Congestion in America highlights inefficiency in the surface transportation system, and particularly the challenge of urban congestion, as a growing cause of wasted time and fuel. Total fuel wasted from urban congestion has fallen between 100,000 and 150,000 barrels of oil per day over the past ten years, and in 2010 alone drivers in U.S. metropolitan areas wasted over 1.9 billion gallons of fuel. Furthermore, in 20 of the nation’s largest cities, annual costs of congestion exceed $1 billion. In the absence of substantial policy intervention, estimates suggest that these costs in fuel waste and travel delays will increase by 30 percent by 2015 and 65 percent by 2030.

Source: Texas Transportation Institute

Source: Texas Transportation Institute

SAFE urges a comprehensive and balanced approach to increasing traveler mobility and reducing congestion related fuel waste. The report outlines the range of options available to policymakers to alleviate the costs of congestion, grouped into the following categories:

• Pricing and other flow management techniques to reduce or eliminate recurring congestion
• Accident/Incident management for mitigating the likelihood and effect of non-recurring congestion
• Improved public transit service and other alternatives to single-occupancy vehicle travel
• Strengthened long-term urban planning and development initiatives

Current federal surface transportation legislation, funding over $50 billion annually in highway and transit programs, expires on March 31 of this year. The policies outlined in Congestion in America present market-based mechanisms to cut oil consumption and increase the efficiency of surface transportation infrastructure while improving energy security. As Congress seeks to pass long-term transportation legislation, it is imperative that these instruments are incorporated, and energy security remains forefront as a key policy priority.

Click Here to Read the Full Report

First things first.  In a fairly stunning piece, even to jaded DC insiders, former Congressman William Delahunt (D-MA) is reported to be working for the small coastal town of Hull, on Massachusetts Bay “for help in developing a wind energy project.”

The catch?  “While in Congress, he personally earmarked $1.7 million for the same energy project.”  And it gets worse, as “80 percent” of the funds his firm will receive will be “from the pot of money he created through a pair of Energy Department grants in his final term of office, records and interviews show.”

Now most former members of Congress who end up in law and lobbying firms claim they aren’t actually lobbyists but instead are “strategists.”  And the former Congressman released a statement quoted by the NYT saying:  “I have no federal lobbying relationship with any past or current client.”  That may be news to the town of Hull, who’s town manager is quoted a few paragraphs later using a textbook definition of access-lobbying:

“Obviously he’s got connections into the federal government that we don’t have . . . . We’re hoping he can open doors at the federal level that we could never open.”

So the Hull wind energy project will soon join Solyndra as grist for the argument that the federal government should not be providing incentives for clean energy technology deployment because those incentives are inevitably transformed into “crony capitalism.”  But just as Solyndra was evidence of the misuse of an innovative technology loan guarantee program for economic stimulus rather than evidence of a problem with government incentives; so too is the Hull project actually a fair indictment of earmarking rather than a fatal flaw in the concept of deployment incentives.  The solution?  Programs that provide funding only where the merits of various projects can be clearly compared using  objective metrics rather than “awarded” through either the legislative process or via an opaque administrative ”negotiation.”  Reverse auctions — where bidders commit to delivering X units of energy at Y cost to the taxpayer and only the best deals are then funded — are particularly suitable for such an objective process.

The second piece begins with the type of human interest angle that can obscure rather than teach, as (again, Massachusetts) a hilltop homeowner laments that the local utility wouldn’t run a natural gas line out to his place and he must instead rely on expensive home heating oil.  The real story, as we soon learn, is that home heating oil users are spending between double and triple what their natural gas-using counteparts do.  Some are out of luck due to location; others because they can’t afford the cost of conversion — even though savings due to lower monthly bills may pay for the investment in just a few years.

What’s the current federal policy response to this problem?  It is a well-intentioned effort to help low-income homeowners stay warm in the winter through the much-maligned Low Income Heating Assistance Program, or LIHEAP, whereby taxpayers subsidize the heating bills of qualified consumers.  Unfortunately, that neither fixes the problem nor encourages conservation, but instead simply transfers wealth to homeowners (and ultimately heating oil providers) “trapped in a cycle of spending more and more for heat . . . .”

Is there a better way?  For some, it could be the hugely popular state and local program called PACE — Property Assessed Clean Energy Bonds (see www.pacenow.org).  Designed to let homeowners invest in energy efficiency retrofits in an affordable way, at no cost to taxpayers, this program has been literally sweeping the nation during the last few years.  And if it doesn’t include switching from heating oil to natural gas as an eligible activity, it should.  That would be an obvious energy market intervention worth making.  No earmarks required.

