Is It News When the President Makes Untrue Statements (i.e. lies)?

We will know the answer to that one soon. President Bush said in his radio address today said that the oil in the offshore protected areas is equal to 10 years of current production.

No, that is not true. The Energy Information Agency, the government agency responsible for making estimates of oil reserves, calculates that there are approximately 8 billion of barrels of oil in the protected areas. Current production is approximately 3 billion barrels a year. That implies that the oil in the offshore protected areas is equal to less than 3 years of annual production, not ten years. That means that President Bush is off by a factor of more than three.

It actually is somewhat worse. U.S. production is only equal to 40 percent of consumption. Consumption is the more relevant factor in determining the importance of this oil. The oil in offshore protected areas is equal to only a bit more than a year of domestic consumption.

In other words, President Bush was completely misrepresenting the importance of oil in offshore protected areas. Why isn’t this major news? Do the NYT, Washington Post, NPR, and Lehrer News Hour believe that President Bush lies so often that it can’t be treated as news?

Links
Annual Energy Outlook 2007 with Projections to 2030
President’s Radio Address

Here is the full text of President Bush’s speech.

THE PRESIDENT: Good morning. Throughout the past week, Americans anxiously watched weather conditions in the Gulf Coast region. The people of Alabama, Louisiana, Mississippi, and Texas were well prepared for Hurricane Gustav — and the coordination between these States and the Federal government was strong.

Now, we’re focusing on the relief effort. Gustav caused damage to infrastructure, forced tens of thousands into shelters, and left more than a million people without power. The Federal government is working with State and local officials to repair this damage, to help residents get back home, and to return life in the region to normal as soon as possible.

While these relief efforts have been in progress, we’ve also been preparing for the arrival of storms like Hanna, Ike, and others that may follow. My Administration will continue to provide assistance to those affected by violent weather throughout this hurricane season. And we will continue to work diligently to coordinate our emergency response efforts with State and local governments.

While the Federal government continues this vital work, there are also important responsibilities awaiting members of Congress as they return to Washington. In just a few weeks, members will be back out on the campaign trail, emphasizing the differences between the two parties. But before they leave Washington, they should show that they can work together on bipartisan measures to help strengthen America’s economy: measures like approving the Colombia and Korean free trade agreements, extending relief from the Alternative Minimum Tax, and addressing one of the American people’s biggest concerns — the high price of gasoline.

The fundamental reason for high gasoline prices is that the supply of oil is not keeping pace with demand. By increasing supply through the use of our domestic resources, we can begin reducing the pressure on prices. So in June, I called on Congress to open up more of America’s domestic oil resources for exploration — including offshore exploration of the Outer Continental Shelf. The American people overwhelmingly support this proposal. But throughout the summer, the leaders of the Democratic Congress refused to allow it to come to a vote.

At the very least, Congress should take action on three common-sense energy solutions that enjoy bipartisan support.

First, Congress should open the way for environmentally responsible offshore exploration on the Outer Continental Shelf. Experts believe that these areas could eventually produce nearly 10 years’ worth of America’s current annual oil production. This exploration is now banned by a provision included in the annual interior appropriations bill. Congress should remove this restriction immediately.

Second, Congress should expand access to oil shale — a domestic resource that could produce the equivalent of more than a century’s worth of imports at current levels. Last year, however, Democratic leaders slipped a provision blocking oil shale leasing on Federal lands into an omnibus spending bill. They should lift that ban immediately.

Third, Congress should extend renewable power tax credits to spur the development of alternative sources of energy like wind and solar. They should make these credits long term and expand them to cover all forms of low-emission power generation — including nuclear power. In the long run, increasing production of low-carbon electricity can help us reduce our addiction to oil by allowing us to power a new generation of plug-in hybrid and hydrogen-powered vehicles.

This Congress has earned a reputation as one of the least productive in history. Throughout this year, Democratic leaders have ignored the public’s demand for relief from high energy prices. This is their final chance to take action before the November elections. If members of Congress do not support the American people at the gas pump, then they should not expect the American people to support them at the ballot box.

Thank you for listening.

The kingdom also promise to expand production capacity, noting that it expects to achieve 12.5 million barrels per day next year and could add an additional 2.5 million barrels – if needed – with a program of massively expensive and technically advanced system improvements.

