrict American energy

Washington, DC – As our chief global competitors continue to expand their access to job-creating, economy-strengthening energy resources, the U.S. Senate Environment Committee held another hearing today focused on subsidizing inefficient, intermittent, and expensive energy sources, while discouraging access to affordable and reliable ones.

Following the hearing, Thomas J. Pyle, president of the Institute for Energy Research, issued this statement:

“Another week, and another missed opportunity by Congress to address our nation’s growing energy crisis. Russia is brokering a deal with communist Cuba to drill just miles from the Florida Keys. The Chinese are voicing interest in partnering with Canada to expand energy production. And Brazil is moving at breakneck speed to develop their oil and gas reserves offshore. But in Washington, our leaders sit idly by, debating misguided policies that will increase the cost of energy, cripple our economy, and make us less competitive.

“Energy rationing and taxpayer-subsidized ‘green jobs’ has been experimented on the local, state, and national level. And universally, it has delivered higher energy costs, and less economic growth. Spain’s experience has led to an unemployment rate approaching 20 percent in its country. Denmark, often touted as the world leader in wind energy, gives away electricity at a loss. And in Lone Star state, Austin residents pay almost three times more for their ‘green’ energy.

“Our national energy strategy is upside down.  Instead of advancing meaningful, supply-oriented policies that keep energy affordable for all Americans – like the ones China, Russia and Cuba are advancing – our leaders are hard at work restricting access to our vast domestic supplies, taxing our affordable carbon based energy sources, and showering the “green” energy brokers on Wall Street with subsidies (tax dollars) and mandates.  Increased domestic energy production creates good-paying jobs here at home. Washington must focus on creating these good jobs, not exporting them offshore.”

More from IER on ‘Green’ Jobs and Abracadabra Energy Policy:

• Study:  Spain’s Green Jobs Experience.
• IER on Secretary Salazar and Solar: Interior Secretary Limits Domestic Energy Production, but Fast Tracks Solar Development.
• IER: Abracadabra Energy Policy: Are the Generating Alternatives to Coal-Fired Electricity Ready for Waxman-Markey Targets?
• IER Blog: Will “Green Energy” Trickle Down?

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Now, after months of limiting access to additional sources of domestic energy, Secretary Salazar has decided to fast track taxpayer-subsidized solar energy development on federal lands. The Bureau of Land Management (BLM), an agency within the Department of Interior, announced earlier this month its intent to use 676,048 acres in six states—California, Nevada, Utah, Arizona, New Mexico, and Colorado—as solar energy study areas. The process to prepare these areas will take 2 years. The first step—soliciting comments via a Federal Register Notice—has already been completed. Comments were due by July 30, 2009. Salazar claims that this action, which will permit the construction of 13 commercial-sized solar facilities on public lands, will create 50,000 jobs.[1]

Salazar failed to mention that because solar power is heavily subsidized by taxpayer dollars, the jobs this plan creates will lead to many jobs lost elsewhere in the economy. He also failed to note that electricity generated by these plants will cost consumers 2.5 to 4 times more than generation from efficient energy sources like coal and natural gas. And solar is subsidized almost 100 times more than petroleum and natural gas, as measured on an electricity production basis (that is, in terms of dollars of subsidy per megawatt-hour produced).

Solar Power Is the Most Expensive Renewable

For decades, advocates of solar power have argued that it will soon be cost-competitive with conventional energy sources. But solar continues to cost much more than other, more efficient, sources of producing electricity. Economist Gilbert Metcalf of Tufts University compiled the table below comparing the cost of electricity from various sources.[2] The column titled “Current Law” shows the price of electricity under current law. However, current law provides for differing tax treatment for each source of electricity. To cancel out the different tax treatments for the different sources of electricity, Metcalf calculated the column titled “Level Playing Field,” which shows the cost of electricity assuming all of the sources were treated equally by the tax code. The last column shows the price if there were no taxes.

Metcalf explains that the costs of wind and solar shown here are actually too low because the cost does not reflect the fact that wind and solar work only intermittently. People demand access to electricity 24 hours a day and become frustrated when the lights go off, even for a short period. To have electricity when clouds cover the sun or the wind is not blowing requires stand-by power that can produce electricity when the renewables are not available.

