$54.85, $54.86, $54.87. You’re grinding your teeth.
$55.35, $55.36. Your stomach is tied up in knots.
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$57.40, $57.41. You’re about to lose your temper.
$58.98. $58.99, click, it’s over. You’ve filled your car’s gas tank for the week. As you sign the credit card bill, hands trembling with anger, you realize you can barely afford that antibiotic you need for that nasty cough. What you pay for gas is even digging into the money you’ve budgeted for your heating bill, a cost that is rising as fast as your frustration. You’re enraged. All you keep thinking is, Damn that mother…
But damn who? Abdallah Salem el-Badri, the secretary general of OPEC? Rex Tillerson, the CEO of Exxon Mobil? George W. Bush? Nope.
Try your legislators and the CEO of Morgan Stanley.
Crude Cost
Long Island uses more oil and oil products than any other region in the Northeast and we pay dearly for it.
How did this happen? To understand how—and why—you have to look deep.
Oil is pumped up from way down under the Earth’s surface. The precious liquid, created over millions of years from the decay and compression of prehistoric carbon matter such as plants, is a close second to water in its importance to humans. From gasoline to kerosene or even petroleum jelly, every petroleum product used by society starts out this way, as crude oil that is taken out of the ground and readied for production.
Crude oil is the raw product that makes most of the world go round. Crude can be dark brown, tea-colored, or even green. Each has different qualities, but among the most valuable is the price: Today, each barrel of crude goes for around over $100 per barrel; 10 years ago, the price was around $15.
It is found around the globe, from the frozen, vast wastelands of Siberia to the tropical climates of Venezuela, the world’s emerging power broker in the oil industry.
New York State’s oil supply comes primarily from Venezuela, some Caribbean nations, Mexico and Canada. Some of its oil is also received from Gulf Coast reserves. As is typical in New York, everything is big: New York Harbor plays host to the largest oil-holding capacity in the Northeast: Up to 40 million barrels of oil can be stored there.
Constant challenges—most unexpected, unpredictable and seemingly unrelated—plague the oil industry and inflate the price of crude. The obvious, of course, is demand—you know, the reason gas prices go up on a holiday weekend, when everyone’s driving. Even on non-holiday weekends, this country’s oil appetite is formidable: The U.S. makes up 5 percent of the world’s population, but consumes 25 percent of the oil.
The next challenge hinges on how the world perceives us, a perception that often sends financial shock waves around the globe. When the U.S. dollar weakens against other currencies such as the euro or the yen, as it has been doing for the last several years, the price of crude will naturally be higher—because crude oil is priced per barrel in U.S. dollars. On April 9, the euro traded at 1.57—one and a half times less than the favored currency of most European nations. Crude prices per barrel also fluctuate wildly across the international markets. For example, on April 8, the price of a barrel of crude was $108.76. On April 9, it closed at $112.
This is an inflated cry from where many believe we should be.
“A barrel of crude should cost $65 to $70 per barrel—no more,” says Kevin Rooney, CEO of the Oil Heat Institute of Long Island, an organization of oil wholesalers and retailers. “It is crazy.”
At the cornerstone of the Island’s—and the nation’s—current financial state is the devaluation of the dollar. With imports far outweighing exports, a growing deficit, expensive war operations and the collapse of the subprime market, paying with an American dollar almost anywhere outside the country has become a handicap. So, affixing the cost of a barrel of oil to the U.S. dollar is, in essence, a losing proposition.
But that is not all that can affect the cost of crude. Analysts in the oil industry will routinely offer other reasons for high crude prices.
For example, Hurricanes Katrina and Rita in 2005 completely shut down oil refining operations in the Gulf of Mexico. That shutdown drove prices up, as oil companies had to import product to fulfill their deliveries. Even though the devastation caused by the powerful storms—days and months later, television news shows continued airing images of huge oil rigs disabled and floating ashore—oil companies were surprised at the public’s reaction.
“It was an eye-opener for big oil,” says Rayola Dougher, a senior economic analyst for the American Petroleum Institute (API). “They did not know they had a PR problem.”
For instance, on April 8, as a reaction to a strong diesel demand and a fire that closed a Finland refinery, home heating oil costs rose for the month of May.
And there it goes: Just as the knee bone is connected to the shin bone, the Finland refinery fire is connected to the financial futures market.
There’s Gold In That Oil
Don’t bother shaking your fist at the gas pump. The truth is, oil prices are affected by lots of things. And before you get that sheik picture in your head again, substitute it with a picture of an American in an Armani suit, working on Wall Street and making boatloads of cash every year.
