A large majority (74%) of consumers say carmakers are not moving fast enough to build more fuel efficient cars according to a new Harris poll. In the meantime, 44% of those surveyed say they are cutting back on products or services in order to pay for the increase in the price of gasoline.

And they are blaming the oil and gas companies for the rise in prices, too. Thirty-nine percent blame the oil and gas companies for wanting more profits, while only twenty-seven percent blame world crude oil prices.

As for who can stop the rise in prices, thirty four percent think the oil and gas industry can do so, while twenty-nine percent believe the federal government has that ability. Twenty-two percent say consumers can can stop the increases.

And consumers are pessimistic about increases. Eighty-one percent believe heating prices will be higher this winter when compared to last winter, while seventy-five percent believe gas prices on Labor Day in September will be higher than they are now.

In the meantime, consumers are cutting back on other spending. Twenty-nine percent are cutting back on dining out and are reducing driving or staying home more. Twenty-four percent are cutting back on groceries, while eighteen percent are spending less on entertainment.

Harris interviewd 2,085 adults ages 18 and older in the US between May 9 and 16, 2006. I first spotted this poll over at green car congress.

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After seeing a number of predictions for very high crude oil prices this year – including many from people who believe that world oil production has peaked and $100/bbl this year is a sure thing – I offered up a $1,000 bet that front month WTI would not reach $100 in 2007. Several people kept telling me what a dangerous bet this was – but none of them would pony up any money. I offered to take on 10 people at $100 each, or someone for the entire $1,000.

Well, someone has accepted for the entire $1,000. We have each transferred $1,000 into a Paypal account controlled by one of the personnel at The Oil Drum. If the front month contract reaches $100/bbl at any point in 2007, he collects $2,000. If not, then on January 1, 2008 I will collect the $2,000.

The reason I consider this a safe bet is that I don’t believe we are at Peak Oil yet. A number of posters at The Oil Drum have argued that Saudi production is down because they have peaked. I have argued that Saudi production is down because they are trying to keep prices up. I am confident enough in that claim to put $1,000 on the line.

There are two scenarios in which I could see myself losing the bet. First, if we really are at peak now, and this becomes obvious as demand picks back up, then I could easily lose the bet. The other way is through a series of unfortunate events. If we have a bad hurricane season in the Gulf of Mexico, combined with terrorist attacks or pipeline problems (or any number of things), then I could lose the bet. But I think the odds of either of these is low enough to warrant the risk. By no means am I a gambler, but I am an investor. I see this as better odds than buying oil contracts.

At the moment February WTI is trading at $54.55/bbl, down about 10% since we made the bet last week.

The job of “consumer advocate” has got to be one of the easiest jobs in the world. You don’t need any credentials, you don’t need to fact check, and you get to write your own press releases in which you liberally quote yourself as an authority. And the most important rule of all seems to be – Send out frequent, hysterical press releases so people will think you are relevant.

This latest release from the FTCR (which spawned Oil Watchdog) has got to be one of the most ill-informed pieces of tripe I have ever read. Does the press who decides to run this junk bother to critically analyze anything? Well, if they won’t, I will:

Foundation for Taxpayer and Consumer Rights: ConocoPhillips Rides Oil Prices to Record Earnings As Consumers Face Soaring Costs at the Gas Pump

SANTA MONICA, Calif., Jan. 23 /PRNewswire-USNewswire/ — ConocoPhillips reported a 37 percent increase in earnings, the best fourth quarter profits in its history, by benefiting from record crude oil prices at the expense of hard-pressed U.S. consumers facing soaring gasoline prices at the pump, consumer advocates said today.

The first of the Big Oil companies to report 2007 results, Conoco said income in the last quarter was $4.4 billion, or $2.71 per share, an increase from $3.2 billion or $1.91 a share in the comparable 2006 quarter.

That bit is accurate enough. The profits did come at the expense of consumers, as do all profits for all corporations. And oil prices are surely higher, and oil companies that produce oil benefit from that higher price. I don’t follow the fates of gold mining companies, but given record gold prices I suspect they had a pretty good year as well. That is the way it goes when one is producing a commodity.

Of course I should probably also point out that oil is a worldwide commodity, and the price is set on the world market. Furthermore, “Big Oil” pales in comparison to the national oil companies like Saudi Aramco. Those are the guys with pricing power. As big as ExxonMobil is, they control only 3% of the world’s oil.

