CONGRESS IS BATTLING over whether to approve the Keystone XL oil pipeline, proposed for the heart of the country.  The project has clear value to the United States. Yet, with all the amped-up rhetoric, it is important to remember what the project would not do. It would not endow the United States with “energy security” in the sense that most Americans understand the phrase and that many pipeline advocates wield it. It would not significantly lower oil prices. In fact, when it comes to oil, America will be affected by global events for decades, and that’s assuming the right policies are in place.

All true, and well put.  The pipeline does have clear value for the US:  more access to a secure product, continued good relations with our stable ally to the north, good jobs, etc.  And yes, the pipeline will not lead to 100% energy security — nor is it the threat to the environment that opponents fear (or fear-monger about).

The Post has some good prescriptions for reducing our dependence on foreign oil — and thus our exposure to world-wide economy-constraining high prices and economically damaging price volatility:

There are sensible policies to promote this long-range goal. An economy-wide, anti-carbon policy, such as a carbon tax, would fit the bill. Short of that, the best policy would be a higher gasoline tax, which could also fund transportation needs. President Obama’s auto efficiency standards will also help. In contrast, direct subsidies for electric cars are extremely expensive for meager benefits.

Unfortunately, after making those mostly solid points, the WaPo takes a gratuitous shot at incentives for electric vehicle and infrastructure deployment.  They are wrong on that.  Vehicle electrification has long been viewed as the logical next step in reducing our economy’s oil intensity.  As key executives at Shell (hardly an entity one would expect to be pro-electrification) said nearly a decade ago:  use electrons for transportation and reserve molecules (of petroleum) for higher-valued applications.  That’s still the right answer for our economy and our energy security.

Between 2009 and 2011, the United States experienced three consecutive years of crude oil production increases for the first time since the early 1980s, as well as the largest surge in output within a three year period since the late 1960s. This marks a sharp reversal from conventional wisdom of only a few years ago, suggesting U.S. crude oil production was in a decades-long state of decline. This shift has far-reaching implications for the United States, with positive benefits including substantive reduction of the trade deficit, and potential employment gains driven by petroleum industry growth. The role of policymakers is to ensure these benefits are maximized by making promising tracts of federal land available for development in environmentally responsible ways.

However, while encouraging pursuit of these advantages, the report emphasizes the importance of long-term strategies to reduce our petroleum dependence and the heavy costs associated with it. While current projections show that extractable resources could drive net liquid imports down by 21 percent by 2020, this boon to our energy supply must not be conflated with energy independence. Notably, even oil exporting nations which produce more than they consume (such as Canada and Norway) are part of the global oil market, and remain subject to the same high and volatile oil prices. Rising domestic production will not achieve a long-term domestic price advantage in oil, and a nation’s level of oil production does not necessarily improve its energy security—a goal which can be achieved through significant cuts in consumption. Furthermore, even with rising domestic production, U.S. oil dependence constrains foreign policy and military options due to our commitment to stability in oil-producing regions of the world.

Consequently, policy prescriptions must also focus on long-term abatement of our petroleum consumption. Towards this end, SAFE recommends aggressive pursuit of fuel economy standards to reduce the oil intensity of the economy, and transitions towards alternative fuel sources, such as natural gas for heavy-duty trucks, and electrification of light-duty vehicles. Only by diversifying the transportation sector can real energy security be achieved.

Click here to access The New American Oil Boom.

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We should exorcise the politically convenient notion that high oil prices result from the market maneuvers of greedy “speculators.” It’s convenient because it suggests that a solution to high pump prices — or a partial solution — is to banish the offending speculators from the marketplace. That’s fantasy.

Despite periodic debunking, it returns whenever oil prices surge. In mid-2008, with crude prices approaching $150 a barrel, the Commodities Futures Trading Commission (CFTC) created a task force to study whether speculation caused the run-up. The task force included experts from the Agriculture, Energy and Treasury departments, the Federal Reserve, the Federal Trade Commission and the Securities and Exchange Commission.

Samuelson quotes the conclusion from this task force:

“Current oil prices and the increase in oil prices between January 2003 and June 2008 are largely due to fundamental supply and demand factors. . . . The Task Force’s preliminary analysis to date does not support the proposition that speculative activity has systematically driven changes in oil prices.”

Despite this clarity, politicians hate to admit they are relatively impotent over an issue like high oil (and gasoline) prices.  So, President Obama has resurrected the idea and has once again pointed an accusing finger at “speculators”:

“We still need to work extra hard to protect consumers from factors that should not affect the price of a barrel of oil. . . . We can’t afford a situation where speculators artificially manipulate markets.”

Well, the good news is we don’t have to worry about speculators artificially manipulating markets, as Samuelson reminds us with a lesson in Economics 101:

It’s true that outside investors (a.k.a. “speculators”) have dramatically shifted money into commodities — raw materials. “Commodity index funds,” which invest in a basket of commodities (oil, wheat, corn), have attracted hundreds of billions of dollars. It’s easy to imagine all this money chasing prices up in futures markets, just as speculative stock market frenzies push share prices to unrealistic levels. It’s also wrong.

