Why is Gasoline Approaching $5.00 per Gallon?

“The more sand has escaped from the hourglass of our life, the clearer we should see through it.” — Niccolo Machiavelli

On March 21 I posted a blog stating that President Obama wanted us to pay $5.00 per gallon of gasoline and more. Since hat posting the price for a gallon of regular (87 octane) gasoline has climbed to $4.25 per gallon in my neck of the woods and in some regions it is quickly approaching the $5.00 mark.

In my blog post I cited the example of how the commodities market works and investors (some call them speculators) buy and sell commodities using something called futures. A futures is what you think a commodity like orange juice, hog bellies, corn, wheat or oil will sell for 30, 60 or 90 days down the road. In essence it’s a bet.

Say you are studding the market for corn. You see that the government is pushing ethanol as a fuel additive and corn is selling for $10.00 per bushel. After your research you bet, that due to the government intervention in the corn market, you think corn will sell for $11.00 per bushel in 90 days. You figure farmers will grow more field corn to sell to for the production of ethanol and less corn for the production of corn syrup and human consumption. This will bring up the demand for corn and thusly the market price.

90 days after you buy you futures at $10.00 per bushel the market price for corn rises to $11.00 so you sell the bushels of corn you purchased for $10.00 and make a 10% profit on your investment in corn futures. To do this you never actually process bushels of corn and store them in your garage of shed, you merely own a piece of paper stating that you control so many bushels of corn. When you sell your corn futures you will be taxed on the 10% profit in the form of a capital gain tax.

On the other hand if there is an abundance of corn and in 90 days the price drops to $8.00 per bushel you will be left holding the bag for a 20% loss — something you don’t want to happen. This is what commodities traders spend a great deal of time studying a particular market. In he instance of corn they would be looking at the fuel additive market, driving patterns, weather, and other demands and influences on the supply and demand for corn. Most of this trading is done at the Chicago Commodities Exchange.

Oil works the same way, except the normal future period is 30 days. Oil companies don’t but oil futures, they buy real barrels of oil on the Spot Market at something called the Spot Price. However, the price for oil on the spot market is set by the supply and demand, not the futures market. The futures market is just a place where you bet on the price, but it does influence the selling price of crude oil.

The quickest way to reduce the price of crude oil is to increase the supply. I don’t think it takes a rocket scientist to understand this fact. This is the way the Organization of the Petroleum Exporting Countries (OPEC) controls the price of oil. Headquartered in Vienna, one of OPEC’s principal goals is “the determination of the best means for safeguarding the organization's interests, individually and collectively. It also pursues ways and means of ensuring the stabilization of prices in international oil markets with a view to eliminating harmful and unnecessary fluctuations; giving due regard at all times to the interests of the producing nations and to the necessity of securing a steady income to the producing countries; an efficient and regular supply of petroleum to consuming nations, and a fair return on their capital to those investing in the petroleum industry.”

When one nation, say Libya, reduces its oil production the other states are supposed to increase theirs in order to spike production and keep world-wide oil prices stable. Also, no state will over produce causing a drop in prices for the other states; in essence it’s the largest cartel in the world.

OPEC's ability to control the price of oil has diminished somewhat since then, due to the subsequent discovery and development of large oil reserves in Alaska, the North Sea, Canada, the Gulf of Mexico, the opening up of Russia, and market modernization. As of November 2010, OPEC members collectively hold 79% of world crude oil reserves and 44% of the world’s crude oil production, affording them considerable control over the global market. The next largest group of producers, members of the OECD and the Post-Soviet states produced only 23.8% and 14.8%, respectively, of the world's total oil production. As early as 2003, concerns that OPEC members had little excess pumping capacity sparked speculation that their influence on crude oil prices would begin to slip.

There are several factors that influence the price of a gallon of gasoline. There are items such as refinery capacity, demand, cost of transportation, environmental regulations and of course the largest — the price of a barrel of crude. The quickest way to reduce the price of a gallon of gasoline is to reduce the price of a barrel of crude and that is done by increasing the supply and this is done by increasing production.

