Saturday, May 3, 2008

Taking a Holiday from Reality

In what is becoming a theme--with the space between the right and Hillary Clinton becoming ever narrower (rhetorically at least)--the gas-tax holiday first proposed by John McCain has been co-opted by Clinton in recent weeks and become a sudden cause celebre. That her outright pilfering of McCain's proposal in full view has propelled her to a point where she's adopting Bushian rhetoric like "you're either with us or against us," while McCain has been virtually ignored on the point is but one more indication that McCain is running a campaign free of any scrutiny. Or seemingly anyone paying him any mind at all.

The American political arena has a long history of seeking out reactionary solutions that fail to address the root causes, but few so-called solutions rise (or sink) to the level of ineptitude and ineffectiveness the gas-tax holiday promises.

By nearly all accounts, the proposal would save American drivers about $25-$30 between Memorial Day and Labor Day, while driving up the demand for oil, most likely raising prices. So, essentially, what Clinton is frothing at the mouth about, complete with her Bushian rhetoric, is a plea to save the status quo.

To Barack Obama's credit, he has avoided taking the easy stance and remained true to his belief that a tax holiday is a superficial and ineffective solution that would do nothing to lower prices long term. All of which is true, but that hasn't stopped Clinton from painting Obama as enemy of the people.

The mechanism behind gas prices is well beyond the scope of this post, but it's a complex combination of supply (encompassing production and reserves), demand and speculation. The Clinton and McCain proposal does nothing to address in even a superficial manner any of those in a positive way.


Meanwhile, the Republicans are using the leverage created by high oil prices to renew their call for drilling in ANWR. Leaving the debate over wether to drill or not aside for the moment and dealing only with its tangible effect, Reuters had an interesting assessment of just what the ANWR reserve would mean to domestic oil prices.

The Energy Information Administration, which is the Energy Department's independent analytical arm, estimated that if Congress had cleared Bush's ANWR drilling plan the oil would have been available to refiners in 2011, but only at a small volume of 40,000 barrels a day -- a drop in the bucket compared with the 20.6 million barrels the U.S. consumes daily.

At peak production, ANWR could have potentially added 780,000 barrels a day to U.S. crude oil output by 2020, according to the EIA.

The extra supplies would have cut dependence on foreign oil, but only slightly. With ANWR crude, imports would have met 60 percent of U.S. oil demand in 2020, down from 62 percent without the refuge's supplies.

A two-percent decline in imported oil is unlikely to have that significant an impact on the American consumer, and certainly wouldn't relieve us from Middle East affairs. And those numbers are of course contingent on the ANWR drilling producing output, which of course does not happen immediately, as new drilling often has a lead time of 10 years or so.

Gerald Kepes, head of the upstream oil and gas practice at the PFC Energy consulting group, said if the Interior Department had begun leasing tracts in ANWR in 2003 the first oil would had probably been flowing in 2012.

"This all assumes that there would be no environmental challenges," said Kepes, as lawsuits to block drilling could take years to resolve. "Really, 2015 is more [sic]likely."

So, the debate over drilling in ANWR is immaterial to the current prices, as the United States would still be more than 5 years out from seeing any production from the Wildlife Reserve. One can debate whether it should continue from here, for sure, but to hold the 2002 vote up as cog in the prices today is disingenuous at best.

Of course, increased American production doesn't take place in a vacuum.

Opening ANWR could have made current prices worse because Saudi Arabia may have delayed increasing its oil production capacity, making world supplies tighter and prices higher.

"Since there is a worldwide market for oil, increases in production in one place (like ANWR) could be offset by decreases in production someplace else to keep the prices high," CAP's Weiss said.

Whatever the impact on any one variable in oil prices, be it new drilling or some superficial, 3-month tax break, analysis of its impact must include all of the other variables. American production doesn't happen in a vacuum, and OPEC is not going to shrug its shoulders and not control its own production capacity.

OPEC exists for the express purpose of controlling output of oil to control price. It's by definition a cartel, and that's its raison d'etre. None of these proposals addresses the sagging value of the dollar or the influence of speculators on the price of oil. Speculators play no small role, and have played an even greater role since enactment of the 'Enron loophole' gave them nearly free reign to do as they pleased.

So perhaps when Bush talks about a "magic wand," he would be better served to focus on real solutions. Attributing gas prices to magic diverts attention from reality-based root causes, many of which, such as the 'Enron loophole,' his administration is responsible for.

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