These oil giants post obscene profits, regularly setting new records and then stick it to the consumer at the gas pump, said John M. Simpson, consumer advocate with the Foundation for Taxpayer and Consumer Rights. Then instead of using their gains to invest in research or to reduce outrageous prices, they simply buy back their stock.

Since Simpson authored this piece, one wonders whether he was interviewing himself. Maybe it’s just me, but I find it highly amusing when people speak of themselves in the 3rd person. But this is where he starts opining on matters in which he is out of his depth. I would first ask Mr. Simpson to define terms. What is an obscene profit? How much profit is deemed reasonable when a company’s capital budget is $15.3 billion for the year? And speaking of capital budgets, didn’t you just say that they don’t invest their gains, but instead simply buy back stock? It seems in your rush to react to the profit announcement, you either failed to check facts, or knowingly put out false information. The stock buybacks are a fraction of the annual capital budget. Is that responsible journalism, Mr. Simpson.

“A responsible company would accept equitable profits and reduce prices to consumers or perhaps take the long view and make substantial investments in research and development,” said Simpson.

And a responsible journalist would bother to correctly report facts instead of rushing out to slander corporations on behalf of their trial-lawyer backers.

A friend recently pointed me to a 2003 paper that attempts to explain the reasoning behind Saudi Arabia’s behavior with respect to their oil fields. This sort of managed production has always been my counter-argument to those who believe Saudi has peaked and production there is coming down involuntarily. This doesn’t prove that they haven’t peaked, but there is certainly another viable explanation for them reducing production.

Here is what I was sent:

The fact that they [Saudi] have not raised production despite high oil prices is not surprising, see article in attachment that you may find interesting. Below I quote one of their conclusions:

If a negative demand shock affects the crude oil market, the difficulties faced by Saudi Arabia are both grave and significant. Therefore, Saudi Arabia has an incentive to cut production in order to sustain higher prices. By contrast, if a positive demand shock affects the market, the large gains do not encourage Saudi Arabia to expand production. With regard to the supply shocks, the simulations indicate that the effects on crude oil prices are small, because the Rest of the World partly offsets the Saudi supply shock in the short term, whereas the Saudi marginal revenues curve is slightly affected in the long term. Nevertheless, any supply shock has an adverse effect on Saudi welfare, which suggests that Saudi Arabia would avoid any intervention, which might disturb the equilibrium in the crude oil market.

The source is Crude oil price fluctuations and Saudi Arabia’s behaviour, a 2003 paper by Roberto A. De Santis.

I am still trying to extract myself from underneath an avalanche of e-mails, but thought I would post just a bit on oil prices, which are again in record territory:

Oil passes $130 for the first time

In the past year, crude oil prices have more than doubled, pushing retail gas prices higher.

The price of a gallon of regular unleaded gasoline hit a record high for the 14th straight day, according to AAA’s Web site.

The nationwide average for a gallon of regular unleaded rose to $3.807, up from $3.80 the previous day and up 19% from year-ago levels.

Global demand has been increasing much faster than supply. In particular, demand for diesel fuel in China, India, the Middle East and South America has made it very difficult for suppliers to keep pace.

The direction of prices has not been a surprise to me, but the speed that they have climbed has been. Last summer, when oil was still bouncing in the $60’s, I said I thought it would crack $100 in 2008. It only missed one trading day by cracking that in 2007, and has been on a tear since fall. Right now prices are about a year ahead of where I had forecast them.

How high will prices go? In the long run, I can’t make a good case for any particular top. They could go much higher. In the short term, I never try to guess the direction. But I am certainly not in the $40 oil camp. Those days are history. The days of $80 oil may even be history, and if that is the case the economy will continue to be in for a rough ride.

You know that forever I have beaten the drum that high fossil fuel prices would make biofuels more expensive due to their poor EROEI. If you are unfamiliar with the argument, it is essentially that most biofuels have very high fossil fuel inputs (and thus a low energy return). That simply means that when fossil fuels get more expensive, biofuels eventually have to follow. I always thought it was funny when people thought just the opposite would happen: As fossil fuels get more expensive, biofuels become more competitive. That could very well be true if you had a ubiquitous source for biofuels that had minimal fossil fuel inputs. But that isn’t what we have. And the Wall Street Journal finally noticed:

Biofuel Costs Hurt Effort To Curb Oil Price

Rising costs of biofuels and other alternative energies are making them less viable as substitutes for crude oil, a development that could frustrate efforts to bring oil prices down in the years ahead.

