$5 Gas? Oil Speculation and Politics

In the last 5 years, the volatility in the price of oil has led to debate, accusations, and a great deal of confusion about the role of the financial markets in determining the price of a gallon of gas. This has included congressional investigation, consumer group accusations, and finally new regulations for the commodity trading industry.

Brent Spot Price of Oil (EIA, 2011)

So what is the basic issue?  Critics allege that traders can artificially manipulate the price of crude by artificially creating demand through purchase of futures and other financial derivatives.  Once the price increases, these can be offloaded for a profit.  Last year the Commodity Futures Trading Commission (CTFC)—the primary government agency tasked with regulating the commodities market—filed a major suit against 5 traders alleging that they cornered the market on oil futures by obtaining such a dominant position that they owned 2/3rds of all the available oil at the Cushing, O.K. exchange.  Subsequently, the CTFC was given the authority through the Dodd-Frank financial reforms to limit the supply that any one trader can own, which it voted to enact beginning in 2012.

2 weeks ago, at the UT-Energy Forum, students heard from a panel of financial industry experts on the topic of movement in oil prices.  Panel member Jason Schenker, of Prestige Economics, strongly rebuffed the idea that financial speculation is a key driver of oil prices.  Instead, Schenker cited basic macroeconomic principles of supply and demand, which was supported by other panel members. This assumption is essentially the energy industry’s institutional answer, supported by major groups such as the American Petroleum Institute (API).  Research by the EIA in 2008 backed this finding, concluding that it was unlikely that inflows of investment or hedging in the commodities markets could increase prices.

Ultimately, this question remains unresolved. In the wake of the global financial crisis, it is unsurprising that the public and consumers are wary of traders and investment bankers.  While the congressional report states that “Addressing excessive speculation offers the single most significant opportunity to reduce the price of gas for American consumer,” it is too soon to tell gauge the impact of new regulations imposed by the CTFC.  However, given the amount of conflicting evidence and disagreement over the role of speculators in the oil market, regulators should proceed cautiously.

Coal’s Hidden Cost in the Billions

A study ordered by Congress says the burning of fossil fuels costs the U.S. $120 billion annually and declares coal the biggest single source of such external expenses. But the damages are likely to be even higher.

The study conducted by the National Academy of Sciences set out to measure the costs not incorporated into the market price of a kilowatt-hour or a gallon of gasoline or diesel. The main budget item: excess mortality. According to the authors, 20,000 people die prematurely every year due to health complications brought on by criteria air pollutants that are released in the process of burning fossil fuels. These toxins include soot particles, which cause lung cancer; nitrogen oxides, which contribute to smog; and sulfur dioxide, the main culprit behind acid rain. While these hidden public health costs are caused almost equally by coal and oil, their single biggest source is coal burning, according to the study.

The findings add support to the efforts of regulators and environmentalists who are pushing for stricter regulations of power plant emissions at a time when representatives of the Obama administration and the E.P.A. are debating how to move forward on the issues. However, critics of the status quo say that the estimates that were not incorporated in the study are even more noteworthy than the enormous price tag researcher from the National Academy of Sciences put on the hidden costs of fossil fuels. These include, aside from the environmental damage of global warming or the damages from burning oil for trains, ships, and planes, the damages from current solid waste management practices in the power industry.

Evidence shows that there has been a dramatic increase in coal waste products that are discarded in waterways or stored in ways that endanger human health. In many cases, such disposal or storage is not regulated or existing regulations are not enforced. Consequently, the hidden cost of power production from coal is likely to be significantly higher than the NAS estimate, critics argue. And thus far it is unclear when the Obama administration will push for additional regulation to curb the increase in harmful pollution.

The production of coal waste such as fly ash and other toxic byproducts of generating electricity from coal, in particular, has increased over the past two decades. To some extend this is the result of an increasing demand for electricity in the U.S. However, improvements in air pollution controls have contributed to this trend even more. Contaminants and waste products that used spew through the power plants’ smokestacks are now captured with greater frequency in solid form. As a result, American coal fired power plants produced 45 percent more combustion waste last year than in 1990, some 130 million tons in total. That’s enough to fill a train of box cars stretching from the District of Columbia to Australia.

While some of this waste product is used for construction fill and other “beneficial uses”, the majority is deposited in 1300 storage sites across the country, most of them unregulated and unmonitored. These dumps, which hold huge piles of this solid waste in 46 states, can reach up to 1500 acres. Frequently, they contain heavy metals such as arsenic, lead, mercury and selenium, all of which the EPA considers a threat to water supply and human health. Different studies have shown that substances leaching from storage sites can cause cancer and birth defects, according to the New York Times.

Yet currently these disposal sites are not subject to federal regulation. Tyson Slocum, an expert in environmental regulation and energy policy with the consumer rights organization Public Citizen in Washington whom I spoke with a few weeks ago, says, “The way we deal with coal combustion products is a big loophole in the country’s waste management system.” He explains that in the absence of federal policy, the states have set requirements, which vary significantly. Alabama, for example, does not regulate the waste product at all, except through nationally mandated water discharge permits. In Texas no groundwater monitoring or engineering requirements exist for utilities that dump coal ash on site.

According to Slocum, these differences in regulation are as much as the result of the varying regional influence of the coal industry as they are the product of tight state budgets. “Many states simply do not have the financial resources to pay the personnel costs necessary to regulate and monitor these waste sites.”

axelgerdau