American Energy Policy, Asleep at the Spigot - NYTimes.com

American Energy Policy, Asleep at the Spigot - NYTimes.com:

This Times story is well worth a read for a summary of the forces at work that have brought us to $4.00+ gasoline prices and the collapse of the American airline and automobile industries. What isn't clear is the future solutions and when they will arrive, if ever.

Given the mpg attainment of autos is Europe ( We were in Italy recently and had rented a diesel powered car that got 35-40 mpg with four people and their luggage.), there is no reason that American manufacturers can do the same. Given the sudden collapse in consumer demand for gas guzzlers, they will be forced to deliver vehicles with better fuel efficiency or cede the market for automobiles to Asia and European manufacturers. Can they quickly turn their production capacity? Probably, but it will take 3-4 years, I think.

While blame for this crisis is flowing freely, we simply must increase petroleum supply while at the same time slow demand for petroleum as a transportation fuel. There's no other practical alternative in the next few years that I can see. Alternative sources of transportation fuel, attractive though they may be, simply cannot take up the slack at the scale needed.

Fuel from food grains is a very bad idea, as we are now coming to realize.

"Congress, meanwhile, in its bid to explain the run-up in fuel prices, is examining the role of speculation and the increased flow of investor money into commodities. Most energy economists emphasize the fundamental issue of supply and demand, rather than market manipulation, but financial factors like the weak dollar are also exacerbating the situation. Stephen P. A. Brown, director of energy economics and microeconomic policy analysis at the Federal Reserve Bank of Dallas, estimates that a little more than 20 percent of the price of oil today can be attributed to the dollar’s fall against the euro and other currencies.

Another financial factor behind the price rise that hasn’t been talked about much on Capitol Hill or elsewhere is reduced hedging by oil companies on futures markets, says Larry Goldstein, a longtime energy analyst. In the past, crude producers would offer buyers a portion of their energy output in future years in order to protect themselves if prices pulled back. But energy companies got burned as prices kept rising during the last two years and have since cut back on selling untapped production — forcing prices for energy futures even higher.

Now, the prospect of a perpetual climb in oil prices has become part of market psychology, which is notoriously hard to change. William H. Brown III, a former Wall Street energy analyst who now consults for hedge funds and financial institutions, says investors have become convinced that the White House and Congress are unlikely to do anything dramatic to bring down prices."

"...

Others say that although the push to blame market speculators rather than discuss economic realities is likely to intensify on Capitol Hill as the presidential election draws near, they believe that what the world is confronting is a momentous shift in energy supply and demand.

“Speculation and manipulation are two different things,” says Mr. O’Reilly of Chevron. “Most of where we are is because of fundamentals and concern about the future.”