From the Detroit Free Press:

Oil prices go sky-high, but don’t fear $5 gas

If oil prices reach $100 a barrel for the first time, does that mean gasoline will be $5 a gallon?

Analysts say no — gas won’t even hit $4, because oil supplies are good.

“This is 100% manipulation by the financial players … and the price of oil at this level isn’t justified by the fundamentals,” said Fadel Gheit, a veteran oil analyst with Oppenheimer & Co. in New York.

Fadel Gheit is probably the most quoted oil analyst in the world, and yet has been consistently wrong on the direction of oil prices for 5 years. It reminds me of Daniel Yergin, who wrote The Prize: The Epic Quest for Oil, Money and Power. Despite a track record of being wrong on the direction of oil prices, he is still the “go to guy” when someone wants to know where oil prices are headed. One wonders if their clients have been asking for refunds lately.

In answer to the essay title, no, it isn’t 100% manipulation as Gheit claimed, but I think he is correct that $90 crude isn’t justified by the fundamentals. The long interest is certainly high and growing, and that alone will drive prices higher as a self-fulfilling prophecy. But there are legitimate supply concerns that OPEC hasn’t yet answered, and it is the expectation of what this could mean that is putting the pressure on prices. If OPEC doesn’t respond soon, $100 will just be a speed bump. If they do, prices will probably drift back down to the $70’s.

But if oil prices hang around at this level for long, come spring you will see gasoline prices again setting record highs. $4 is not out of the question. After all, the price of gasoline is not entirely dictated by the price of oil. Last spring we saw a disconnect as refinery capacity couldn’t keep pace. So even if oil supplies are adequate in the spring, but gasoline inventories are still this low, yes, we will probably see $4 gasoline.

There has been a lot of speculation lately over whether the Saudi oil production cuts over the past year have been voluntary. I have argued that they were voluntary based on a combination of what was happening with inventories last spring (crude inventories were very high and trending higher), and then price (started falling in the summer and fell for the rest of the year). But I think we will soon know for sure.

This is subscriber information from the daily OPIS report, so I will only post a small portion of the report:

Over the past five weeks, there has been a fundamental shift in the oil Market — a shift that has resulted in increasingly higher prices. The shift has to do with basic fundamentals; not speculation, not hedge funds, not futures trading. Oil supplies in the U.S. have dwindled sharply in the past five weeks, more than some people may realize.

According to the EIA, in the U.S., total company-held oil inventories have shed 87.4 million barrels since OPEC’s 0ct. 20 meeting. By the end of the first quarter of 2007, stocks will be 100 million barrels below end-September 2006 levels, the EIA forecasts. Meanwhile, demand has been higher than normal, so the “supply cushion” has been depleted.

Over the past five weeks total product inventories have dropped nearly 60 million barrels, an average of more than 10 million barrels per week. Gasoline supplies, which comprise the largest part of the U.S. petroleum stock base, have shrunk as well. Inventory dipped almost 4 million barrels this week leaving supplies 8 million barrels under year-ago levels and less than 3 million barrels over the five-year average for this time of year.

What we are seeing right now is a combination of falling inventories and rising prices. This should provide both the opportunity and the motive for Saudi to increase production. Demand will really kick up in April and May, when refineries are coming out of their turnarounds. If the current trend continues, the Saudis are going to be called upon to bump up production pretty soon.

If they don’t, then I will conclude that at least for the time being, they can’t. That may mean that their production has peaked, either due to geological constraints, or because they failed to anticipate demand and didn’t bring their projects online soon enough. I have seen the announced projects they have in the pipeline, and they won’t be enough to satisfy demand any time soon. If their current reduction is involuntary we are in for some tough sledding ahead, resulting in all kinds of price records this year. I might start thinking about buying a more fuel efficient vehicle if I hadn’t just bought one.