Right now Canada provides the United States with approximately 22% of our crude oil. Also, Canada and the United States have more oil reserves than all of the OPEC nations. The problem is that our government and environmental special interest groups are prohibiting us from extracting this oil for various reasons. President Obama has declared that he wants the price of gasoline to rise to $10.00 per gallon so he and his environmental and left-wing supporters can wean us off the internal combustion engine and get Americans into public transit and alternative energy sources. This is way he supports Cap and Trade.

This is a bone-headed policy and why Obama will not tell the world of oil investors that we are opening all of our oil reserves for extraction. This one statement would be like an atomic bomb to the oil futures market and the price of oil would begin to plummet. This is not Obama’s game plan. If we opened the Gulf of Mexico to drilling, as the Brazilians and Chinese are doing, released the oil leases of the coast of California, opened Anwar in Alaska and got out of the way of the extraction of the Bakken shale oil formations in North Dakota and Montana we would be oil independent of OPEC.

One of the least reported on oil reserve is the Williston Basin in North Dakota, Montana and Saskatchewan, Canada. It is estimated that there are 3.65 billion barrels (USGS Estimate) of extractable sweet crude in the basin along with vast quantities of natural gas. The USGS also estimates there are 1.85 trillion cubic feet of associated/dissolved natural gas, and 148 million barrels of natural gas liquids in the Bakken Shale Formation of the Williston Basin Province, Montana and North Dakota. These estimates are low in relation to higher estimates from other sources that range from 18 to 24 billion barrels of oil. In 1995, the USGS surveyed the Bakken area in which they found roughly 151 million barrels of recoverable oil. Since then, there have been many technological advances causing the big spike to 3.65 billion barrels of recoverable oil. The biggest oil field, which is located at the Arctic National Wildlife Refuge in Alaska (ANWAR), could potentially hold up to 10 billion barrels of oil with another 30 billion barrels off the Alaskan coast.

A report from one “expert” I have seen states; “For those that haven't been following oil development in North Dakota, the Bakken shale underlies about the western third of the state and is estimated to contain over 500 Billion barrels. Yes that is Billion — not a typo. For comparison, Saudi Arabia has 25 billion and Alaska about the same.”

“Recoverable shale oil with current technology is apparently 20% although two companies drilled two laterals in the same section in Mountrail County last summer. Up until those, the procedure was to go down vertically in one corner of a section (square mile) and drill horizontally (the lateral) at a diagonal across the section. (The closing scenes in the video are not Bakken wells — the wells are too close together.) One lateral in each section taps into a very small amount of the shale formation. Multiple laterals in one section may substantially increase the recoverable amounts. I've seen the Bakken crude and seen chemical analyses of it — it is very close to kerosene or diesel fuel - some of the sweetest crude in the world. Initial production from the Bakken wells ranges from 300 to 2400 barrels per day depending on location since the shale seems to be different in different areas.”

I have not verified this report and it seems to contradict the estimates of other sources, including the U.S. Geological Survey. However, I received this information from a reliable source and the reporter seems to know what he or she is talking about. I find the 500 billion barrels number to be off the chart. As stated above the highest number I have seen is 18-24 billion. Even so, it’s a considerable amount of oil within our national boundary, and I am sure, as with all past oil estimates this number will increase with further exploration and advancements in drilling technology. Since the discovery of oil in near Titusville, Pennsylvania in 1859 by Edwin Drake there have been numerous claims of the world running out of it as illustrated by the remark "We're running out of oil!" — Harold Ickes, U.S. Secretary of the Interior, 1943.

This is one of the reasons North Dakota is one of the few states running a budget surplus and an unemployment rate of 3.8%. “Unemployment is 3.8%, and according to a Gallup survey last month, North Dakota has the best job market in the country. Its economy "sticks out like a diamond in a bowl of cherry pits," says Ron Wirtz, editor of the Minneapolis Fed's newspaper, fedgazette. The state's population, slightly more than 672,000, is up nearly 5% since 2000.

