Thursday, August 11, 2005

No, go downstream 

Hugh is having bad thoughts during his vacation.
If the GOP does not deliver on new oil exploration ina time of $60 a barrel oil, it will provide ammuntion to every cynic who believes that the Congress is incapable of acting on any issue that is remotely difficult. After the war, the courts, and the defense of marriage, energy exploration was the hot button in the past three elections, and not just because of the cost of gas, but also because it represents the defeat of environmentalist posing by clear-eyed science and the belief in progress.

I'm not sure Hugh realizes that if you started drilling in ANWR tomorrow, it would still take about seven years for the flow of oil to show up here. I'm as in favor of drilling as he is, but can you imagine three years from now, when Hillary runs for president, giving her a platform that says "we're degrading the environment in Alaska and we're still paying $2.50 for a gallon gas"?

Next time the boat pulls into port, Hugh should read The Capital Spectator from this morning. The U.S. has oil inventories, but capacity around the world is hitting a wall. Moreover,

Bumping up against a wall is also the story when it comes to manufacturing gasoline in America, where new refinery development has remained the stuff of dreams for two decades. In the U.S., refineries operated at 95% capacity last week, the EIA reports. Meanwhile, gasoline demand keeps rising, the agency notes. For the week ending August 5, gasoline demand was 9.483 million barrels per day, up slightly from 9.472 million barrels a day a year earlier.

It's also true that gasoline inventories fell last week for the sixth week in a row. That lends momentum to the fact that this is the peak season for gasoline demand, courtesy of summer driving, a fact that hasn't been lost on traders. In fact, gasoline, measured by the near-term futures contract traded on the New York Mercantile Exchange, has run up more than oil. Gasoline prices climbed more than 60% this year through yesterday vs. 53% for oil.

The incentives for elevating oil inventories further, in short, remain high. But that's where oil and gasoline part company. Crude oil is an unrefined product that's pumped from the ground; gasoline is manufactured and therefore subject to the constraints of refinery capacity, of which a thin 5% spare capacity exists in the U.S.

If Republicans want to win a battle with environmentalists that would count now, in time for the 2008 elections, it must deal with the restraints on building gasoline refineries. Here's a classic post from Useful Idiots on environmentalism run amok in another remote corner of the U.S. that would have started building a refinery two years ago. See also Cato's Jerry Taylor, in testimony to Congress a few years back.

UPDATE: And Craig Depken.

UPDATE 2 (a bit longer): Dafydd thinks Hugh's saying that the markets have lost confidence in Iraq. I don't think that's what Hugh's saying at all, but rather than have me guess, let's hope Hugh posts something more.

But there's something more to Dafydd's commentary that bears criticism. The market for oil and gas contains a large number of players with many little bits of information. Some read blogs, some don't; some read political op-eds, others read Bloomberg screens. And they're geographically diverse. The price in the market is not the reflection of any one of these people. It is the interaction of them. Markets move when either a) there's new information that changes many expectations, or b) some group or another becomes more convinced that their price forecast is correct, opening new positions, or incorrect, closing their positions out.

And much of the information that's important to the market price isn't something gathered in general news. It's local information, held by market participants, and communicated to other participants by the act of buying and selling.

I don't think this is what Hugh is worried about, because he's concerned about political consequences of reaction of the public to the rise in the price of something they value -- which is gas, not oil, as my original post argued.