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Home Front Economy

Harry's Plan for Energy Independence

2008-07-12

Addressing High Gas Prices

Skyrocketing gas and energy prices are hurting Nevadas working families. Thats why I am pushing Congress to pass legislation to address the root causes of the problem and reduce the burden on consumers and the economy. Excessive speculation on Wall Street and around the world has helped drive dramatic increases in oil and energy prices. The bill I introduced would curb speculation, go after OPEC for collusion, and convince the oil companies to start investing their huge profits in clean, affordable alternatives like wind, solar and geothermal energy to power our economy. I've forced votes at least five times this year on legislation to help restrain energy prices and help the consumers. For those who say we should drill more at home, I believe the oil companies should start using the 68 million acres of onshore and off-shore leases they already own, before asking for more land. But let me be clear, we can't simply drill our way to lower prices or to real energy independence because America has less than 3% of the world's oil supplies and uses more than 25% of its production. That is why we must increase our investment in renewable energy sources like the ones that are so abundant in Nevada.

For more information on my energy plans, click here.

Posted by:Bobby

#24 addendum: jumping margins requirement to 100% or requiring the fuutures buyer to take delivery kills the rise to $145- the buyer buys at 140 and it stays there until supply/demand moves it. And increasing supply reduces upward pressure on the product, as do demand reduction. Plus supply/demand curse will decrease demand once the prodcut becomes too expensive.

the problem is speculators do not have the same supply demand as the commodity they trade - they creade demand and supply themselves with their trading activity.

So thats why whacking speculators by either eliminating them by restricting trade to actualy suppliers and consumers (true supply/demand) or taking away margin will cause corrective action and allow for a true supply-demand marketplace, thus bubble deflation.

In that environemnt, supply side actions like increasing drilling, will have an effect on price quite quickly, as anticipation of price increases will soften, allowing price to drop or at least steady in the face of increased supply.

Posted by: OldSpook 2008-07-12 22:08

#23 And yes speculators can be the cause of this bubble by themselves.

Remember, unlike a buying customer, who will put ALL of the capital into a contract and take delivery, speculators can borrow most of the money, putting little of theirs in.

That means the only cost of the trade to them, for the most part, is the interest cost. ANd as long as they can say that the price will go up faster than the interest rate, they will buy the contract, sell it for a profit - probably to another speculator.

Many contracts trade as much as 20 to 60 times before a delivery (final) contract is taken.

That means speculators, on margin, are driving the bubble up on their own by trading between themselves, creating high velocity of money and momentum trading.

Put it this way:

Given oil at 140 a barrel, and say Oil looks to be going to 150 due to less supply and sustained demand for the indefinite future. Its fluctuating wildy and will swing $5 in a week, possiby in a day.

Not unreasonable.

OK, say we have a corporate fleet that makes bulk discounts, and uses 10,000 barrels equivalent a quarter. To buy the equivalent of 10,000 barrels of oil, a consumer, who takes delivery, pays out $1.4 million to fix the price in place.

Now lets look at a speculator at a hedge fund or brokerage with access to large credit lines, instead, has a 5% margin and 8% interest.

So he enters the market - grabbing the same lot of 10,000 barrles at $140. He pays 5% out of pocket for the margin = 70K. He gets a loan for the $1.33M, and takes on $2046 a week in interest costs (106.4K annual interest).

He now holds for a swing in price.

As previously stated, oil looks to be going to 150, so a week later he finds another speculator that will buy from him for 145 (betting on 150), putting $1.45M in his pocket.

He pays back the $1.33M in loan and $2046 in interest for the week.

So: he put up $70,000 of his own, and got back $1.45M - 1.35046M = $99540 Thats a gain of $29540 in a week. A 42 percent return on investment.

As long as the momentum keeps up (cheap money, constricted supply), its behooves the trader to keep trading and pushing the price. His risk is minmal, compared ot the returns.

So the specualtor only puts $70K of his own, whereas the consumer has to put up $1.4 million.

HUGE difference. Increse the margins makes the yield go down. Increase production reduces upward pressure which increases the risk for the speculator.

So you have to do BOTH.

Posted by: OldSpook 2008-07-12 21:57

#22 I agree that margin requirements are too low, but that doesn't lead to futures traders being able to drive up market prices for this long. It's real, not speculators.

ps, 3dc your cousin's a speculator and I hope she makes money on the gamble.

Posted by: Nimble Spemble 2008-07-12 21:30

#21 One other thing dumbass Harry missed - the current leases are NOT as good a land as are the off limits area. The reason they havent been exploited is those areas show little promise to be productive enough even at today's rates. They are the "leftovers", the likely non-producing areas.

