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Home / Articles / News / Local News /  GAS UP
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GAS UP

$4 a gallon—and the end of oil isn’t far down the road.

June 11, 2008, 12:00 am

Don’t shoot the messenger, or better yet, don’t run over the petroleum marketer.

“We’re the same as you,” Baca says. “You have your car and you go and fill it up and it holds 14 gallons. We send our truck to the loading rack and buy 8,000 to 8,500 gallons at a time. Whatever price is posted when we get there, that’s what we pay.”

Baca gets out of bed at 6 am each morning, plugs in his coffee machine, then reads the newspaper cover-to-cover, highlighting and setting aside any article that could potentially have an impact on the gas market. He drives his three grandkids, who live with him, to school and then runs whatever small errand is on the way back to his home office. As bad as his long-term predictions are, Baca’s fairly proud of his ability to peg the prices at the pumps before he even leaves the house.

“I can come pretty close by just looking at the price of oil and then I look at the refinery levels and see what their price is,” Baca says. “I can come within 2 to 3 cents every time.” Contrary to popular myth, Baca says, gas stations in New Mexico don’t profit off the price spike—the windfalls belong to the oil corporations, who have largely quit the retail game in New Mexico. Eight years ago, Chevron and ExxonMobil sold off all their company-operated stores and ConocoPhillips is in the process of doing the same. Neither Shell nor Texaco operate stations in New Mexico. The retail side only produces a fraction of the profit a corporation can make from oil production and refining.

Oil is pushing $140 per barrel, more than triple the price five years ago. Baca says he started calling publicly for a change in national energy policy approximately eight years ago but even then the US was more than a decade behind the curve.

“The United States has missed the boat,” Baca says.  “We don’t have an energy policy that is of any significance, so therefore we pay the price. That’s about it. We had it too good for too long.

In the 1970s you could operate the United States on the oil we were pumping out of Texas and across the country if we had to. By the mid-1980s, we started having to buy more and more overseas and that should’ve set off some sort of warning signal, some sort of red flag that we needed to do something else. But we didn’t.”

In short, Americans can only blame themselves and their elected officials for the price of gas. New Mexicans are particularly responsible because the state’s two senators, Bingaman and Republican Pete Domenici, are the ranking members of the Senate Energy Committee. President Bush even held the signing ceremony for their Energy Policy Act of 2005 at Sandia National Laboratory. That bill, Baca says, was as light on energy reform as it was heavy with pork projects—particularly for companies connected to Texan politicians. (For the record, Sen. John McCain and Sen. Hillary Clinton both voted against the Act, while Sen. Barack Obama voted for it. Bingaman told an MIT audience in January that Congress had the problem wrong in 2005; it focused on cutting back on foreign oil, when the US needed to be cutting back on all oil, period.)

But if New Mexicans want someone other than themselves to bludgeon, look no further than commodity futures traders, Baca says. By Baca’s estimates, barrels of oil are overpriced by a good $30 to $40 because speculative investors are essentially aggravating the market. Whether the commodity is cotton, sugar or crude oil, futures traders push prices higher than the market value when a commodity is already on the increase, and drag the prices down when the commodity begins to slump.

Oil is not going to slump any time soon; unlike bananas, gasoline doesn’t grow in groves. Once the global supply is depleted, that’s it.

“I don’t want to say that it’s market manipulation, but there’s several bills in Congress to reign in the commodities people,” Baca says. “They’re becoming extremely rich while the rest of the country is going down the tubes.”
Rita Ryan, a commodity futures trader who lives in Rio Rancho, doesn’t disagree.

“For any other market I would say the cure for high prices is high prices and eventually it burns itself out, but not in this case,” Ryan says. “I’m glad they’re investigating the brokerage houses. I’d like everybody to be on the up and up, but that’s not life. There very well could be some serious manipulation that’s going on in this market and we just don’t know.”

But don’t blame her either; Ryan’s just the “Corn Lady,” trading mostly on agricultural futures. She’ll occasionally dabble in crude oil—it’s hard to resist a market so dynamic—but she watches oil prices closely because, at this stage, the price of every commodity, from seeds to pork bellies, hinges on how much it costs to ship it. In the case of her specialty, corn prices are currently trading at more than double what she’d usually expect in a bull market like this.
And she’s never seen anything like it. Ryan got her start as a runner for soybean futures at the Chicago Board of Trade, where transactions were conducted with colored paper and tickers.