When you begin adding up all of our oil reserves the number surpasses that of OPEC and it’s easy to see that by some simple actions by our federal government gasoline prices could plummet to below $2.00 per gallon within a year as it was a few years ago. Of course states like California would lose billions in tax from a lower price per gallon as California imposes a 8% sales tax on a the price of gasoline — including the state and federal gasoline tax of $0.36 per gallon. This would be quite a blow for Jerry Brown and his big spenders.

So, don’t blame the oil companies or commodities investors for the high price of gasoline as Bill O’Reilly does, instead focus your ire where it belongs — at the feet of the environmental lobby, Congress and Barack Obama.

To view an animated video of how Bakken shale oil is extracted click here. The technology involves will fascinate you.

Obama and the Feckless EU

“War is not an independent phenomenon, but the continuation of politics by different means.” — Karl Von Clausewitz.

On March 13 the AP reported: Moammar Qaddafi's forces swept rebels from a key oil town Sunday with waves of strikes from warships, tanks and warplanes, closing on the opposition-held eastern half of Libya as insurgents pleaded for a U.N.-imposed no-fly zone.

Qaddafi's troops have been emboldened by a string of victories in the struggle for Libya's main coastal highway but their supply lines are stretched and their dependence on artillery, airstrikes and naval attacks makes it hard for them to swiftly consolidate control of territory, particularly at night.

The insurgents claimed they moved back into the strategic town of Brega after dusk in a fast-moving battle with a constantly shifting front line, destroying armored vehicles and capturing dozens of fighters from Qaddafi's elite Khamis Brigade.

The United States sent U.S. Secretary of State Hilary Rodham Clinton to meet with rebel leaders in Paris on Monday as world powers consider trying to ground Qaddafi's air force.

Stratfor reported on March 10; The French government said on March 10 that it would recognize the Libyan National Transitional Council as the sole representative of the Libyan people. It will soon move its ambassador to Benghazi from Tripoli. This comes as French President Nicolas Sarkozy said he would call for airstrikes against Libyan forces at the March 11 EU Council meeting.

France has been one of the most vociferous supporters of a no-fly zone in Libya. However, the issue for French involvement is the capacity of Paris to enforce such a zone on its own. The French aircraft carrier Charles de Gaulle is the only aircraft carrier in the Mediterranean Sea at the moment. However, its (around) 35 aircraft alone would be insufficient to set up the initial zone. Therefore, the question is: To what extent can France enforce the zone on its own?

The logic for the call to an intervention is largely a domestic one for Paris. Initially, France took a lot of criticism for how it responded to the wave of protests in Tunisia and Egypt. France’s then-Foreign Minister, Michele Alliot-Marie, took a lot of criticism not only for vacationing in Tunisia by flying in a private jet of a businessman close to the regime, but also for offering the regime help from French security forces in repressing its protesters three days before the Tunisian president fled the country. Sarkozy ultimately had to replace Alliot-Marie with veteran Alain Juppe. The replacement was a considerable embarrassment for Sarkozy and for the French government. Therefore, one aspect of the logic for France’s support of a no-fly zone is the compensatory for the earlier lack of clarity on French policy toward change in the Middle East.

Another reason for the support of the no-fly zone is, of course, the French role in EU affairs. With Germany’s rising clout in economic and political policy of the Eurozone and the wider European Union, Paris wants to maintain its leadership in foreign affairs and any military initiatives of the Europeans. Therefore, leadership on this issue is very important for Paris. Furthermore, what aids Paris in its diplomatic push for a no-fly zone is an actual lack of interest in Libya.

That is not to say France has no interest in the country; it does import 10 percent of its oil from Libya. However, it has nowhere near the level of interest in Libya as its Mediterranean neighbor, Italy, has, which imports about 20-25 percent of its oil from the North African state. Therefore, France has less of a need to hedge its policy toward the Gadhafi regime. It can be far more forceful in supporting an intervention because it is not as worried as Italy about its energy assets and investments in Libya

In evaluating such calls, it is useful to remember that in war, Murphy’s Law always lurks. What can go wrong will go wrong, in Libya as in Iraq or Afghanistan.

