The bill known as the “Close Big Oil Tax Loopholes Act” was introduced last Tuesday (May 10, 2011) by United States Senators Robert Menendez (D-NJ), Sherrod Brown (D-Ohio) and Claire McCaskill (D-Mo). The bill would have redirected the billions of dollars in savings from ending the tax breaks currently enjoyed by the U.S. oil industry and would have gone a long ways towards closing the budget deficit.
“At a time when families are feeling the pain at the pump and our deficit keeps growing at an alarming rate, we simply can’t afford to keep giving away billions in taxpayer handouts to oil companies that are doing nothing to help lower prices” Menendez said in a statement. “The Close Big Oil Tax Loopholes Act was based on a simple premise: we need everyone to do their share to lower the deficit, not just working families and the elderly.”
The bill would have also modified the foreign tax credit rules applicable to major integrated oil companies. U.S. taxpayers who happen to live and work outside of the United States are taxed on their income just as those of us who live and work here are. They are entitled however to a dollar-for-dollar tax credit for any income taxes paid to a foreign government. American oil and gas companies have been accused of disguising royalty payments to foreign governments as foreign taxes, allowing them to lower their taxes in the U.S. The bill would close this loophole for foreign oil produced by the Big Five American oil companies.
This bill would have also limited the Section 199 domestic manufacturing tax deduction for any income attributable to the production of oil, natural gas or their primary by-products. Back in 2004, Congress enacted this tax deduction but in 2008, Congress froze the Section 199 deduction at six percent for all oil and gas activity. This bill would have gone further by eliminating altogether the Section 199 deduction for the Big Five.
American oil companies have always gotten deductions for intangible drilling and development costs. This bill would have limited those deductions by denying the Big Five oil companies the option of expensing Intangible Drilling Costs (IDC) and require these costs to be capitalized IDCs such as expenditures for wages, fuel, repairs, hauling and supplies necessary for the drilling of oil wells. Currently, oil companies can expense 70 percent of the cost of IDCs. This bill would have required that the Big Five capitalize all of their IDCs.
Another loophole eliminated by this legislation would have limited the percentage depletion allowance for oil and gas wells. Today, firms that extract oil and gas are permitted a deduction to recover their capital investment under one of two methods: First, there is the recovery of actual capital investment such as the costs of searching, discovering, purchasing and developing the well over the period that the well actually produces income. Under this method, the oil company’s total deduction cannot exceed its original investment. Percentage depletion allows the cost recovery to be computed using a percentage of the revenue from the sale of the oil or gas. Under this method, total deductions could exceed the taxpayer’s capital investment. This bill would have repealed percentage depletion for the Big Five.
Second, oil and gas companies today receive a deduction for “tertiary injectants” which are used in enhanced oil drilling—to drive more oil from an existing well. Oil companies are currently allowed to deduct the cost of “tertiary injectants” rather than capitalizing their costs and then recovering those costs over time. This bill would have limited the deduction for “tertiary injectants” by requiring the Big Five to capitalize the cost of “tertiary injectants” they use during the year and recover those costs over time.
Finally, this bill would have repealed outer continental shelf deep water and deep gas royalty relief by repealing Sections 344 and 345 of the Energy Policy Act of 2005. Section 344 extended existing deep gas incentives, while Section 345 provided additional mandatory royalty relief for certain deepwater oil and gas production.
President Obama has urged Congress to repeal tax breaks for the largest oil companies as part of a deficit reduction effort. Republican congressional leaders however have argued that the oil companies would only increase the cost of gasoline to make up for the loss of tax breaks. On Tuesday, all of the Senate Republicans and three of the Senate Democrats agreed with Republicans and voted this bill down.
The oil industry has been lobbying fiercely to protect the tax breaks. "More taxes would do nothing to lower prices,” said Brian Johnson, a senior tax advisor with the American Petroleum Institute, during a press briefing Monday. “They would not affect the global economics underpinning oil supply and demand, which explain today's gas prices. They would, however, hurt the economy by reducing energy investment and the new jobs that would flow from that investment. Proponents of tax increases need to get serious about American jobs and American investment. Oil and natural gas companies can do much more to help, but the right policies are needed to facilitate this. Increasing taxes is not the answer.”