“In the old days, I lived that trading floor experience,” Ryan says. “When there was a trade you knew what house it was coming from just because you were on the floor and you could see what was happening. In today’s markets, where everything is done electronically, all of this has become very anonymous. You’re sitting at your computer terminal and you’re watching the prices go up, up, up, up, up and then you see some selling come in and the prices go down, down, down and then up, up, up, up and then down, down, down, down, but you don’t know who’s hitting the market with all those buys and sells.”

And it used to be that when prices broke sharply in one direction or another, the reason for it—for example, a sudden shortage of cotton in China—would become obvious, if not immediately, then within a matter of weeks. It’s what commodity traders call the “fundamental,” the basic supply-and-demand driving the market.

In the case of crude oil, Ryan knows that countries like China and India are driving up the demand for fuel as their economies boom. But, like Baca, she doesn’t see how those fundamentals account for such large and wild swings on the oil market. On June 5, for example, Ryan was dumbstruck when, after a week of gradually decreasing prices, crude oil suddenly shot up $6 per barrel in an instant. She doesn’t expect to ever learn why.

“Before, there was always something to tie to the move; Maybe you didn’t see the fundamental right away, but you saw it later,” Ryan says. “So, here’s the big dilemma with the crude oil: A lot of it isn’t making sense. It’s not just the average person sitting at their house, going, ‘Wow, where did this $4 gasoline come from? I just paid $3.79 for gas and I’m considering that a bargain.’ Even professionals in the business don’t know what’s going on.”

There are many reasons why politicians like the phrase “energy independence.” It’s patriotic. It implies strength through self-reliance and, to the war-weary, it guarantees that America’s fuel needs will never again be a motive for the invasion of a sovereign nation.

Perhaps most of all, politicians use “energy independence” because it sounds a whole heck of a lot better than what it actually means: “Much, much, much more drilling at home.”

The US can’t wean itself off foreign oil without surrogating it with domestic oil. And domestic oil can’t be drilled without domestic risk, whether it’s the Arctic Wildlife Refuge in Alaska’s Anwar Province or the Galisteo Basin here in Santa Fe County.

The question, then, is what’s in it for New Mexico, a state that already produces more oil than it consumes? Some might suggest that the rules of economics that state where there is increased supply, lower prices follow, might bode well for local drivers.

But really, Baca says, any effect of an increase in local production would be slight and indiscernible.
“The problem with oil is that it’s traded on the commodities market,” Baca says. “I don’t care if you drill it in New Mexico and produce it in New Mexico and you sell it to a refinery here in New Mexico, it’s still the same price as if you would sell it in Houston or you were to ship it up to Utah.”

When Houston-based Tecton Energy held its public meetings about drilling in the Galisteo Basin last fall, Managing Partner Bill Dirks promised that whatever sweet crude it sucked from the ground would be refined locally into gasoline. That would potentially create jobs and help the economy, but Dirks stopped short of what could have been the deal-clincher for many skeptics. Had he promised relief at the gas pump, perhaps that would have won over at least a handful of converts. It also would have been a lie.

Instead, the anti-drilling community successfully lobbied Gov. Bill Richardson and the Santa Fe Board of County Commissioners to pass temporary moratoriums on drilling in the Galisteo Basin. Tecton announced it would hold no more public meetings and all press inquiries would be handled by a local public relations agency.
In his first public communication since January, Dirks confirms via e-mail that Tecton has indeed signed an oil contract with the Western Refining (formerly Giant) refinery in Farmington. Tecton, Dirks says, will have no control over gasoline sales. Furthermore, he adds, it doesn’t matter whether Tecton finds 100 barrels or 100 million barrels beneath the Galisteo Basin—New Mexico’s refineries have a fixed production capacity. This means there wouldn’t actually be an increase in local supply.

“No amount of locally refined Galisteo Basin crude would be able to dramatically lower prices at the pump in Santa Fe,” Dirks writes. “The price will just keep going up with rising global demand unless the US adds major new domestic supply.”

