Why Obama Did Not Answer Romney's Oil Drilling Permits on Federal Land Question

When Obama claimed that oil production was up due to his policies, Romney pointed out that the Obama administration has been approving many fewer permits than Bush had.  Obama evaded a direct response to the number of oil drilling permits he was approving.  He was really doing a most obvious bit of squirming to avoid answering the issue.  Romney correctly pointed out that oil production was up only because it had gone up greatly on private land while going down on federal land and offshore. 

Update of Chart originally posted, since the original chart not only was not plotted with a zero baseline, but also had proportionality problems with the length of the bars.  In other words, it was incompetently plotted.  This chart, provided by Dr. Francisco Santiago, is accurate:

[The original bad plot of the permit situation from a CFACT report is shown below:

Note that the baseline in this graph is not zero.]

The failure of the Obama administration to approve more oil drilling permits will cause increasing decreases in oil production from federal lands for some time after permits approved rises under Romney.  It will take awhile for production to catch up with an increase in permits, so this problem will be with us for awhile.  This was a missed opportunity to provide Americans lower gasoline prices, which we know is contrary to the Obama policy that high gasoline prices are desired.

Speculators are Good in a Free Market

When I was a sophomore at Brown University in 1966-1967, I sat in on the first semester economics course and then took a test to get credit for the course.  I then took the second semester as a regular course.  The course was taught by a Brown Ph.D. graduate student and in a lecture he made it clear that he did not like speculators and that he did not understand their essential role in a free market economy.  I explained it to him after class, making myself late for my next class.  To this day, few people understand the critical and good role that speculators perform.  They are presently being blamed by Obama, Bill O'Reilly, and many others for the increasing price of gasoline at the pump.

Obama claims that there is plenty of oil available and the price of gasoline should not be so high.  But, he says the mean, cold-hearted, selfish speculators are driving the cost of oil up and therefor the cost of gasoline is going up.  There are indeed times when speculators do drive the cost of oil up.  There are also times when they drive the cost down.  The total longer term average of their effect on the price of oil is probably a downward effect.  Let us consider why this is the case.

If you look at the market for a given product, you see the free market price of that product now fairly readily, if you have a free market.  What is harder to figure out is what the future price of that product will be.  Let us take the case of oil, since that is the present example of most interest.  Let us suppose even that Obama is right that there is enough oil now to meet the present demand for oil in the sense that the supply and the demand do not dictate a price increase.  Is it perhaps the case that speculators are driving the price up?  It may very well be the case.  Yes, even Obama can be partly right every now and then.  Even though he has no understanding of economics and business at all, he is sometimes partly right about something in some moment of time.  What he is most likely wrong about is his assessment that the rising price is entirely caused by speculators and that their contribution is bad.

The speculators are bidding up the price of oil because they think that we will before very long face a situation in which the supply of oil will not be enough to satisfy the future demand for it without the price going up more even than the speculators are bidding it up to now.  The speculator makes money only if he is right in his assessment of the future supply and the future demand.  If he is wrong, he will lose his shirt.

So, speculators have recently bid up the cost of oil by buying it.  Why might they do this?  First, the world economy has been in a severe recession with a slow recovery, so present demand is still suppressed.  Countries such as India, China, and Brazil have had rapidly growing economies in recent times, which may surge ahead as the world gets over the recession.  Many people in under-developed countries have been improving their standard of living and are using more energy.  World trade will grow and the transportation of goods will increase.  Meanwhile, OPEC has been limiting its production of oil.  The national oil companies that control the vast majority of the world's presently developed oil fields are very inefficient oil producers.  Will they be able and inclined to increase production by enough to keep prices near present levels as economies continue to recover from the recession?  There is also a loss of production of oil in Libya and some legitimate concern that the unrest in the Middle East may lead to other disruptions of oil production in other countries. 

Even the rather free market oil companies are not able to increase oil production by much, because many countries are closed off to them and because the U.S. will not allow them to develop new oil fields offshore or on any of the vast federal lands.  Even on private land, they are often prevented from oil field development by lawsuits.  At the moment, there are also some oil refineries being threatened by production problems by the flooding of the Mississippi River.  In addition, speculators are predicting the future value of the dollar.  Will it continue to drop as the Federal Reserve continues to print money?  Perhaps the speculators think oil production will not therefor increase enough as demand increases to keep prices at present levels or at those that speculators are bidding the price up to currently.  Perhaps they are betting -- almost surely correctly -- that the value of the dollar will continue to shrink.