Basically what this dipshit is saying, were this to farmers, is that he wants us to farm the rocky slopes, before he lets us farm the fertile plains.

Moron - its political BS and obfuscation of the worst kind.

Posted by: OldSpook 2008-07-12 21:27

#20 DIpshit Harry is missing one thing: the speculation woudl nto be possible were it not for severely constrained supplies and loose trading rules.

Tighten margin requirements (or eliminate them completely) will force speculators to put up sufficient capital instead of miniscule amounts.

That kills the bubble from the demand side.

Drill here, drill now - that fixes it form the supply side. Knowing that the US is going to be exploring and bringing on 10's of millions of barrels in the next 5-6 years domestically is more than enough to take the edge off the supply squeeze and reduce upward pressure. That will cause the futures to steady, which will driuve the specualtors out as well.

Stable markets are not exploitable to the degree we have seen with the speculation bubble, especially if you take into account a higher opportunity cost (raising margin requirements).

This is only to buy breathing space while we build nukes for primary baseload power, wind and solar for peak, and push for petroleum replacement for vehicle fuel.

And don't forget natural gas - we are the Saudi Arabia of Natural Gas.

Posted by: OldSpook 2008-07-12 21:24

#19 One point not made so far: by refusing to drill here at home, we send $147 a barrel to people like the Saoodis, Nigerians, etc. It makes sense to me to keep as much of the money here at home as we reasonably can. This also means that the jobs required in drilling stay home. And whatever we produce here can be taxed here by the states and the Federal gummints. Therefore drilling at home makes more sense than buying oil abroad.

Second point: oil companies drilling in America have to be careful and responsible to the environment. That's the law and the Feds generally do a good job enforcing it. The 'law' in Nigeria isn't nearly so strict, so there is a lot more pollution there. By saying that we won't drill at home, we encourage the pollution of the world elsewhere. Try that one on a liberal friend and see how they respond.

Third point: drilling at home would send a message to the world that we're serious. Combine that with better efficiency (NOT conservation, since few like to be lectured about conserving but everyone likes to be more efficient), a move to flex-fuel plug-in hybrid cars, producing ethanol from switchgrass, buying ethanol from Brazil (*), and a serious push to nuclear power, and you have a plan that dampens speculation substantially.

(*) Would you rather buy ethanol from Brazil or oil from Iran? Discuss.

Posted by: Steve White 2008-07-12 20:46

#18 AzCat, in a market there are always an exactly equal number of buyers and sellers.

The article you quote is poorly written and it's not clear if long positions held by speculators are now 71%. If they are then there must have been an exactly equal increase in short sellers. Who are they? Other speculators? Oil companies? OPEC? Without knowing this, we are just speculating. A plausible scenario is OPEC is gaming the speculators.

Otherwise, you have a point and futures markets feed a bubble mentality that spills over into the physical market, because prices people pay are determined by the spot physical market and not the futures market.

Posted by: phil_b 2008-07-12 20:22

#17 Nimble: My cousin has 28,000 acres of coal and oil bearing wheat/cattle land in Montana. She has 2 refineries withing 20 miles.
NEITHER ONE WILL PAY HER MORE THAN $20 BBL.
So she shut her pumps off!

Posted by: 3dc 2008-07-12 20:22

#16 NS is right, speculators don't drive up the price of oil over any period longer than a few days. That requires physical hoarding of oil and as a practical matter that can only occur by not pumping oil, which OPEC has done for many years. Were a business to do this, there is nothing wrong with it. Holding product back from the market in the hope of higher prices later is a legitimate business practice. The problem with OPEC is that it is a cartel.

Posted by: phil_b 2008-07-12 20:08

#15 NS - speculators exist and they are significantly impacting the markets. Consider, for example, this bit from Consumer Affairs.

Here's a very relevant anecdote:

In 2007, speculators owned just 37 percent of the contracts to buy West Texas Intermediate Crude on the New York Mercantile Exchange. The remaining 63 percent was controlled by oil refiners, wholesalers, trucking companies and other end users of petroleum products.

By April of this year, the proportion had almost reversed itself. Speculators controlled 71 percent of the contracts while oil users held only 29 percent.

With more and more money from speculators chasing a finite number of oil futures contracts, the supply and demand principle takes hold. When demand for something outpaces the supply, the price rises.