The stock and futures markets operate differently. In the stock market, herd psychology can lead to speculative bubbles or panics. In a bubble, almost everyone seems to win (until the bubble bursts); in a panic, everyone seems to lose (until the panic subsides).

By contrast, futures markets are “zero-sum games.” One investor’s gain is matched by another’s equal loss. Here’s why. Under the standard futures contract, one investor agrees to buy the commodity (say, 1,000 barrels of oil) at a future date for a given price, and another investor agrees to sell for the same price. If the actual price on the settlement date has gone up, the buyer reaps the gain; if it’s gone down, the seller wins. The loser pays the winner; actual commodities are rarely transferred.

There are measures that policy-makers can adopt to help lessen the impact of high oil prices — and ultimately lower prices themselves.  Chief among those would be assisting in the deployment of vehicle electrification infrastructure and advanced biofuels.  Bashing the bogeyman of speculation doesn’t help a bit.

In the Washington Post’s coverage of the Social Security Administration’s Trustee’s Report, the first three words by journalist N.C. Aizenman say it all:

“Surging energy prices and a slower-than-expected economic recovery have worsened the financial outlook for Social Security compared with last year, while the picture for Medicare remains grim but essentially unchanged, according to annual forecasts released by the government Monday.”

Unfortunately, the impact higher energy costs will have long-term effects. The piece continues (bolded added for emphasis):

“They also pointed to two unforeseen economic factors: Rising energy prices necessitated a larger cost-of-living increase to benefits, and worker earnings — and the resulting payroll taxes used to pay for Social Security — were lower than than expected. In both cases, the impact will resound for years.”

Readers of this blog know the dangers that oil dependence has on our national and economic security. Now, the fiscal threats are creeping to hurt entitlements.

“Regarding electrification, the beauty of plug-in hybrids and pure electric vehicles like the Chevy Volt and the Nissan Leaf is that they are powered by electricity, which can be generated from many sources: nuclear, coal, natural gas, and renewables. Best yet, these are all domestic energy sources, meaning OPEC won’t be able to corner the market. And the retail price of electricity is far less volatile that the price of oil.

Unfortunately, the recent battles over environmental policy have defined electric vehicles as a climate change project driven by hostility to conventional energy production. In fact, displacing oil through alternatives offers the most significant and pressing means to protect America’s private-sector growth engine and global leadership. The environmental advantages of transitioning the transportation sector away from oil should not prevent skeptics of the environmental movement from embracing such a goal. The enormous costs of oil dependence, combined with the absence of a viable free-market remedy, support a policy that leverages diverse, affordable, stable, and domestic energy. Electrification of transportation at scale would accomplish exactly this objective.

Events outside the control of the United States are making oil prices increasingly volatile, damaging household budgets and eroding consumer and business confidence. It’s time to act to protect our national interests and get serious about a real oil security strategy.”

The same panel of business and military leaders also spoke today at the Hudson Institute in Washington D.C. defending energy security as a means to national and economic security, and electrification as a primary means to achieve it. Watch the video on CSPAN here and check out the event details here on the Hudson Institute’s website.

A Tuesday OpEd in the Wall Street Journal, “The End of the Saudi Oil Reserve Margin,” by Cambridge professor and author Jim Krane illustrates how Saudi Arabia’s space capacity has frequently enabled U.S. military interventions in the Middle East, as the Saudis have always been capable of compensating for disruptions. As Krane writes, “the idea is to have your cake and eat it-to meet U.S. foreign policy goals without disrupting oil markets and antagonizing the American motorist.” The Saudi safety net, which the United States has relied on in the past, simply cannot exist indefinitely, and the article highlights some truly frightening facts. Saudi energy demands are increasing, and disproportionate. Domestic electricity demand is rising 10% per year in the kingdom, which now consumes one quarter of its oil production. Saudi Arabia now consumes more oil than Germany, which has triple the population and an economy almost five times as large. London’s Chatham House estimates Saudi Arabia will be a net importer of petroleum as early as 2038.

Saudi Arabia’s current crude oil production rates are currently at a three decade high (10mbd), and the IEA estimates that the kingdom’s crude capacity currently stands at 11.88 million barrels per day. This means Saudi spare capacity is a mere 1.88mbd, still over half of OPEC’s total spare capacity, estimated to be 2.75mbd. Meanwhile, American and European oil demand is down, American production is up, American crude oil imports are down, and yet there’s no respite in oil prices, with Brent crude remaining above $120 this week. Indeed, the Wall Street Journal reported that the ballooning price of Brent crude futures have reached over $30 above the cost of contracts for delivery in 2018. Democrats are critical of “speculators,” who are perceived to have driven the gulf in oil prices, arguing the current crude oil market currently resembles the housing market before the 2008 crash. Another major factor driving the high prices is the “risk premium” stemming from instability in the Middle East, as well as growing demand from emerging markets. We are not expecting this trend of high prices and increasing volatility to change in the near future. The International Energy Agency estimates that global oil demand will reach a record 91.1 million barrels per day in Q4 2012, a 1.4% increase from the same period in 2011.