Despite the promises from Saudi Arabia, that increase in production will have no real effect on the fundamental supply of oil available to market. This week has seen attacks on the oil production infrastructure in Nigeria that has cost the African nation its position as the top oil producer in Africa. It is now #2, after Angola.

The fires resulting from oil production in the Niger River Delta can be seen from space. If you click the photo you can see other flare sites throughout the Delta.

Nigeria now pumps less than 1.5 million barrels a day, its lowest level in 25 years, rather than the 2.5m b/d it has the ability to produce, according to officials at the meeting in Jeddah. A long history of problems arising from the corruption in the Nigerian government and massive pollution. Unlike drilling in most of the Persian Gulf region where the oil fields are not replacing viable argicultural land or displacing people, the drilling in the Niger Delta is taking place on top of an ecosystem thats been home to tribal people for longer hundreds of generations.

The Niger Delta contains the 3rd largest contiguous mangrove forest in the world. Once rich in biodivesity and teeming with marine life, the area is now being rapidly degraded by petroleum production. The entire region is engulfed in what might be called a Petroleum War – a war fueled by the uncontrolled development by multinational oil conglomerates and their cronies and mafia-style henchmen in government.

Check out Marcus Bennasson’s photos of Oil spills in Niger Delta. Since the discovery of oil in Nigera over 50 years ago, the amount of oil spilled has represented the equivalent of one Exxon Valdez disaster per year.

While considerable media attention has focused on Florida Governor Charlie Crist’s reversal of his position on the issue, nearly every other coastal governor remains opposed.

“Coastal governors know that offshore drilling is bad news for the environment and for tourism,” said Mike Daulton, Director of Conservation Policy for the National Audubon Society. “It makes no sense for states to put our important beaches, fisheries and coastal habitats and multi-billion dollar tourism economies at such risk for so little gain.”

The statements from the coastal governors follow.

California Governor Arnold Schwarzenegger (R): “California’s coastline is an international treasure. I do not support lifting this moratorium on new drilling off our coast.” US News and World Report

Washington Governor Christine Gregoire (D): “For 26 years, our coasts have been protected by that moratorium and I believe that it should remain in place in perpetuity. With soaring gas prices, there is no better time to end our dependence on oil. As a country, we should be pursuing clean energy sources and investing in alternative energy technologies.” Seattle Post-Intelligencer

North Carolina Governor Mike Easley (D): “It’s just too much squeeze for the juice when you’re looking at the real estate market that’s on the coast, recreational fishing, the tourism and other economic interests that would be adversely affected by some problem that could easily arise from off-shore drilling.” MSNBC

New Jersey Governor Jon Corzine (D): “Our $35 billion economy is driven by tourism and the use of the shore.” Associated Press

Oregon Governor Theodore Kulongoski (D): Lifting the ban would be “a short-sighted response to a long-term issue of creating a sustainable and secure domestic energy economy.” Associated Press

Maine Governor John E. Baldacci (D): “We need an energy policy that looks to the future for answers, not to the past,” Democratic Gov. John Baldacci’s spokesman, David Farmer, said in a statement. “We need to cut consumption and develop renewable, clean sources of energy.” Morning Sentinel (Maine)

South Carolina Governor Mark Sanford (R): Sanford spokesman Joel Sawyer said “We would certainly have some hesitation just based upon tourism and the natural beauty along the coast. We certainly wouldn’t want to do anything that would kill the goose that laid the golden egg.” Greenville News

Source: National Audubon Society

Many under funded startups in Asia and Europe have overly aggressive and optimistic growth plans that could cause the airlines to cancel or defer orders. For example, Robert Stallard, a director at Macquarie Capital, questions whether SpiceJet has a strong enough balance sheet to secure credit for the 16 Boeing 737-800s it has ordered and says it might not even qualify for a sale/leaseback. “The question that has yet to be answered is not whether there will be a downturn, but how bad it will be,” says Stallard in the AVIATION WEEK article.

Anselmo offers two outcomes: the optimistic view that “Boeing and Airbus can afford to lose orders and still make it to the industry’s next up-cycle with minimal pain;” and the more negative answer “that a steep change in global energy demand has created a permanent era of high prices and sent the airline industry into uncharted territory.”