Solar Power Will Continue to be the Most Expensive Renewable

According to the Energy information Administration (EIA), an independent agency within the Department of Energy, solar will continue to be the most expensive source of renewable electricity. EIA recently calculated the average cost of generating power from new fossil fuel, renewables, and nuclear energy. They estimate that by 2016 solar power will still cost 2.5 to 4 times more than the cheapest alternative, coal, which currently generates almost 50 percent of our electricity.

In reality, solar is even more expensive. EIA applied a three-percentage point increase to the cost of capital for coal-generated electricity to account for the possibility that future coal projects may need to purchase allowances or invest in other greenhouse gas emission-reducing projects to offset their emissions. This three-percent increase is similar to a $15 per ton carbon-dioxide-emissions fee.[3] On the other hand, EIA applied a two percentage point reduction in the cost-of-capital for eligible renewable technologies to take account of the loan guarantee program of the stimulus bill.

Solar Subsidies Are Huge

The federal government provides large subsidies for solar power generation in an effort to make solar more cost-competitive. Solar is eligible for a 10-percent business investment tax credit, which was made permanent as part of the Energy Policy Act of 1992. The Energy Policy Act of 2005 established a 30-percent personal tax credit, capped at $2,000 for the purchase of solar electric and solar water heating property. That tax credit was extended to 2016 by the Emergency Economic Stabilization Act of 2008, which also lifted the $2,000 cap and allowed electric utilities to qualify. [4]

To understand the significance of those subsidies, the EIA compared them to other fuels used for electric generation. The EIA calculated that federal subsidies for solar in fiscal year 2007 were over 55 times higher than those for traditional coal-fired generation and almost 100 times more than those for petroleum and gas generation, on an electricity production basis.[5] Even more stark differences in subsidies were documented by the General Accounting Office (GAO), which found that solar received subsidies over 1,200 times the subsidies provided to coal, on an electricity production basis.[6] The difference is largely in accounting, in that GAO attributes all solar subsidies to electricity generation where EIA attributes the majority of solar subsidies to residential, commercial, and industrial end users.

Solar Development Causes Job Loss Elsewhere

To judge the relevance of Secretary Salazar’s statement about job creation, let’s look at other countries that have more experience with solar technology construction. Spain, for example, requires that 20 percent of its electricity be produced from renewable energy by 2010. Its National Energy Commission estimates that 2,945 megawatts of solar capacity were installed by year-end 2008, making Spain second among nations for installed solar capacity. That capacity generated less than one percent of Spain’s electricity in 2008, and at a price per kilowatt hour that was over seven times higher than the average price of electricity. To attract investors and make renewable energy competitive against other forms of energy, Spain regulated rates and subsidized its renewable market. However, a prominent Spanish researcher found that for each megawatt of solar energy installed in Spain, 12.7 jobs were lost elsewhere in its economy. While solar energy may appear to employ many workers in the plant’s construction, it consumes a substantial amount of capital that would have created many more jobs in other parts of the economy. [7] Recently, the Spanish government decided to slash subsidies to solar power. The government will subsidize just 500 megawatts of solar projects this year, down sharply from 2,400 megawatts last year. [8]

Solar Energy Requires Massive Land Area

The land mass requirement for solar technology is large, which is why Salazar’s BLM is putting aside over 670,000 acres for it. Compared to nuclear power, for example, the acreage requirement is almost 230 times as much.[9] For this reason, some politicians are urging that the size of solar projects be limited. For example, Interior Appropriations Subcommittee Chairwoman Dianne Feinstein (D-Calif.) said solar projects are “huge” and their size should be limited so that they do not “become an enduring blight upon the land.” She said solar installations require fences, troughs, and steam plants. “That has a huge mark on land that we’re trying to conserve.”[10]

Will Energy “Alternatives” Make us Energy Independent?