The truth is, had this bill passed last Tuesday, it apparently would have been unconstitutional since all revenue-raising bills must originate in the House. But Senate Democrats have clearly decided to use the current legislative session to force Republicans to take a series of votes sure to be unpopular with a majority of the American electorate. Now that 235 House Republicans have voted to end Medicare as we know it via the Paul Ryan plan, there is no way that any of them and possibly more importantly, no Republican presidential candidate can deny. Democrats plan to continue forcing Republicans to demonstrate who they really are and what they truly believe in.
With polls showing Americans vehemently opposed to any changes to Medicare, and very much in favor of taxing the wealthy and ending special interest subsidies, Republican candidates could very well find themselves on the short end of a stick in 2012, dragging several unpopular votes behind them.
Let’s hear one for the Grand Ole Party!
Friday, May 27, 2011
Wednesday, May 18, 2011
Speculation
As I pumped gas this morning at $3.93 per gallon, I turned to a fellow customer and said, “I thought the price for gas was supposed to fall this week because the cost for a barrel of oil has dropped.”
He looked at me and said, “Yeah, it seems that when the price is raised, they can post that difference very quickly but when it drops, it takes them much longer to adjust the price on the pump.” Then he added very sarcastically, “But I bet they have a very logical reason for that.”
In my post last week, I tried to present some of the technical reasons for the price of oil’s recent rise, especially in face of the coming summer. This week I am going to focus on something that gets very little press.
The next time you drive to a gas station, only to find prices are still sky high, take notice of the rows of foreclosed houses you passed on your way to the gas station. Foreclosed homes and high gas prices may seem to be on the surface, issues that would have absolutely nothing to do with another. But high gas prices and foreclosures are actually very much interrelated. Before most of us were even aware there was an economic crisis looming on the horizon, some investment managers had already begun to bail out on failing mortgage backed securities and were looking for the next lucrative investment. What they finally set their sights on was oil futures.
An oil future is simply a contract between a buyer and seller, where the buyer agrees to purchase a certain amount of a commodity—in this case oil—at a fixed price. Oil futures offered investors an opportunity to gamble on whether a barrel of oil would increase in price in the very near future. Once locked into a contract, an oil futures buyer would receive a barrel of oil for the price dictated in the future contract, even if the market price was higher when the barrel of oil was actually delivered.
Whenever the denizens of Wall Street hear the word “bet” they flock to whatever opportunity it represents. In this case, Wall Street flocked to futures, taking the entire market to strange new places on what defines legal in the marketplace. In the last two centuries, the market bet on grain. Now, in the 21st century, it is oil. Just five years ago, despite the fact that American petroleum reserves were at an all-time high, the price of oil began to rise dramatically and it happened in spite of the fact that supply was managing to keep pace with increased demand. This created an economic phenomenon within the oil market wherein the laws of supply and demand no longer applied and in its place, an artificial market was born.
The reality of artificial markets is that they are volatile and not only are they difficult to predict they can change direction without any seemingly plausible explanation. As a result of this artificial oil market, the average price for a barrel of crude oil increased from $31.61 in July 2004 to $137.11 in July 2008. The average cost of a gallon of gas for regular unleaded gas in the United States grew from $1.93 to $4.09 over the same period.
So what happened?
As oil prices, and by extension gas prices, suddenly began to soar, the world was caught off guard. Immediately, competing theories seeking to explain the sudden increase in price emerged. One theory was that the world had finally hit a point where oil production inevitably had begun to decline since the amount of oil on our planet is after all finite. That argument was undermined to some extent however by the amount of oil left in reserve, supply still exceeded demand. Others pointed to geopolitics. Unstable nations hostile to the West such as Nigeria and Venezuela are depended on to supply much of the world’s oil. Still others argued that instability was causing volatility in the markets. Michigan Senator Carl Lewis put the kibosh on that argument when he rightfully pointed out during a May 2006 hearing on energy, “Without doubt, much of our oil comes from unstable parts of the world. But that is nothing new. It has been that way for decades.” The more Congress and market watchers looked into the unexplainable rise in oil prices, the more it looked like oil speculation was the culprit.