Dirks says there’s another awful truth. Although allowing Tecton to drill won’t reduce gas prices, denying the company the opportunity to drill does have the potential of raising gas prices. Perception is the driving force on the futures market and not-in-my-backyard activists fuel the “scarcity mentality,” he says.

“I do believe Santa Fe and other counties to some extent influence the commodity traders when imposing drilling moratoria,” Dirks says. “But you have to put that into context against other fear factors like Nigeria losing 2 million barrels a day capacity because of tribal conflicts, etc., which are much bigger news.”

And that doesn’t even touch on the obvious: The longer Santa Fe County postpones Tecton’s drilling, the more the company’s potential profit margin grows. Oil prices maybe rising, but the cost of drilling remains unchanged.

It’s May 23, the thick of silly season in politics, and Jon Elliott, host of a late-night Air America talk show, has opened the phone lines. It’s free topic Friday and every issue is on the table.

The caller on the line is an articulate, youngish-sounding man who wants to talk about gas prices and he seems to have a grasp, if not on the nuances of congressional politics, then at least the big names. And the big names he drops are: Senate Majority Leader Harry Read, D-Nev., and international pop star Shakira.

As the caller explains to Elliott, Shakira visited Capitol Hill the day before to lobby for the Education for All Act, a bill to provide funding for school construction in the developing world. The caller claims that, in between press conferences, Reid and Shakira stuck a backroom deal: She would become a covert “oil ambassador” to South America, using her powerful connections (she’s engaged to the son of the former Argentinean president) to negotiate oil aid for the US. In return, Reid would ensure passage of the bill and, as a bonus, arrange for her appointment as secretary of state in a Barack Obama administration.

The caller said he read it on the Internet. Elliott hung up on him.

Craig O’Hare, special assistant for renewable energy in the New Mexico Energy, Minerals and Natural Resources Department, happens to be an early Shakira fan—he had her third album, Pies Descalzos, well before she made it big.
Nonetheless, O’Hare didn’t mention Shakira during his testimony to the New Mexico Legislature’s Interim Committee on Radioactive and Hazardous Materials at the end of May. But gasoline prices were a central theme of his PowerPoint presentation, “The Rapidly Changing Global Energy Landscape—Implications for New Mexico.”

O’Hare told the committee that the price of a barrel of oil could hit $150 this summer and $200 by next year, which would translate into $7-per-gallon prices at the pump. While the commodities traders certainly play a role, O’Hare points to the concept of “peak oil” as the root of the problem.

In short, he explains, peak oil production is the date when half of the world’s oil supply has been consumed. The US reached peak domestic oil production in the 1970s, but the global point has either already been breached or is on the verge.

Newly tapped oil fields won’t make a dent in the problem, O’Hare says, pointing out that Brazil’s newly discovered 8-billion-barrel oil field will only fuel the planet for four months. If the US were to open drilling in the Arctic National Wildlife Refuge in Alaska, the product would only satisfy US consumption for a year.

So, if there’s nothing that can be done on the supply end, it only makes sense to look at the demand. And that’s where O’Hare pointed legislators: Early evidence of driving habits indicate that $4 is the breaking point for New Mexicans. In 2008, they’re driving less, riding buses more and the car dealerships can’t stock hybrid cars fast enough.
“We’re into a complete paradigm shift,” state Rep. Peter Wirth, D-Santa Fe, who sits on the Interim Committee, says. “The days of driving large, inefficient vehicles are coming to an end.”

This election cycle, politicians have been careful to measure their talking points about gas prices, even though it will likely be one of the central issues of debate leading up to November. Short-term solutions are contentious, as illustrated by how quickly the debate over a national gas tax holiday fizzled once economists pointed out that such a move would provide, at best, a one-tank-of-gas savings. In DC, Bingaman successfully led the effort to stop the president’s filling of the nation’s strategic oil reserve. While that means the US government won’t be driving up demand itself any longer, Congress has yet to convince the president to release any of the oil into the market.
Even if he did, the impact would be minimal and short-lived: The 701 million barrels in the 97 percent full emergency supply would barely sustain the US for a month.