Let us suppose that the speculators are thinking this way and they have bid up the price of oil.  When that future time comes and many people are desperate for oil and its products such as gasoline and plastics, the present production oil of that future time would be bid up to very high prices by consumers.  It is then that the speculators let the oil they have been holding back onto the market.  The supply of oil is then increased and the price is driven down.  The speculator makes a profit if he was right about the future direction and rates of supply and demand changes and the value of the dollar.  If we deny him his profit, he has no reason to take the risk of acting on his judgment to try to smooth out price fluctuations.  The speculator takes advantage of price fluctuations to make a profit.  But, his act to make a profit, provides more supply when supply is low or demand is high, so his action reduces the price fluctuations that would otherwise occur.

In an act of idiocy, Congress made it illegal to speculate on the price of onions.  As a result, the price of onions fluctuates much more than most agricultural products.  Its price fluctuations were used as an illustration of what happens when speculators are removed from a market by a recent John Stossel program on Fox Business News.  He also discussed oil and onion prices in a column.  The horrible onion price fluctuation history goes back to 1958.  Because of the ban on onion speculation, onion prices recently went up by 36%, worse than the price increases on oil.

The present price of oil is not up just due to speculators in any case.  Much of the rise is due to the declining value of the dollar.  Obama and the big spending government thugs want badly to distract us from this effect.  They also want to distract us from the effects that past oil field development restrictions have had on oil prices, because they wish to continue those restrictions.  The loss of a large part of the Libyan oil production also causes world prices on oil to be bid up for its present effect on supply and demand.  Some states, desperate for more tax revenue, have also increased the gasoline tax.  The continued requirements for ethanol in gasoline and the increase of mixes to 15% ethanol causes the price of gasoline to go up as well.  All of these problems are caused by governments and our government wants our attention to be on speculators, not on it.  In similar past times, the government has investigated the role of speculators about 30 times and they never find anything substantial in the investigations.  These hearings are dog and pony show distractions just as Senator Hatch complained this last week.

I made the claim that the average effect of oil speculation is probably one of decreasing the cost.  Why would this be the case?  When the price of oil is low, many oil producers will cut back their higher cost production wells.  For instance, there are oil pumps all over the U.S. that pump oil only a few hours a day or less, as oil slowly seeps into the pump area from porous rock.  Delivering this small quantity of oil to market can be a bit expensive and the maintenance of the pumps which work such a small fraction of the time is high.  They simply get shut down when the price of oil goes way down.  Minimum oil production costs and then refining costs for gasoline will set something of a floor for how low oil and gasoline prices can go.  On the up side, however, there are many critical uses of oil and gasoline that make it possible for the price to go very high when demand becomes very great and the supply becomes too little.  Many a driver will still pay for gasoline to drive to work.  Many an American would pay $8 a gallon if he had to.  Many would pay $10/gallon.  Sudden decreases in supply or of demand could result in huge upward price spikes.

Yes, these price increases will bring on increased production.  For enough money, OPEC will crank up their production somewhat.  Those hour a day pumps will surely be turned back on.  Political pressure on the U.S. government will force it to allow some new oil field development.  While some deep water offshore oil fields will take 10 years of development, there are shallow off-shore and land sources that can be developed much faster.  There are old depleted oil fields in which more expensive oil recovery measures can be justified and more oil can be squeezed from them.  Greater effort can be made in refineries to break down large oil molecules to squeeze out more gasoline.  Things can be done to bring down the high prices, but many of them take time to occur.  Over shorter periods, prices can spike upward badly.  These deleterious effects are mitigated by the much maligned speculators.  Speculators are our friends.  Governments, both the U.S. and the OPEC governments, are our enemy.

Fanny Mae and Freddy Mac Steal Again

The gang that cannot shoot straight, has come galloping into Washington, D.C., and robbed the Treasury, the People's Bank once again.  Sheriff Obama and his hooligan crew of law enforcers carried the loot out to their horses for them and invited them to a good dinner.  They are still in town, living it up!  Why not?  In the past, Fanny Mae and Freddy Mac always provided the Democrats and Obama in particular with great campaign contributions.  The more money the sheriff lets them steal, the more money they give him to remain sheriff.

Fanny Mae has just asked for another $8.4 billion from the Treasury after First Quarter losses this year of $13.1 billion, including $1.5 billion in dividends paid to the government on its preferred stock.  The government took control of Fanny Mae, a government-sponsored corporation, in September 2008.  Fannie Mae ended the First Quarter with a net worth of -$8.4 billion dollars.  This government-run business lost $15.2 billion in the Fourth Quarter of 2009 and $23.2 billion in the First Quarter of 2009.