Everything that can be bought or sold has what 18th-century political economist Adam Smith called a “natural price.” This price is the sum total of the values of everything that came together to create the product or service. Raw materials, labor, distribution—all of these add to the natural price of a product. Any amount that the seller of a good or service can get above this natural price is profit.
What speculators do is bet on what price a commodity will reach by a future date through financial instruments commonly referred to as derivatives. Unlike an investment in an actual commodity, such as a barrel of oil, a derivative’s value is driven by whether the price of the commodity (in this case a barrel of oil) rises or declines. Speculators have no role in the sale of the commodity they are betting on because they are neither the buyer nor the seller. It is simply a side bet on whether the crap shooter makes his point or not.
By placing a bet on the price outcome of a single futures contract, a speculator would have no effect on the market as a whole. It is simply a bet. A speculator however, with the capital to purchase a sizeable number of futures derivatives at one price can actually sway the market. As energy researcher William Engdahl put it “Speculators trade on rumor, not fact.” A speculator purchasing vast futures at higher than the current market price can cause oil producers to horde their commodity in the hopes that they will be able to sell it later on at the future price. This drives prices up in reality—both future and present prices—due to the increased amount of oil currently available on the market.
Henry Ford once said that “Speculation is only a word covering the making of money out of the manipulation of prices, instead of supplying goods and services.” He should know…
Now here is where the price begins to rise: Investment firms that can influence the oil futures market are positioned to make a lot of money. Oil companies that both produce the commodity and drive prices up of their product through oil futures derivatives stand to make even more. Investigations into the unregulated oil futures exchanges turned up major financial players like Goldman Sachs and Citigroup. But it also revealed energy producers like Vitol, a Swiss company that owned 11 percent of the oil futures contracts on the New York Mercantile Exchange alone.
All of this speculation created an environment in which an estimated 60 percent of the price of the oil per barrel was added. In other words a $100 barrel of oil should in reality only cost $40. What is even more irritating is that despite having an agency created in 1974 specifically to prevent speculation from artificially inflating the price of commodities (Commodity Futures Trading Commission), by the time oil prices skyrocketed, the Bush administration had made a paper tiger out of it.
In fairness, the argument that it was speculators who drove up the price of gas and oil is one that is still hotly debated. A July 2008 report by the International Energy Agency (IEA) concluded that speculation had little to do with price increases. But a report issued by the United States Senate that following September contradicted the IEA report, pointing to correlations between the influx of money in oil futures markets and the rising cost of oil. The price of oil doubled, tripled and eventually quadrupled in step with the increase from $13 billion to $260 billion in the market from 2003 to 2008.
In response to calls for better regulation of oil futures, the U.S. Congress introduced the Consumer-First Energy Act in May 2008. The bill would have extended Commodity Futures Trading Commission oversight to foreign markets, but the act died on the Senate floor only one month later. After the bill was defeated, the argument over oil speculation changed from what caused oil prices to rise, beginning in 2006, to how long the U.S. will allow speculation on oil derivatives to continue.
He looked at me and said, “Yeah, it seems that when the price is raised, they can post that difference very quickly but when it drops, it takes them much longer to adjust the price on the pump.” Then he added very sarcastically, “But I bet they have a very logical reason for that.”
In my post last week, I tried to present some of the technical reasons for the price of oil’s recent rise, especially in face of the coming summer. This week I am going to focus on something that gets very little press.
The next time you drive to a gas station, only to find prices are still sky high, take notice of the rows of foreclosed houses you passed on your way to the gas station. Foreclosed homes and high gas prices may seem to be on the surface, issues that would have absolutely nothing to do with another. But high gas prices and foreclosures are actually very much interrelated. Before most of us were even aware there was an economic crisis looming on the horizon, some investment managers had already begun to bail out on failing mortgage backed securities and were looking for the next lucrative investment. What they finally set their sights on was oil futures.
An oil future is simply a contract between a buyer and seller, where the buyer agrees to purchase a certain amount of a commodity—in this case oil—at a fixed price. Oil futures offered investors an opportunity to gamble on whether a barrel of oil would increase in price in the very near future. Once locked into a contract, an oil futures buyer would receive a barrel of oil for the price dictated in the future contract, even if the market price was higher when the barrel of oil was actually delivered.