“Speculators are the No. 1 reason for ridiculous oil prices,” says Matthew Cordaro, Ph.D., the director of the Center for Management Analysis at the College of Management at C.W. Post Campus of Long Island University. “There is enough supply out there to meet demand.”
There are some companies that enjoy undeniable name recognition and need very little introduction. Investment bank Morgan Stanley is certainly one. Since 1935, it has been a fixture on Wall Street. It has made billions of dollars for its clients. And, like many solid companies, it is diverse. To bolster its trading business, Morgan Stanley branched into other areas—including oil.
Aside from being one of the leading financial institutions that trades oil futures, Morgan Stanley is the largest U.S. investment bank that is in the physical oil business. Although the company would not disclose its assets in the physical oil market, a quick check reveals how deep they are in it after all.
“Morgan Stanley holds title to more oil coming into New York Harbor than any other company, period,” says the Oil Heat Institute’s Rooney. “That includes the big names in the oil business.”
One company owned by Morgan Stanley is TransMontaigne, a player in the business that has storage capacity of up to 6 million barrels, owns terminals, tankers, trucks, ships and a pipeline. In 2006, Morgan Stanley Capital Group, Inc. purchased all of the issued and outstanding capital stock of TransMontaigne.
According to a 2007 ranking by Risk magazine, Morgan Stanley is the largest trader of oil derivatives on the market. Or, simply put, anything that has to do with oil that is traded is under their purview.
Commodities trading is done on the New York Mercantile Exchange (NYMEX), as opposed to, say, Google being traded on the New York Stock Exchange. In commodities, the game is speculation of where something—like gold, silver or oil—will be, price-wise.
Sean Cota, president of Cota & Cota, Inc. in Vermont and president of the New England Fuel Institute, believes that futures trading is responsible for a lot of the overcharging of crude prices—about $1.25 more per barrel. Cota has testified before Senate and Congressional committees about the role speculators play in driving up the price of commodities, especially oil. At the heart of his debate is what has become known as the Enron Loophole.
In 2000, before the mighty fall of the energy giant, Enron somehow got legislation passed in Washington, D.C., that removed almost all federal oversight of trading of the energy markets.
“Enron isn’t even around anymore and we’re still dealing with [the loophole],” says Cota, whose passion about the subject is obvious. “Now, though, there is a lot more money behind it and people have gotten smarter about using it.”
He points the finger at the U.S. Commodity Futures Trading Commission (CFTC), too, and says that the commission does not do nearly enough to protect investors and regulate futures trading, which is no game for the faint of heart, either. It is “a game of chicken,” says Cota, one that can involve high risk but produce great rewards. One of the biggest issues that critics have with the current trading guidelines involves the very low margins that are necessary to become a player.
When buying equities, such as company stock, a buyer must have at least 50 percent of the purchase price to buy on margin. But when buying commodities, a buyer can make a purchase on as little as 5 percent. The low margin versus the outstanding monies borrowed has a big impact on sale price—and these low margin requirements can also be blamed on the Enron Loophole.
But not all the observers agree that speculative trading drives up the price.
The API’s Dougher does not see eye to eye with those who point the finger at speculators and commodities traders. “There has been a lot of controversy over this issue,” she says. “But much research cannot find the impact of speculators. The market is driven by supply and demand.”
Although Cota is highly critical of the futures market, he says he would rather see an investment bank in the physical oil business instead of trading futures.
Economics 101: Taxation Without Explanation And Big Demand
So, it’s easy to be angry with Big Oil, that elite club of large companies like ExxonMobil and Shell, and the financial conjurers who have a hand in determining the price of oil. But the map back to them can be difficult to follow.
After crude leaves the drilling location, it’s bound for the refinery, and then it becomes the oil that heats homes, gasoline that powers cars, and just about every other product that fuels Western Civilization. These are the distillates of oil.
The cost of a barrel of crude oil determines about 68 percent of the price you pay for a gallon of gas by the time the crude finds its way to the pump. On top of that, there are the taxes.
One’s immediate anger is mitigated by this fact: On Long Island, we pay as much as 64 cents per gallon at the pump in gasoline taxes, and nearly 66 cents per gallon in diesel and heating oil taxes.
That’s per gallon.
Dougher points out that we are on the high side statewide, too. New York ranks third highest in the nation in per-gallon oil taxes, next to California and Connecticut, respectively. New York is even higher than Hawaii—where drivers are now plunking down $4.09 for a gallon of gas. But a quick jump to New Jersey would net as little as 33 cents per gallon in taxes.
