More Wall Street Profits, More Drilling, More Refineries, Less Innovation

While Mark Kirk expends time, press and energy using gas prices to campaign against Dan Seals, our gas stations are hovering around $4.15 9/10 and climbing. When he's not badmouthing Seals, he and his buddy John McCain are supporting the Bush line on how to solve the problem. They don't want you to know that speculators in oil futures are creating a problem similar to the mortgage crisis created by mortgage pool securitization speculation. The Bush, McCain and Kirk solution is to give more money to oil companies and allow continued Wall Street speculation. That will not solve your problem while filling up that greedy SUV gas tank.

Kirk claims the prices have nothing to do with the Iraq war or speculation in the energy markets. He says the problem is a gas shortage due to increased demand from developing countries like China. Again, he talks to us like we are twits and do not understand the free market. The folks at that bastion of liberal thought (snark snark), Business Week disagree and make it pretty clear, there is no energy free market.

Kirk says that global demand has caused the increased gas prices. However, the Business Week article points out: "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%."

Kirk and his fellow republicans say it's those awful Democrats concerned for the environment that have stopped construction of refineries that are to blame. Kirk says the solution is in building more refineries. Sorry Mark, not so says Ed Wallace writing for Business Week:

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.

[and the kicker]

[refineries] have been cutting back on the production of gasoline because their margins have declined.

[here's more]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.

Here's a version of Wallace's article with more commentary. This is an interesting quote from the comments:

Those investigations looked into the unregulated trading in energy futures, and both concluded that energy prices' climb to stratospheric heights has been driven by the billions of dollars' worth of oil and natural gas futures contracts being placed on the ICE - which is not regulated by the Commodities Futures Trading Commission.

Don't like Business Week? Want another source. Take a look at Bloomberg. The Senate also looked into this in 2006. See here too. Even the folks in Texas who buy into the refinery and China demand argument are talking about the role of Wall Street in driving up prices. Some are saying that as much as 60% of oil prices are based on speculation. Many blame what they call the Enron loophole which exempts energy speculators who make trades electronically from US regulation. The farm bill that just passed the House without Mark Kirk's vote would close that. So, when Kirk voted against food stamp increases, he also voted to keep oil prices high. McCain is also against regulating energy speculators.

So, it appears that the problem is not a shortage of oil refineries, but more Enron style energy speculation. Wallace compares it to the investor bailouts of the mortgage fiasco because current policy is protecting those who invested heavily in oil futures when demand is declining. Maybe that's why the Saudis told Bush to jump in the sand when he asked for more oil despite Bush's 2000 election promise to "jawbone" them into lowering oil prices. They admitted to as much at a conference back in 2006. Take a look at this article from Huffington Post. This is the crux of the problem as described in same:

Last week, at a conference on energy, the economy, etc., a discussion ensued about the reasons for the very high price of oil and the ever-present perception of shortages. I heard the director of the services group for the Saudi government-owned Aramco Oil Co. say that Aramco had ample spare capacity, but no takers. He volunteered that the big oil producer was ready to load additional cargos at any time.

Donning my old trading hat, I asked a simple question: "Why don't you lower the price?" I reminded him that when you have too much product, traditional business theory suggests that if you cut the price a bit, you might be able to move it. The Saudi representative answered: "Why should we sell for less than the prices quoted on the futures exchange?" He went on to say that the refiners are making too much money as it is.

Kirk's big idea on gas prices is to needlessly pour more dollars into oil companies and increase pollution. What that prevents is the same money from being poured into innovation. Take Brazil. My Dad told me about this one. They make gas out of sugar cane byproducts. That didn't affect sugar prices like Kirk's other plan "E85" affected grain prices here because in Brazil, they use a sugar cane byproduct, not the product itself.

Maybe the saddest part of the Bush/Kirk energy plan (apart from the lying (again) to get our tax dollars for their buddies) is not that we are once again required to bail out investors, but it's just another instance of preventing the USA from being a world innovator, a status of which we were once so proud and one that made us prosperous.

So, in the end voters will have to decide whether they are more upset about the few bucks Seals spent to illustrate the problem of gas prices, no more than food or political swag given away at a Kirk campaign event, or the fact that Kirk votes to continue the oil speculation that keeps prices artificially high the same way the mortgage securitization falsely inflated home prices and votes your tax dollars away to the oil companies. The only matter I can see getting in the way of Kirk's defeat on this issue alone is the press treatment. The Chicago Tribune shills for the Kirk campaign and fails to ask the hard questions or do the easy research (if I can find information on oil speculation in my spare time, why can't the full time well paid reporters of the Chicago Tribune). Now, if you want to talk about ethics and campaign law violations, perhaps there's your topic.