Whenever the denizens of Wall Street hear the word “bet” they flock to whatever opportunity it represents. In this case, Wall Street flocked to futures, taking the entire market to strange new places on what defines legal in the marketplace. In the last two centuries, the market bet on grain. Now, in the 21st century, it is oil. Just five years ago, despite the fact that American petroleum reserves were at an all-time high, the price of oil began to rise dramatically and it happened in spite of the fact that supply was managing to keep pace with increased demand. This created an economic phenomenon within the oil market wherein the laws of supply and demand no longer applied and in its place, an artificial market was born.
The reality of artificial markets is that they are volatile and not only are they difficult to predict they can change direction without any seemingly plausible explanation. As a result of this artificial oil market, the average price for a barrel of crude oil increased from $31.61 in July 2004 to $137.11 in July 2008. The average cost of a gallon of gas for regular unleaded gas in the United States grew from $1.93 to $4.09 over the same period.
So what happened?
As oil prices, and by extension gas prices, suddenly began to soar, the world was caught off guard. Immediately, competing theories seeking to explain the sudden increase in price emerged. One theory was that the world had finally hit a point where oil production inevitably had begun to decline since the amount of oil on our planet is after all finite. That argument was undermined to some extent however by the amount of oil left in reserve, supply still exceeded demand. Others pointed to geopolitics. Unstable nations hostile to the West such as Nigeria and Venezuela are depended on to supply much of the world’s oil. Still others argued that instability was causing volatility in the markets. Michigan Senator Carl Lewis put the kibosh on that argument when he rightfully pointed out during a May 2006 hearing on energy, “Without doubt, much of our oil comes from unstable parts of the world. But that is nothing new. It has been that way for decades.” The more Congress and market watchers looked into the unexplainable rise in oil prices, the more it looked like oil speculation was the culprit.
Everything that can be bought or sold has what 18th-century political economist Adam Smith called a “natural price.” This price is the sum total of the values of everything that came together to create the product or service. Raw materials, labor, distribution—all of these add to the natural price of a product. Any amount that the seller of a good or service can get above this natural price is profit.
What speculators do is bet on what price a commodity will reach by a future date through financial instruments commonly referred to as derivatives. Unlike an investment in an actual commodity, such as a barrel of oil, a derivative’s value is driven by whether the price of the commodity (in this case a barrel of oil) rises or declines. Speculators have no role in the sale of the commodity they are betting on because they are neither the buyer nor the seller. It is simply a side bet on whether the crap shooter makes his point or not.
By placing a bet on the price outcome of a single futures contract, a speculator would have no effect on the market as a whole. It is simply a bet. A speculator however, with the capital to purchase a sizeable number of futures derivatives at one price can actually sway the market. As energy researcher William Engdahl put it “Speculators trade on rumor, not fact.” A speculator purchasing vast futures at higher than the current market price can cause oil producers to horde their commodity in the hopes that they will be able to sell it later on at the future price. This drives prices up in reality—both future and present prices—due to the increased amount of oil currently available on the market.
Henry Ford once said that “Speculation is only a word covering the making of money out of the manipulation of prices, instead of supplying goods and services.” He should know…
Now here is where the price begins to rise: Investment firms that can influence the oil futures market are positioned to make a lot of money. Oil companies that both produce the commodity and drive prices up of their product through oil futures derivatives stand to make even more. Investigations into the unregulated oil futures exchanges turned up major financial players like Goldman Sachs and Citigroup. But it also revealed energy producers like Vitol, a Swiss company that owned 11 percent of the oil futures contracts on the New York Mercantile Exchange alone.
All of this speculation created an environment in which an estimated 60 percent of the price of the oil per barrel was added. In other words a $100 barrel of oil should in reality only cost $40. What is even more irritating is that despite having an agency created in 1974 specifically to prevent speculation from artificially inflating the price of commodities (Commodity Futures Trading Commission), by the time oil prices skyrocketed, the Bush administration had made a paper tiger out of it.
