Big Oil’s Iranian Scare Tactic

On nearly every level, this is a terrible bill. And Senator Inhofe and his co-sponsors likely understand this fact.

Republican bill uses Iran as bogeyman to benefit Big Oil donors and neuter environmental law

By Jed Morey
Twitter: @jedmorey

This column originally appeared onwww.LongIslandPress.com

A couple of weeks ago, Sen. James Inhofe (R-OK) put forward a bill (S.965) with the title “Iran Sanctions Implementation Act of 2013.” It’s a ridiculously worded and speciously reasoned piece of legislation that calls for the expansion of domestic oil production in an effort to overtake and choke off Iran’s remaining crude oil supply. According to the bill, “by expanding oil production in the United States by 1,250,000 barrels per day” (the amount Sen. Inhofe estimates to be the current level of Iranian crude oil exports), “the United States will displace all oil exports from Iran on the world market.”

Inhofe accomplishes this in the bill by granting the president of the United States authority to “designate any area of Federal land that the President determines appropriate as an ‘Iranian Oil Replacement Zone,’” and that “Each Zone shall include any area of Federal land necessary for the transportation… of the oil produced in that Zone.” Moreover, Inhofe’s legislation would grant exclusive management of these zones to the individual states, thereby circumventing the federal agencies designated to protect and manage these territories. Finally, as a kicker, he exempts the entire act from both judicial review and environmental oversight under the National Environment Policy Act (NEPA) of 1969.

On nearly every level, this is a terrible bill. And Senator Inhofe and his co-sponsors likely understand this fact. But before we delve into the rationale behind floating a bill with almost no chance of succeeding, let me explain why it is so off-target.

First off, it’s important to know that this is not how the global crude oil market operates. By making the assumption that increased U.S. oil production can displace another country’s production ignores market fundamentals. As Gene Guilford, an expert in the field of energy policy, explains, “The Saudis, Libya and Iraq have already increased their output to some extent for this purpose. The excess crude oil production capacity that exists in the Middle East to take the place of Iranian production for export is already available.”

To most of us, the crude oil and gas market is a complex world. From drilling and transporting and buying and selling, it’s a murky realm of oil barons and commodities traders that speak a different language. But election cycles provide enough of a window inside to inform most Americans of this basic fact: The oil business is booming.

“We’re basically bursting at the seams with supply,” says Michael Masters, president of Masters Capital Management, an Atlanta-based hedge fund that specializes in the commodities sector. When oil prices spiked in 2008 and the derivatives market began to unravel, Masters provided important congressional testimony that gave U.S. lawmakers insight in to the inner workings of the commodities business. U.S. production has been so robust in recent years that Masters says, “I imagine in the second half of this year we won’t import any oil.”

This is a sentiment shared by Guilford, who talked about the remarkable turn of events in the U.S. fossil fuel industry. “In 2007 we were talking about peak oil,” says Guilford; “today we speak of the very real potential of the U.S. being the world’s leading crude oil producer by 2015 and U.S. energy independence.”

When I asked Masters specifically about Inhofe’s notion of displacing Iranian oil, he said, “It’s sort of a ridiculous theory because you’re not going to take it out of the market.”

In fairness, sanctions on Iran have lead to a serious decrease in Iranian crude oil exports. It’s estimated that Iran exported nearly 4 million barrels per day when President Obama took office. Today that figure is estimated to be anywhere between Inhofe’s proposed 1.25 million and 2 million per day. Either way, it’s a precipitous decline. But the decline has less to do with the supply of oil and more to do with pressure the U.S. brought to bear on those who purchase Iranian oil. So the question of whether or not the U.S. has the strength to convince the few remaining Iranian oil customers has less to do with availability and more to do with diplomatic ability.

To the extent that this is possible, the United States doesn’t necessarily hold all of the cards.

