CAPTION: Senate Minority Leader Mitch McConnell (R-KY) is the latest of many national political figures to attempt lowering fuel prices with expanded US oil drilling, but drilling increases would do nothing to affect gas and heating oil prices. (image: newsmax.com)

With Americans frustrated by rising fuel costs and the start of the summer driving season just a week away, President Obama and both parties in Congress are addressing concerns with policy moves. The last two weeks have seen a whirlwind of proposals at the federal level aimed at increasing domestic oil production. But despite some claims that those proposals will help bring down the cost of gasoline and other retail fuels like heating oil, they would do nothing to bring down short-term prices and offer little to no long-term price relief.

On May 5, the Republican-controlled House of Representatives passed a bill requiring the government to restart sales of oil drilling leases off the coast in the Gulf of Mexico and in Atlantic waters off the coast of Virginia. Those areas had been opened up to drilling by the Obama administration in the spring of 2010, but lease sales were halted by the administration’s drilling moratorium following the April 20 oil rig explosion and subsequent oil leak in the Gulf. House Majority Leader Eric Cantor (R-VA) tied the Republican bill to lower fuel prices in pointedly partisan language, as quoted by the Washington Post:

In response to the Obama administration’s aggressive fight against domestic energy production, House Republicans have taken another important step to encourage economic growth, create jobs and lower gas prices – especially right here at home in the Commonwealth [of Virginia].

Last week, the House passed two more bills aimed at increasing domestic production of crude oil. Passed on May 11 and May 12, the bills would force the Department of the Interior to approve drilling permits within 60 days and open previously off-limits areas to offshore drilling, respectively.

Despite claims by Rep. Cantor and other Republicans, the measures proposed in the three House bills would do nothing to lower fuel prices in the coming months, and offer slim-to-none hopes of bringing prices down in the longer term. This fact was cited by the White House as a key reason for the President’s opposition to the bills. However, in a surprising announcement, the Obama administration offered its own plan to streamline domestic oil production that shared some common ground with the Republican oil drilling bills.

Soaring oil and gasoline prices have sparked heated political debate about whether to open up more US areas to off-shore drilling. (image: greenfudge.org)

In his weekly address to the nation on Saturday, President Obama said he would take steps to increase “safe and responsible oil drilling here at home.” His plan includes extending leases affected by the drilling moratorium enacted last year, offering new leases in Alaska’s petroleum reserve, and speeding up environmental reviews of potential oil reserves off the Atlantic coast. In contrast to congressional Republicans, Obama ceded that increasing domestic drilling would not lower today’s high fuel prices, and emphasized that his proposals would reduce US dependence on foreign oil, help create jobs and stimulate the economy.

In the latest salvo in the war of rhetoric over fuel prices, Senate Minority Leader Mitch McConnell (R-KY) introduced a bill that would have forced government sale of leases off the coasts of Virginia and Louisiana. The bill failed to win enough support in the Democrat-controlled Senate on Thursday to enter into floor debate. In defense of the bill, McConnell repeated the errant belief that increased US drilling would bring down fuel prices. As quoted by UPI, McConnell told Senate leaders, “our plan would actually do something to increase supply, putting downward pressure on price.”

As reported by HeatingOil.com in April, increasing domestic production of crude oil would have absolutely no effect on gasoline and heating oil prices for two reasons. First, the price of crude is set on a global market that is driven by world supplies, so boosting crude supplies in the US would not affect prices paid for oil by American companies. Second, US crude reserves are simply too small to increase world supplies to an extent that would drive down global prices. Even if US production were to increase to 3 million barrels per day (as the third of the House drilling bills mandates by 2027), US crude would only constitute 4 percent of the approximately 74 million barrels per day generated worldwide, not nearly enough of a supply increase to bring about trickle-down reductions in retail fuel prices.

With gasoline and heating oil prices rising steadily once again, the summer driving season just days away, and a presidential election next fall, fuel prices have become the political issue of the hour. But so far, none of the policy proposals put forth by the president or Congress offer any hope of bringing prices down. So as both political parties jockey for a political advantage on the issue, consumers would do well to keep the realities of oil prices and world markets in mind and demand more effective and concrete solutions from their elected leaders.

Timeline of recent oil drilling policy proposals:

Thurs 5/5: House passes bill requiring lease sales in Gulf and VA coast.

Wed 5/11: House passes second bill forcing Dept of Int to approve drilling permits within 60 days, permits automatically approved it deadline not met.

Thurs 5/12: House passes 3rd of 3 bills—open new drilling areas in CA, AK, and Atlantic coasts; require US production to reach 3 mbpd by 2027.

