Why oil prices rose to more than $100/barrel

Barry Ritholtz sez, "It turns out that for the past three decades, we've had a George Costanza energy policy -- every decision we have made as a country has worked to drive energy prices higher. Had we made the opposite decisions, crude oil prices would be much lower than they are today ($130.17 as I type this). What follows is a list of energy-related policies of the United States. On many of these, I have no opinion -- but I wanted to list as many as I could to demonstrate why oil is where it is. Just about every one of these policies (or non policies) has contributed to oil prices skyrocketing from $8 to $130 since 2000." Link (Thanks, Barry!)

I write books. My latest is a YA science fiction novel called Homeland (it's the sequel to Little Brother). More books: Rapture of the Nerds (a novel, with Charlie Stross); With a Little Help (short stories); and The Great Big Beautiful Tomorrow (novella and nonfic). I speak all over the place and I tweet and tumble, too.

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Falcon_Seven

Reasons #4, #6, and #15 are three of the five reasons that the price of oil has skyrocketed in the past few years. The author fails to point out the hedging of currency risk through commodities speculation by large banks to cover their exposure and to cover their losses in the epic fail that was the sub-prime mortgage debacle as the other two. Leeway is given for the reasons being ‘off the top of his head’.
Agent 86

Oil was around $25 in 2000, from what my google-fu tells me. I’m suddenly unsure of this author’s ability to report.

Does anyone see any other obvious mistakes, or is the reasoning sound?
Falcon_Seven

Oh. I forgot to mention that it’s all the fault of that inbred hick in the White House.

Apologies to all the inbred hicks out there, sorry.
Antinous

Oil was around $25 in 2000

Light sweet crude was as high as $37.20 in 2000. The Daily Show has shown footage of candidate Bush railing about it as a reason to expel the Democrats from government.
Anonymous

#2 AGENT 86. It has much less to do with what the author claims are the drives and more to do with unregulated hedge funds that have driven the high prices on oil. IF you don’t think that hedge funds can have that much of an impact on the market, reference the “Big Pile of Money” Mortgage explaination over at NPR. That big pile of global money didn’t just invest in CDOs. They put their money in many of the hundreds of hedge funds that traded everything from the S&P500 to west texas crude futures. Current Oil prices are artificially inflated.

I find is interesting that the author, who is a hedge funds manager, happened to leave that small piece out.
ROSSINDETROIT

FYI Barry Ritholz has a pretty good track record. This isn’t some unfounded rant.
rdking647

As a former (21 years) commodity trader on the trading floor I think alot of the blame for high oil prices can be traced to one fact. Hedge funds can trade oil contracts on the ICE without position limits and very little CFTC oversight. It doesn’t take much for a hedge fund to force the cost of oil up. For an example look at the silver marker in the early 80′s when the Hunt brothers tried to corner the market and drove silver to $50 an ounce. If the goverment imposed positon limits on US hedge funds oil prices would fall in a hurry
Foofer

#4 is the main reason. Hussein was dumping the dollar for the Euro, so he had to go down. Chavez was going to do the same, so we were close to taking his ass out. Now, the Iranians have the IOB, which is excluding the dollar (which Ahmadenijad calls “a worthless piece of paper”), so it’s no surprise that we are going after them. He’s wrong though, the dollar is worth about .03 cents.
amccann

Summary:

1. Government force is the source of every problem
2. Government force is the solution to every problem
3. Freedom is bad, except where it isn’t.
4. “Game changing breakthroughs over the past decades in solar, battery, or energy generation technologies?” – when did legislating that we would come up with a breakthrough ever make it happen? People create, not governments.
ROSSINDETROIT

I remember the first modern oil crisis, caused by OPEC nations embargoing nations that supported Israel in the Yom Kippur war in 1973. I have learned more about American politics from thinking about why we didn’t immediately develop a policy for energy independence than from any other source.
spazzm

#8: “when did legislating that we would come up with a breakthrough ever make it happen?”

When government backs up legislation with R&D funding.

Some research investments only give returns in the 30+ year term, and are quite likely to give not returns at all. But when they give returns, they give lots. Most of Einstein’s work is one obvious example.