The article confirms that this is a GLOBAL problem.

No region is immune to the pain. Fuel now makes up 65% of Air New Zealand’s operating costs on long-haul routes. “There could be a significant downturn ahead for carriers in the Asia-Pacific region,” predicts Stallard. “The only way that airlines can react is to raise prices, which will further dent demand.”

The section titled “Will Soaring Transport Costs Reverse Globalization?” begins on page four of the free report and is worth reading.

The chart on the right looks at shipping costs in 2000, 2005, and current costs. Using that data the writers are able to extrapolate the expected shipping costs when oil reaches $150 a barrel and then $200 a barrel.

Oil at $200 a barrel may sound far fetched, but earlier this month, Wall Street investment bank Goldman Sachs, whose oil and gas team is widely considered the most authoritative in the sector, warned there was a new reality for crude oil. It argued that prices reaching $150-200 a barrel over the next 12-24 months appeared “increasingly likely”.

This increase in shipping costs may be a major boon for my Pennsylvania – where I live.  The increasing cost of shipping steel from China to the United States is acting like the kinds of tariffs the US had in place for most of the twentieth century.

Cost savings from cheaper overland shipping costs  in the US could increase enough to offset the lower labor costs involved in steel produced in China.

Wish luck, this will lead to a revitalization of the once great US domestic steel industry.  This kind of change could have broad reaching effects including a surge in domestic US manufacturing of cars and major appliances.

From CICB World Markets:

The soaring price of oil has dramatically increased the cost of moving goods around the globe, posing a major threat to price stability and overseas manufacturing, finds a new report from CIBC World Markets.

“Exploding transport costs may soon remove the single most important brake on inflation over the last decade – wage arbitrage with China,” says Jeff Rubin, Chief Economist and Chief Strategist at CIBC World Markets. “Not that Chinese manufacturing wages won’t still warrant arbitrage. But in today’s world of triple-digit oil prices, distance costs money.”

The report finds that the cost of shipping a standard 40-foot container from East Asia to the U.S. eastern seaboard has already tripled since 2000 and will double again as oil prices head towards US$200 per barrel. These soaring energy costs are threatening to offset decades of trade liberalization and force some overseas manufacturing to return closer to home.

“Unless that container is chock full of diamonds, its shipping costs have suddenly inflated the cost of whatever is inside,” adds Mr. Rubin. “And those inflated costs get passed onto the Consumer Price Index when you buy that good at your local retailer. As oil prices keep rising, pretty soon those transport costs start cancelling out the East Asian wage advantage.”

Mr. Rubin says that these forces may reverse the impact of globalization. “Higher energy prices are impacting transport costs at an unprecedented rate. So much so, that the cost of moving goods, not the cost of tariffs, is the largest barrier to global trade today.”

The report notes that it currently costs US$8,000 to ship a standard 40-foot container from Shanghai to the U.S. eastern seaboard, including in-land transportation. That’s up from just US$3,000 in 2000 when oil was US$20 per barrel. At US$200 per barrel of oil, the cost to ship the same container is likely to reach US $15,000.

The impacts of these rising costs are already being seen in capital intensive manufacturing that carry a high ratio of freight costs to the final sale price, such as steel production. Soaring transport costs, first on importing coal and iron to China and then exporting finished steel overseas, have more than eroded the wage advantage and suddenly rendered Chinese-made steel uncompetitive in the U.S. market. Underscoring this is the fact that China’s steel exports to the U.S. are falling by more than 20 per cent year over year, while U.S. domestic steel production has risen by almost 10 per cent.

“That’s great news if you are the United Steelworkers of America,” says Mr. Rubin. “Long lost jobs will soon be coming home. And the more that oil and transport costs rise for Chinese steel exporters, the more that North American steel wage rates can grow. But if you’re a steel buyer, your costs are going up regardless of whether you’re sourcing from China or Pittsburgh.”

Converting transport costs into tariff equivalents shows how disruptive soaring energy prices can be. Mr. Rubin notes that oil at US$150 per barrel equates to an 11 per cent tariff rate – a level last seen in the 1970s. At $200 per barrel of oil, “we are back at tariff rates even prior to the Kennedy Round GATT negotiations of the mid-1960s,” he says. “Even at US$100 per barrel of oil, transport costs outweigh the impact of tariffs for all of America’s trading partners, including Canada and Mexico.”