The bandwagon on $100 oil filled up very quickly. I thought we were likely to see $100 oil next year, which is why I have consistently said I wouldn’t make that bet on oil prices for 2008. But, if you look back just a couple of months ago, nobody was calling for $100 oil this year. In early August, WTI was hovering in the low $70’s. That’s when you need your financial advisor to step up and say “$100 oil is coming fast.” That would be a gutsy call. Yet it would be a call supported by pretty much the same fundamentals that are in place now (with the exception of Iraq/Turkey). After all, supply and demand projections are pretty much on target from what they looked like in August. Nothing has dramatically changed. If anything, the supply picture looks a bit better with OPEC cracking the taps a bit.

So why did oil have to go through $85 with a bullet before the chorus for $100 oil became loud? $100 oil by the end of the year is now conventional wisdom. The experts on CNBC are telling us to brace for it. We are given this information as if we can’t deduce for ourselves that the chance of $100 oil this year is much higher after the rapid rise into the high $80’s.

This herding behavior is sort of comical to watch. We saw it on Black Monday. I noticed it when ethanol stocks were riding high in the first half of 2006. I thought most were overvalued. In fact, I wrote my first article on overvalued ethanol stocks in June 2006 in response to an article the previous week that urged investors to embrace ethanol stocks. As ethanol stocks drifted lower and lower, the herd started to defect. But they didn’t defect until the slide was well underway. Why didn’t they defect early, based on the fundamentals? Because that’s not the way a herd behaves. (I grant that there are lots of exceptions). I sometimes wonder about the ratio of people doing fundamental analyses to those just parroting the work of others and getting paid for it.

Finally, ethanol stocks were down 60% and the remainder of the herd awoke from their slumber. Ethanol stocks became a poor investment, and the remaining holdouts finally said “Perhaps we should downgrade ethanol stocks from hold to sell.” It’s the same kind of herding behavior that pushed some tech stocks from $5 to $150 to $2 in the late 90’s.

Back to oil prices, there was a very funny column in yesterday’s Houston Chronicle that explains oil prices are so volatile:

A day in the life of an energy trader

Here are some excerpts (OK, extensive excerpts!) that capture the gist:

It was just another day on the trading desk at Flippum Energy Partners. I decided to drop by and see what the traders thought about crude oil prices, which closed above $89 a barrel Thursday, setting a record.

“The prices have consumers worried. What does it all mean?” I asked Lefty Dollarhyde, the head trader. “It means oil is going to $100 a barrel before Thanksgiving,” Lefty said. He spoke without taking his eyes off of the bank of computer screens in front of him. Their glow bathed him like a tanning bed. He hammered furiously on the keyboard.

“What can we do?” I asked feebly over the clacking.
“Go long oil. That’s what we’re doing. We’ve maxed our position.”
“If oil keeps rising, doesn’t that mean gasoline will soon follow?”
“Nah, we’re short gasoline. Nobody’s driving.”
“OK. If nobody’s driving, then won’t demand for oil eventually fall?”
Lefty’s fingers froze over the keys. He paused for a moment, then leaned back in his chair and called to another trader sitting in the next row.

“Hey, Slick! Check the stockpiles. Whatcha got?” Slick responded with a litany of numbers and place names, but he talked so fast I couldn’t write them down. Lefty returned to the screens. He picked up the phone and punched in a few numbers, cradling the receiver on his shoulder. If I understood his staccato instructions, he was placing an order for January puts, a bet that prices would fall. I was confused.

“Didn’t you just say oil was going to $100?” “Nah,” he said, the phone still against his ear. “Stockpiles are fat. It’s going down. It’s nuclear winter, baby. A major glut. We’re shorting crude big time.”

As Lefty typed furiously, I looked around and saw a group of traders gathered around a television across the room. They appeared to be ogling Maria Bartiromo. Suddenly, one of them turned away and shouted in our direction.

“Lefty! Turkey’s amassing troops at the Iraqi border. It looks like an invasion.”
Geopolitical scares Lefty unleashed a string of profanity so foul it singed the pages of my notebook from 2 feet away. He shook his head. “See? Geopolitical conflict. That’s what it’s all about. We got a new war. No oil’s getting through. Bundle up, baby, we’re all burning trash to stay warm this Christmas.”