In fairness, the argument that it was speculators who drove up the price of gas and oil is one that is still hotly debated. A July 2008 report by the International Energy Agency (IEA) concluded that speculation had little to do with price increases. But a report issued by the United States Senate that following September contradicted the IEA report, pointing to correlations between the influx of money in oil futures markets and the rising cost of oil. The price of oil doubled, tripled and eventually quadrupled in step with the increase from $13 billion to $260 billion in the market from 2003 to 2008.
In response to calls for better regulation of oil futures, the U.S. Congress introduced the Consumer-First Energy Act in May 2008. The bill would have extended Commodity Futures Trading Commission oversight to foreign markets, but the act died on the Senate floor only one month later. After the bill was defeated, the argument over oil speculation changed from what caused oil prices to rise, beginning in 2006, to how long the U.S. will allow speculation on oil derivatives to continue.
Wednesday, May 11, 2011
Up! Up! And Away!
Despite the recent reduction in the cost of a barrel of oil, gas prices at the pump are once again on the rise. According to Atlantagas.com, local prices in that city have risen by almost thirty cents in the past month and by a dollar in the past year. While Atlanta’s gas prices are about five to ten cents cheaper than anywhere else in the United States, the rate of increase is the same as everywhere. What is even more frightening is that the U.S. Energy Information Administration (USEIA) has just released a report predicting gasoline prices could rocket past four dollars per gallon this coming summer.
To understand when we will all get some relief from high gas prices, it is first necessary to understand why they are rising so rapidly in the first place. One reason that gasoline prices are higher today is that it is almost summer. During summer months, oil refiners are legally bound to produce a different recipe referred to as a “summer blend” by the oil industry. Cheaper additives used in winter tend to evaporate and cause higher levels of pollution in warm weather so Federal and local laws require different additives in summer to protect the environment. Of course, these different additives are more expensive which then drives up the price of gas at the pump. The other factor in this scenario is that as refiners switch to this so-called summer blend, the cost of changing blends also adds to the overall price of the gas that we purchase. Federal law requires the summer blend from June 1st to September 15th but some local governments (most notably in California) have their own timeline. In order to guarantee that this summer blend is in gas stations prior to June 1st, production must commence in March or April.
There is an up—side to the switch (not just up in price) and that is you should experience a slight increase in fuel economy during the summer. This is because there is more gasoline in the mixture and fewer total additives that in the winter blend.
The USEIA Short Term Energy and Summer Fuels Outlook (April 12, 2011) referred to above, explains two additional factors in the current escalating oil and gasoline prices. First, rising fuel prices are due to the growth in demand as the global economy finally shakes of the recession. Second, as you might suspect, the delivery of oil has been reduced by the disruption of not only Libyan oil exports but the continuing unrest throughout the Middle East.
A ride through history (use your bike) will reveal a pattern that demonstrates whenever oil prices rise sharply, an immediate manifestation of that is economic recession. These “oil shocks” have occurred at various times over the past fifty years. The Arab oil embargo of 1973 led to the first oil shock and a major recession from 1973 until 1975. Another shock occurred in 1979 with the Iranian Islamic Revolution causing the recession of 1980 to 1982. A smaller shock took place in 1990, brought on by the Iraqi invasion of Kuwait and again in 2001 after the September 11th attacks. The shock immediately prior to our current dilemma was in the summer of 2008.
These interruptions to the smooth flow of oil into the United States cause a decline in the demand for oil as the prices are catapulted into the stratosphere. There are two reasons for this: If you and I are spending too much at the pump then it stands to reason that we have less to spend on other things. Also, if the price of other commodities is rising simultaneously because the oil required to manufacture and deliver those products has risen, that cost is then added to the price of those products as well. As the resulting demand drops, companies earn less in sales and therefore reduce their work force resulting in both high unemployment and lower production.
The economy then becomes the nightmare that we are all too familiar with—it slides into a recession. Besides what we are experiencing today, the most vivid example of this phenomenon was the 2008 collapse of oil prices due to a failing economy.
The flip side of that is when the rising price of oil becomes an incentive for producers to produce more oil. Oil reserves that were not good business to tap at low prices are suddenly attractive. Other producers, such as our friends in the Middle East—OPEC—are guilty of historically ignoring production quotas or caps in order to take advantage of rising prices as well. The sudden increase in the supply of oil that is refine-ready drives the oil price down. Eventually however, supply and demand reach a point of equilibrium at a lower price.