The U.S. Census Bureau released its numbers today, revealing a larger trade deficit than analysts expected, stemming mainly from growth in oil imports.  Total import spending for 2011 is expected to rise to $325 billion for 2011, the highest it has reached since 2008. Oil’s contribution to the trade deficit rose to 58 percent on average for the year through November, the highest level on record.

The November increase was the first widening of the deficit in five months. BBC news reports that figures from the Commerce Department show that the overall deficit grew 10.4 percent to $47.8bn, while imports rose 1.3 percent to a record $225.6bn, boosted by demand for oil and foreign cars. Exports fell for the second month in a row, dropping 0.9 percent to $177.8bn, after lower sales of cars and capital goods such as aircraft and machinery. The average price of imported oil rose 3.7 percent from October to $102.50 a barrel.

One of the “upsides” of the financial crisis was decreased oil consumption, which led to a narrowed trade deficit in 2009 and 2010. Although the current deficit remains smaller than 2008 levels, with continued economic recovery greater petroleum imports will likely be needed.  Considering the continued volatility in Iran and Nigeria, a severe or prolonged oil price spike could dramatically worsen the situation in 2012.

To update: In addition to a threat last week to close the Strait, yesterday (Tuesday, January 3^rd), Iranian armed forces commander General Ataollah Salehi delivered a series of provocative statements to the USS John C. Stennis aircraft carrier that recently left the Persian Gulf’s waters, saying “We warn this ship, which is considered a threat to us, not to come back, and we do not repeat our words twice.”  The Islamic Republic  is known for its exaggerated military rhetoric (Iranian Naval Commander Admiral Habibollah Sayari is quoted as saying that closing the Strait would be “as easy as drinking a glass of water”), yet oil prices still jumped 4% in response, and U.S. officials note that Iran’s increasingly bellicose tone is likely a result of economic desperation, the Washington Post reports.

The Wall Street Journal’s Editorial Staff has taken a rather hawkish approach to the situation in their piece, “Iranian Strait Talk: A Carrier response to Tehran’s threats.” They point out that Iran fits all potential categories for regime gone rogue, with violations ranging from taking hostages and repressing their own citizens to test-firing ballistic and cruise missiles during naval exercises. In their assessment, Iran can’t do much more than bluff, considering “The “American warship” that Tehran is now threatening, the USS John C. Stennis, is a Nimitz-class carrier whose air wing alone is more capable than the entire Iranian air force.”  They conclude, “the best response to Iran’s threats would be to send an American aircraft carrier back through the Strait of Hormuz as soon as possible, with flags waving and guns at the ready. If it can’t be the Stennis, the USS Eisenhower would drive home the message.”

The companion piece to this OpEd, “Iran Won’t Close the Strait of Hormuz” was written by Bradley Russell—a Navy captain—and Max Boot, visiting and senior fellows at the Council on Foreign Relations, respectively. Their argument: while it remains true that Iran’s conventional forces are little match for American military might, they have ample asymmetrical resources at their disposal to cause severe and prolonged disruptions to global oil markets. In 1984 during the Iran-Iraq war, Iran avoided direct attacks on U.S. forces, but scattered mines throughout the Strait and used small, maneuverable patrol boats to fire a variety of missiles at tankers. A fleet of aircraft carriers is not necessary to inflict sustained damage to the Strait’s daily flow of 17 million barrels of oil, or worse, to injure or kill American military personnel.

Analysts believe oil prices have already increased by $5 to $10 a barrel due to the uncertainty, with the capability to grow much larger in coming weeks depending upon how events unfold. Both of Wall Street Journal’s articles raise several key points, but there is also a greater force at work: if it were not for our dependence on the foreign oil being transported through this strategic waterway, the Strait of Hormuz wouldn’t be considered strategic in the first place. But since the world has no other options for its primary transportation fuel, we can expect prolonged oil price spikes and continued threats as Iran flexes the only weapon it really has.

The report bases its analysis on three risks that become quickly intertwined: general geopolitical instability, continued oil demand growth in developing economies, and the closing down of more than 1 million barrels of refining capacity in the Atlantic Basin in the past two years that could keep gasoline very high this summer in the U.S., even without the additional risks.