Just four days earlier, Freddie Mac asked for a $10.6 billion handout.  Its First Quarter loss was $8 billion.  Freddy Mac had previously received $50.7 billion in bailouts, while Fanny Mae had previously received $76.2 billion.  Fanny Mae had already been given $15.3 billion of taxpayer's money as recently as 31 March 2010.  In December 2009, the Obama administration removed a $400 billion cap on gifts to Fanny Mae and Freddy Mac and promised unlimited support in 2010.  The total taxpayer money given them since they were taken over by the government, including the current requests, is $145.6 billion.

In the First Quarter, Fanny Mae purchased or guaranteed about $191.4 billion in loans.  Its credit losses were $5.1 billion, which was up from $4.1 billion the previous quarter.  The number of loan defaults was up in the first quarter.  5.47% of Fanny Mae mortgages were delinquent in the First Quarter, which is up from 5.38% in the Fourth Quarter of 2009.  The single-family foreclosure rate was up from 1.03% in the previous quarter to 1.36%.

Obama and the Democrats have refused to include Fanny Mae and Freddy Mac in any financial industry reform bill effort, since they are using them to reduce home foreclosures with loan modifications and will not admit their guilt in weakening the entire financial system of the U.S.  In the First Quarter, Fanny Mae made 94,000 mortgage modifications, after making 42,000 in the Fourth Quarter of 2009.  Together, Fanny Mae and Freddy Mac own or guarantee almost 31 million home mortgages worth about $5.5 trillion.  This is more than 40% and close to half of all home mortgages.

It is common to say that the recession began in the United States and was caused by too much easy credit.  Republicans go on to say government-sponsored Fanny Mae and Freddy Mac caused the recession and Democrats say an unregulated Wall Street caused it.  In fact, it was triggered by the sharp increase in oil prices.  After May of 2004, the price of oil went up in real terms, dropped briefly in late 2006, and then spiked upward beginning in early 2007.  By July of 2007, production in Canada had dropped.   It dropped  in Italy in August 2007, in France in October 2007, and the Euro area as a whole in November 2007. Japan's production reached a peak in October 2007, though it had a one-month uptick in February 2008. The decline in the U.S. was in February 2008.  In January 2008, the OECD leading indicators were down from a year before by 4.1 points in Ireland, 2.8 points in Japan, 2.6 points in Korea, 2.3 points in Sweden, but only 0.8 point in the U.S. Stock prices are another leading indicator. Stock prices peaked in Japan and in the Euro area four months before they peaked in the U.S. and the U.K. in October 2007!  In the 4th quarter of 2008, real GDP was lower around the world than it had been 1 year before, but it had dropped by much less in the U.S. than almost anywhere else. The dollar value of imports into the U.S. did not fall until August 2008 and the consumer purchases did not fall in the U.S. until September 2008.  The U.S. was the last economic engine to sputter to a stop and it took the combination of the oil price spike, the recession already underway in the rest of the world, Fanny Mae's and Freddy Mac's vulnerability, and the Wall Street over-extension combined to put us into this severe recession.

While we cannot blame the entire recession on Fanny Mae and Freddy Mac, they were the most egregious weaknesses and the most easily avoided ones in the U.S. economy.  They were following a foolish policy of easy credit for people who could not make their loan payments under almost any condition of strain and they with the easy credit Federal Reserve were the starting point for much of what went wrong in the private sector.  Government regulation of Freddy Mac and Fanny Mae did not keep them out of trouble and there is no reason to believe more federal regulation would have helped on Wall Street.  In fact, some of the problems on Wall Street turned out to be due to too much regulation and too cozy a relationship with the federal government.  The biggest backers of the unwise lending practices through the years were the Democrats.  Obama had contributed once he was in the Senate and he had worked on a lawsuit against Citibank himself to force them to lower their lending standards before that.  Meanwhile, President Bush had warned a number of times that the easy credit policies of Fanny Mae and Freddy Mac were a major risk for the economy.  McCain also joined in with warnings.  These were all ignored by Congress, which in 2007 and 2008 was controlled by the Democrats.

Fanny Mae and Freddy Mac could not be more controlled by the federal government.  We have only to examine how badly run they are to see the looming disaster as the Democrats try to gain more regulatory control over the major financial institutions of America.  We will be turning investment company after bank after insurance company into the next Fanny Maes and Freddy Macs.  This is exactly what the Democrats want to do.  Imagine how easy it will be to extort money from these more regulated companies and how easy it will be to command many of them to self-destruct.  Even as Fannie Mae had collapsed, Obama and the Democrats had been able to milk it mightily for campaign contributions.  This is the fate of the entire financial industry, if they get their way.