Some argue we need increased electricity production from solar power to reduce our reliance on oil, coal, and natural gas. Solar currently, however, produces only 0.02 percent of the electricity generated in this country. Its increased production will not displace petroleum or make the United States more energy independent, as 99 percent of our electricity is already produced by non-petroleum sources. [11] Our demonstrated reserve base of coal will last over 436 years, at current consumption levels,[12] and much more coal is known to be available.[13] Nuclear fuel can be reprocessed and used again to generate electricity in our nuclear facilities—something other countries are already doing. And although there is great political desire to force the use of renewable energy to replace fossil fuels, it simply cannot happen anytime soon, as hydrocarbons supply 84 percent of our current energy demand[14] and 71 percent of our electricity generation.[15] The level of manufacturing capacity needed to replace a significant portion of that simply does not exist. For example, new solar installations required to replace just one percent of U.S. fossil fuel generated electricity would consume all of the world’s current solar module manufacturing capacity.[16]

As noted above, while Salazar is fast-tracking solar, in early February, his Interior Department canceled oil and gas leases on 77 parcels of federal land in Utah and launched a review to see whether or not they were appropriate for leasing. Also in February, Salazar halted the previous administration’s oil-shale research and development leasing efforts, saying he would offer new lease terms after seeking public input.[17] In April, a federal circuit court invalidated the 2007–2012 offshore leasing program, saying the most promising sales in Alaska needed more documentation.[18] At the end of July, the court clarified that they were only requiring the Alaska OCS sales to be placed on hold, meaning the Gulf of Mexico sales could proceed. Alaskan OCS areas are the most prospective for new oil and gas discoveries because few wells have been completed there.[19]

Last year, when oil prices exceeded $140 per barrel, over twice the current price, Congress allowed the moratoria on oil and natural gas development in restricted areas in the outer continental shelf to expire.[20] However, all of the recent actions noted above reduce our ability to increase domestic production of oil and natural gas, lessen petroleum imports, and create needed jobs. The outer continental shelf—including sections which have been off limits to drilling since the early 1980s—may contain as much as 115 billion barrels of oil.  Taking full advantage of our potential offshore energy production could generate 1.2 million new jobs, $8 trillion in additional economic output and, $2.2 trillion in extra tax receipts nationwide.[21]

For decades, the federal government has restricted access to vast tracts of our domestic energy resources. Now, the government is mandating politically popular, but inadequate energy sources such as wind and solar. Taken together, these policies will create higher prices for U.S. consumers and restrict job formation. In the case of energy policy, the facts speak for themselves—our government is clearly the problem, not the solution.

[2] Source: Gilbert Metcalf, Federal Tax Policy Toward Energy, p. 22 (Oct. 2007) http://web.mit.edu/globalchange/www/MITJPSPGC_Rpt142.pdf

[3] http://www.instituteforenergyresearch.org/2009/05/12/levelized-cost-of-new-generating-technologies/

[4] http://www.instituteforenergyresearch.org/2009/06/11/facts-on-energy-solar/

[5] Energy Information Administration, Federal Financial Interventions and Subsidies in Energy Markets 2007, http://www.eia.doe.gov/oiaf/servicerpt/subsidy2/pdf/execsum.pdf, Tables ES5 and ES6.

[6] General Accounting Office, Federal Electricity Subsidies, Oct. 2007, page 21, http://www.gao.gov/new.items/d08102.pdf

[7] Study of the effects on employment of public aid to renewable energy sources, Universidad Rey Juan Carlos, March 2009, http://www.juandemariana.org/pdf/090327-employment-public-aid-renewable.pdf .

