WASHINGTON – Sky high gas prices are not caused by any one reason, but rather a complex puzzle of events that are all interconnected. This is the message two world renowned experts on global energy delivered to Senate Republicans and Democrats who gathered for a one day energy summit, hosted by Energy Cmte Chairman Jeff Bingaman, D-NM.
It's not what most members wanted to hear, though, as Dr. Dan Yergin and Roger Diwan were pushed and pulled in all directions, as each senator tried to get either expert to provide information that gave credence to their cause. Yergin, a Pulitzer prize-winning author and chairman of Cambridge Energy Research Associates, implored members not to look for "either, or" solutions. But that was not what most had in mind. Diwan, an energy markets expert, urged members to look at a constantly changing range of connected events. But that, too, didnt fit in the equation of most.
Democrats looked for support for anti-speculation measures, which both Yergin and Diwan provided. Meanwhile, Republicans dug for the root cause in the tight global supply market - and pushed a need to drill, which both Yergin and Diwan supported. But the experts told members the two were not mutually exclusive.
Yergin outlined what he saw as the reasons for sky high gas prices: speculation, the weak dollar, geopolitics or volatile world events, like Iran's nuclear ambitions, and a "shortage psychology."
Democrats were eager to hear that Yergin and Diwan both perceive big problems in the futures markets for oil, each saying "oil is the new gold" that has, over the past two years, come to be seen as a valuable asset class. Diwan said there are far too many noncommercial people in the market, those who do not actually touch the product, and called for more transparency, especially with nontraditional over-the-counter trades and swaps. Diwan said Congress "should insist all players in the market abide by position limits," something a Democrat-sponsored bill on the Senate floor now would do.
The real estate crisis had a global effect, depressing the value of the dollar even further, and both experts told senators the weak dollar is a prime driver in the cost of oil going up. This, in turn, said Diwan, is creating a "vicious cycle" that is pushing more oil into the global financial market and in turn creating a "very strong cycle that is hard to break," he told Sen Sheldon Whitehouse, D-RI, who asked if there was a "negative feedback cycle."
Sen Lisa Murkowski, R-AK, thought she had the answer. Just two days after President Bush lifted the ban on offshore drilling, Murkowski said the price of oil went down $9.00. Was that psychology at work, which would favor oil drilling?? No, Diwan, told the senator. "It's very difficult to assign one cause. I can come up with 20 reasons. The U.S. announced that it would negotiate with Iran that day, Diwan said, and that had a "much bigger effect."
Both experts agreed that world events were a major part of the rise in prices. In a tight supply market, any event can have a traumatic effect. Yergin said concerns over Iran's nuclear ambitions were having a particularly "pervasive effect." Yergin also added that unrest in Nigeria, Venezuela, Iraq - 8 big fields are not operating, Mexico, and Russia were all creating tremendous problems.
Finally, both Yergin and Diwan talked extensively of a "shortage psychology" in the global market that is working to push up prices. Yergin said, "There's a false perception that the world is running out (of oil)...pervasive in the market is the belief that world is out by 2012 or 2013."
Diwan laid out a timeline that led to increased prices. He said there were 2 shocks from 2003 to 2005 — a "supply shock" (Venezuela, Nigeria problems) and a "demand shock" (a surge in the emerging world, China and India, and in U.S.). By 2005, only Saudi Arabia had spare capacity. Also that year, with short supply, the financial markets got involved in the picture. Supply got tighter and tighter. In 2006, the price of oil jumped from $40 to $100. "Now oil is financial," Diwan said, noting that now about 70% of the speculation market is made up of people who never touch the commodity.
Demand in the U.S. is coming down now, but it is not coming down globally - which keeps the markets tight. Diwan seemed to say that only massive action would break through the skeptical markets. The perception is that new drilling, which takes years to produce results - if any are produced at all, will produce only small amounts of oil, if anything, especially in the U.S., but both men held out hope that new technology could change that. Both referred to a major discovery two years ago in offshore Brazil. Yergin said, "No one would have thought you'd find a North Sea there," referring to a major oil-producing area off Russia.
Sen Majority Leader Reid made a brief appearance in the morning, pushing his speculation agenda and a bill which he's introduced on the floor to reign in the practice. "We cant continue forever to consume 25% of the world's supply of oil while we only have 3% of world supply. It's simple math," he said. "Speculation is only part of the problem," Reid finished, promising to bring other issues to the floor "at a later time." He then left the meeting.