“People create, not governments.”

Sure, but it’s hard to find investors to fund research without near-guaranteed returns within 5 years. Governments must fund the long-term, risky stuff.
Dustin Driver

4. “Game changing breakthroughs over the past decades in solar, battery, or energy generation technologies?” – when did legislating that we would come up with a breakthrough ever make it happen? People create, not governments.

Um . . . the Manhattan Project? The Moon Landing? The LHC?

There’s something to be said for legislation and government funding. Businesses tend to follow profits, and that often doesn’t align with long-term societal needs. A properly executed government-funded project can achieve things that corporations wouldn’t even touch for fear of losing moolah.

Yeah, corporations have come up with some real zingers. And they will continue to. I think there should be a nice mix of government-funded and privately-funded research into renewable energy. And everybody should share ideas, for Chrissakes. Enough already with the profit seeking and intellectual property mongering. Renewable/alternative energy is important stuff!
NathanBowers

@#11 Prestigious public works like the Moon Landing are not automatically examples of “good” government spending just because they succeeded. You have to take into account what else could have been done with all those people, time, and money.

Was the moon landing worth it? Maybe. Are most other government projects inefficient at best and wasteful pork barrel rent seeking at worst? Hell yeah.
AWar

@25 – FYI, Energy can be stored indefinitely by pumping water up into a tower tank, or as compressed air.

A better battery would be great, though, for situations requiring low mass.

Also, in regards to the policy analysis, I’m in favor of limited industrial activity on the sea and in the wilds. The price of oil isn’t nearly high enough judging from the empty buses in my town. I’m rooting for crisis.
Lord Peter

@#12 Sorry, but I like roads, and sidewalks, and greenways, and parks, and, well, the Internet.

Clearly, there are areas best left to private companies, and the government would do well to stay out of these areas. But just as clearly there are projects that only government can or will do, and they should continue to do so.
Agent 86

What about the stories I’ve been reading that global oil production is growing faster than global oil consumption? What does that do to your demand theories?
dainel

How about we replace all roads with rail? They can be electrified and we wouldn’t need better batteries for cars. Almost all road accidents can be eliminated; greatly reducing medical expenditure on those injured in road accidents and loss productivity from sick days. And self-driving rail-cars is a technology that is already here. It’ll be like getting your own personal driver.

Sure, laying down that much rail will need a lot of steel, but it’s a much less limited resource compared to oil; and it’s not actually “consumed”. Once you put it down on the ground, it stays there. Even if they don’t last forever, if you need to “re-lay” new tracks, you can recycled the old stuff.
Daemon

“Lack of remotely sane anti-price grouging laws”
Anonymous

#25 DRBLACK

“We need a better battery.”

Not that much, really. The grid is the battery (sort of). While a better battery might be useful for mobile applications (automobiles, laptops and other consumer devices), that’s a very small part of things when you consider how much energy is used for stationary applications such as manufacturing, office buildings, homes, etc. Current stationary solar applications typically provide any excess (greater than current local demand) back into the grid, pushing the power meter backwards. The energy is then usable for other customers. If you push your meter negative, you actually make money or can draw out the equivalent amount of power later (without paying) from the grid.

What’s really more important is increasing the efficiency and lowering the cost of panels and controllers, and encouraging more installations to take advantage of the power available from sunlight. Recent research regarding the avalanche effect that may effectively triple the efficiency of solar panels is encouraging, but it remains to be seen whether (and how soon) such nanotech panels can be brought to market and whether they are, in fact, inexpensive to produce.
sparkzilla

Wicked lad: Yes. apparently, loaded tankers are waiting outside Gulf ports so that the oil can be sold at higher rates.

It’s an oil price bubble caused by speculators who moved out of mortages into oil. Government intervention won’t help and it will probaly make things worse. We just have to wait til the bubble bursts and then we’ll be back to where we were, with the advantage that people are more aware of their energy usage.
ivan256

The author misses the biggest force pushing up the cost of oil.

