The editor’s opinion from Marketplace, Northeast Wisconsin’s business magazine. (Obligatory disclaimer: Most hyperlinks go to outside sites, and we’re not responsible for their content. And like fresh watermelon, peaches, pineapple, grapefruit, tomatoes and sweet corn, hyperlinks can go bad after a while.)

July 2, 2008

Kagen, and the truth about oil prices

This italic type shows the comments of myself and others to Tuesday’s news release by U.S. Rep. Steve Kagen (D–Appleton) on gas prices.

Congressman Steve Kagen, M.D. is striving in both Northeast Wisconsin and Washington, D.C. to enact common sense solutions to rising gas prices.

Or that’s what he would like you to believe. It is just common sense that OPEC will run screaming into the desert when OPEC hears that Congress has approved Kagen’s bill allowing oil companies to be sued, right?

Kagen brought together community and industry leaders today to talk about the crippling effects of the price of gas and some plans for relief. …

“I am working hard to find a way forward. Together we will begin to ease prices and end our addiction to foreign sources of oil,” said Kagen. “Drilling for new oil, investing in renewable energy and conservation will work in the long term, but in the short term we must prevent manipulation of oil supplies and prices.”

Well, this is interesting news. Didn't Kagen say we can’t “drill-and-burn” our way out of high oil prices? Didn't Kagen bring a Congressional colleague to say that “We needed these higher prices to force us to change our ways”?

Congressman Kagen has been listening to the comments and concerns from families in Wisconsin and local business owners in the energy industry …

Ah, that explains it. Election Day is four months from now. Perhaps Kagen has noticed that Republicans, including his opponent John Gard, are making headway blaming Democrats (rightly) for high energy prices. Perhaps Kagen has also noticed that gas prices have now increased 74 percent since he took office.

… and he outlined his thoughts on how we can provide relief from rising gas prices:

1. Drill for new oil here in America. We must increase domestic energy supplies, and yet oil companies are drilling on only 12 of the 68 million acres the government leased to them, even though over 100 billion barrels of oil lie beneath these lands. American oil companies should be encouraged to drill for new oil or turn these valuable rights over to someone else who will. Simply put, they should use it or lose it.

About “use it or lose it,” the Wall Street Journal reported the truth Monday:

In other words, these whiz kids [Democratic leaders] assume that every acre of every lease holds the same amount of oil and gas. Yet the existence of a lease does not guarantee that the geology holds recoverable resources. Brian Kennedy of the Institute for Energy Research quips that, using the same extrapolation, the 9.4 billion acres of the currently nonproducing moon should yield 654 million barrels of oil per day.

Nonetheless, the House still went through with a gesture called the “use it or lose it” bill, which passed on Thursday 223–195. It would be pointless even if it had a chance of becoming law. Oil companies acquire leases in the expectation that some of them contain sufficient oil and gas to cover the total costs. Yet it takes years to move through federal permitting, exploration and development. The U.S. Minerals Management Service notes that only one of three wells results in a discovery of oil that can be recovered economically. In deeper water, it's one of five. All this involves huge risks, capital investment — and time.

2. Invest in every source of renewable energy while promoting energy conservation and efficiency.

“Every source of renewable energy” would include wind energy, which is opposed by such environmentalists as Robert F. Kennedy Jr. and neighbors of the wind farms around the Horicon Marsh; solar energy, which, according to our own federal government, is far from environmental impact-free; and hydroelectric power, except that environmentalists are working to remove dams across the nation. No word here from Kagen either about how he feels about nuclear power, which emits no greenhouse gases at all.

As for “promoting energy conservation and efficiency,” that should go without saying if it saves the user money; of course, when reports indicated that Al Gore’s Tennessee house used more electricity each month than most households use in an entire year, he upgraded the energy efficiency of his Tennessee home, with the result that it uses … more electricity. Then again, Gore's environmental credentials pale in comparison to those of George W. Bush.

3. Prevent manipulation of oil prices in our free markets. It takes years to explore, drill, refine and deliver the fuel we need. But we need lower prices now — not next year. Recently, sworn testimony during congressional hearings indicated that oil price manipulation is real, and that by designing more effective oversight in the oil markets, prices for gasoline could drop by $2.00 per gallon.

Amazing, isn't it, that Democrats can claim that drilling in the Arctic National Wildlife Refuge and in presently prohibited offshore locations will drop prices by only a few cents, and then prove that speculation is responsible for half of today’s gas prices.

Investors Business Daily begs to differ:

The logical answer to any question about speculation in a market is: What are you doing to boost supply? In the case of Congress and the solution offered by Obama, the answer is nothing. They would punish people who do economically useful work, but wouldn't add a drop to our oil supply. If they really wanted to break the back of speculation, they should signal that they intend to use every means at their disposal to bring energy markets back in line. …

As for speculation, one tell-tale sign of market manipulation is a buildup of inventories kept off the market to keep prices high. That is, as the price runs up, the speculators pull supply off the market. Is that happening? No. Oil inventories, in the most recent data, are down year over year. No one's hoarding oil.

Claims of surging speculation likewise fall apart on closer examination. It's true that speculative positions in oil have jumped from 37% of all oil traded in 2000 to 70% now. But much of that trading involves commercial hedging and risk-management — not speculation by people out to make a killing. As the Commodity Futures Trading Commission notes: “There are almost as many short speculative positions as there are long positions.” In other words, speculators are betting as much that prices will drop as they will rise.

I also wonder if Kagen realizes who exactly owns stock in those big, bad oil companies. A 2007 study concluded that 29.5 percent of oil company stocks are held by mutual funds (median family income of mutual fund holders: $68,700) and asset management companies, 27 percent are owned by pension funds (today’s and retired soldiers, teachers, police officers and firefighters), 23 percent are owned by individual investors, and 14 percent are held in IRAs and other individual retirement accounts (average account size: $22,000).

Who else owns oil company stocks? Barack Obama.

Last week, Kagen voted for two pieces of legislation and cosponsored another to lower prices at the pump. Kagen voted for the Responsible Federal Oil and Gas Lease Act, also known as “use it or lose it”, which would bar companies from obtaining any additional federal leases for drilling unless they are producing oil and gas from the leases they already hold or are about to do so. Kagen also voted for the Energy Markets Emergency Act, which would direct the Commodities Future Trading Commission to investigate conditions in energy futures markets to eliminate excessive speculation and price distortions. Kagen co-sponsored the Consumer Oil Price Protection Act, which would prevent excessive speculation in oil markets by limiting participation to those who are actually are able to produce, manufacture or take possession of the oil they buy. This measure is expected to come up a vote in July.

How much new oil has this blizzard of Kagen-sponsored legislation produced? Not one drop. Nor will it. Those evil speculators look at what the U.S. is doing to increase energy supplies (that is, nothing), and correctly assume that oil prices are going to continue increasing.

I’m not even going to take the opportunity to have the last word on this. I'll leave that to Joseph Kugler of Appleton, one of Dr. Kagen’s constituents, as posted at

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