He was on the phone again, going long on crude. As he put the receiver down, Herb Flippum, the firm’s founder, walked up. We chatted a few minutes as Lefty continued to stare at his computer screens. Flippum patted Lefty on the shoulder.

“Hey, Lefty, remember my neighbor who bought that huge SUV, the Ford Subdivision? He told me this morning he’s selling it and getting a Yaris.”

Flippum walked off shaking his head and chuckling to himself. Lefty was already on the phone. “That’s what makes us different. I factor anecdotal evidence into my positions. If a guy’s selling his SUV for an econo-bug, that tells me demand is falling off. Prices will hit $75 before they hit $100.”

He leaned back in his chair to catch his breath. He looked at me, as if he just realized I’d been sitting with him all morning. “So, what do you want to know?”
“Well, I was hoping to explain to my readers what’s happening with oil prices.”
“Oh,” he said with a shrug. “You just have to understand the markets.”

Don’t get me wrong. I obviously believe the underlying fundamentals strongly favor higher oil prices going forward. But I know what’s going to happen if the herd now spooks in the other direction. Monday is the last day for trading the November WTI contract. I think you will see a lot more volatility with the December contract, which becomes the front month contract on Tuesday.

I started this post almost a year ago, but forgot about it. But someone at The Oil Drum just said they wished they had more information on where our gasoline imports come from. No need to wonder, because the EIA publishes this information.

For 2007, our Top 10 importers of finished gasoline into the U.S. in thousand barrels were:

1. United Kingdom (Thousand Barrels) 25147
2. U.S. Virgin Islands (Thousand Barrels) 23590
3. France (Thousand Barrels) 11209
4. Canada (Thousand Barrels) 10605
5. Netherlands (Thousand Barrels) 10518
6. Norway (Thousand Barrels) 8406
7. Germany (Thousand Barrels) 8351
8. Russia (Thousand Barrels) 7387
9. Italy (Thousand Barrels) 7239
10. OPEC Countries (Thousand Barrels) 5516

Europeans demand more diesel. Since you get diesel and gasoline from the refining process, they get rid of their excess gasoline by sending it to the U.S. That helps keep gasoline prices in check. Take a look at diesel prices to see what gasoline prices might look like if not for the imports.

Source: U.S. Imports by Country of Origin

Following the theme of the previous post on where we get our gasoline imports, below is the list of our Top 10 sources of oil imports for 2007.

For 2007, our Top 10 importers of crude oil into the U.S. in million barrels were:

1. Canada 680.533 million barrels
2. Saudi Arabia 530.245
3. Mexico 514.48
4. Venezuela 419.841
5. Nigeria 394.856
6. Angola 181.215
7. Iraq 177.009
8. Algeria 161.755
9. Ecuador 72.138
10. Kuwait 64.306

Source: U.S. Crude Imports by Country of Origin

If you compare to the list for gasoline imports, Canada is the only country common to both lists (although “OPEC Countries” in total came in at #10). Any surprises on that list? I am surprised to see Ecuador in the Top 10. I would have thought Brazil would have come in higher than Ecuador (Brazil was 11th). For me, it was also noteworthy that Mexico and Saudia Arabia swapped places in 2007.

Total OPEC imports in 2007 were 1.97 billion barrels. Total non-OPEC imports were 1.69 billion barrels. Consider how dependent we are on oil, how oil prices have run up, and the resulting massive transfer of wealth out of the U.S. and into other countries.

This is a big reason that I am pessimistic about the U.S. economy recovering any time soon. A lot of discretionary income is disappearing from American pockets and ending up flowing into the hands of oil exporters. An obvious solution is to do more business with these oil producers, and offer them something of value that will pull more of that money back. (I am also basing many of my personal finance decisions based on the premise that this trend will continue).

Peak demand or not, oil prices show no signs of subsiding:

Oil Surges Above $140 to Record as Libya Warns of Output Cut

June 26 (Bloomberg) — Crude oil jumped above $140 a barrel to a record as Libya threatened to cut output, OPEC’s president said prices may reach $170 by the summer and the dollar weakened.