Because oil is a commodity that is traded globally it is obviously most responsive to price. According to Guilford, “Iran’s customers may well not care about alternative sources that are more expensive than Iran and that is one very likely reason Iran still has customers.” Knowing that Iran’s customers include nations such as China and South Africa, Guilford naturally questions our ability to drive the final nail in Iran’s coffin through sanctions asking, “Does the U.S. have the diplomatic ability to convince Iran’s buyers to pay more in order to isolate Iran?”

Nevertheless, this opens an important dialogue about the nature of sanctions themselves. There is no question that U.S.-lead sanction policy has been extremely effective in isolating Iran and wreaking havoc on its economy. Kate Gould, a lobbyist for Middle East Policy at the Friends Committee on National Legislation, believes that sanctions sometimes have the opposite of the desired effect by serving to “punish civilians, embolden hardliners and foreclose diplomatic options.” She explains her economic position saying, “We’ve seen huge growth in the black market, which is controlled by the Iranian Revolutionary Guard, so Iranians become dependent on going through these channels instead of legal channels.” Gould is quick to point out that despite decades of crippling sanctions against Iraq, “Saddam Hussein never missed a meal.”

Despite the backward logic inherent in Inhofe’s rationale, the bill currently has 11 other cosponsors, all Republican. Most hail from states with large swaths of federal land such as Arizona, Utah, North Dakota, North Carolina, Idaho, Kentucky and Missouri. Not surprisingly, Sen. Inhofe’s top campaign contributors between 2007 and 2012 are from the oil and gas industry, with Koch Industries being his single-largest donor.

Not surprisingly, the idea of manipulating federal regulations regarding drilling rights and ceding these rights to individual states is dangerous territory for the environmental community.

“Senator Inhofe would auction off America’s national parks and public lands to big polluters just so we could mimic Iran’s all-oil energy policy,” blasts Athan Manuel, Director of the Sierra Club’s Lands Protection Program. “We’d be better off embracing job-creating clean energy projects that protect our wild legacy and our future rather than selling off our nation’s crown jewels to the highest bidder.”

Legislative affairs specialists for the Bureau of Land Management (BLM), which controls the largest amount of federally protected land, did not respond to my request for an interview as of press time.

But Gould believes Inhofe’s bill is little more than a Trojan horse for U.S. oil and gas companies to gain access to land that is currently difficult to obtain.

“I think it’s a political stunt to try to disguise getting around environmental laws with sanctions,” she says, adding that sanctioning Iran, “generally has broad bipartisan support.”

Guilford sees it this way as well, but takes more of an academic approach to Inhofe’s proposal. He calls the “goal of increased domestic production a sound idea,” but says the “removal of judicial review and NEPA” would have “opposition that is only exceeded by those trying to stop the Keystone pipeline.”

The chances of Inhofe’s bill making it out of committee and eventually becoming law are slim. To put it into perspective, of the 3,716 Senate bills proposed between 2011 and 2013, only 449 (12 percent) made it to the floor. Of those, only 71 were enacted, or less than 2 percent. The fact that this particular bill was referred to the Senate Committee on Energy and Natural Resources, led by Sen. Ron Wyden (D-OR), means it will almost assuredly die in committee.

So why go through the machinations of compiling the language and amassing support for a bill that is practically dead on arrival?

The best way to view Inhofe’s bill is as a trial balloon—a way to test the effectiveness of certain angles and particular language.

“Perhaps for some the theory would be that U.S. domestic energy security isn’t reason enough to increase current production,” muses Guilford, “so the issue needs to be recast into a foreign policy and security debate about shutting down the remainder of Iranian production.”

Gould puts it more bluntly, saying it’s, “using the Iran bogeyman to advance an extreme agenda on another issue.”

No matter how you slice it, all roads lead back to Big Oil.

Senator Schumer Responds (and so do I…)

Senator Charles Schumer responds to last week’s column in which I claim he is responsible for the high price of oil. This is his full response along with some helpful commentary that illustrates the fact that he never actually answers the question. Welcome to Washington.