Thurs 5/12: Senate hearing on Oil industry tax breaks

Sat 5/14: Obama extends Gulf and AK leases, increases frequency of rights sales in AK petroleum reserve

Thurs 5/19: Senate rejects McConnell-sponsored bill to reopen lease sales on VA and LA coasts closed after oil spill

Historic losses posted by crude and heating oil at the NYMEX on Thursday offered a welcome reminder that commodity market volatility can lead to sharp price declines as well as increases.

But the long-term trend in crude, heating oil, and other commodity prices is up, and the sheer unpredictability of prices has led to higher retail prices for exchange-traded commodities.

In a report published on Friday, the New York Times detailed how wildly unpredictable commodity prices in recent years have caused substantial cost increases for many businesses, including heating oil dealers, that have in turn driven up consumer prices.

Many market participants and observers argue that a flood of speculative demand for commodity-based financial products has inflated prices for exchange-traded commodities beyond their fundamental value (a view most recently articulated by Starbucks CEO Howard Schultz).

While such arguments are highly controversial and have yet to be conclusively proven, it is an unequivocal fact that commodity prices as a whole are much more volatile than they were 10 or even five years ago.

That volatility has forced end users (wholesale and retail businesses like heating oil dealers) who deal in commodities to invest more extensively in hedging their material costs by purchasing commodity-based financial products. At the same time, the cost of those investments has increased dramatically – margin calls, the money-down requirements to make commodity investments, have ballooned in recent months. The Times report cited the cost of investing in cotton futures on the UK’s InterContinental Exchange (ICE) as an example:

The InterContinental Exchange requires from $6,000 to $8,400 in initial margin for each 50,000-pound cotton contract today. A year ago, the range was $1,500 to $2,100 per contract. Companies using the markets to hedge multiple contracts, which is typical, can quickly see their margin requirements swell into the hundreds of thousands of dollars or more.

The need to make more hedging investments and a higher overall cost of investing simply translate to higher retail costs for exchange-traded goods, from coffee to heating oil. Starbucks CFO Troy Alstead told the Times, “It is inevitable the consumer is going to pay more in a riskier, more volatile environment around commodities,” and Vermont heating oil dealer Sean Cota explained, “It is affecting my company drastically. I pass the extra cost on to customers, but sometimes I just have to swallow it.” According to Cota, hedging’s added per-gallon cost to the dealer has shot up in the last decade, regardless of whether the prices of crude and heating oil are rising or falling at any given time:

Seven or eight years ago, such protection added 2 to 6 cents to each gallon of heating oil he bought. These days, volatile oil prices mean it costs him 37 cents a gallon for such hedging

Those who see excessive speculation as a leading cause of commodity price volatility hope that pending regulations to curb commodity speculation by financial institutions will ease prices into more predictable ranges. But those who deny the speculative boom has had any effect on commodity price volatility, many of whom have benefited financially from increased commodity speculation, have accepted wildly unpredictable prices as the new status quo. As Thomas W. Farley, president of the ICE’s US operations told the Times, “In the absence of a change to the macroeconomic factors that are causing this high volatility, this volatility is here to stay in these markets.”

(image: zernike.nl)

After two years of work at building, maintaining, and growing HeatingOil.com, I am leaving my post as Managing Editor to attend graduate school and pursue a career in environmental policy.  It is with great pride, appreciation, and some sadness that I leave HeatingOil.com, and feel a deep admiration for my colleagues here as I bid them farewell.  I will continue to contribute to HeatingOil.com in a reduced capacity, and will now join the ranks of its loyal daily readership.

I leave HeatingOil.com in capable hands: a veteran journalist with keen instincts and a burgeoning heating oil expert, Lane Nichols will be stepping in to assume the Managing Editor role.  I wish him the best of luck with confidence that he will seamlessly carry on the site’s tradition of high-quality reporting and service to the heating oil industry and its customers.

Thanks to all of you who have ever read, thought about, tweeted, or commented on a news story at HeatingOil.com–it’s been a true pleasure.

-Josh

WIth crude, heating oil, and gasoline prices on the rise, it seems like everyone is an "expert" at explaining why. (image: kulr8.com)

Over the past heating season, heating oil users coped with prices that rose steadily from October to March, and prices have continued to climb since the season ended. Now that the nationwide average price for gasoline is approaching the feared $4-per-gallon level, placing drivers across America in much the same situation as heating oil consumers earlier this year, news reports, proclamations, and accusations over what exactly is driving up crude oil and, in turn, heating oil and gasoline prices, are popping up on a daily basis.