[8] Wall Street Journal, “Darker Times for Solar-Power Industry”, May 11, 2009, http://online.wsj.com/article/SB124199500034504717.html

[9] http://www.instituteforenergyresearch.org/2009/06/11/facts-on-energy-solar/

[10] Environment and Energy Daily, Interior: Senators grill Salazar on renewable energy siting, June 4, 2009, http://www.eenews.net/EEDaily/2009/06/04/archive/3

[11] Energy Information Administration, Annual Energy Review 2008, Table 8.2a, http://www.eia.doe.gov/emeu/aer/pdf/pages/sec8_8.pdf

[12] Energy Information Administration, Annual Energy Review 2008, Tables 4.11 and 7.1, http://www.eia.doe.gov/emeu/aer/pdf/pages/sec4_23.pdf and http://www.eia.doe.gov/emeu/aer/pdf/pages/sec7_5.pdf

[13] http://pubs.usgs.gov/dds/dds-077/ and http://www.eia.doe.gov/cneaf/coal/page/acr/table17.html

[14] Energy Information Administration, Annual Energy Review 2008, Table 1.1, http://www.eia.doe.gov/emeu/aer/pdf/pages/sec1_5.pdf

[15] Energy Information Administration, Annual Energy Review 2008, Table 8.2a, http://www.eia.doe.gov/emeu/aer/pdf/pages/sec8_8.pdf

[16] The Credit Crunch’s Implications for Energy, Robert Goodof, Equity Research Analyst, February 2009. http://www.loomissayles.com/internet/internet.nsf/($DocumentID)/A9D1F278A7F6AD9485257561005A804D/$FILE/ccimplications_energy209.pdf

[17] Environment and Energy Daily, Energy policy, March 16, 2009, http://www.eenews.net/EEDaily/2009/03/16/archive/1?terms=salazar+and+OCS

[18] Environment and Energy News, Offshore drilling, April 17, 2009, http://www.eenews.net/eenewspm/2009/04/17/archive/3?terms=salazar+and+OCS

[19] The Associated Press, Offshore drilling ruling does not apply to the Gulf, http://www.google.com/hostednews/ap/article/ALeqM5ijmzoObcMDyeXXrne4t-7meTNxQwD99OC5V00

[20] http://www.api.org/policy/exploration/index.cfm

[21] The American Energy Tour, Part II, U.S. Rep. Adrian Smith, July 6, 2009, http://www.mccookgazette.com/story/1552538.html

Here’s what’s not supposed to change: the facts of existence, and the substance of the truth. Unfortunately, in the case of President Obama’s Commodity Futures Trading Commission (CFTC), every bit of analysis the agency did previous to the current regime can be tossed out the window–not because it was wrong then, but because it’s politically inconvenient now.

Observe the latest news from the CFTC this week. On Tuesday, the Commission announced that it will release a report in mid-August blaming the 2008 swings in oil prices on speculators (spoiler alert!) The announcement raises eyebrows because in 2008, the CFTC itself decisively concluded that fundamental supply and demand, not speculation, drove oil up to record highs in the summer of 2008. Bummer if you happen to make a political living off of scaring your constituents with shadows and straw men.

Could it be that the CFTC’s flip flop has something to do with the Obama Administration’s desire to further regulate the financial markets? By placing arbitrary limits on which institutions are allowed to spend their money on certain financial products, the government will make oil prices more volatile, and it will steer even more profits into the huge, politically connected firms on Wall Street. Meanwhile, the American people are still waiting for the government to remove the roadblocks to the offshore energy they were promised last year when two separate bans were finally and formally put out to pasture.

The Social Function of Oil Speculation

The essential insight of Adam Smith was that a market economy harnesses the self-indulgence of individuals and motivates them to serve the common welfare. In a free market, one becomes affluent by creating better and cheaper products or services that consumers are willing to buy.

In the case of speculation, this process actually reduces the volatility of price swings. We have all heard the successful speculator’s motto of “buy low, sell high.” To be more specific, the phrase should really be “short-sell high, cover low.” What this means is that if some investors believe that oil prices will rise sharply in a month, they can profit from this hunch by buying oil futures contracts. If and when the price of oil does rise as they had anticipated, their futures contracts will be adjusted, booking a profit to their trading accounts. (On the flip side, if some investors think oil prices will fall, they can sell—“go short”—oil futures contracts.)

It’s true, as the critics point out, that an investor who purchases oil futures contracts will indirectly pull up the current price of oil. This happens because producers have an incentive to reduce current sales when the futures price gets pushed up. They are effectively diverting some of their scarce supplies of oil to the future, rather than selling it all in the present.