It has been pointed out that a no-fly zone is not an antiseptic act. In order to protect the aircraft enforcing the no-fly zone, one must begin by suppressing enemy air defenses. This in turn poses an intelligence problem. Precisely what are Libyan air defenses and where are they located? It is possible to assert that Libya has no effective air defenses and that an SEAD (suppression of enemy air defenses) attack is therefore unnecessary. But that makes assumptions that cannot be demonstrated without testing, and the test is dangerous. At the same time, collecting definitive intelligence on air defenses is not as easy as it might appear — particularly as the opposition and thieves alike have managed to capture heavy weapons and armored vehicles, meaning that air defense assets are on the move and under uncertain control.

Therefore, a no-fly zone would begin with airstrikes on known air defense sites. But it would likely continue with sustained patrols by SEAD aircraft armed with anti-radiation missiles poised to rapidly confront any subsequent threat that pops up. Keeping those aircraft on station for an extended period of time would be necessary, along with an unknown number of strikes. It is uncertain where the radars and missiles are located, and those airstrikes would not be without error. When search radars and especially targeting radars are turned on, the response must be instantaneous, while the radar is radiating (and therefore vulnerable) and before it can engage. That means there will be no opportunity to determine whether the sites are located in residential areas or close to public facilities such as schools or hospitals.

Previous regimes, hoping to garner international support, have deliberately placed their systems near such facilities to force what the international media would consider an atrocity. Libyan leader Moammar Gadhafi does not seem like someone who would hesitate to cause civilian casualties for political advantage. Thus, the imposition of a no-fly zone could rapidly deteriorate into condemnations for killing civilians of those enforcing the zone ostensibly for humanitarian purposes. Indeed, attacks on air defenses could cause substantial casualties, turning a humanitarian action into one of considerable consequence in both humanitarian and political terms.

The more important question is what exactly a no-fly zone would achieve. Certainly, it would ground Gadhafi’s air force, but it would not come close to ending the fighting nor erode Gadhafi’s other substantial advantages. His forces appear to be better organized and trained than his opponents, who are politically divided and far less organized. Not long ago, Gadhafi largely was written off, but he has more than held his own — and he has held his own through the employment of ground combat forces. What remains of his air force has been used for limited harassment, so the imposition of a no-fly zone would not change the military situation on the ground. Even with a no-fly zone, Gadhafi would still be difficult for the rebels to defeat, and Gadhafi might still defeat the rebels.

The attractiveness of the no-fly zone in Iraq was that it provided the political illusion that steps were being taken, without creating substantial risks, or for that matter, actually doing substantial damage to Saddam Hussein’s control over Iraq. The no-fly zone remained in place for about 12 years without forcing change in Saddam’s policies, let alone regime change. The same is likely to be true in Libya. The no-fly zone is a low-risk action with little ability to change the military reality that creates an impression of decisive action. It does, as we argue, have a substantial downside, in that it entails costs and risks — including a high likelihood of at least some civilian casualties — without clear benefit or meaningful impact. The magnitude of the potential civilian toll is unknown, but its likelihood, oddly, is not in the hands of those imposing the no-fly zone, but in the hands of Gadhafi. Add to this human error and other failures inherent in war, and the outcome becomes unclear.

As you can see from the above reports from the AP and Stratfor the situation in Libya is a mess. In fact it is such a mess that Madame Hillary Clinton fired her deputy press spokesman, P.J. Crowley, after he had given mixed messages regarding events in Egypt and Libya.

Crowley resigned Sunday after also recently angering the White House for comments that he made during the height of the Egyptian crisis that forced President Hosni Mubarak to step down.