A few years ago, many energy economists predicted that higher oil prices would ensure the success of alternative energies such as biodiesel or wind power by making them more financially attractive. In many cases, though, the opposite has occurred: Even as crude-oil prices approach $100 a barrel, some alternatives look less attractive than in the past.

Many energy economists predicted that, did they? I guess that’s why I am not an energy economist. That this would happen is a no-brainer, again because of the energy inputs. How they could get it so wrong is beyond me.

One reason: Energy demand is now so intense that supplies of just about every kind of fuel are in short supply, driving up prices of the raw materials involved in making many alternative energies.

It is the same across the energy industry. That’s why projects keep coming in over budget. That’s why GTL projects have been abandoned, and CTL can’t get off the ground. And that’s why I think Shell’s oil shale efforts are doomed. (I know that ethanol prices lately have collapsed, but with high energy and corn prices, their margins are getting crushed and a shakeout is inevitable).

The problem is most acute for crop-based alternative fuels, like ethanol and biodiesel, though it has also proved true to some degree for solar power, nuclear power and other competing energy sources. Biodiesel, a fuel made from farm crops like soybean oil and palm oil, was in some cases supposed to be economically competitive with crude-oil prices as low as $50 a barrel, according to analysts who studied the industry.

What a surprise. Who could have predicted that?

From the Dallas Morning News:

Jul. 9–Consumers watching the news about soaring crude oil prices normally would expect to pay for those increases at the pump. But since May, that has not been the case.

Oil prices have passed $70 per barrel for the first time this year, but gasoline prices for the area have been on the decline, dropping almost 17 cents in the past month.

The two prices often travel together, and that was the case for the first five months of the year. Since then, the numbers have mostly gone in opposite directions.

Analysts said the supply, demand and stability of each product have caused the opposite trends.

Supply of gasoline is up from the spring because the country’s oil refineries are recovering from outages and other problems, which forced the refineries to keep lower levels than they normally would during that time. As they bounce back, they put more gasoline on the market.

The FTCR made such a fuss earlier when oil prices were flat and gasoline prices shot up. Where are they now? Oh, right. Claiming that oil companies are trying to influence the energy bill by dropping gasoline prices. Some day they will learn that they can gauge gasoline prices based on what inventories are doing, and that is influenced by demand, imports, and refinery utilization – not by the whims of oil companies.

But there is disagreement as to whether prices have peaked:

“The inventories are definitely up, and they’re within a range that is still on the low side but adequate for the rest of the season,” said Ken Miller, vice president of international energy consulting firm Purvin & Gertz in Houston.

Prices headed back up slightly at the end of the week because of a malfunction at the ConocoPhillips refinery in Borger, Texas, on Thursday.

He also said that the peak gasoline season ended after July 4, and as a result, demand will fall.

This dual effect is resulting in lower profit margins for the refineries, Mr. Miller said, a trend that he thinks will continue, at least for the short term. He said that gas prices should continue to fall in the near future.

What? I thought refiners just dialed in whatever margins they felt like. Maybe they just feel like giving a little back. Or maybe margins don’t work the way some seem to think they do.

That opinion is not shared by another industry analyst, Peyton Feltus, president of Randolph Risk Management in Dallas.

Mr. Feltus agreed that the lull in gas prices is caused by an increased supply out of the refineries, but he said that high prices are just around the corner because of the country’s insatiable appetite for gasoline.

“The consumer of these products holds their own price destiny in their hand,” Mr. Feltus said. “Consumption of gasoline is growing at a rate of 1 to 1.5 percent year to year. Anybody can understand that if consumption is going up, it’s putting upward pressure on price.”

Yeah, but ethanol is going to put a stop to that growth rate.

Of course to be fair and balanced, there’s this story:

Sorry, there’s no gas-price conspiracy

Remember those big headlines and loud evening news telecasts this spring about soaring gasoline prices reaching record highs? Remember the calls for investigations and the drum-beating for government action to end so-called “price gouging”?