I'm not done. I have 400 other ways to not answer your question.

Last week I authored a rebuke of the financial regulatory system in the United States, particularly with respect to the rising cost of fossil fuels. Americans, and in fact all citizens of the world, are being fed what I consider to be utter nonsense from our elected officials, and the Wall Street puppeteers who control them, about the reasons behind the high oil prices.

My findings were published in my regular column, Off The Reservation in the Long Island Press and archived exclusively here, as always, on JedMorey.com. In it I concluded that because irresponsible deregulation spanning two decades is the most dominant factor in the price of oil, a responsible regulatory correction is the only solution to mitigate the current crisis. Further, because Senator Charles Schumer (D-NY) sits on every governing body with the ability to restore accountability in the markets, he is therefore quite logically the one man on the planet responsible for the price of oil. This is not to say that he was responsible thus far, but that because control is within his ability and purview, it is therefore incumbent upon him to reverse this horrendous trend.

You are welcome to review my assertions and follow my logic in arriving at this conclusion by clicking here. Then, you can read the Senator’s response below. Here is my take (spoiler alert) on his rebuttal: It is exactly the type of benign platitudinous response Americans have been conditioned to accept from the people who occupy the highest offices in the land.  748 words of nothing designed to throw us all off the scent. This is what we refer to in the newsroom as “gorilla dust” whereby two gorillas face off against one another in a spectacle of chest-thumping and screaming, throwing dirt in the air to create a commotion for the purpose of actually avoiding an altercation.

With that said, below is Senator Schumer’s response to my column that appeared in the Letters section of the Press this week. You be the judge. (Oh, and I’ll help a little along the way…)

Dear Editor,

I know that with oil prices surging day after day, Americans are being squeezed at the pump and paying more for everything from groceries to plane tickets. The bottom line is, Americans need relief from soaring gas prices. (Yes we are. Thank you for acknowledging that.)

That’s why, as a short term solution, I’ve called on the administration to tap the Strategic Petroleum Reserve (SPR). Established by the U.S. government in the wake of the 1970s Arab oil embargo, the reserve has been used since then to deal with crises that disrupt oil production. And it’s worked. When President Bill Clinton released 30 million barrels in 2000, in part because of my constant prodding, gasoline prices fell 10%. When President Bush released oil from the SPR in 2005 following Hurricane Katrina, oil prices fell more than 9 percent. If accessed today, the reserve would not only provide much needed relief to New Yorkers and Americans across the country – but also help ensure that our economy doesn’t slip back into a decline. (Wait, what? The 70’s embargo was a forced supply crisis and Katrina was a natural disaster. Supply is at an all-time high and experts agree supply has nothing to do with prices.)

But we cannot rely on the SPR alone. We must do more over the long-term so we are not constantly at the whim of what happens in places like Libya, Iraq or Venezuela. The way to do that is by reducing our dependence on foreign oil and investing in clean energy. We can do that by: (Golly, I hate to be rude but Libya doesn’t supply the U.S., we pretty much took care of the whole Iraq thing – wouldn’t you say? – and Venezuela owns Citgo… Can’t force them out of business in America, can you?)

1)      Passing NOPEC, the No Oil Producing and Exporting Cartels Act. This legislation would prevent future price increases of gasoline by permitting the Department of Justice to bring actions against foreign states – such as members of the Organization of Petroleum Exporting Countries (OPEC) – for collusive practices in setting the price or limiting the production of oil.  (But I think it’s been established that they’re not setting the prices, the investment banks on our own commodities exchanges are. Sounds like gorilla dust to me… )