Citigroup sees the upside risk to oil prices as more numerous than in 2011 – which is saying something considering that the Arab Spring boosted global prices throughout the past spring and early summer.

These geopolitical risks include: low OPEC spare capacity, presidential elections in Egypt, Russia, Venezuela, France and the United States, and the natural climate for escalation that exists in the Persian Gulf. Iran and its increasingly numerous set of adversaries — Israel, the U.S., Saudi Arabia and the Arab Gulf states – could get into a military conflict in the next year that threatens shipping in the Strait of Hormuz, where 15.5 million barrels past each day on their way to world markets.

Add to the geopolitical risk the continued de-linking of emerging and developing economies around the world from rich economies in North America and Europe. By the second quarter of 2012, the report estimates emerging economies that include China and India will surpass the developed economies of the world in oil demand for the first time in history, with each averaging about 45 million barrels of demand a day.

This is a big deal; it means that regardless of the strength or weakness of major economies like the United States, the developed world is no longer the main driver of oil market prices. In the past, markets could count on the fact that if the U.S. entered an economic slowdown, oil demand would slump, followed quickly by a fall in oil prices. These lower prices would then allow the economy to recover, starting a new cycle of recovery. But these days are over, which explains why U.S. consumers spent more than $4,100 in 2011 on gasoline, a record, even as its economy remained in the dumps.

Finally, Citigroup’s global head of commodity research Ed Morse says it is almost certain the U.S. will suffer an incredibly tight gasoline market in the coming summer with gasoline prices much higher than currently anticipated. This is because between 2010 and 2012 more than 1 million barrels of refining capacity has been shut-in the Atlantic Basin as refineries that were operating at a loss were closed. Up to 700,000 barrels a day of refining capacity has been shut-in in the East Coast U.S. alone, and these refineries have been the disproportionate producers of summer-grade gasoline whose use in mandated in many parts of the country to lessen smog pollution during the hot summer months. The absence of this refining capacity has cut into summer-grade gasoline stocks, which will cause traders to bid-up gasoline prices as the summer driving season approaches.

None of these dynamics bode well for American consumers over the next year or two as the U.S. economy attempts to escape the Great Recession. With these structural changes in the global oil market, transportation options that involve the use of non-petroleum based fuels like electricity could be more and more attractive thanks to the dramatic fuel savings that will be available. It just so happens that more than 20 models of plug-in electric vehicles (PEVs) will be available in the U.S. during the next 12 months. It will be interesting to see their sales numbers if even a few of the risks highlighted in the report come to pass.

And, yes, Mr. Kaiser apparently talked about the project with White House — but never “personally lobbied” for the guarantee.  Indeed, the piece in today’s WaPo by Joe Stephens and Carol Leonnig even portrays Kaiser as pushing back on a proposal to lobby the White House:  ”I question the assumption that the WH is the path to pursue when both of your issues are with the” DOE.  This isn’t a smoking gun; it’s not even a water pistol.

The real scandal we should be paying attention to got top treatment on the WaPo editorial page and a piece in yesterday’s WSJ.  That’s our inability to constrain Iran’s ambitions to build a nuclear weapon.  The reason for that is the reason that the DOE loan guarantee program should be focused on getting us off of oil — not trying to compete with cheap natural gas for electricity.

Imagine the late great Joe Frazier being forced to box with one hand tied behind his back and you’ll have a sense of US foreign policy in this long age of oil dependence.  The WSJ lead was chilling:

The United Nations’ nuclear agency said Iran has developed technologies needed to produce nuclear weapons, a finding that puts new pressure on the Obama administration to act more forcefully against Tehran.

And the money line later in the article was depressing:

While U.S. officials say Washington will try to use the report to bring new sanctions, the Obama administration has stepped back from one potential target—sanctioning Iran’s central bank, the principal conduit for Iran’s oil sales. Administration officials have voiced fears that blacklisting the bank could significantly drive up international oil prices and hurt the U.S. economy.

That’s right.  We are so terrified of spiking oil prices that we refrain from taking action that could prevent a nuclear confrontation in the Middle East.

When economists talk about the externalities of oil consumption, they are usually referring to environmental impacts and Defense Department costs of war-fighting in oil-rich regions or expenditures made to keep sea lanes open for oil-related commerce.

It’s impossible at this time to quantify the monetary value of a foreign policy tool like sanctioning Iran’s central bank.  It will be easy to quantify the costs of a new war in the Middle East that may be the consequence of our failure to prevent Iranian nuclearization.  And that failure will have been directly related to our addiction to imported oil.