But even if futures purchases push up current oil prices, the speculators perform a service to everybody else so long as they correctly anticipated a price spike. If oil is currently selling at $50, and an investor believes it will jump up to $70 in one month, then the investor will buy futures contracts until the “futures price” gets pushed up to reflect his forecast. In the process, his actions may have pushed the current, spot price up to $55. But that’s a good thing, because now the price will approach $70 more gradually; it won’t shock the market as much when oil hits $70.

Of course, if speculators are wrong, then they do make market prices more volatile. If a price is actually going to fall in the future, and speculators foolishly buy futures contracts because they mistakenly expect a price hike, then yes that does distort markets. But the government doesn’t need to crack down on this antisocial behavior, because the market has a built-in penalty: speculators who guess wrong lose money. And in fact, many investors lost a bundle of money when oil prices collapsed in the fall of 2008. And you didn’t hear the politicians praising speculators for the run down in the price of oil either.

The other thing producers do, and perhaps the most important thing for consumers, is that they are encouraged by the higher price to invest in finding more oil, because they will get a higher price for the oil. They buy equipment, hire people and buy services. They explore for new supplies and add new capacity. By combining their risked capital, additional human resources and intelligence, they bring new oil to the markets. New oil supplies help producers meet the increased demand and prices fall. This is supply and demand working to meet the wants and needs of consumers and there is nothing sinister about it.

Even Paul Krugman Agreed that Speculators Didn’t Cause the 2008 Spike

So we see that even when speculators move prices, so long as their forecasts are correct, they are actually helping to stabilize prices. Ironically, the point is moot regarding the 2008 price swings, because many analysts from across the political spectrum did not believe that speculation drove those movements. Instead, the underlying supply and demand conditions were the best explanation for why oil rose so high by the summer of 2008, and then collapsed in the fall.

The “smoking gun” in this conclusion was the fact that oil inventories were not rising during oil’s large ascent. Independent analyses by IER and the CFTC pointed to this fact, and Paul Krugman has recently reminded his readers that he too does not believe oil speculators were responsible for the 2008 movements.

All three analyses noted that the only way for speculators to drive up prices, is by giving an incentive for people to take oil off the current market and stockpile it for future sale. Since there was no obvious accumulation of oil inventories during the first half of 2008, oil speculation couldn’t have been the driving force. The reason the spot price of oil rose so much through the summer, was that worldwide supply still lagged behind demand for much of the year.

Putting New Curbs on Financial Markets Will Hurt Consumers

Of course, the real reason behind the CFTC’s change of heart is that it needs to justify its desire to expand its regulatory purview and slap on even more regulations of the financial markets. Specifically, the CFTC wants the power to limit “speculative” purchases of oil futures and other derivatives. The idea is that “physical hedgers”—such as airlines and oil producers—can trade in futures contracts as much as they want, because in theory they are just shielding their businesses from sensitive oil price moves. In contrast, the CFTC wants to crack down on those who buy futures contracts out of purely speculative motives.

This is a false dichotomy, and certainly we can’t trust bureaucrats to know the difference in practice. Airline companies can hold an opinion on oil prices too, and “bet” accordingly—that’s why some airlines invest more heavily than others in futures contracts. So even institutions that are directly related to the oil business can dabble in speculative transactions that will affect oil prices based on their forecasts.

On the other hand, investors who are completely isolated from the oil market might buy oil futures as a “hedge.” For example, during 2008 many portfolio managers gained more and more exposure to oil, meaning they “went long” on oil futures contracts. But they weren’t doing this in order to bet on higher prices. Rather, they could see that as oil kept rising, it was hurting the share prices on many major companies. So in order to protect their clients, the portfolio managers diversified their holdings, by selling off some of their stock and bond holdings in order to buy commodity futures. New government regulations could hinder this very useful tool to shield average investors from large price swings.

Finally, we need to realize that CFTC regulations will not stop large speculators from changing the world price of oil. Politically connected investment firms will easily be able to qualify as an “approved” purchaser of oil futures. And if nothing else, rich investors who want to bet on the price of oil can always take their business to foreign exchanges. Does anybody really think George Soros won’t be able to find someone else in the whole wide world willing to take the opposite position of an oil trade he wants to make?