Well, you haven’t read or heard such stuff lately because gasoline prices have declined for six consecutive weeks, and are still dropping. Since peaking in May, gasoline prices have dropped 30 cents per gallon in California, and 25 cents nationally, according to the San Francisco Chronicle, citing figures from the Automobile Club.

Have you noticed the dearth of headlines and protesters? Have you observed the lack of calls for an investigation into this downward swing? If the increase in prices was alarming, shouldn’t a decrease be greeted with cheers?

Of course, the conspiracy enthusiasts, and indeed most of us, are indifferent when things go well. It’s almost as if we consider more affordable prices the way things are supposed to be, as if it’s something we are entitled to.

Now that’s my kind of sarcasm.

Shell’s president says we are just one bad storm away from high and volatile oil prices. I wonder what he considers high and volatile?

Shell president: Energy crisis ‘one hurricane away’ in U.S.

“We are one hurricane away from energy scarcity and volatile, high prices,” Hofmeister said a day after crude oil prices topped $80 — a record, unadjusted for inflation. “We are so tight on the demand-supply relationship.”

Americans for the past half-century have largely enjoyed a lifestyle based on the availability of cheap, abundant energy, Hofmeister said. As demand for energy has grown — the nation today consumes 10,000 barrels of oil per second, he said — its “energy security” has been compromised, he said.

“We have seen our country pass, in my opinion, a tipping point of energy supply keeping up with demand,” Hofmeister said.

Hofmeister just described Peak Lite, which should be a pretty good preview of the situation shortly after world oil production actually does peak. He is also spot on about the potential for a storm to bring on the pain. Had we had a Katrina-style hurricane this summer that took some refineries offline for a significant period of time, you would have seen gas stations running out of product very quickly.

But this is also why I think oil company stocks remain a good investment. If you have a product in great demand, and supply can’t keep up, prices are going to stay high (although I do expect prices to correct downward by year-end). Oil companies should be a safe, but perhaps not a sexy place to keep some money for the long-term. I do not subscribe to the viewpoint that oil companies are going to sit around, twiddle their thumbs, and become extinct while alternative energy producers take over the energy industry.

Disclosure: My 401K does contain oil stocks, and I probably have more through various mutual funds.

I never thought I would see this again:

Gas prices dip below $2 in some parts of Texas

Dan Ronan, a Texas AAA spokesman, said falling crude oil prices, the slumping economy and steady gas inventories have helped reduce prices.

“They are dropping pretty quickly,” he said. “Enjoy it while it’s here.”

In Harlingen, in the Rio Grande Valley area, a gallon of unleaded gas is selling for $1.98 today at Stripes convenience store, sparking a price war with a nearby H-E-B station that was selling for $1.99.

Wow! As I said a couple of posts back, plunging prices pose a big risk for inventories. Keep a close eye on demand at these prices. If demand picks up and inventories can’t recover, we will go into spring in position for gas prices to reverse in a hurry.

Now, I think I will go out for a drive.

I have a few essays in the queue (including a nifty biodiesel story), but I thought I would comment on an article in today’s Deseret News out of Salt Lake City. The article was entitled “Will U.S. Slap Tax on Big Oil Profits?”. (1) A few excerpts from the article, followed by my comments:

Republican Sen. Arlen Specter said Sunday that the U.S. Congress should consider taxing the “windfall profits” reaped by oil companies as a result of surging crude oil prices.

I understand the frustration with high gas prices even as oil companies rake in record profits. But what is Specter trying to accomplish? Does the good senator believe this will magically bring the price of oil down? Will it cause OPEC to open the taps, flooding more oil into the market? Or is the real purpose to punish oil companies for making money, so he can boast about it during his reelection bid? Would he stipulate that the money be allocated to somehow reducing our demand for oil, which is the real issue?

Specter, of Pennsylvania, earlier this month introduced legislation to strengthen antitrust enforcement of the oil and natural gas industry to counter the consolidation of production and refining operations. Sen. Byron Dorgan, D-N.D., is proposing a 50 percent excise tax on profits from oil sold at more than $40 a barrel.

Let’s think about that for a moment. A lot of oil is expensive to extract, and only becomes economically viable as oil prices climb higher and higher. As oil prices climb, the incentive to pump more oil increases. If more oil can actually be pumped, it should eventually result in an oversupply situation, and prices will come back down. (This is why the oil industry is cyclical). If more oil can’t be pumped, then prices won’t come down.