Due to Greece’s ongoing debt crisis, many of its former suppliers of crude oil—particularly Russia—are no longer willing to risk trading with a country struggling to pay its bills. Consequently, Greece has grown increasingly desperate to secure its energy needs. Iran, increasingly desperate for customers to buy its crude oil as it faces sanctions from the European Union and United States, has increased its share of Greek petroleum supplies from 14 percent in 2010 to 53 percent in Q3 2011. Additionally, Greece has been depleting its strategic petroleum reserves—a move which violates the conditions of its membership in the International Energy Agency and the European Union. Both organizations stipulate member states must maintain strategic oil stocks to compensate for up to 90 days of imports or consumption in the event of emergency supply disruptions.

The situation severely complicates international efforts to deter Iran’s nuclear program. Greece’s desperation undermines transatlantic solidarity on Iranian sanctions, and weakens the case for other nations such as Spain and Italy, which import substantial quantities of Iranian oil (16 percent and 13 percent respectively in Q3 2011), to continue pursuing alternative petroleum supplies. These three nations could initiate a concerted lobbying effort to weaken the EU’s sanctions. Furthermore, the combination of Greece’s fragile economic state and heavy dependence on Iranian oil leaves it an open point of vulnerability. On February 25, it was reported by Iran’s Fars news agency that Iran had refused to load a Greek oil tanker, sending it back empty. Although this report is unsubstantiated, it underscores Iran’s ability to exploit Greece’s position and retaliate against Western sanctions on Iran.

The complete analysis of the situation, as well as SAFE’s recommendations to mitigate the situation, can be found here in the latest intelligence report, “Greece’s Debt Woes: Deepening their Reliance on Iranian Oil.”

 With higher gasoline prices holding steady, the Obama administration on Wednesday took steps that could pave the way for oil and gas exploration off the coast of Alaska and in the Atlantic Ocean as it sought to combat criticism it is hostile to fossil-fuel development. . . . For the Atlantic, the administration released a draft environmental review outlining a 330,000-square-mile area from the Delaware Bay to Cape Canaveral, Fla., where seismic surveys could be conducted. The administration has no current plans to allow drilling in the Atlantic, though Mr. Salazar said that could change in light of the surveys.

Moving toward much-needed seismic surveying is good news, of course.  But while establishing the necessary conditions for seismic is important, nothing will happen as long as those areas are left out of leasing plans. If the administration is serious about these areas, it should include lease sales in the Five Year Plan for coastal states that support them.

Randall Luthi, president of the National Ocean Industries Association, put it a bit more colorfully when he “called the surveys ‘a welcome step,’ but said that ‘it appears the department has given the offshore industry a canoe with no oars, since there are no lease sales planned.’”

The kingdom’s oil minister insisted this week that oil markets are amply supplied and that it stands ready to boost output. Its council of ministers asserted that excessively high petroleum prices threaten the global economy and that a downturn would lead to an abrupt pullback in prices, hurting the interests of oil exporters and consumers.

 Last week, the transport arm of state-owned Saudi Aramco booked at least nine supertankers — far more than usual — for shipments to the United States, according to traders and Lloyd’s List. Each tanker can carry 2 million barrels of oil.

 And the Saudi oil minister, Ali al-Naimi,told reporters in Doha, Qatar, on Tuesday that the kingdom was producing 9.9 million barrels a day, about three-quarters of which is exported.

 Yet oil markets remain unimpressed. On Wednesday, the price of the West Texas Intermediate grade of crude oil for May delivery rose $1.20 to $107.27 a barrel — about where it was a week earlier. Expensive crude is driving up gasoline prices — a fact the Obama team worries will hurt the president’s reelection prospects.

 “What the Saudis are trying to do is to change the psychology of the market and demonstrate that the market is well supplied,” said Robin West, chairman of PFC Energy, a consulting firm.

In a free market, the laws of supply and demand combine with open competition to produce prices that rise and fall.  Crude prices have been steadily rising — or have been stuck on near-historic highs — because of growing demand.  In a normal market that demand would be pulling new supply into the market until the demand was met and exceeded, at which point prices would begin to fall.  Then either supply drops or demand grows, and prices rise again.  A macroeconomic circle of life, as it were.

Only not for oil:

Naimi said that Saudi Arabia could boost output to 12.5 million barrels a day to meet demand but that customers are not interested in buying more than they are now.

 “We ask the customers, ‘Do you need more?’ And invariably the answer is, ‘No, thank you,’ ” he said, according to Reuters.

 Really?  How could that be?  Here’s the answer:

One major oil trader, who requested anonymity to protect business relationships, said that if Saudi Arabia really wanted to tamp down prices it could lower its asking prices and then customers might buy more. Saudi prices are adjusted monthly, but the trader said Saudi Aramco is “extraordinarily inflexible” in the terms it offers buyers.

In a free market, other competitors would undercut the Saudi price and that would force more flexibility for Saudi Aramco.  But, as some politicians can’t seem to grasp, there is no free market in oil.  That’s why folks who are normally libertarian-leaning on economic matters advocate policy interventions when it comes to energy security.