All of the investment capital that used to be in the mortgage market is being dumped into the energy market. These investors aren’t hungry for oil. They’re hungry for oil futures, which they re-sell at a profit without ever taking delivery of the commodity itself. They have enough capital to collectively corner the market, and have done so successfully.
ivan256

#32:

There are empty busses around here too. I think it has more to do with the poor upkeep, inconvenient schedules, and routes that don’t benefit most people.

I don’t care how much oil costs. If the bus doesn’t go to the places where I want to go, or if I don’t feel safe on the bus, I’m not going to take the bus. Again: this is true for any ridiculous price of oil you want to come up with.

Mass transit in the area I live (west of Boston) travels perpendicular to the major routes. So in order to get to any of the places you want to go, you have to ride into the city, and then back out. The roads, however, run in nice rings around the city and take you straight to the place you want to go. Whoever designed such a system was both an idiot, and probably one of those city-dwelling types that is sufficiently proud and arrogant about his/her city to assume that everybody wants to be downtown. I’m not talking about getting around suburbia either. There are plenty of small cities in Boston’s metro-west area along 495 and 128, and the only way to travel between them is to drive, or to go into Boston then back out.
Takuan

is the purportedly enormous pool of oil under Gull Island, Alaska, real or myth? It is true, who is served by keeping it back. If it is false, who is served by rumours of huge reserves
danegeld

I think the market needs to be close to demand outstripping supply to be able to make the difference by tying up the oil on individual ships or with contracts, though.

If we’re about to go through peak oil, it makes sense to buy it on the cheap side and sell it on the expensive side. … but that doesn’t mean it’s the speculators who are causing the peak, just that they’re the only ones who can profit from it in the short term …

`You know they’ve reintroduced the death penalty for futures traders?’
`Really?’ said Arthur. `No I didn’t. For what offence?’
Trillian frowned. `What do you mean, offence?’
`I see.’
spazzm

I disagree with the following points from the article:
1. Limited areas available for offshore drilling;

This is based on the faulty assumption that there is lots of oil available under the seabed. There isn’t.
There is about enough to cover the U.S. oil consumption for about 3 years (IIRC). But it would be slow and costly to extract, so the effect on prices would be marginal.

27. No new oil refineries built in the USA over the past 25 years.

Oil refineries turn crude oil into other petroleum products, such as gasoline or diesel. Increasing the number of refineries do not increase the amount of crude oil available, so it is unlikely that it would have a positive effect on the price of crude oil – rather the opposite in fact.
Takuan

look around you: who is rich or richer now?
Dustin Driver

@ #12: My point was that large government-funded projects did lead to technological breakthroughsâ€”for better or worse.

I definitely think the US could’ve done much better things with our money besides sending whitey to the moon and building the A-bomb. Like create super-efficient solar cells or get us a step closer to a fusion reactor. Hell, that money would’ve been better spent on schools.
Patrick Austin

11. Suburban Sprawl: Americans, on average, live further from where they work than Europeans do;

This isn’t a policy. It’s a symptom of thousands of different energy, transportation and land use policies at federal, state and local levels, combined with low gas prices in the past. The problem is that we’ve built ourselves into a hole. For 50 years we’ve been expanding out from cities, gong out as far as is rational given $1-2 per gallon gasoline…

You think the housing crunch is bad now? Wait until all those $200/mo gasoline bills become $1000/mo.
Wicked Lad

I’m skeptical about the commenters like rdking647 at #31 who assert that speculation in oil futures drives the price up. Eventually, the speculator has to sell the futures contract or take delivery of the oil. If s/he sells the futures contract, the price goes down. If s/he takes delivery and sells the oil, the price goes down. The only way I can see it driving the price up is if the speculator takes delivery and hoardes the oil. Is that what hedge fund managers are doing?
Agent 86

“sending whitey to the moon”

…are you trying to lose vowels?
danegeld

@40: can you imagine George Bush or Gordon Brown coming out with that kind of vision?
Antinous

But the space program pumped enormous amounts of money into fundamental scientific research which has produced enormous collateral benefit to society. If it weren’t for the flash and glitter of NASA, that money would never have gotten anywhere near the sciences.
Sam

My father was Vice President and general council for a large oil exploration company for quite some time. He said ANY TIME the government tried to get involved with oil, it would make things more expensive and worse off.