Of course, we will have to suspend final judgment until we see the CFTC’s new report. It’s possible that every single analyst at the CFTC missed something last year when they concluded that speculation wasn’t driving oil prices. But one can’t help but note the timing of the CFTC’s about face – just as the Obama Administration is pushing for more regulation of energy markets.

FOR IMMEDIATE RELEASE
July 24, 2009
Contact:
Patrick Creighton, 202.870.0850
Laura Henderson, 202.621.2951

Biden Promotes Free-Market Energy Principles Abroad

Will He Check Those Beliefs on Air Force Two?

Washington, DC – Vice President Joe Biden recently told Ukrainian officials how they could strengthen their country by altering their energy policies. Ironically, Biden’s message dovetails perfectly with what the Institute for Energy Research (IER) has been saying for years.

“We are truly impressed,” said Robert P. Murphy, resident economist with IER, a leading free-market energy think tank. “Vice President Biden is calling for an end to government subsidies that distort energy markets, recognizing the benefits of liberalizing natural gas markets and boosting domestic energy production. Here at IER, we could not agree more.”

Key excerpts from a Wall Street Journal report on Biden’s remarks regarding free-market principles as a means to achieving energy independence and stronger national security:

• Mr. Biden saved his toughest criticism for the government’s handling of the energy sector, where the government provides large subsidies on imported natural gas that is sold domestically. Analysts have argued the disparity between market prices and the cheap government-sold gas has created a black market where corruption is rampant.
• In addition, analysts said, the large subsidies have forced Kiev to rely on below-market-price imports from Russia, which allows Moscow to directly influence Ukraine’s domestic economy. Twice in the past three years, disputes between Russia and Ukraine over gas payments have shut down a major gas pipeline that transits from Ukraine to the rest of Europe, leaving parts of Eastern and Central Europe shivering during the winter.
• Although he didn’t mention Russia by name, Mr. Biden said reform of the energy sector was essential to Ukraine’s independence and national security, saying only if the country liberalized its gas market would it be free of dependence on foreign powers and their suppliers.
• “Your economic freedom depends more, I suspect in this country, on your energy freedom than on any other single factor,” Mr. Biden said, urging conservation as well as reform. “That will be a boon to your economy and an immeasurable benefit, I respectfully suggest, to your national security.” Mr. Biden also announced the establishment of a joint U.S.-Ukrainian working group on energy security.

The Institute for Energy Research (IER) is a not-for-profit organization that conducts intensive research and analysis on the functions, operations, and government regulation of global energy markets. IER maintains that freely-functioning energy markets provide the most efficient and effective solutions to today’s global energy and environmental challenges and, as such, are critical to the well-being of individuals and society.

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FOR IMMEDIATE RELEASE
July 21, 2009
Contact:
Patrick Creighton, 202.870.0850
Laura Henderson, 202.621.2951

California Drilling: Progress or Economic Self Destruction?

Efforts to expand offshore production come with Sacramento’s heavy hand, and a wink and a nod from the enviros

Washington, DC – Thomas J. Pyle, President of the Institute for Energy Research (IER), issued the following statement today regarding California’s ongoing budget negotiations to meet the state’s 26 billion dollar financial shortfall, which includes responsible domestic energy development off Santa Barbara’s coast:

“It took more than 40 years, double digit state unemployment, the worst budget crisis in the state’s history, and a laundry list of concessions, handouts, and payoffs, but California is finally ending its irrational ban on responsible energy production off Santa Barbara’s coast.

“While some may consider this progress, the devil is always in the details. Under this so called ‘deal,’ negotiated by several out-of-the-mainstream organizations, Plains Exploration and Production (PXP) will be permitted to drill 17 wells from an existing platform in federal waters, tapping oil and gas reserves beneath an existing lease in state waters.

“In return, PXP must shut down the platform by 2022, dismantle three others, close two processing plants, donate 4,000 acres of land for a state park, and buy $1.5 million dollars worth of buses for Santa Barbara County. This, in my view, sounds more like a shakedown than progress. Either way, this ‘deal’ speaks directly to why California is facing a $26 billion dollar budget deficit.”