Libya may curb output because of a U.S. law that allows terror victims to seize assets of foreign governments as compensation. OPEC President Chakib Khelil said oil may surge on a European interest rate rise, France 24 reported. Oil, gold and copper climbed today as the dollar dropped because the Federal Reserve gave no signal of higher interest rates yesterday.

Crude oil for August delivery rose $5.09, or 3.8 percent, to $139.64 a barrel at 2:59 p.m. on the New York Mercantile Exchange, a record settlement price. Futures touched $140.39 today, surpassing the previous intraday record of $139.89 reached on June 16.

I think you’re seeing a clear flight from equities into commodities, said Kyle Cooper, an analyst at IAF Advisors in Houston.

Record oil prices helped send U.S. stocks tumbling. The Standard & Poor’s 500 Index plunged 38.82, or 2.9 percent, to 1,283.15 in New York. The Dow decreased 358.41, or 3 percent, to 11,453.42.

I am starting to think Matt Simmons could win his $5,000 bet that oil will average $200 in 2010. (I still think he’s likely to lose, but at one time I thought he was sure to lose).

The reason I am not a short-term trader is that you have that extra variable of market sentiment to take into account. Market sentiment can change in a hurry; it can shave the value of a stock by 50% in one trading session. In the longer-term, it is less of a factor and you can rely more on the fundamentals; i.e., there is less luck involved. So, I adopted a philosophy long ago that I would plan long-term, and ignore short-term trends. Those short-term moves can build wealth rapidly, but just as quickly destroy it. A lot of day-traders learned that lesson the hard way a few years ago.

In the oil markets, sentiment has changed dramatically since August, and this week’s inventory report saw another bullish shift. Prior to the report, oil had been drifting lower. But this week’s inventory report changed all of that. As I wrote on Wednesday, “I suspect crude will be off to the races again” and “this inventory report will provide a lot of fuel for the bulls for another week.” And in the past two sessions, oil has been sharply higher. If you were in the position to make an immediate trade following the release of Wednesday’s report, buying oil was a no-brainer for a short-term trader. But you have to be sitting in front of that terminal again next Wednesday, because a negative report will cause a fast sell-off.

In the wake of this week’s inventory report, you may have heard that crude set another record high yesterday:

Oil hits new record over $90

OPEC, which supplies about 40 percent of the world’s 84 million-barrel-a-day oil habit, agreed to boost production by 500,000 barrels in September, but the move did little to calm oil prices.

There had been speculation that the cartel would again boost production at its next meeting in December. One trader downplayed the notion that OPEC would increase production. “No one has any more to give us,” said Nauman Barakat, a trader at Macquarie Futures, the trading arm of Macquarie investment bank.

Of course following the statement that there is nothing left to give, the same trader contradicted himself:

While Saudi Arabia is generally believed to have the ability to pump about 2 million more barrels a day – the world’s only significant remaining spare production capacity – Barakat said they are keeping that in reserve in case of a real supply disruption.

I have long argued that we would find ourselves in this situation. In my first ever essay on Peak Lite, written a year and a half ago, I argued that we would find ourselves in a situation of higher and higher oil prices (which was the basis of my long-term strategy). The move up has been sharper than I expected, but has been exacerbated by speculators and a weakening dollar. However, I suspect these prices are here to stay. And if OPEC is really unable to boost production much more – as some suspect – then this is really just the tip of the iceberg. I wouldn’t bet that we will see $200 oil next year, but we could see $150 oil. If prices continue to ease higher, and OPEC doesn’t start boosting production significantly, the game will be over and oil will be on a run with no end in sight.

In the short-term, the direction of prices is going to be highly influenced by next week’s inventory report. Another large decline will probably sustain this bull market right past $100. However, if last week’s report was an anomaly (or a mistake, as OPIS suggested this week), then the rise will be arrested, and prices will await some other news for direction.

Back to OPIS, here was the blurb this week on the inventory report:

DOE statisticians have garnered a free pass for most of the year when it comes to petroleum numbers. Most of the criticism has been targeted at API or at the lofty demand quotes suggested by the newcomer on the block, the MasterCard SpendingPulse report.