Ms. Solomon’s lead:

“The White House has put itself squarely in the middle of a fight over a planned pipeline that promises much-needed jobs in a weak economy but upsets President Barack Obama’s environmental base.

White House Press Secretary Jay Carney said Wednesday about the Keystone XL pipeline, “You can expect that the decision that is reached will reflect [Mr. Obama's] views.

The comments signal a shift by the White House, which in the past has said the decision to approve or deny construction of the Canada-U.S. pipeline rested with the State Department.”

On one level, this shouldn’t really be news.  It is highly unlikely that any President would let his Secretary of State make an essentially domestic policy decision of this magnitude — construction of a pipeline crossing several states to transport a vital commodity  — without significant consultation throughout the Administration and ultimate sign-off by the Whtie House.

State’s Enviromental Impact Statement can — and should —  be read at http://www.keystonepipeline-xl.state.gov/clientsite/keystonexl.nsf?Open, It well describes the extent of the project:

The proposed Keystone XL Project (click here for map) consists of a 1,700-mile crude oil pipeline and related facilities that would primarily be used to transport Western Canadian Sedimentary Basin crude oil from an oil supply hub in Alberta, Canada to delivery points in Oklahoma and Texas. The proposed Project would also be capable of transporting U.S. crude oil to those delivery points. The proposed project could transport up to 830,000 barrels per day and is estimated to cost $7 billion.

Keystone is a very big deal.  And passions run high in what is becoming the poster child for the “jobs versus environment” debate.  As Ms. Solomon writes:

A decision in favor of the pipeline would risk alienating environmentalists, a core Obama constituency, ahead of the 2012 election. But the political risks on the other side might be higher: Rejection of the pipeline would likely hand a 2012 issue to Republicans, who already argue the president’s policies are hindering job creation and hurting economic growth.

It would be great if, as folks enter into this debate, they actually take a look at the EIS as prepared by the State Department.  At the end of the day, regardless of the President’s decision, it needs to be grounded in facts and not just rhetoric.

Bachmann’s comments may reflect a broader public misunderstanding of how oil markets and gasoline prices operate, thus serving an opportunity to review some fundamental oil pricing economics.

Oil markets are not intuitive.  The biggest misunderstanding about the oil market seems to be the “myth of foreign oil”.  Oil is a fungible global commodity.  This means that a supply disruption anywhere in the world, impacts oil consumers everywhere, as a function of the oil they consume.  Therefore, for the United States, whose oil consumption is equal to approximately 25 percent of global oil consumption, oil shocks translate into significant economic impacts.  However, the key implication is that the economic impact of an increase in oil prices will be exactly the same regardless of whether we import 20 or 80 percent of our oil.  Put another way, even if domestic oil production meets 90 percent of domestic demand, a disruption halfway across the globe that increases global oil prices, will raise the prices of all oil consumed domestically.

Increased dependence on foreign oil does increase our exposure to direct supply disruptions (e.g. a political uprising or armed conflict that blocks the Strait of Hormuz and prevents distribution of 90 percent of Middle East oil exports).  But even this argument depends on from where we import the crude oil.  Less than 50 percent of our crude oil imports come from OPEC, while more than 50 percent of our crude oil consumption comes from North America.  If Canada hypothetically supplied 100 percent of U.S. oil demand, one could argue that there will be nearly no chance of a direct supply disruption (although again, the impact of price spikes will not be greatly mitigated).

Another major misconception of increased domestic supply is by how much it will actually lower gasoline prices.  Economic theory tells us that an increase in oil supply will reduce oil prices.  Yet, this basic supply and demand model applies most clearly to a perfectly competitive market – something the oil market is definitely not.  If we were to add 30 million barrels of oil to the market on a single day, then the sudden increase in supply would offset prices.  However, oil is a dynamic market.  It takes years for new oil production to get online.  With information regarding an increase in new supply months in advance, oil companies will adjust their future production accordingly.  National oil companies, controlled by state governments and holding up to 90 percent of global oil reserves, make decisions based on government politics opposed to profit-maximization.  Add to that, Middle Eastern politics and their influence over global spare oil capacity, one can quickly see how OPEC countries can more than offset any attempt to reduce gas prices with higher levels of domestic production.