Take the speculative money out of the market, for example, and watch what happens. With another 71 percent of oil contracts up for grabs, and no speculative money to compete for it, oil users are the only ones left bidding for contracts. They don't have to bid as much, now that there is less demand.

Posted by: AzCat 2008-07-12 20:04

#14 That was me, as if you couldn't tell.

Posted by: Nimble Spemble 2008-07-12 19:30

#13 They are absolutely not to blame and to say so exposes your naivete. Buying and selling oil is as much speculating as futures.

Dealing with speculators who drive up the price for extended periods is easy because they don't exist. The people who are driving up the price are the people with oil in the ground who won't drill for it. They are speculating the price will go up and they are Democrats.

Posted by: Large Whinegum6365 2008-07-12 19:29

#12 Increased drilling has been happening, tied to the rise in oil prices over the past few years. It just takes a while to get to the point where the oil comes out of the ground, as apparently it takes longer than the six weeks needed to build a normal house.

Posted by: trailing wife 2008-07-12 19:27

#11 Call 'em whatever you want NS but the folks driving up the value of oil futures contracts are partly to blame here. Trading futures is speculation until and unless someone produces a working crystal ball.

Of course the speculators aren't entirely to blame but they're the most quickly and easily dealt with component of the problem.

Posted by: AzCat 2008-07-12 19:21

#10 Do you folks realize that by saying the price of oil is rising due to speculators you are agreeing with Idiot Reid? There are no speculators except the people who have oil but choose not to pump it. And who does that definition fit? The Democrats!

Posted by: Nimble Spemble 2008-07-12 19:17

#9 Azcat is correct. A "We're gonna drill" announcement would have an immediate impact on the speculators (nobody wants to be holding the short end of an expensive stick), and an effect at the pump shortly after

Posted by: Frank G 2008-07-12 19:09

#8 Sorry, but drilling anywhere is not going to do anything to gas prices for a long time.

Actually it will if the speculators believe that we're serious about ramping up production. Throw open *all* federal lands to *all* types of mineral production and you halve oil prices in a matter of months. Actual available supply isn't necessary to turn long speculators into short sellers.

Posted by: AzCat 2008-07-12 19:01

#7 Sorry, but drilling anywhere is not going to do anything to gas prices for a long time. Potential demand is far higher than actual supply. I suppose if you nationalized it, it could help, otherwise it would still be sold to the highest bidder (which would be China). It's simple economics people, not rocket science. And you would still have to build up a lot more refining capacity. No, a better solution is to start devoting some of the billions we are spending in Iraq to increasing hydrogen infrastructure. We've all but got Iraq won, as we start drawing down we could dump billions into that. We have to get off of oil. That's the only solution. And no I am not some greenie, I am a realist. I don't believe in AGW, hell I don't even believe we know for sure if the climate is warming. Regardless, get us off oil, make the oil ticks irrelevant, let China deal with them.

Posted by: AllahHateMe 2008-07-12 18:49

#6 Well, if he was serious, he could call for Vegas to dim their lights for a few hours to help conserve energy.

;)

Posted by: Swamp Blondie in the Cornfields 2008-07-12 18:31

#5 Yeah, he's right - a lot of the price of oil is speculation. Speculators are betting on increased future demand and tightening supplies of petroleum. Nothing wrong with wind, solar, or geothermal power - except they're not exactly going to provide energy to power our cars anytime soon. I also notice no mention of nuclear power - which is proven and does not require R&D.

Drilling in Alaska, off both coasts, and off of Florida WOULD drop prices, as the markets would factor in a large increase in future supply.

The smart move would be to drill now, build nuclear plants, AND invest in alternative energy R&D. But now one would EVER accuse Harry Reid of being smart.

Posted by: DMFD 2008-07-12 17:54

#4 Not Scrappleface. I signed up for Harry's newletter a while back, so I cound get fun little nuggets like this one, which I share with my friends at the 'Burg. Enjoy.

Posted by: Bobby 2008-07-12 17:24

#3 ATM we still produce domestically about 40% of our oil.

Which, if I take Dingy Harry's figures, means we're producing .25*.4= 10% of the world's oil production with 3% of its resources, even as much as retards like him have limited it.

Posted by: Abdominal Snowman 2008-07-12 16:22

#2 I'm not old enough to remember most of them, but it seems to me Harry is gunning for worst Senate Majority Leader ever.

Posted by: Raj 2008-07-12 16:02

#1 (Assuming that this isn't Scrappleface)

Dear Harry,

Go to Hell. Go to Hell and die.

Yrs, Every non-wealthy family in America.

Posted by: Anonymoose 2008-07-12 14:47

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