NOTE: Just last week, IER was joined by more than a dozen other consumer-focused and pro-energy groups in calling on the president to increase domestic energy exploration and production offshore. Click HERE to view this letter.

The Institute for Energy Research (IER) is a not-for-profit organization that conducts intensive research and analysis on the functions, operations, and government regulation of global energy markets. IER maintains that freely-functioning energy markets provide the most efficient and effective solutions to today’s global energy and environmental challenges and, as such, are critical to the well-being of individuals and society.

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FOR IMMEDIATE RELEASE
July 8, 2009
CONTACT:
Laura Henderson, 202.621.2951
Patrick Creighton, 202.621.2947

Supply, Not Speculation, Responsible For Volatile Energy Prices

Latest CFTC Action a Diversion from the Real Cause, Supply and Demand

WASHINGTON – This week, the Commodities Futures Trading Commission (CFTC) unveiled a new plan for government takeover of how energy commodities are traded, valued and sold. In response to these proposed actions, Thomas J. Pyle, president of the Institute for Energy Research (IER), issued the following statement:

“For politicians who consistently oppose responsible energy development here at home, the demonization of so-called speculators remains a popular tool for absolving themselves of responsibility for the historically high prices they helped create. But for those with a genuine interest in punishing speculators who make money when oil prices are high, no single action would hurt them more than flooding the market with new supply.

“The CFTC, at least as an institution, understands this fact, and has published dozens of studies over the past several years debunking the myth that market trading activity artificially inflates the price of energy. Unfortunately, it appears that the current head of the commission has not read much of its previous work, joining a long list of policymakers either unwilling or unable to understand the difference between cause and effect.

“Washington has kept billions of barrels of oil shale in the Inter-mountain West under lock-and-key. Billions of barrels of oil remain effectively off-limit in our deep oceans, especially in Alaska. And at the same time, Washington is working to halt American energy production even further through massive tax hikes, mandates, and job-killing regulations. Interested in understanding the real causes of high energy prices? Speculate no more.”

READ MORE:

• IER: Speculators Fixing Oil Prices? Don’t Bet On It
• IER: Question: How Many Times Has the FTC Found Evidence of Price Gouging by Energy Companies?
• Paul Krugman: “Speculative nonsense, once again … The mysticism over how speculation is supposed to drive prices drives me crazy, professionally … A futures contract is a bet about the future price. It has no, zero, nada direct effect on the spot price … As I’ve tried to point out, there just isn’t any evidence from the inventory data that this is happening.” (New York Times, 6/23/08)
• Krugman: “Hyperventilation over oil-market speculation is distracting us from the real issues.” (New York Times, 6/27/08)
• T. Boone Pickens: “A U.S. probe into whether speculators manipulated oil prices up to more than $135 a barrel is a ‘waste of time,‘ … ‘There’s nothing to it to start with,’ Pickens said.” (Bloomberg, 6/3/08)
• Pickens: “Speculation has become a ‘scapegoat’ for what is largely a supply and demand problem.” (Houston Chronicle, 7/10/08)
• Warren Buffett: “But it’s not speculation, it is supply and demand …” (CNBC’s Power Lunch, 6/25/08)
• Federal Reserve Chairman Ben Bernanke: “The most important cause [of high gas prices] is the global supply-and-demand balance.” (Congressional testimony, 7/16/08)
• Bernanke: “If financial speculation were pushing oil prices above the levels consistent with the fundamentals of supply and demand, we would expect inventories of crude oil and petroleum products to increase as supply rose and demand fell. But in fact, available data on oil inventories show notable declines over the past year.” (Congressional testimony, 7/15/09)

The Institute for Energy Research (IER) is a not-for-profit organization that conducts intensive research and analysis on the functions, operations, and government regulation of global energy markets. IER maintains that freely-functioning energy markets provide the most efficient and effective solutions to today’s global energy and environmental challenges and, as such, are critical to the well-being of individuals and society.

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