Annual Discussion of Energy Prices

4/8

It’s Friday afternoon and the oil markets are just closing… 12 cents up in the last 24 hours.  Once a year I gather up all the facts about the oil market and condense it down for our readers, and today appears to be a better day than most!  But I’ll be short and to the point, don’t worry.

The price of oil is chillingly high, with retail oil exceeding $4.00 per gallon.  What factors explain it?  It isn’t explained by greedy fat cats with cigars, or by an evil, manipulative government.

 It’s explained by the supply and demand for energy, the state of the American economy, the miserable state of the US Dollar, the flight of investment dollars to commodities, explosive revolutions in seven countries at once, and an American energy policy that can only be described as insane.

 I know you don’t think I can be short and to the point, so I’m going to prove it:

Supply and Demand for Energy: The US is no longer the size of the rest of the world’s economy combined.  In fact, we represent an ever shrinking slice of that pie.  So the fact that we are still in a recession doesn’t mean the demand for oil has fallen significantly.  Other countries are experiencing economic growth, which uses energy for construction, transportation, manufacturing, etc.  In short, demand is still strong, while supply remains unchanged, which causes prices to climb.

The State of the American Economy:  The US economy is still in recession, whatever we may read in the paper.  We still have record high unemployment, record low property values, record high business failures, and empty storefronts in every town across the country.  But we are slowly coming out of recession, which means demand will soon increase (construction, transportation, manufacturing, etc.).  Since energy supply is pretty much a constant, it doesn’t take a genius to see the pinch coming.  That anticipation causes today’s energy prices to climb.

The Miserable State of the US Dollar:  Remember when you could go to Mexico on vacation and live like a king for $50 a day?  That was because of the relative strength of the Dollar vs. the Peso.  Currencies are strong when their underlying economies are strong.  When the US economy crashed in 2007 – 2008, the dollar lost value because the economy lost value.

When we printed trillions more dollars and poured them into the system to keep our economy going, that was like pouring a half cup of boiling water into your coffee cup… it’s still coffee, but it’s a lot weaker.  When we try to buy foreign oil with that weak cup of coffee called the US Dollar, guess what?  It doesn’t go as far.  I’m not saying we shouldn’t have printed the money, but it certainly caused energy prices to climb.

The Flight of Investment Dollars to Commodities:  It isn’t just oil.  Wheat, corn, and soybean prices are up over 90%.  That’s because the stock market appears very risky to investors after the crash of 2008, so the typical investment mix now includes up to 20% in commodities.  That infusion of money – from every retirement fund, every pension plan, and every hedge fund – has inflated the price of oil… some say by as much as $2.00 per gallon.

And with that much money in play, investors have found ways to game the system, which makes profits on Wall Street while inflating commodity prices even more.  We’ve been lobbying the Commodities Futures Trading Commission to close speculative loopholes, but they’ve been slow to act.  Investment in commodities and speculative loopholes have both caused energy prices to climb.

Explosive Revolutions in Seven Countries at Once:  I don’t really think this needs explaining.  After all, these countries aren’t in Antarctica, they’re in the Middle East.  Oil fields are part of the battle ground.  Even countries that have kept their revolutionaries quiet, like Saudi Arabia, are terrified that they’ll be next.  The instability alone (if you can call armed revolution “instability”) has caused energy prices to climb.

An American Energy Policy that can Only be Described as Insane:  This is tricky, but I promised to be brief.  The stated energy policy of our nation is to shift away from traditional energy sources and toward renewable fuels for environmental reasons.  But all large scale energy production has environmental impact:

• Coal makes smoke (albeit a lot less than it used to) and despoils the land in the mining process.

• Oil requires drilling, which can go horribly wrong once in a while, such as last year’s debacle in the Gulf.

• Natural Gas leaks Greenhouse Gases far more than people know (big cover-up), and recovering it from shale deposits destroys watersheds.

• Nuclear power has some inherent safety risks, and we can’t agree on what to do with the waste.

• Tidal power entails huge and intrusive float farms that make the coast inaccessible to boats and ruins the look of the shore.

• Windmills are only “pretty” if you drink the Kool-Aid and ignore the fact that they don’t generate enough energy to pay for themselves without huge taxpayer subsidies… otherwise they’re far more intrusive than cell towers, which it is fashionable to despise despite their undeniable utility.

• Solar hardly works at all north of the Mason-Dixon line, and it also takes up tremendous space and requires taxpayer subsidies to be viable.

Shifting to these “alternative” energies will cost the taxpayer in every scenario, and we’re in a recession with a budget crisis.  More to our point, the President announced last week that he wants to reduce our dependence on foreign oil by a third within ten years.  At the same time he agreed to help fund Brazil’s development of their offshore oil reserves, saying “We want to be one of your best customers.”

This announcement struck the energy market as being schizophrenic.  It also guarantees we will pay higher energy costs in the future because there is absolutely no way to make up 1/3 of our imported energy with windmills, solar panels, and tidal power.  Instead, we refuse to allow our own citizens to develop oil reserves, pay others to develop theirs, and then pay them for the oil.

I know this may not be intuitive to many people, but the mere announcement of our future dependency causes the price of oil to rise.  Conversely, an announcement that we will open up our own proven reserves to drilling would cause oil prices to collapse.  That’s right, all it would take is the announcement of a sane energy policy in which we agree to grant Americans access to our own proven reserves, which amount to more than 100 years of oil alone.

What can we do about these high energy prices?

On a macro level, we can hope the revolutions in the Near East settle down quickly.  We can hope the government institutes an energy policy which embraces the domestic fuels at our disposal that are available without taxpayer subsidies.  And we can lobby our members of congress for financial market reform.

On a local level, I would suggest getting a Price Cap on fuel for the next year.  Available on both oil and propane, a Price Cap protects you from a rising market, and also gives you the benefit of a falling price in a falling market.  The premium for a Cap is less than 10% of your annual energy bill, which makes it cheap insurance.

It’s also useful to note that all Bantam Fuel’s heating oil contains 5% BioDiesel, making it the cleanest, most renewable heating oil in Western Connecticut.

Finally, it pays to have an expert review your heating system and see if you can save money by upgrading to a high efficiency solution.  All but the newest systems are good candidates for this.