However, neither situation is helped by slapping a tax on oil over $40 a barrel. In fact, such moves decrease the reward for marginal producers, which may lead them to shut in production. Since foreign producers won’t be paying that tax, what do you think is going to happen? U.S. production will decrease further, imports will increase, and oil prices will remain high. If high oil prices are the objective, then this is a way to accomplish that objective.

“Windfall profits, eliminating the antitrust exemption, considering the excessive concentration of power are all items we ought to be addressing,” Specter said Sunday on CNN’s “Late Edition” program. “Anybody up for election this year ought to be working very hard, taking it very seriously.”

Oh, I bet they are. That’s why they ignore the real reasons for rising oil prices, and aren’t doing anything to address those issues. They are posturing and pandering, trying to make sure they get themselves reelected. The founding fathers would be rolling over in their graves if they saw the level of mediocrity that permeates our government today. Nobody has the guts to stand up and tell the truth.

Sen. Carl Levin, D-Mich., said President Bush should call oil company executives to the White House and tell them he’ll support a new tax on their profits unless they lower prices.

“I’ll bet that the price of gasoline would come down within a matter of days,” Levin said on the CNN program. “We need a windfall profits tax because these profits have been absolutely obscene.”

Wow! Is Levin this uninformed? Does he think oil company executives set the price of oil? Does he not understand that oil is a global commodity, and if China or India are willing to pay more for oil than we are, then that is going to drive the prices up? That’s sort of like asking a company to lower the value of their stock, because you want to buy some, but think it’s too expensive. It’s the price it is because that’s what buyers and sellers in the open market have agreed upon for a value. Oil company executives do not set the price of oil. This only happens in politician’s dreams.

Bush, in California over the weekend to promote his initiative on alternative fuels, said a lack of refining capacity in the United States and the thirst for oil in emerging economies such as China and India are contributing to increased energy costs. He said he recognized the price of gasoline is hurting consumers and warned that the price is likely to go higher.

Like him or hate him, Bush is correct about this. I bet even the good senators would agree with this. So, let’s pose a question. A lack of refining capacity is a problem that is putting a lot of pressure on gasoline prices. Expanding refineries takes lots of capital. If we extract more money from the oil companies in the form of punitive taxes, are they likely to spend more money or less money on capital projects? Now, is this likely to make the refining bottleneck better, or worse? Again, if your goal is to have gas shortages and drive the prices even higher, then they are on the right track. Like I have said before, we tried this already and it didn’t work. (2) From a 1990 Congressional Research Service report:

“The windfall profits tax reduced domestic oil production between 3 and 6 percent, and increased oil imports from between 8 and 16 percent. This made the U.S. more dependent upon imported oil.”

This report should be required reading for legislators who think a windfall profits tax is a good idea.

Specter has focused his attention on oil industry consolidation and competition. “We have allowed too many companies to get together to reduce competition,” he said.

There were more than 2,600 mergers in the oil industry in the 1990s, according to James Wells, director of natural resources and the environment for the Government Accountability Office. A study by the GAO, Congress’ research arm, found that concentration of market power may have added as much as 7 cents to the price of fuel, he said.

As much as 7 cents? I think Senator Specter has identified the culprit. Gasoline prices are “as much as” 7 cents higher than they would be had they stopped those mergers. This is clearly the source of spiraling gas prices. If it was “as much as” 7 cents, I wonder what the lower estimate was. It really sounds like Specter is on a wild goose chase.

While politicians pander, I am still waiting for someone in government to have the guts to suggest that a potential solution to this problem is to encourage Americans, somehow, to conserve. I am waiting for someone to explain that cheap oil is not an American birthright, and as long as China and India compete for the same oil, there will be no more “cheap” oil. Of course more expensive oil will enforce conservation eventually. Maybe the politicians are much smarter than I think, and this is part of the plan. If we adopt the policies they are advocating, oil prices will spiral out of control, gas will no longer be affordable, and we will finally start conserving. Maybe there is a method to their apparent madness.

References

1. “Will U.S. Slap Tax on Big Oil Profits?”, Deseret News, April 24, 2006.

2. Glassman, James K., “Windfall Profits” Tax on Oil Companies, Capitalism Magazine, September 26, 2005.