The question of what makes oil prices do what they do is incredibly complex. That fact, combined with the political weight and volatility of the issue, make for lots of outlandish claims and massive volumes of misinformation.

To help separate posturing from reality, HeatingOil.com has compiled a list of the most commonly stated claims about the causes of (and solutions to) high oil prices, complete with evaluations of how accurate or off the mark each claim is. So turn off that talk radio, put down that editorial page, and find out what’s really going on with petroleum prices.

1. MYTH: More oil drilling in the US will lower gasoline and heating oil prices.

The bottom line is that crude oil is sold on global markets and its price is based on global factors. The US simply does not possess enough crude oil reserves (both on shore and off) to make the kind of difference in world supplies that could bring prices down. A study conducted by the US Energy Information Administration (EIA) in 2009 found that unrestricted drilling in US coastal waters would have absolutely no effect on global oil prices until 2030. Even then, the EIA said, decreases in the price of gasoline would top out at just three cents per gallon. Put another way, a massive increase in US oil drilling would only lower gasoline prices by three cents a gallon, and even that small decline would not be seen for 19 years. As oil price analyst Tom Kloza told CNN Money this week, “This drill drill drill thing is tired. It’s a simplistic way of looking for a solution that doesn’t exist.”

2. MYTH: President Obama’s policies are to blame for high oil prices.

This myth is closely related to claim #1. Many public figures have pointed to the Obama administration’s tightening oversight of drilling regulations since the BP oil spill as the only obstacle in the way of price-lowering increases in US oil production. As previously explained, a huge increase in US production would only bring down gasoline prices by three cents per gallon, and take nearly two decades to do so. Setting that fact aside for a moment, an examination of US oil production data shows that US oil production has increased substantially since Obama took office in 2009.

US oil production has been on a major upswing since 2008. (source: EIA; image: climateprogress.org)

American operations currently produce about 5.4 million barrels of crude per day, making the US the third-largest producer of oil in the world, behind Saudi Arabia and Russia.  US production began climbing in 2008 and has continued on an upward path since then, thanks in most part to improved drilling methods and technologies. So even if increased production in the US could bring down oil prices, the current president’s policies have not stopped or slowed increases in oil extraction.

3. PARTIAL TRUTH: Political unrest in the Middle East is causing oil prices to rise.

Nearly every news story covering rising oil prices over the last three months (including those at HeatingOil.com) mentions “Middle East unrest” or “instability in the Middle East and North Africa” as leading causes for daily increases in crude oil prices. In the context of global oil markets, those explanations are true. Oil prices are set by futures contracts that, as their name implies, represent what oil will be worth in the future, anywhere from a few weeks to several years hence. The worst-case scenario would be a regime-changing revolution in Saudi Arabia, the world’s leading exporter of crude. Upheaval in that country could suddenly cut off a major portion of supplies and cause shortages worldwide that would catapult oil prices skyward. With this scenario in mind, oil traders have been buying oil prices higher for months, knowing that if crisis hits Saudi Arabia before their oil contracts expire, they could make massive profits. However, in the real world of right now, political upheaval in Egypt, Libya, Bahrain, Yemen, Tunisia, and Syria have had a relatively small effect on global supplies. Furthermore, the US receives almost none of its crude oil from the countries affected by political unrest (Canada is our top crude oil supplier). So saying that loss of US oil supplies to Middle East protest movements have driven up gas and heating oil prices in the US would be 100 percent untrue. But saying that fears of catastrophic supply cutoffs that could result from spreading political instability have led to the price of all oil sold on world markets moving higher would be accurate.

4. PARTIAL TRUTH: Excessive speculation on oil markets is inflating petroleum product prices.

This is probably the most controversial claim regarding rising oil prices. Many people, including experienced oil traders, senators, and Commodity Futures Trading Commission (CFTC) commissioners, believe out-of-control speculation on oil is a leading culprit of rising prices in recent years. Basically, this belief is supported by mountains of anecdotal evidence but has yet to be proven conclusively. That wiggle room has led a chorus of voices to declare that speculation has no effect on prices, and that attempts to curb speculative activity currently in the works at the CFTC are unnecessary and economically harmful. Those voices tend to come from the financial sector, which has benefitted nicely from the explosion of oil speculation over the last decade—hedge fund managers, investment bankers, and commodity exchanges have all made massive profits on various forms of oil speculation. Perhaps the most compelling commentary on the speculation question came from leading investment bank Goldman Sachs in March. Goldman, which has shared in the financial sector’s huge profits on oil bets, released a research note that acknowledged “record speculative length in the oil market” was contributing to overpriced oil. How much does barely-regulated oil speculation add to prices? The only way to find out would be to implement the position limits and other regulations the CFTC has been mulling over for years and see what happens.