Despite the fact that Europe is Libya’s primary customer, the crisis there has also helped to drive up international oil prices. As it becomes increasingly difficult for Libya to keep its oil producing infrastructure online, Europe is forced to look elsewhere for its oil. That continent’s thirst for oil is no less than anywhere else so the addition to the international market of another consumer who gulps oil almost as fast as it is produced only serves to drive the price higher for everyone. Since the fighting broke out in Libya, estimates place the loss of its means of producing oil at two-thirds. Prior to the fighting, Libya was the 17th largest oil producer in the world with Italy and Germany its two largest consumers. The current disruption in Libya is the eighth largest oil disruption in modern history.
As far as Middle East unrest goes. Libya is not alone. Egypt, Bahrain, Yemen and other Arab countries are all experiencing flash revolutions and while the violence has not yet reached Saudi Arabia, the largest oil producer in the world, Saudi forces have intervened militarily to support the ruling family in Bahrain. Should the unrest spread yet further in the Middle East, other oil producing nations would add to a further pressure destined to increase oil prices. And as always, we can never take our eyes of Iran’s nuclear ambitions which ultimately may be the biggest threat to the region.
Next week, more on the rising price of oil and what we pay for it at the pump.
To understand when we will all get some relief from high gas prices, it is first necessary to understand why they are rising so rapidly in the first place. One reason that gasoline prices are higher today is that it is almost summer. During summer months, oil refiners are legally bound to produce a different recipe referred to as a “summer blend” by the oil industry. Cheaper additives used in winter tend to evaporate and cause higher levels of pollution in warm weather so Federal and local laws require different additives in summer to protect the environment. Of course, these different additives are more expensive which then drives up the price of gas at the pump. The other factor in this scenario is that as refiners switch to this so-called summer blend, the cost of changing blends also adds to the overall price of the gas that we purchase. Federal law requires the summer blend from June 1st to September 15th but some local governments (most notably in California) have their own timeline. In order to guarantee that this summer blend is in gas stations prior to June 1st, production must commence in March or April.
There is an up—side to the switch (not just up in price) and that is you should experience a slight increase in fuel economy during the summer. This is because there is more gasoline in the mixture and fewer total additives that in the winter blend.
The USEIA Short Term Energy and Summer Fuels Outlook (April 12, 2011) referred to above, explains two additional factors in the current escalating oil and gasoline prices. First, rising fuel prices are due to the growth in demand as the global economy finally shakes of the recession. Second, as you might suspect, the delivery of oil has been reduced by the disruption of not only Libyan oil exports but the continuing unrest throughout the Middle East.
A ride through history (use your bike) will reveal a pattern that demonstrates whenever oil prices rise sharply, an immediate manifestation of that is economic recession. These “oil shocks” have occurred at various times over the past fifty years. The Arab oil embargo of 1973 led to the first oil shock and a major recession from 1973 until 1975. Another shock occurred in 1979 with the Iranian Islamic Revolution causing the recession of 1980 to 1982. A smaller shock took place in 1990, brought on by the Iraqi invasion of Kuwait and again in 2001 after the September 11th attacks. The shock immediately prior to our current dilemma was in the summer of 2008.
These interruptions to the smooth flow of oil into the United States cause a decline in the demand for oil as the prices are catapulted into the stratosphere. There are two reasons for this: If you and I are spending too much at the pump then it stands to reason that we have less to spend on other things. Also, if the price of other commodities is rising simultaneously because the oil required to manufacture and deliver those products has risen, that cost is then added to the price of those products as well. As the resulting demand drops, companies earn less in sales and therefore reduce their work force resulting in both high unemployment and lower production.
The economy then becomes the nightmare that we are all too familiar with—it slides into a recession. Besides what we are experiencing today, the most vivid example of this phenomenon was the 2008 collapse of oil prices due to a failing economy.
The flip side of that is when the rising price of oil becomes an incentive for producers to produce more oil. Oil reserves that were not good business to tap at low prices are suddenly attractive. Other producers, such as our friends in the Middle East—OPEC—are guilty of historically ignoring production quotas or caps in order to take advantage of rising prices as well. The sudden increase in the supply of oil that is refine-ready drives the oil price down. Eventually however, supply and demand reach a point of equilibrium at a lower price.