But today, DOE is coming under some intense scrutiny by the physical traders and sellers that move refined products. That group believes that today’s surprising statistical bulletin is at best an anomaly, and at worst “bogus”. Many marketers also disagree with the notion that recent demand is exceeding supply. For at least the first ninety minutes after the data release, the paper markets regard the numbers as credible, with substantial across the board gains in petroleum.

Traders can’t quite come to grips with the 2-million bbl gasoline stock decrease, of which 1.2-million bbl occurred on the West Coast. The smaller 300,000 bbl decrease on the East Coast is attributable to the lower import number. Blendstock cargo arrivals have really tailed off in the last couple of weeks, but some weather delays were a culprit. Next week’s import number is predicted to go well back above 1-million b/d nationwide after this week’s low total of 838,000 b/d.

The distillate numbers were also questionable. Overall stocks fell by 1.8-million bbl and a drop of more than 3-million bbl in ULSD stocks was the major factor. That dip seems severe, even at harvest time, with some traders wondering whether a few exports might have been part of the mix. Distillate output also slumped, thanks mostly to a 193,000 b/d slide at the Gulf Coast.

That demonstrates the kind of hidden risk factors inherent in short-term trading. Was the report unusual? Yes. Could it have been an anomaly? Yes, we have seen those kinds of unusual moves before, only to see them undone the following week. And if it turns out that stocks are sharply up next week, I would take profits very quickly.

On the topic of speculators, I have just had an interesting exchange with a speculator at The Oil Drum. Like many of his tech stock predecessors, he attributes his success to his financial acumen and understanding, and yet at the same time displays a very faulty understanding of some of the “inside the fence” basics. But he can’t see this, because he is making money, and therefore he believes he is making shrewd decisions based on his special interpretation of news reports. More on that later, as the exchange provides a window into the thinking of a speculator.

2nd Update

Crude was down sharply following today’s release. The AP explains:

NEW YORK (AP) — Oil’s rise to $100 a barrel, which seemed a done deal as recently as two days ago, was dealt a severe blow Wednesday when the government reported an increase in supplies at the Nymex delivery terminal in Cushing, Okla., which is closely watched by traders as a benchmark of oil inventory tightness.

Overall crude supplies fell during the week ended Nov. 23 by 400,000 barrels, in line with the 500,000 barrel decrease analysts had expected. But that decline was overshadowed by a 600,000 barrel increase in inventories in Cushing, Okla. Cushing inventories are up 13.4 percent in two weeks.

Activity at the Cushing terminal is studied closely by oil traders because it is the physical delivery point for Nymex crude. Falling supplies there are seen as a symptom of a tight market, and those concerns ease when Cushing inventories rise.

At this point, I think the only chance oil has of reaching $100 this year is if OPEC comes out of the meeting next week and really spooks the market. Of course every time I say that, oil runs up $8. But I do expect it to drop into the $80’s pretty soon.

Updated following the release

Crude inventories fell less than expected, but mostly in line with expectations. Refinery utilization is picking back up. The one thing to note is that crude imports are now up over the same period last year, and with the reports of more OPEC shipments headed this way, this trend is likely to continue. This is the first time in a long while that I recall imports being up year over year.

Summary of Weekly Petroleum Data for the Week Ending November 23, 2007

Some excerpts:

U.S. crude oil refinery inputs averaged nearly 15.5 million barrels per day during the week ending November 23, up 573,000 barrels per day from the previous week’s average. Refineries operated at 89.4 percent of their operable capacity last week.

U.S. crude oil imports averaged nearly 10.4 million barrels per day last week, up 534,000 barrels per day from the previous week. Over the last four weeks, crude oil imports have averaged 10.1 million barrels per day, or 144,000 barrels per day more than averaged over the same four-week period last year.

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) dropped by 0.4 million barrels compared to the previous week. At 313.2 million barrels, U.S. crude oil inventories are in the upper half of the average range for this time of year. Total motor gasoline inventories increased by 1.4 million barrels last week, and are below the lower end of the average range.

Nothing earth-shattering in this report. I think now it’s a waiting game until OPEC’s meeting next week.