It isn’t unreasonable to expect gas prices to top $5 or even $6 by the time the New Mexico Legislature meets again in January. Lawmakers already anticipate they’ll be under significant pressure to do something about it.

By then Wirth will be a state senator and he’s fully expecting two proposals to emerge at the forefront of debate.
From his Republican counterparts, he expects a move to reduce New Mexico’s 17-cent gas tax by using New Mexico’s windfall profits from its natural gas severance tax. That proposal, however, suffered a major blow when Rep. Dan Foley, R-Chavez, the legislator who championed it in 2007, was defeated in his reelection bid on June 3.

In 2005, the Legislature passed a tax incentive program for New Mexicans who buy hybrid vehicles. That’s when Wirth picked up his Toyota Prius with a $750 discount, not including a similar federal tax incentive package. The program is set to expire in 2009; Wirth says it needs to be renewed in order to prevent a car-market crisis in which everyone will want to sell their cars, but no one will want to buy them.

 “I think we have an obligation to use some of this revenue to assist particularly lower income and middle income folks in making these transitions to more efficient vehicles,” Wirth says.

Wirth isn’t the only politician who rolls the roads in a hybrid: Bingaman, US Rep. Tom Udall, D-NM, and congressional Democratic nominee Ben Ray Lujan all drive hybrids they bought under the state’s incentive program. In a sense, the hybrid is becoming the driveway equivalent of the American flag lapel pin: You can’t run for office without one. At least not as a Democrat.

And yet, despite all the warnings against it, there are still those advocating that people drive more, just for the sake of driving. They aren’t motivated by profit, but by hatred for former Vice President Al Gore.

The Grassfire.org Alliance, a conservative nonprofit 501(c)4 organization, has dubbed June 12 “Carbon Belch Day” and announced its plans to release 100 million pounds of CO2 into the air. The group hopes to prove that, contrary to Gore’s claims in An Inconvenient Truth, climate change has nothing to do with one’s carbon footprint.

At Carbonbelchday.com, Grassfire.org members are asked to pledge to gratuitously expend as much as energy as possible, including driving needless miles. When contacted by e-mail about the implication the holiday may have on gasoline prices, Communications Director Ron De Jong responded with what can only be described as a nervous electronic titter.

“Don’t overthink Carbon Belch Day,” he writes. “We are simply making a humorous statement that partaking of the normal activities of our lives—turning on lights, driving a car, making a left turn in a car, smoking a cigar, cutting a lawn, etc., does not endanger the planet or hasten its destruction.”

And New Mexico, because of Grassfire.org’s strong stance on immigration, is part of the group’s base.
“We’ve had a good showing from New Mexico, I can’t quote the exact amount of CO2 set to be released from its citizens, but we had more than 3,300 folks sign our petition opposing the coming carbon tax from your great state,” De Jon says.

Carbon belchers aside, Gore’s PowerPoint presentation really isn’t half as influential as the standard corner gas station sign. Fuel prices alone are the reason why the waiting list for a Prius at Beaver Toyota is three months long.
 “All the cars that are real economical, like the Corolla, the Prius and the Yaris, have been doing very well,” Toyota salesman Andy Palmer says. “A couple of months ago, we had 41 Priuses on the ground and we sold them all. Then gas prices jumped again and, because of the jump, people started ordering them. We have 31 orders and that means most of those of people have never even driven one, but they’ve committed to it and given us a $500 deposit (which is refundable).”

Looking more like an NFL coach than a car salesman, Palmer stands in the best spot to launch a pitch: between the dealership’s front door and the first empty parking spot. The job is more complicated these days: Palmer hasn’t had a Prius on the lot to show customers for weeks. Somebody even booked the dealership’s lone rental Prius for a full month.  All the cars on the lot display stickers explaining their gas mileage, but even those figures are obsolete: The annual estimated fuel costs are based on  $2.80-per-gallon assumptions. Regardless, driving a Prius cuts the cost of gas in half.

A customer rolls up on a moped-class scooter. As the rider lifts his helmet, Palmer shoots off the only appropriate sales pitch. “With the gas mileage you get on that thing,” he says, “you really don’t need to buy a car.”

When a car salesman is talking people out of a new set of wheels, it’s officially time to stop idling.  SFR

 

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