2)      Ending subsidies for oil companies and putting the money into renewable energy sources. We need to make sure that oil companies, that are currently making record profits, aren’t receiving billions of billions of dollars in subsidies. Astonishingly, that’s what’s happening. I’ve called for the elimination of these subsidizes to help reduce our deficit and stop wasting taxpayer money subsidizing oil companies that don’t need any help. This week, House Speaker John Boehner stated his openness to ending some taxpayer subsidies for oil and gas companies, and I am urging my Republican colleagues in the senate to follow his example. (Again, this has NOTHING to do with why prices are so high given the extraordinary supply. Fostering renewable energy is a great idea, but it’s a way to create an additional supply of energy, not mitigate the current price. Of course the subsidies are ridiculous but given that logic shouldn’t prices be lower because we’re subsidizing part of the cost of production through tax breaks Senator? Hmmm. Something doesn’t quite add up here.)

3)      Passing the Use It or Lose It legislation. Under current law, oil companies can lease possible oil reserves on Federal land regardless of whether they are producing oil on that land or have plans to produce oil there. In some cases, oil companies are leasing – but failing to develop – federal land in order to book more reserves on their balance sheet and inflate their stock price. This legislation would force companies to report how they plan to use millions of federal acres already under lease for energy exploration and innovation. (Um, okay. We’re not talking about land use or stock prices here. We’re talking about the price of oil TODAY. Hey, are you trying to change the subject?)

4)      Promoting renewable energy sources.  This month, I helped secure over $57 million dollars to support solar photovoltaic technologies at Albany University that will produce clean power from domestic renewable energy. Additionally, in 2008 I supported a two billion dollar investment in wind power for New York. We must build off these successes and continue to promote clean and renewable energy investments. (Wow. $57 million dollars. Here’s a fun fact… Did you know that ExxonMobil just released their first quarter earnings of more than $10billion in profit?! This section doesn’t fall under the category of gorilla dust. This is what we call ‘pissing in the ocean to warm it up’.)

5)      Promoting cleaner energy sources. Also this month, I helped to protect a $100 million loan guarantee to build the Taylor Biomass Energy facility in Orange County that uses a process called gasification to convert over 95% of the waste received at its facility into cleaner energy.  We must also promote and fund similar projects across the country. (“Gasification” I see. There’s only one thing spouting hot gas right now and it ain’t the Taylor Biomass Energy facility.) 

6)      Using new sources of oil in the US where we can and it is safe to do so. I was one of 6 Democrats to support expanding a portion of the east Gulf to oil exploration, so long as it’s safe, with the greatest environmental protections, and small businesses and workers are not put at a financial risk. (Ahhh. Drill baby drill. Where have I heard this before?)

In this still-recovering economy it is vital that we do everything we possibly can to help middle class families stretch their paychecks. Every additional dollar spent on filling the gas tank is a dollar that could go toward paying for college, a much-needed family vacation, or paying the grocery bill.  By focusing on long-term fixes to our dependence on foreign oil and immediate short-term relief at the pump, we can bring down the costs of gasoline now and finally end the stranglehold that oil producing countries have on the New York and Long Island economies.  

Sincerely,

U.S. Senator Charles E. Schumer

Well, there you have it. Hope my helpful cues along the way illustrated what an absolute load of “gasification” this response was. Pity. Like I said, I guess Chuck Schumer is responsible for the price of oil.

$4 Per Gallon: Beating The Oil Drum

America and oil. Perfect together.

Americans are being warned about $4 gasoline at the pumps as an impending and potentially persistent reality. In actuality we’re really being sold on this proposition by the same people who are obfuscating the facts behind what is essentially a looming consumer economic crisis. The triumvirate of the federal government, oil companies and major financial institutions are at the core of disseminating information about, and controlling the pricing of, oil and the varying distillates it produces. I use the term “triumvirate” loosely as it presupposes a separation among the three entities when it has become increasingly apparent they are fused into a singular, inseparable juggernaut where players move freely through revolving doors interconnected through a labyrinth of commissions and exchanges that empty into the special bureau of greed and codependence.