“New Yorkers certainly have something to be angry about there,” says Dougher.
Then there is the demand conundrum. Whether you believe there is enough supply in the world is one thing. But it is hard to argue the fact that demand has increased.
Take the influence of the exploding economies of China and other countries on the supply of crude oil worldwide. Currently, the world uses 87 million barrels of oil each day (compared to the United States’ 21 million barrels per day and China’s 7 million barrels). China and India are looking to produce oil themselves, rather than continue importing it.
The game never ends, and it keeps hitting home, harder. LI, with its exorbitant property taxes, the collapse of the local housing industry and a lagging job market, is being hit hard by the rising oil costs. One reason: On the Island, “Fifty to 60 percent of us heat our homes with oil,” notes Cordaro. So we really feel the pinch of high oil prices.
One thing is certain. The flagging U.S. economy is playing havoc worldwide, with crushing blows landing right here at home. With a devaluing dollar and lack of hard oversight on trading, it looks like things will remain the same for some time. In the end, there is no solitary reason we are in this position. A lot of it is up to us to become more efficient and play the energy game smarter. If the demand goes down, the price goes down.
Until then, feel free to curse when you pay up at the pump, or when the oil man comes calling.
Four Questions About Oil
There are so many questions surrounding the price of oil, so we decided to speak with four of L.I.’s experts on our oil consumption habits, the fluctuating prices—and what we can do about it.
Question 1: Are Long Islanders “oil hogs?” Does our infrastructure, such as a lack of solid mass transit throughout the region, play a bigger part than our needs or wants?
Dorian Dale, energy director, town of Babylon
More like “oil pigs.” SUVs have become basic equipment, more about appearance than functionality, transforming the most diminutive truck into a three-ton, 200-horse powerhouse, thanks to section 179 of the tax code. They should be called FUVs.
Alas, we are not densely packed enough to support a metro-caliber mass transit system. Heck, we can’t even get congestion pricing for Manhattan through our State Legislature. You could say we’re more like “pigheaded.”
Gordian Raacke, executive director, Renewable Energy LI
Unfortunately we are oil hogs, gas guzzlers, natural gas gobblers, and electricity exuberants. We use more energy per dollar of GDP than most other industrialized nations. The lack of adequate and attractive public transportation plays a big role, and so does the fact that we build our cars, trucks, appliances, lighting and buildings to energy-efficiency standards that are much lower than what today’s technology would allow.
Question 2: Let’s put Green initiatives aside for this Q&A. Suppose we have to deal with oil because that is all we have. How can an average homeowner or business begin to help the situation?
DD: The premise that oil has peaked is predicated upon assumptions that may well be belied by future developments, as have previous citations of oil depletion. In Babylon, we continually examine the prospects of various alternative fuel apps. One major stumbling block is and will continue to be infrastructure. How many hydrogen fill units in our most proactive state, California, which drew up a hydrogen roadmap back in the ’90s? Go to Google for the latest answer (probably not more than a handful). The hydrocarbon infrastructure is, and will remain, supreme for decades. With oil headed north of $100 you can bet that all sorts of untapped sources will be revealed as enhanced recovery techniques for so-called exhausted fields are revisited. We’ll just be paying through our piggy snouts.
With cost burdens busting our pocket books, we are going to go with all sorts of efficiencies that are here today to be had. In Babylon, we’re about to roll out a residential retrofit program that will self-finance without loading up the strapped homeowner with added debt. Two months ago my wife got a Prius, which more than doubles her gas mileage. So call me a “latte-drinking, Prius-driving, Birkenstock- wearing, trust-fund baby,” if you must. But the only trust I got from my father was the principle, “Trust people, but don’t forget to count.” Count all the ways you can cut back today; they’re all around you, especially in the house you live in and the car you are driving, and the drive-thrus you shouldn’t be idling at. Waste not, want not.
GR: Homeowners can dramatically reduce energy consumption for heating, cooling, lighting and appliances by getting a professional home-energy audit and investing in making the home more energy efficient. This may mean installing better insulation, reducing air infiltration, using highly energy-efficient appliances, and of course adding solar or other renewable energy systems. Businesses can use the same approach. These investments pay for themselves in a few years, and there are utility rebates and tax credits available.
Kevin Rooney, CEO, Oil Heat Institute of L.I.
