According to Keith Olbermann (video) last night, and according to this article, one of the reasons gas prices are so high is because of the Enron loophole — infamously used by Enron to gouge California power users just before the company’s downfall. In Olbermann’s video, you can see Congressional testimony which states that fixing the loophole has the potential to cut gas prices in half.
Is that true? If not, how much effect (if any) would it have?
[…crickets…] Hoping to catch some evening traffic. […crickets…]
They mentioned it on today’s Diane Rehm Show, but I was listening at work and got interupted when they began to explain it. If you have time give it a listen, the parts I heard were pretty interesting.
Thanks for that link, River Hippie. I finally found it about 35 minutes in. The caller raised a similar question, and they talked about it for a minute or so, but they didn’t really answer the OP in the sense of whether the testimony before Congress was accurate.
Here’s the results of a search of the Congressional Record in the year 2000 for the Commodity Exchange Act.
I’m far too lazy to wade through that, but if you’re so inclined, hopefully, that’ll get you there.
ETA: oops, that for the original act…you’re looking for where the said it might cut gas prices in half…I’ll do a quick search for that and post again in a minute.
Ah, crap…that stuff’s useless…nevermind. :o 
As a tangential question: how much effect can an US regulation quirk have on oil prices, especially 8 years after the fact? I can see how it can effect a domestic electricity supplier, but oil is fiercely bidded and traded at a global level.
I think that’s a good point dre2xl. The oil market is too big to corner. One US state’s natural gas market for a while or a sub-market for heating oil I can believe, but the world’s oil market?
I didn’t really get much from the Olberman video. As far as I can tell - and whilst I’m an economist, I don’t know a great deal about oil prices - the situation is pretty simple:
Both supply and demand for oil products are pretty unresponsive to prices in the short term. This means that any mismatch caused by a demand or supply shock will produce big price changes.
Speculation that drives prices away from what seems to be the right value now will occur when mismatches are (probabilistically) anticipated. The overall effect of this is benign: if the speculators are right it smooths prices, if they are wrong they will lose money.
There are good reasons to suspect that most of what’s going on is due to current and expected fundamentals. There is growth in demand from China and India. There is a fairly restricted supply. There are concerns about supply interruptions (due to current middle east instability and fear of a war in Iran) which would make saving oil for tomorrow a good idea effected by speculators driving up current prices via futures markets. There are policy uncertainties about carbon taxes and the like which affect new investment in the sector. There are concerns about the long-term viability of existing supplies (“peak oil”). Plus of course, the depreciation in the $US has made the oil price go up more for you than it has for others - although the din here about petrol prices is pretty unholy too.
Unregulated futures trading may or may not be a good idea, but the idea that because it allows speculation it is bad is not sensible. Destabilising speculation (a bubble) or cornering the market would be bad, but speculation that simply allows the market to account for the fact that prices will rise is not. The oil companies would have no interest in the former (since if they’re the ones driving up oil prices they would lose money if they’re holding when the bubble pops) and I don’t see that they have the money to even think about a corner. I suppose that they could be doing a big pump and dump thing here - panicking the markets into thinking prices must rise, then selling before other speculators get wise - but I doubt it. 50% of the recent price rise? No way.
There’s a lot of angst and paranoia about oil prices. Partly this is because there have been real conspiracies (Standard Oil, OPEC) and partly because markets with steep demand and supply curves don’t work very well because moderate shocks induce big price changes.
Thanks for the more detailed explanation.
It’s also worth that many countries’ oil production has peaked – Venezuela, Norway, Mexico, Iran et cetera are all down significantly from their highs. It’s been speculated that being nationalized, the government is happy with their profits and isn’t re-investing in exploration even as the output falls.
(Each country’s output is easily Googled, but if you want me to provide links for each countries, I can try.)
Saudi Arabia has said a lot of things to fuel speculation to indicate that they’re tapped out, especially in the last 2 months. For example, it’s not so hard to read between the spin in this article: http://www.msnbc.msn.com/id/24660754/
It’s human nature to want to believe anything except the worst case scenario, that we’re running out of oil (or more accurately, oil that we can tap right now). What’s worse, if it’s true that the world at large simply hasn’t been reinvesting their profits in new wells, we can expect a steep decline year-over-year until new wells are created given that once a well peaks output from it declines by roughly 5-15% every year thereafter (http://www.commondreams.org/archive/2007/10/22/4737/); even if every country mobilized to start drilling wells everywhere right this instant, it’d be 2.5 years to 10 years before new oil started coming.
Coming back to the OP, the answer is likely “minimal at best.”
Corruption, corrupt unions, and nationalism all contribute to that too. Mexico is trying hard to invite private equity into their oil business, but the populist, quasi-socialist opposition party is doing everything to prevent “selling out” their national treasure. :rolleyes: The problem isn’t for a lack of smart capitalists that know how to inject efficiencies, but rather a surplus of stupid, populist obstructionists.
I guess we’ll see. Saudi Arabia announced that it will increase production by 10-plus million barrels a day. If it’s a simple problem of supply and demand, prices should go down.
I don’t think that is a realistic expectation at all. Wiki lists their 2007 production as 10.234 million barrels of crude per day.
That means they’re doubling it, then. Why would that make no difference?
Link?
This is the most recent one I could find.
http://money.cnn.com/2008/06/22/news/international/Saudi_summit/?postversion=2008062214
That’s significantly still down from their high, and I doubt they can sustain it for long if they reach it at all. Everything they’ve said adds up to “we’re running out of oil.”
I don’t mean that a massive increase in supply will not drive prices down. I mean that there is no way the Saudis could increase the supply to such an extent.
In any case, it’s not so simple as that. Some probability that the Saudis will increase production is already priced into the market.
Speculation has a very valuable function in the market. The speculators absorb risk and translate it into prices, which affects consumption now rather than in the future. This is a good thing.
For example, let’s say there’s a risk that oil will go to $500/bbl within five years. Speculators see that risk, and start investing in oil futures so they can profit if prices rise. This causes prices to increase *now, which slows consumption of a good that may be in short supply soon. That’s a good thing. The speculators also act as collectors and holders of oil for the people who need it most (those willing to pay the most) when supply shortages begin. This makes the market more efficient.
Without speculators and futures contracts, oil might be a little cheaper today - but then we’d be using more of it, and we wouldn’t be working quite so hard on replacements.
Now, if the oil crunch doesn’t come, the speculators lose ther money, sell their stocks at a loss, and prices go even lower. So we benefit on the back end. And if they do go higher, the speculators make a profit but there is more oil available than we otherwise would have had.
They’re going to push it to 12 million within a year.
http://www.eia.doe.gov/emeu/cabs/Saudi_Arabia/Background.html
It was also on the news.
I don’t think anyone is talking about eliminating speculation. The idea is simply to restore oversight to the process.
That accounts for about $20 of the total price, according to Gov. Jon Corzine. (Corzine used to be Chairman and CEO of Goldman Sachs, and served in Clinton’s Treasury Department as Chairman of the Borrowing Committee). He says oil should be about $80 a barrel, including that $20, and that the rest of the price is a bubble.