Listen closely to what it is we’re being sold. We’re being fed a barrage of reports about two major drivers of oil prices: demand and unrest. The latter refers to the remarkable and unrelenting spread of democratic uprisings in the Middle East and Northern Africa. While the situations in Egypt and Tunisia had little immediate impact on oil prices because they are marginal players in the energy field, Libya and Bahrain have had a dramatic effect on oil prices because they are fundamentally oil-based economies. (Bahrain, by the way, is half the length and width of Long Island.)

Yet not only does the United States maintain a military base in Bahrain where demonstrations have been organized and peaceful after a shock of initial bloodshed, but Libya produces surprisingly little oil considering the ripple effect the burgeoning civil war is causing. Moreover, the war is being funded by the continuance of oil production operations, which neither side can afford to sabotage to the point of paralysis. The upshot there is that of the 2 percent of global oil production Libya claims, most of it will continue to flow. That being said, suppose for a minute it is halted completely. How could losing temporary access to 2 percent of global production account for a 33 percent increase in pricing? It doesn’t, which leads us to the demand question.

The purported rise in global demand is being attributed to the growth in demand from developing economies and the global economic recovery. Yet in real GDP terms and with respect to indicators such as manufacturing, shipping, job creation – in short, anything that isn’t the Dow Jones Industrial Average – the global economy is still limping toward pre-recession, pre-housing bubble crash levels when oil hovered around $70 per barrel. And even at this level, several commodities experts and economists theorized that as much as 40 percent of the $70/barrel figure was pegged to speculation in the financial markets and not market forces such as supply and demand.

In regards to new demand from developing nations, new areas of production in Canada and Africa as well as deep-sea, offshore drilling are keeping pace with demand as evidenced by the sustained levels of reserves around the globe. Even the Obama administration, which has stated that tapping our own strategic oil reserves is a viable option to increase supply and suppress oil prices, admits in the same breath that supply isn’t the issue. This is hocus-pocus to distract us all from what the actual issue is. For clarity on the real reason behind the spike in oil prices, one need look no further than the mini-oil crisis in the summer of 2008 and the federal government’s response in the months, and now years, that followed.

CLICK HERE TO READ THE LONG ISLAND PRESS COVER STORY ABOUT THE OIL SCANDAL OF 2008

When the price of a barrel of crude oil topped $145 in 2008, rampant speculation was ultimately blamed for the anomaly but only after the major banks and trading institutions could no longer blame increasing demand with a straight face. They simply pushed that line too hard to keep up the ruse. If ever there was even a question about the role of speculation and the government’s willingness to cover for the big banks, all was answered in my mind by the U.S. government response, or lack thereof.

Federal regulators made a big fuss over the creation of more stringent regulation on the commodities exchanges by moving oil trading from opaque over the counter (OTC) exchanges to more “legitimate” exchanges with greater transparency. Or so we were told. The big winner in this move: The Intercontinental Exchange, or the ICE. The ICE is aptly named because any attempt to investigate this exchange ends up cold. Here’s where it gets interesting and perfectly illustrates the symbiotic relationship between the federal government and big banking.

The most helpful context I can place this explanation in is to stress the point that the ICE is a business. It was established for the purpose of providing an efficient electronic trading infrastructure for energy commodities. Trading energy futures before the Atlanta-based ICE was established was confusing, inefficient and antiquated. But the ICE was a small operation until then-President George W. Bush granted it status as a foreign exchange because it purchased a trading desk in London even though the entire trading infrastructure was based in Atlanta. Foreign exchanges aren’t subject to the same oversight as domestic ones. So even though the Commodities Futures Trading Commission (CFTC) interacts with and governs some of the procedures at the ICE, no one can actually see who is doing the trading. This one small regulatory change put the ICE on the map and set the groundwork for one of the greatest, yet most obscure, con jobs ever pulled on the American people.