It didn’t matter if they were trying to bring the prices down, simplify laws, or increase production – no matter what they did it always had a negative effect.

There are no thinkers and strategists in the government, only politicians who lack basic operations skills.
Takuan

“sending whitey to the moon” is a legitimate quote in an American socio-economic historical priority discussion – but ya better attribute it for them furriners who don’t get’s it
Dustin Driver

@#18: It’s a song, “Whitey on the Moon” by Gil Scott-Heron. Sums up the issues with funneling money into the moon race: http://www.gilscottheron.com/lywhitey.html
Anonymous

Number 10 on his list is wrong — tax credits have been given for consumers who buy hybrids:

http://www.irs.gov/newsroom/article/0,,id=157557,00.html
Agent 86

Cool song! My bad, you’re not a bigot, I’m just ignorant. I’ll have to track down some audio.
Dustin Driver

@#19 Antinous: Yeah, isn’t that crazy? We had to go through all the trouble of going to the moon to get politicians to fund science programs. Not that I don’t think the moon missions weren’t completely awesome . . . I love all the space race history and I think it’s endlessly fascinating and inspiring. NASA continues to do wonderful work and I have nothing but respect and awe for its scientists and engineers. But I can also see how one could argue that it was a really insane thing to do with public funds.
Dustin Driver

@#22 Agent 86: Oh man, you need to check him out! Some solid stuff! Also check out “The Revolution Will Not be Televised.” A classic. Cheers!
Agent 86

The environment is served by not drilling for it, and it serves as a back up in case of future energy crisis. At least, that is what I’ve been told.
Agent 86

Wicked Lad

…speculation that the prices will continue to grow CAUSE the prices to continue to grow. Seems simple to me.
insomma

Ivan

If I understand you correctly you’re referring to the MBTA commuter rails that spider out from Boston to the neighboring cities.

Some food for thought: Those trains were implemented in the 1970s when fuel shortages, energy costs, urban congestion, and concern over air pullution were all responsible for renewed interest in the MBTA and dramatic commuting increases. Back then (pre-SPRAWL-sprawl)the majority of people who needed trains needed them to get into the city. That’s why you can’t get a train from, say, Fitchburg to Lowell. Hopefully the present energy crisis will spark a new interest in evauluating and improving public transportation to encourage commuting between secondary cities. It may be to late though.
Ben

There are no thinkers and strategists in the government, only politicians who lack basic operations skills.

And a metric assload of lobbyists telling them what to do.
drblack

I have been saying this for years. We need a better battery. Solar is good and getting better all the time but we need a way to store the energy.
A cheap, efficient,long lasting and recyclable battery will solve most of our energy needs. Solar efficiency and cost are improving all the time.
If you want to be a trillionaire, invent a better battery.
nyenyec

The main reason that oil prices rose (and will continue to rise) is that worldwide demand increased (thanks to fast growth in the BRIC countries) but oil production and especially net oil exports have peaked in the past years.

http://netoilexports.blogspot.com/

Why oil costs over $120 per barrel

http://europe.theoildrum.com/node/4007
jetsetsc

All of these policies have succeeded – insanely high oil prices are the goal. Why would the oilogarchs running the government want to reduce oil prices? That would be opposite, Jerry.

And Carter did implement some great alternative energy programs – my grandfather put solar panels on his roof with Gov’t $$. Reagan gutted those programs in short order.
billtheburger

last year OPEC stated that the oil should cost no more than $60 a barrel and then earlier this week:
“A source at Opec said its 13 members were uncomfortable with the current price of crude, which last week hit a record $135 a barrel.

Based on present supply and demand, he said it should be fetching $60-$70 a barrel.”
from
http://news.sky.com/skynews/article/0,,91211-1317363,00.html
so i believe it could be to do with SHELL & BP’s 1st quater profits of $8billion
danegeld

I would have said nuclear is the cleanest and safest option due to tighter regulation, but apparently the leeches have infiltrated there too, and it’s been possible to trade uranium futures since March 2007. Is nothing safe anymore?

http://preview.tinyurl.com/5cjwjd
toyg

Better a race to the moon or a race to Iraq’s oil wells? If money has to be spent in penis-measuring contests between nations, I’d rather give some pork to scientists than to war-profiteers.