Neither the EU nor Obama know what to do about Libya. The French want a no-fly zone, the Italians are clueless, the Germans are mute, Obama is more concerned with the Wisconsin battle against the public sector unions and the Saudis want us to bomb Qaddafi because they don’t like him and the “rebels” are reported to be more in line with their Islamic philosophy.

We haven’t the slightest idea who the “rebels” are and what they represent. Are they connected to the Muslim Brotherhood or Al-Qaida? Or are they truly a group of untrained, poorly armed and disorganized Libyans wanting a free and democratic Libya? We really don’t know.

All we know is what is coming from incomplete and biased news reports. We don’t like Qaddafi so our tendency is to side with the “rebels.” This is a civil war and no matter which side we support we will pick the wrong one. This is the way civil wars go. This is what happened in Egypt. This is what is happening in Afghanistan.

I recall the days of the Bosnian-Serbian-Croatian conflict (1992-1995) when the EU and UN diplomats were shuttling back and forth between Sarajevo, Belgrade and Dubrovnik trying to stop the conflict and ethnic cleansing by all sides. They all hated each other and their passions were greater than their self-interest. I can recall having a conversation with a few of my British colleagues in Swansea, Wales during the height the conflict. They asked what I thought should be done to stop the killing. My response was: “We should build a fence around the place and let them fight it out. No one was going to abolish hundreds of years of ethnic hatred. The EU and UN were powerless to stop this conflict, as they were so anti-war they could not credibly back up their peace initiatives with real force. Only we could and then we would incur the wrath of the western world. Both the EU and UN were feckless” They did not seem to like my response, but I turned out to be correct.

It finally took a volley of cruise missiles launched by Bill Clinton and an intervention by NATO to bring the warring factions to a peace table in Dayton, Ohio. Everyone applauded and claimed peace had come to the former Yugoslavia. Four years years later we were dropping tons of bombs on Belgrade to prevent the Serbs from killing all of the Muslims in Kosovo.

After 9/11 these very same Muslims, we supposedly saved in Bosnia and Kosovo, danced in the streets as they saw the twin towers of the World Trade Center collapse, the Pentagon burn and 3,000 Americans die. This is what the reward for intervention in civil wars brings. Afghanistan is turning the same direction.

Obama has seemed almost Shakespearean in his public musings about whether to be or not to be. In general, from the very beginning of the unrest in Tunisia, the United States has appeared erratic, inconsistent, and contradictory, often pontificating and talking loudly while carrying a tiny stick. It also apparently has no clue that Iran, Libya, and Syria are different sorts of autocracies from a dictatorial Egypt, Tunisia, Jordan, or the Gulf states.

We should not take too seriously the sudden European chest-thumping about jumping in to support Libya. The British government has a tawdry record of cynicism in its money-making diplomacy (BP) with Qaddafi the last few years. The Italians cozied up to him for gas and oil, and the French and Germans will sell anything to anyone at any time. No European government will back up any of their ongoing humanitarian rhetoric with force; they will launch no Euro air sorties from Spain, southern France, Malta, Italy, or Crete to stop Qaddafi’s use of airspace to put down the rebels.

After all, the present U.S. policy of non-interference is exactly the sort of soft-power contemplation that the Europeans for the last decade have clamored for in an American administration. Secretary Clinton’s and President Obama’s emphases on the primacy of the U.N., multilateral consensus, U.S. deference to the Arab League, the EU, NATO, etc., is European to the core. Chamberlain squared.

All this is not to deny that Sarkozy et al. are shrewd. They hope to get out in front of the U.S. (and have) in terms of humanitarian concern for the Libyan rebels, without any concern for themselves: If we do nothing, they, not us, appear the custodians of Western values; if we do act, even better for them — France and Britain finally shamed the U.S. into action. Or, to put it another way, we take the risks, incur the costs and ill-will, and yet appear to be reacting to a more moral Europe’s far earlier and stronger hectoring.

It will be a cold day in hell before we see Mirage jets flying over the Gulf of Sidra. How long will it take before we are suckered in to send in the F-18s? We don’t need Libyan oil — Europe does.