So there you have it, the whole truth (albeit a shortened version) about four of the most commonly- stated claims about what’s behind rising oil prices. Now that you have the skinny, use you powers to identify and condemn politicians and pundits who play fast and loose with the truth.

The Energy Information Administration will have to curtail many of its activities due to a major budget cut. (image: lorinroche.com)

The Energy Information Administration (EIA) is the statistical branch of the US Department of Energy, charged with tracing energy production, consumption, and other data. It is also one of many federal agencies and programs to feel the sting of deep cuts in the US budget passed earlier this month. In a press released published on Thursday, the EIA outlined what programs and activities it would be eliminating and suspending in order to reduce its operating costs, which included data collection and analysis of oil prices and oil production.

Overall, the news in the 2011 budget agreement was good news for the heating oil industry and its customers, making only modest cuts to the Low Income Home Energy Assistance Program (LIHEAP) and providing most of the increase in funding requested by the Commodity Futures Trading Commission (CFTC) to support its initiative to increase oversight of oil speculation.  But the major cutbacks to the EIA’s budget will almost certainly make for less transparent crude and heating oil markets by reducing the amount of reliable data on supply and demand. The EIA reported that its 2011 budget is “$95.4 million…a reduction of $15.2 million, or 14 percent, from the FY 2010 level.”
The widely watched reports on petroleum product stockpiles and refining activity the EIA releases every Wednesday will not be affected, and will continue to affect short-term heating oil and other petroleum product prices.

But longer-term collection and examination of oil product supply and demand data will be curbed significantly. According to the EIA press release, budget cutbacks will force the agency to

Curtail collection and dissemination of monthly state-level data on wholesale petroleum product prices, including gasoline, diesel, heating oil, propane, residual fuel oil, and kerosene. Also, terminate the preparation and publication of the annual petroleum marketing data report and the fuel oil and kerosene sales report.

Funding cuts will also cause the EIA to “Suspend auditing of data submitted by major oil and natural gas companies…through EIA’s Financial Reporting System.” Although the effects of EIA examination of oil industry data on markets and prices is unclear, the suspension of such auditing could only lead to less accurate information on oil company finances. Voluntary, unverified reports from the oil industry are notoriously inaccurate, as exemplified by the frequent multimillion-barrel discrepancies between the weekly inventory reports released by the American Petroleum Institute (API), an oil and gas industry group, and the EIA.

Perhaps most distressing for the heating oil industry, the EIA will “Curtail efforts to understand linkages between physical energy markets and financial trading.” The curtailment is just the latest in a string of obstacles the CFTC faces in its effort to write and implement new regulations to curb excessive speculation’s inflationary effect on crude and heating oil prices. The CFTC requires a massive influx of technology and manpower to delve into the complex and secretive swaps markets, where many financial products tied to heating oil and other exchange-traded commodities are bought and sold.

Although the CFTC collects much of its own data, the loss of a supplementary government source of data and analysis could only slow down the commission’s efforts to better understand and regulate swaps and other commodities-related financial activities.

Ben Bernanke's comments at an unprecedented press conference following a meeting of the Federal Reserve's Open Market Committee helped drive up oil prices at the NYMEX on Wednesday. (images: foxnews.com and Nicholas Whitaker for HeatingOil.com)

The reassuring tone and message from the Federal Reserve’s Open Market Committee following its meeting on Wednesday led support for oil prices at the NYMEX. As expected, the Fed left near-zero interest rates intact and stated that the US economic recovery is proceeding at a moderate pace. The keeping of the status quo offered some reassurance on the state of the US economy and offered a boost to expectations of increasing demand for petroleum products. The EIA’s weekly inventory report, released on Wednesday morning, offered some mixed news on domestic petroleum demand, but ultimately helped drive heating oil prices higher. The report showed a huge increase in crude oil stockpiles, but notable decreases in gasoline and distillate stockpiles, indicating solid demand for gas and diesel fuel. The Fed announcement and inventory report combined to cause both crude and heating oil prices to post late gains and end the day above their opening positions. The sharp price increases at the NYMEX during afternoon trading led to a midday increase in retail heating oil prices that carried over into Thursday. On Thursday morning, crude and heating oil prices were on the rise as the bullish report on gasoline inventories and Fed chairman Ben Bernake’s comment that his agency could do nothing to control rising gas prices provided continued support.

Today’s average retail heating oil price in the Northeast is 2 cents higher per gallon than Wednesday’s average price.