The simple answer is that the average person can’t do anything about the cost of energy, but they can do something about the amount of energy they use. Loosely defined, conservation means doing or producing as much or more with less energy input. Over the past 20 years, the average LI homeowner using oil heat has reduced their annual consumption by some 350 gallons, or 28 percent, as a result of conservation, i.e., installing new boilers, furnaces, water heaters, thermostats, etc. This not only has a positive impact on average household energy expenditures, but also a concomitant positive impact on total emissions and air quality. But, in the area of conservation, there is still a great deal more in savings which could be achieved, particularly with the right financial incentives. Which makes it nothing short of mind-boggling that then-Gov. Spitzer vetoed legislation last year which would have extended the $500 NYS Income Tax Credit for installing a new “Energy Star”-rated residential heating system, and the current governor has seen fit to not include it in the current budget. They [elected officials] all talk a good game, but are rarely willing to put their money where their mouth is on issues such as energy conservation.
Question 3: Is there anything a citizen can do to complain about the oil pricing? A letter campaign to elected officials complaining about the speculative market, for example?
Matthew Cordaro, Ph. D., C.W. Post
Citizens should write their congressman about the need to overhaul speculative oil markets by, for example, increasing the margin cost for oil future contracts so that there would be more at stake for speculators in manipulating oil prices.
KR: While our U.S. senators and LI members of Congress have been very supportive of the industry effort to curb unregulated speculation on energy commodities markets, much more needs to be done. Giving the CFTC real power to regulate foreign boards of trade using U.S.-based electronic trading platforms (such as the Intercontinental Exchange) would be a start; dramatically increasing the margin requirements on oil and gas commodity contracts for non-industry participants, i.e., hedge funds, investment banks, etc., would also help to reduce the incredible level of short-term, profit-driven speculation which has driven crude prices into the stratosphere. Elected officials need to know that their constituents, who are our customers, are downright angry at the price they are paying for all energy products they use, and all other goods tied to higher energy costs. My sense is that they want their elected officials to reflect their sense of outrage that a combination of utterly incompetent fiscal and monetary policies on the part of the Bush administration, coupled with uncontrolled speculation, market manipulation and unconscionable profiteering on the financial and commodities markets by the “Bigs on Wall Street,” is totally unacceptable. The financial markets are in trouble, the stock market is down, the mortgage fiasco seems to be getting worse, the Fed is bailing out major investment banks (and yet Wall Street bonuses handed out earlier this year totaled a record $52 billion), all the while regular folks are having a hard time paying their basic bills and some are losing their houses. What is wrong with this picture? Where’s the goddamned outrage from the politicians? If they don’t realize that their constituents are frustrated and royally pissed off, then they’re oblivious or tonedeaf. Should people contact them by mail and phone? Yes, every day!
GR: They can, but judging from past experience, I would focus my energies on pushing for more and better energy-efficiency assistance and legislation or codes from all levels of government.
Question 4: Is the way this business is conducted fair to the consumer?
DD: Any time my 11-year-old twins used to summon up the “It’s not fair,” protest I’d reply, “Life isn’t fair.” That protest is a thing of the past. Advice to consumers: Look in the mirror, get a reality check, and don’t forget to count. God helps those who help themselves.
GG: No, it is not. Just one example: The average consumer does not even get clear market price signals in the electricity sector. When we use electricity, we don’t know what our utility company pays for that kilowatt hour. It may be as little as a few cents or much, much more during peak times in the summer. Absent such price signals, it is difficult for the average consumer to make economically sound decisions.
MC: The way business is now conducted is really not fair to customers because it sidesteps the basic supply-and-demand concept of markets. Unfortunately, if the existing speculative situation persists, oil prices will continue to rise, and when the bubble bursts, as it has done in the subprime mess, the fallout from the significant losses speculators should see will also have a negative impact on the customer. On this course, everything is heading toward a no-win situation for consumers.
KR: If energy prices were based in large part on physical supply-and-demand considerations, then the price issue could be addressed by either increasing the available supply through exploration and development, more refineries, power plants, alternate fuels, etc., or decreasing consumption through conservation, improved efficiencies, alternate technologies, higher prices, etc., or simply a combination of both approaches. In the long run, we might all have to pay more for the energy we use, but at least there would be some rationale behind the cost increases that reasonable people could accept. But when non-energy entities are “gaming the system” in the commodities markets and making a financial killing at the expense of the American consumer and the U.S. economy, no, that isn’t fair, and that’s why it has to be stopped. Don’t get me wrong: I’m not some raving Socialist who wants government to totally control the operation of free markets; but, as Teddy Roosevelt often observed in his battle to break up the trusts, unfettered, unbridled and uncontrolled capitalism invariably inures to the benefit of the investors at the expense of the public. Energy commodities markets currently operate in a world totally divorced from the physical realities of supply and demand; that, quite simply, has got to end.