————————————

Here is the expectation for this week’s report:

NEW YORK (Reuters) – U.S. crude oil stocks probably fell last week on lower imports, a preliminary Reuters poll of nine industry analysts showed on Monday.

Analysts called for an average draw of 800,000 barrels for crude oil stocks, a 1.4 million barrel drop in distillates, which include heating oil and diesel fuel, and a 1.0 million barrel increase in gasoline stocks.

However, the estimates were all over the place:

Phil Flynn of Alaron Trading in Chicago, however, predicted that crude stocks rose on higher imports. Crude imports had fallen 667,000 barrels per day to 9.8 million bpd in the week to Nov. 16.

Imports last week could have fallen about 300,000 bpd to 9.5 million bpd, according to an estimate by Tim Evans, analyst at Citigroup Global Markets in New York.

But Peter Beutel, president of Cameron Hanover in New Canaan, Connecticut, estimated crude imports could have risen between 250,000 to 750,000 bpd last week.

Generally, you would expect that a draw this week should push prices back toward $100. However, there are other factors pulling crude in the other direction. Given that one of the major factors that pushed oil up has been a widely held belief that OPEC had nothing more to give (or couldn’t back up their promised 500,000 bpd increase), news like this should give traders pause in the short term:

OPEC oil exports, excluding Angola, will rise by 720,000 barrels per day (bpd) in the four weeks to December 8, according to Roy Mason of tanker tracker Oil Movements.

The increase will be the biggest this year, with most of the extra supply heading to Western refiners. Mason estimated that seaborne exports from the 11 OPEC countries would rise to 24.54 million bpd from 23.82 million bpd to November 10.

Based on these observations, I think it is very likely that a new all-liquids peak will be set in November. In fact the IEA’s new production numbers for October (the full report is now available for free) show a (preliminary) new record. The total liquids production rate in October was reported to be 86.43 million bpd (see Table 3). That is up almost 2 million bpd over August, and 300,000 bpd above the previous July 2006 record of 86.13 million bpd (thanks to Stuart Staniford for providing that number). The IEA doesn’t break out just crude + condensate, but with all-liquids in that neighborhood, C+C should be near record territory as well.

The other big question is the upcoming OPEC meeting. All year I have been in the (lonely) camp that OPEC is setting on some spare capacity. I think that question has been answered, although they were certainly slow to open the taps. The questions now are 1). How much more capacity do they have?; and 2). Can Saudi get the production increase that they reportedly desire? I think there is a lot of risk out there for short-term bulls. Supply appears to be increasing, there are projections that demand will soften at these prices, and OPEC is about to discuss another production increase.

Yesterday’s OPIS Report also had a blurb on this:

The list of market watchers predicting $100/bbl oil is growing, putting more pressure on OPEC to boost production at its Dec. 5 meeting. “The market is still not pricing in production increases. I would have thought today would have been a little more give-back,” said one trader who expects OPEC will boost supply.

Oil has certainly run up higher than I thought it would this year. However, the factors that helped with the price run-up are starting to shift. The long-term bullish factors remain. Short-term, I would heed the signs pointing to a more favorable supply/demand situation.

Update: Obama Says ‘No Way’

WASHINGTON – President Barack Obama on Friday rejected his transportation secretary’s suggestion that the administration consider taxing motorists based on how many miles they drive instead of how much gasoline they buy.

“It is not and will not be the policy of the Obama administration,” White House press secretary Robert Gibbs told reporters, when asked for the president’s thoughts about Transportation Secretary Ray LaHood’s suggestion, raised in an interview with The Associated Press a daily earlier.

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Regular readers know that I would be strongly in favor of increasing gasoline taxes in exchange for income tax credits. I think such an idea would be politically palatable, provided it is clearly communicated to everyone that 1). If they make efforts to conserve, this system would be better for them financially; and 2). Higher gasoline prices will push us in the direction of less energy dependence by encouraging conservation and alternatives. Those who love the idea of energy independence and hate the idea of sending our dollars to OPEC should love the idea of changing our tax system in this way.