I call it a con job because the ICE falsely professes to be a bastion of transparency, going so far as to describe itself as “an alternative to the previously fragmented and opaque markets.” So let’s be transparent about this supposed transparency the ICE purportedly affords. It has nothing to do with the ability to witness transactions or those who are doing them, but to simplify the transaction process. It’s the equivalent of your bank offering online banking for your checking account. It’s fast and easy but doesn’t mean your neighbor can see you doing it.

Now consider who is doing the trading. Are you? My guess is no.

The only ones with the financial strength to risk betting on oil futures that would also benefit from anonymity are financial institutions and oil companies themselves. And that’s precisely what they’re doing. Now that you’re armed with an understanding of the fundamentals behind the commodities market, take a gander at the incestuous family tree of oil trading. Once you follow the money you’ll never again question why prices at the pump are so high.

• The ICE is a public, for-profit business traded on the New York Stock Exchange that takes in almost one billion dollars in transaction fees from commodities trading and has performed better than all other major exchanges in recent years.

• The founders of the ICE are Morgan Stanley, Goldman Sachs and British Petroleum (now BP)

• Morgan Stanley is not only a financial institution. If you add up their direct holdings in the oil business, they would be one of the world’s biggest oil companies.

• Gary Gensler, chairman of the CFTC, is a former Goldman Sachs partner

• Jeffrey Sprecher, chairman and CEO of the ICE, is on the CFTC Energy and Environmental Markets Advisory Committee alongside representatives from JP Morgan, Morgan Stanley, Goldman Sachs and Merrill Lynch

The takeaway: The government has cleared the way for banks and oil companies (sometimes one in the same) to determine the price of oil by investing large sums of money no one can see on a trading exchange they own and direct.

If you follow this logic, dig this scenario. (Or “digg” it if you’re reading this online – thanks in advance for the plug). Instead of cracking down on this legalized price-fixing and collusion scheme, the government rewarded everyone involved. In 2009 it granted the ICE the ability to trade credit default swaps (remember those?) in order to provide “more transparency” to these troubled investment vehicles by moving them from OTC exchanges. Sound familiar? The ICE got this part of their exchange up and running in 2010 ahead of schedule.

With the regulatory wind of the White House at their backs and a gullible public duped by propaganda about unrest in the Middle East being responsible for the spike in oil prices, Wall Street is having its way with us all.

In case you were wondering what their take on this sorry state of affairs is, Morgan Stanley analysts David Greenlaw and Ted Wieseman offer the following sentiment: “Of course, the increase in oil prices transfers income (and wealth) to oil producers, and the effect on global growth will depend on how the producers spend their windfall.” A rhetorical question if ever there was one; after all, when’s the last time ExxonMobil cut you a check? 

So the next time you’re gritting your teeth at the pump and cursing the day you walked into the SUV dealership, you’ll know who’s really taking your money. Unfortunately, you’ll also realize that there’s not a damn thing you can do about it. 

CLICK HERE TO READ JED MOREY’S RESPONSE TO THE BP OIL SPILL AND OUR OIL ADDICTION

Why Is Oil So High? Crude: Part II

Former Morgan CEO John Mack and His Love Pump

Greetings all. With oil prices rising and likely topping $100 per barrel in the New Year, I revisited a favorite subject in the Long Island Press this week. This week’s Off The Reservation is an update to a cover story penned two years ago about the oil speculation scandal in 2008 that artificially drove prices through the roof.

Returning to the subject, I found that not much had changed. A couple of the players, perhaps, but the speculation scheme is alive and well. So when you read projections from “industry analysts” who see crude oil prices rising due to a weak dollar and surging demand, you’ll know the real deal. Don’t get me wrong, these are key drivers of crude oil but are far from the entire picture. There are those who believe that pricing for the last several years is anywhere between 60% and 70% as a result of speculation; the remainder is due to market forces.

So when you’re at the pump cursing the Saudi’s, China, Obama, the Fed – whatever your poison – the biggest ass f#$*ing is still coming from Wall Street.