Congress Holds Yet Another Hearing on Oil Prices

With gasoline prices averaging $4.07 a gallon in the U.S., congress is holding yet another hearing on the cause of high oil prices. It’s the fortieth hearing on the topic so far this year, according to the New York Times. If holding 40 hearings without getting an answer isn’t enough to convince you that they won’t get an answer this time either, consider that the featured “expert” speaker at the hearing is Daniel Yergin, the Pulitzer Prize-winning author and the head of Cambridge Energy Research Associates. Yergin has gained fame by repeatedly making incorrect predictions about the price of oil: Three years ago, with oil at $50 a barrel, he predicted it would fall to $40 by 2007 - instead it rose to $57. One year ago, with oil at $70 a barrel, he said it would fall to $60 by the beginning of 2008 – instead it rose to $90.

So what will the Pulitzer prize-winner tell congress this time?

In an interview yesterday about the upcoming hearings, Yergin told reporters that the high price of oil was due to a shortage psychology in the financial markets. We can only hope that Senator Schumer, Chair of Congress’ Joint Economic Committee, will ask him whether this “shortage psychology” is being caused in whole or in part by the oil shortage.

(See the video that includes this story.)

Comments

[Bill Dempster]

I watched some of the recent House hearing on oil prices on CSPAN. Part of the testimony was that the current cost of oil production is in the $60 - $70 range, including profit on the order of 20%. This would be up by a factor of 3 to 4 from about a decade ago. Of course, there was no detailed breakdown of how those costs are arrived at as apportioned among cost of labor , cost of equipment, cost of energy, cost of transportation, etc. Compared to any genuine forensic investigation, I find all the congressional hearings to be just laughable for numerous reasons. One would think that with subpoena power, congress could find the procedures to conduct genuine investigations, but it is blatantly obvious that they never get anywhere near the real core issues by these hearings on any subject, including the price of oil.

Anyway, if the production cost of oil is ~$65, including profit, that means the futures contracts are now running about double. The excess over cost some might argue is "psychology", but more realistically would be ascribed to markets, perhaps to a market bubble, but also maybe not. Most of the testimony I saw indicated that production was able to keep up with demand, although it wasn't clear if there was any or how much excess production capacity. Plus the prospects of accelerated demand from developing nations must mean there isn't much excess capacity relative to the next few coming years. As we know, a similar price spike occurred with natural gas in the US a few years ago when excess production capacity approached zero, and the price of natural gas has still trended upward.

The witnesses I watched proposed a remedy to high oil (and gasoline) prices to be imposition of regulation that would severely restrict the ability to buy oil futures contracts unless the buyer was certified to accept delivery of the product, rather than only being a paper trader. The suggestion was that this would kill the speculative influence and bring prices down to near production costs within a few weeks and that gasoline prices would promptly reflect the oil price reductions.