Of course this does not mean that there are not substantial benefits to increasing domestic oil supply, namely job creation and keeping American dollars at home.  But it does mean that increasing domestic oil production can only be one part of a long-term energy security policy; diversification of fuel sources beyond petroleum and reduced oil intensity must also play a role.

 The rather unsurprising finding is that investors looking for strong returns placed big bets on crude prices, and that Goldman Sachs, Morgan Stanley and other banks “dominate the list.”  Dugan and Pleven tease us a bit with the assertion that the list of investors “could fuel calls for a crackdown on oil speculators, a label critics apply to those who trade in oil but don’t use or produce it.”

Yet one searches the article in vain for any explanation of why that might be the case.

In addition to the big banks, the article lists “Yale University, Singapore’s government, hedge funds Brevan Howard and D.E. Shaw & Co., as well as pension funds for Texas teachers and Danish workers” along with “a handful of individuals, including Aubrey McClendon, chief executive of Chesapeake Energy Corp., one of the nation’s largest producers of natural gas. Cascade Investment LLC, the investment arm for Microsoft Corp. co-founder Bill Gates, appeared.”

And far from explicitly lending fuel, so to speak, to fire directed at “speculators,” the reporters note that the list “doesn’t imply that any person or company on it has done anything improper.”

Exactly.  Trading in commodities like oil is one way rich people and institutions get richer.  It’s the American, indeed global, way.  Given oil’s centrality to our economy, of course, groups like the U.S. Commodity Futures Trading Commission and the Justice Department need to be vigilant about potential market manipulation.  But no one appears to be alleging that here.  Indeed, the greater the plethora of players in a market, the lower the risk of manipulation.

More market participants also means more money flowing around the commodity.  This market liquidity is generally considered to be a good thing.  Just as the term implies, less liquidity means a more sticky price signal that doesn’t move as well in response to the law of supply and demand.

Yet at the same time, can there be too much liquidity?  When capital hungry for returns chases a finite set of potential investment targets, can prices spike and bubbles form?  Does the amplitude of the price volatility swing magnify?Those are the questions thoughtful people ask — particularly in the wake of our 21st century tech stock and housing bubble bursts.

And while those questions are hinted at, they aren’t answered in today’s WSJ piece.  The closest it comes is to note that:  

‪”When oil was rising in 2008, the growing role of investors frustrated oil users, especially airlines, who were trying to use the oil market to protect against price swings.”

And that’s the trade-off.  You need a market liquid enough so that transactions can fairly reflect robust price discovery and are as little susceptible to manipulation as possible.  At the same time, if end users of a commodity can’t hedge at reasonable prices, then macroeconomic oil price volatility is going to translate into microeconomic pain.  So here’s hoping for some calm reflection at the CFTC combined with thoughtful congressional oversight.

Although the goal is to decrease dependence on oil, reduced consumption as a result of depressed economic activity (no vacation, no roadtrip etc.) is not a preferable outcome.  Although the short-term demand for oil is inelastic, high oil prices and weakened consumer sentiment about the economy will likely push families to trim their budgets – including making cuts to gasoline consumption.  The decrease in oil demand must come as part of strong, long-lasting structural improvements to the economy, such as the wider use of more efficient and alternatively-fueled vehicles, and reforms to transportation infrastructure.

Some may be excited about the prospects of lower oil prices, expecting that spending less on gasoline will allow for a necessary boost to the fledgling economy.  If oil price decreases translate into savings at the pump, consumers will have more disposable income to spend on other, often domestic, goods and services.

WTI futures-Source: CME Group

The lesson at hand, however, has nothing to do with whether oil prices today are high or are low.  What can be taken away from the current climate is a real-life example of just how extreme and acute the volatility of these prices may be.  Short-term and long-term prices are onerously difficult to predict due to the complexities of the oil market.  Thus, the impacts oil prices will have on our economy and on consumer behavior are also precarious.  A rapid decline in oil prices may be an indicator of a weakening economy, yet the recessions of the past four decades have all occurred along with, or immediately preceded by, a spike in oil prices.  The global market is a rough one, which carries influences from many factors and players.

The American people, for the most part, have no choice but to be subject to the instability of the oil markets.  More reliable, consistent, and controllable sources of energy need to be incorporated into our energy use to protect the United States from the impending effects brought upon by the uncertainty attached to oil prices.  Although Congress may be on recess, the need has not disappeared for a comprehensive energy policy to enhance U.S. energy security and the nation’s economic future.