Sen Byron Dorgan, D-ND, a staunch advocate for strongly reigning in the oil futures markets, asked Yergin how it was that prices shot up so high over the past 18 months. "Oil prices were bumping along at about $70 per barrel at the start of the credit crisis," Yergin recounted, saying the weak dollar and loss of confidence in the U.S. markets were a big factor. Again, Yergin said Iran had a major effect; "It's centrifuges continued to whirl." He also said supplies in Mexico and Venezuela decreased; Iraqi production has not returned post-war; and Russian production is down and "may even be in decline."
Dorgan was not convinced, saying, "Well, I think speculation plays a larger role."
Still, Sen Jeff Sessions, R-AL, tried to tie speculation to a need for more drilling. He said curbing speculation was like finding a guy on an island dying of thirst with flies all around him, saying, "This is like coming along swatting flies away, but what he really needs is to give him a drink of water. If we produce more we can stop speculators."
No matter how hard members pushed Yergin and Diwan to confirm their own positions, neither would be pinned down to one solution, saying, as Diwan did, "It would be very difficult for me to say how you shift one piece of the puzzle." Yergin warned, "There is a tendency to try to find a simple explanation. But for something this complex, there just is not single explanation."
Yergin also warned senators that they better consider increasing the supply of natural gas. He said, "I suspect this winter you'll be looking at some big problem like now" which he said would dramatically push up electricity costs, as well.
So, what would the experts do if they were in a position to create policy to attack high prices? Yergin said, "I'd want to look more on the demand side...conserve..Do more on CAFE (Corporate Average Fuel Economy)." Yergin said there is "a woeful lack of knowledge" in the U.S. about concrete steps Americans can take that would save 600-700,000 barrels of oil per day. He said a public information campaign could highlight three easy actions that would reap big savings: keeping tires properly inflated, cold starts, and no lead foot driving.
Yergin said senators should look at the whole picture — production, speculation, and conservation. "We have a $14 trillion economy. It doesnt work to just rest on one leg." Diwan noted that conservation was a problem, too. "We have allowed, over the years, encouraged consumption not conservation," he said and called on Congress to "flip that." And Diwan reminded members that the average car efficiency in the U.S. is "about half here than in Europe. So, you can do things on the efficiency side now. The U.S. consumes about 50% of the world's gasoline."
Congress increased CAFE standards in a 2005 energy bill to 35 miles per gallon by 2020, but members were ridiculed for offering a way out, or "off ramp," for auto manufacturers who can prove that this move would cause harm to their business. Members called it a "high hurdle," but experts balked.
Republicans took away some measure of comfort as Yergin told them that in this very tight supply market, any announcement of new areas opening up for oil companies could have a bigger, positive effect on prices than it probably normally would. But Yergin said oil companies are dealing with a doubling of costs to develop an oil field, a shortage of labor and equipment, as well as a "steel shock" - with costs of steel up 40% since the first of the year.
It was clear, members on both sides of the aisle want a new inventory of what's available in the Outer Continental Shelf, saying most of the information known is at least 10 years old. Yergin called on members to include both oil and natural gas.
The nearly 3-hour long workshop ended on a bit of down note with a bipartisan twist. Sen Pete Domenici, top Republican on the Energy Cmte, said, "This is the worst economic problem America has ever had in my time here...and it's capable of destroying us...I think we ought to go after the offshore and Alaska with a vengeance." But Conrad countered, "Speculation is part of what's occurring. There are a whole new set of players in market...But it's also true that we have a set of policies that have discouraged production and encouraged consumption. We have got to reverse that...Some of our colleagues just want to deal with half of the ball field (Democrats and Republicans)...As far as I'm concerned, they have it half right."
Meanwhile, on the Senate floor, Democrats and Republicans are expected to deal with four measures next week — each side offering a bill to deal with speculation and each side offering its own energy bill. It is unclear how the debate will unfold or what will be in each bill. Democrats are expected to address drilling in their energy bill, though they are not expected to call for an opening of any new areas for this, according to a senior Democratic leadership aide. Republicans have long pushed for new drilling, anti-speculation measures, and increased use of plug-in vehicles.
One thing is clear from today's activities, members are feeling intense pressure from their constituents to do something to bring down gas prices.