Despite the fact that Europe is Libya’s primary customer, the crisis there has also helped to drive up international oil prices. As it becomes increasingly difficult for Libya to keep its oil producing infrastructure online, Europe is forced to look elsewhere for its oil. That continent’s thirst for oil is no less than anywhere else so the addition to the international market of another consumer who gulps oil almost as fast as it is produced only serves to drive the price higher for everyone. Since the fighting broke out in Libya, estimates place the loss of its means of producing oil at two-thirds. Prior to the fighting, Libya was the 17th largest oil producer in the world with Italy and Germany its two largest consumers. The current disruption in Libya is the eighth largest oil disruption in modern history.
As far as Middle East unrest goes. Libya is not alone. Egypt, Bahrain, Yemen and other Arab countries are all experiencing flash revolutions and while the violence has not yet reached Saudi Arabia, the largest oil producer in the world, Saudi forces have intervened militarily to support the ruling family in Bahrain. Should the unrest spread yet further in the Middle East, other oil producing nations would add to a further pressure destined to increase oil prices. And as always, we can never take our eyes of Iran’s nuclear ambitions which ultimately may be the biggest threat to the region.
Next week, more on the rising price of oil and what we pay for it at the pump.
Thursday, May 5, 2011
This is a Good Thing!
The killing of Osama bin Laden earlier this week has certainly served to boost the credibility of the United States in the war on terror and while it is still early, it may also make it difficult for President Obama’s political rivals to portray him as soft on national security issues as the 2012 campaign gets underway.
Bin Laden, the follower of al-Queda and mastermind of the September 11th terrorist attacks in 2001 had often referred to the United States as weak and not much more than a paper tiger. Immediately after the bib-Laden planned 1983 arrack on U.S. Marines in Lebanon and of course after the al-Queda attack on the USS Cole in Yemen in 2000, bin Laden ranted in videos that he would bring the United States to its knees. Ironically, it was made easier for him to make that claim by U.S. reaction to those attacks. The USS Cole was in the process of being refueled when it was attacked and all our government did in response was to change its re-supply routes for our naval fleet.
Osama bin Laden’s death announced by President Obama this past Sunday night shows however that our government is entirely capable of responding to threats to its national security. This was not the first time this President has responded with force and apparently it will not be the last. I have the sense however, that the brazen raid into Pakistan which located, identified and then killed bin Laden might be a signal that our time in Afghanistan might just be coming to an end. The removal of bin Laden seriously weakens the rationale for the U.S. to remain in Afghanistan much longer. The reality that the war is not going all that well only serves to strengthen the argument for getting out of a treasury draining war that very few people support wholeheartedly. More importantly, with the United States economy finally beginning to show signs of life again, propping up a policy in which the leader of the country we are trying to help is constantly ridiculing us is not a reasonable investment of strained U.S. resources.
To that end, President Obama has always maintained that he would begin the troop withdrawal from Afghanistan this summer and while some Republicans have opposed that strategy, the President’s position for beginning the withdrawal on target has been strengthened by the capture and killing of Osama bin Laden.
Undoubtedly, bin Laden’s killing may incite some reprisals from al-Queda and other terrorist groups, but it is quite possible that the opposite could happen. Losing a leader of the stature of Osama bin Laden is terribly challenging to bounce back from. The symbolism of bin Laden, particularly to the more radical elements of the Muslin world was always a source of strength to them. The loss of that symbol which more than anything lent some semblance of unity to a fractured movement may be irreplaceable.
Despite the rumblings of protest from Pakistan, it is doubtful that the raid on bin Laden’s Pakistani stronghold will have any significant or negative impact on our relationship with Pakistan. While the raid was carried out on Pakistani soil without the prior knowledge or approval of the Pakistani government, most of the more secular Pakistani politicians hated bin Laden almost as much as we did.