But some have a different idea of changing the way we are taxed:

Transportation Secretary LaHood eyes taxing miles driven

WASHINGTON, D.C. — Transportation Secretary Ray LaHood says he wants to consider taxing motorists based on how many miles they drive rather than how much gasoline they burn – an idea that has angered drivers in some states where it has been proposed.

A tentative plan in Massachusetts to use GPS chips in vehicles to charge motorists by the mile has drawn complaints from drivers who say it’s an Orwellian intrusion by government into the lives of citizens. Other motorists say it eliminates an incentive to drive more fuel-efficient cars since gas guzzlers will be taxed at the same rate as fuel sippers.

Yeah, count me among those who would say that. While it doesn’t eliminate the incentive to drive fuel efficient cars – after all, there is still the matter of the gasoline bill itself – it does remove some of the incentive for choosing fuel efficiency. It also decreases the incentive for choosing alternatives to gasoline-powered vehicles. It seems inherently unfair that the person who drives the new Ford Fusion hybrid should pay the same road taxes as the person who drives a Hummer. I want to encourage people to drive the Fusion.

Besides a VMT tax, more tolls for highways and bridges and more government partnerships with business to finance transportation projects are other funding options, LaHood, one of two Republicans in President Barack Obama’s Cabinet, said in the interview Thursday.

“What I see this administration doing is this – thinking outside the box on how we fund our infrastructure in America,” he said.

I am all for outside the box thinking. But let’s be clear: There is a reason ideas are outside the box, and sometimes it’s because they are just really bad ideas.

LaHood said he firmly opposes raising the federal gasoline tax in the current recession.

Think for a second about what he is saying. He opposes raising the gasoline tax. Why? Well I presume he would say that he doesn’t want to increase people’s tax burden. OK, then why do you propose to change taxes on the basis of miles driven? Is it to raise less money? The same amount of money? No, you are trying to raise more money, because there have been shortfalls as people have reduced their consumption:

Among the reasons for the gap is a switch to more fuel-efficient cars and a decrease in driving that many transportation experts believe is related to the economic downturn. Electric cars and alternative-fuel vehicles that don’t use gasoline are expected to start penetrating the market in greater numbers.

Further, you are going to increase the costs of vehicles by requiring the GPS chips be installed. But I guess it could make it much easier to give speeding tickets. Imagine with a GPS system in your car just how easily it would be to catch speeders. Surely we can all embrace a system that could be utilized to send you a speeding ticket any time you drive 2 miles an hour over the speed limit.

Am I off base here? Someone convince me that this is a good idea. I think people are going to be much more resistant to this than what I have proposed.

Today the International Energy Agency (IEA) released their Oil Market Report. While the report is only available for subscribers for the first 2 weeks following the release, reports are already emerging on some of the contents:

Record oil prices put brake on demand growth – IEA

LONDON (Reuters) – The International Energy Agency on Tuesday sharply reduced its forecast for oil demand growth through the rest of 2007 and into 2008 saying oil’s march towards $100 was already slowing consumption.

The adviser to 26 industrialised consumer nations cut its prediction for fourth quarter demand growth by 570,000 barrels per day (bpd) and by 180,000 bpd in the first quarter of 2008.

That will cut the need for OPEC crude by up to 700,000 bpd in the fourth quarter of this year and up to 300,000 bpd in the first three months of next year, the Paris-based agency said in its monthly Oil Market Report.

“…the recent dramatic price rise is having a ’short-term’ shock effect, at the same time as consumers appear to be adapting behaviour to deal with steady annual price increases,” the report said.

The IEA had already made deep downward revisions to its demand forecast in its October report. In total, the IEA has slashed projected fourth quarter demand growth by nearly 900,000 bpd and cut growth in the first quarter by more than 200,000 bpd.

The major significance there is that the dire warnings of OECD inventories falling to critical levels were based on the IEA’s earlier forecasts. Those projections of critically low inventories (and those projections have been wrong all year long) have helped drive oil prices higher. I haven’t seen any reports of revisions to the IEA’s inventory projections, but the slashed demand should signicantly increase future projected inventory levels. In short, the emergency that many have projected in the near term will be delayed by this latest IEA report.