Unfortunately there’s just one answer to the current situation, and it’s stronger international regulation and taxation of oil companies. Which ain’t coming.

My next car will be a hybrid.
Mindpowered

Jimmy Carter April 18, 1977.

“The first principle is that we can have an effective and comprehensive energy policy only if the government takes responsibility for it and if the people understand the seriousness of the challenge and are willing to make sacrifices.

The second principle is that healthy economic growth must continue. Only by saving energy can we maintain our standard of living and keep our people at work. An effective conservation program will create hundreds of thousands of new jobs.

The third principle is that we must protect the environment. Our energy problems have the same cause as our environmental problems — wasteful use of resources. Conservation helps us solve both at once.

The fourth principle is that we must reduce our vulnerability to potentially devastating embargoes. We can protect ourselves from uncertain supplies by reducing our demand for oil, making the most of our abundant resources such as coal, and developing a strategic petroleum reserve.

The fifth principle is that we must be fair. Our solutions must ask equal sacrifices from every region, every class of people, every interest group. Industry will have to do its part to conserve, just as the consumers will. The energy producers deserve fair treatment, but we will not let the oil companies profiteer.

The sixth principle, and the cornerstone of our policy, is to reduce the demand through conservation. Our emphasis on conservation is a clear difference between this plan and others which merely encouraged crash production efforts. Conservation is the quickest, cheapest, most practical source of energy. Conservation is the only way we can buy a barrel of oil for a few dollars. It costs about $13 to waste it.

The seventh principle is that prices should generally reflect the true replacement costs of energy. We are only cheating ourselves if we make energy artificially cheap and use more than we can really afford.

The eighth principle is that government policies must be predictable and certain. Both consumers and producers need policies they can count on so they can plan ahead. This is one reason I am working with the Congress to create a new Department of Energy, to replace more than 50 different agencies that now have some control over energy.

The ninth principle is that we must conserve the fuels that are scarcest and make the most of those that are more plentiful. We can’t continue to use oil and gas for 75 percent of our consumption when they make up seven percent of our domestic reserves. We need to shift to plentiful coal while taking care to protect the environment, and to apply stricter safety standards to nuclear energy.

The tenth principle is that we must start now to develop the new, unconventional sources of energy we will rely on in the next century.”

Boy did we miss the boat on that.
Antinous

A source at OPEC said its 13 members were uncomfortable with the current price of crude, which last week hit a record $135 a barrel.

Bush has been begging the Saudis to increase production to drop the price. They keep pointing out that supply is adequate to demand and prices are inflated due to speculation. So why does everyone think that the Middle East is full of raving lunatics? They’re sticking to basic economic principles while we’re driving without our hands off the wheel.
Latente

only Yoshiaki Arata can save us:
http://physicsworld.com/blog/2008/05/coldfusion_demonstration_a_suc_1.html
Wicked Lad

Sparkzilla wrote

Yes. apparently, loaded tankers are waiting outside Gulf ports so that the oil can be sold at higher rates.

I do hear these stories about loaded oil tankers languishing in secret harbors and hush-hush BRIC stockpiles of crude: ways of explaining how oil is being hoarded out of sight, driving up prices. But I’ve never heard or seen any of this quantified, much less credible references cited. Do you have any links you could share? Hoarding in sufficient quantity could indeed explain a lot.
consideredopinion

There are numerous particular errors of reasoning in his 27 points, which I comment on point by point in the link – even though I generally agree with the overall argument that the US can and should have been doing more to address our current energy situation.

The main problem is that all 27 points are seen from the perspective of only oil price, and besides the fact that many of these points do not necessarily directly relate to oil price, these historical decisions and future opportunities exist in a context broader than mere oil price. What about opportunity costs in: other R&D paths, food production, marine ecosystems, carbon emissions, etc.?
Latente

update from Italy:
today gasoline is 8.798 U.S. dollars / US gallon
Takuan

http://www.americanfreepress.net/html/gull_island_oil.html