It is also probable that the rest of the Arab world has breathed a collective sigh of relief at the news of bin Laden’s death. The recent uprisings across the whole of the Middle East have been driven for the most part by ideals that call for democracy and transparency. This is something that was totally antithetical to Osama bin Laden. If anything, our strike at bin Laden which led to his capture and ultimate death presents an opportunity for the United States to re-engineer its relationship with the entire Muslim world and to even now be in a position to lend fuller diplomatic support for democracy in the region. It is quite possible that the generals in the Pentagon have finally accomplished something that no one else has been able to—to give peace a chance.
As hard as President Obama has tried to keep this victory an apolitical one, politics will most certainly influence where we go from here.
As the President starts to bring American fighting men and women home from Afghanistan, his credibility as a commander-in-chief will be right back where it was this past Saturday. To muddy the water further, he will be putting his foreign policy credentials on the line with at best, an uncertain and withering ally.
Consequently, the President’s ability to experience a re-election will, as it almost should, rest primarily on the state of our economy at that time. It is still, “the economy stupid.”
Bin Laden, the follower of al-Queda and mastermind of the September 11th terrorist attacks in 2001 had often referred to the United States as weak and not much more than a paper tiger. Immediately after the bib-Laden planned 1983 arrack on U.S. Marines in Lebanon and of course after the al-Queda attack on the USS Cole in Yemen in 2000, bin Laden ranted in videos that he would bring the United States to its knees. Ironically, it was made easier for him to make that claim by U.S. reaction to those attacks. The USS Cole was in the process of being refueled when it was attacked and all our government did in response was to change its re-supply routes for our naval fleet.
Osama bin Laden’s death announced by President Obama this past Sunday night shows however that our government is entirely capable of responding to threats to its national security. This was not the first time this President has responded with force and apparently it will not be the last. I have the sense however, that the brazen raid into Pakistan which located, identified and then killed bin Laden might be a signal that our time in Afghanistan might just be coming to an end. The removal of bin Laden seriously weakens the rationale for the U.S. to remain in Afghanistan much longer. The reality that the war is not going all that well only serves to strengthen the argument for getting out of a treasury draining war that very few people support wholeheartedly. More importantly, with the United States economy finally beginning to show signs of life again, propping up a policy in which the leader of the country we are trying to help is constantly ridiculing us is not a reasonable investment of strained U.S. resources.
To that end, President Obama has always maintained that he would begin the troop withdrawal from Afghanistan this summer and while some Republicans have opposed that strategy, the President’s position for beginning the withdrawal on target has been strengthened by the capture and killing of Osama bin Laden.
Undoubtedly, bin Laden’s killing may incite some reprisals from al-Queda and other terrorist groups, but it is quite possible that the opposite could happen. Losing a leader of the stature of Osama bin Laden is terribly challenging to bounce back from. The symbolism of bin Laden, particularly to the more radical elements of the Muslin world was always a source of strength to them. The loss of that symbol which more than anything lent some semblance of unity to a fractured movement may be irreplaceable.
Despite the rumblings of protest from Pakistan, it is doubtful that the raid on bin Laden’s Pakistani stronghold will have any significant or negative impact on our relationship with Pakistan. While the raid was carried out on Pakistani soil without the prior knowledge or approval of the Pakistani government, most of the more secular Pakistani politicians hated bin Laden almost as much as we did.
It is also probable that the rest of the Arab world has breathed a collective sigh of relief at the news of bin Laden’s death. The recent uprisings across the whole of the Middle East have been driven for the most part by ideals that call for democracy and transparency. This is something that was totally antithetical to Osama bin Laden. If anything, our strike at bin Laden which led to his capture and ultimate death presents an opportunity for the United States to re-engineer its relationship with the entire Muslim world and to even now be in a position to lend fuller diplomatic support for democracy in the region. It is quite possible that the generals in the Pentagon have finally accomplished something that no one else has been able to—to give peace a chance.
As hard as President Obama has tried to keep this victory an apolitical one, politics will most certainly influence where we go from here.
As the President starts to bring American fighting men and women home from Afghanistan, his credibility as a commander-in-chief will be right back where it was this past Saturday. To muddy the water further, he will be putting his foreign policy credentials on the line with at best, an uncertain and withering ally.
Consequently, the President’s ability to experience a re-election will, as it almost should, rest primarily on the state of our economy at that time. It is still, “the economy stupid.”
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