Mr. Rubin points to history to show how higher energy and transport costs serve to dampen trade and force markets to seek shorter, and cheaper supply lines. Global exports have soared in all periods over the last 50 years when trade barriers were reduced and oil prices were low, his analysis shows. But he says exports “went absolutely nowhere” during the oil and energy crises of the 1970s, and for several years after despite reductions in global tariffs and healthy recoveries from recessionary periods.

“It’s relatively easy to see why American importers shifted to regional trading” during that time, says Mr. Rubin. “Trans-oceanic transport costs literally exploded during the two oil price shocks. The cost of shipping a standard cargo load overseas almost tripled, just as it (has) over the past few years. Ultimately, soaring transport costs were borne by consumers and markets responded accordingly, substituting goods that could be sourced from closer locations than half way around the world carrying hugely inflated freight costs.”

Mr. Rubin says that goods with a low value-to-freight ratio will be the most sensitive to rising transport costs. A “surprisingly high percentage” of Chinese exports to the U.S. fall in this category, and include furniture, apparel, footwear, metal manufacturing and industrial machinery, he notes.

“Freight-sensitive Chinese exports to the U.S. now account for 42 per cent of total exports – down from 52 per cent in 2004,” says Mr. Rubin, adding he estimates “that if it were not for the dramatic increase in transport costs, growth in Chinese exports to the U.S. since 2004 would have been 35 per cent stronger than the actual tally.”

Mr. Rubin says there is “certainly no reason why we should not expect to see at least comparable if not greater trade diversification” than was seen during the oil shocks of the 1970s. “Instead of finding cheap labor half way around the world, the key will be to find the cheapest labor force within reasonable shipping distance to your market.”

In that type of world, Mexico’s proximity to the rest of North America combined with its labor costs will give it a second chance to compete with Pacific Rim production, says Mr. Rubin who further predicts that when oil prices reach US$200 a barrel, it will cost three times as much to ship the same container from China than from Mexico.

“To put things in perspective, today’s extra shipping cost from East Asia is the equivalent of imposing a nine per cent tariff on East Asian goods entering the U.S. And at oil prices at US$200 per barrel, the tariff equivalent rate will rise to 15 per cent.”

“In a world of triple-digit oil prices, distance costs money. And while trade liberalization and technology may have flattened the world, rising transport prices will once again make it rounder,” says Mr. Rubin.

CIBC World Markets is the wholesale and corporate banking arm of CIBC, providing a range of integrated credit and capital markets products, investment banking, and merchant banking to clients in key financial markets in North America and around the world. We provide innovative capital solutions and advisory expertise across a wide range of industries as well as top-ranked research for our corporate, government and institutional clients.

Source: CIBC World Markets

An interested reader would have to jump over to Forbes or the Financial Times to get the full picture and see that the biggest factor in the rise in oil prices are economic in nature.  Both stories about the issue on these and other financial news sites point out that it is the weak dollar that is pushing oil prices higher and higher recently.  I know most people in the US don’t seem to care about the value of the dollar but they really certainly seem to care when the pump price of gasoline goes up a few cents.  When the US dollar is weak it’s Americans who suffer most from rising energy prices. 

Most of the world’s oil is traded for US dollars.  In fact, several oil-producing Gulf Arab countries, including Saudi Arabia, peg their currencies to the dollar, since the dollar is the currency used in the international oil trade. When businesses or traders in a country like Canada or Australia wants to buy petroleum they must first buy US dollars and then use them to purchase the oil.   The cost of those US dollars determines the true cost of a barrel of oil in those countries.  Right now, with the US dollar at record or near record lows against other currencies the high price of a barrel of oil disproportionately affects Americans.

I did some number crunching to try to put this in perspective.  I looked at a few factors and applied them to the US dollar and five other currencies so you can see how this rise in price per barrel of US Light Crude has affected different currencies.  First I located the price per barrel for US Light Crude on June 1, 2007 and found it to be $65.08.  Second, I looked at the closing price yesterday (November 6th, 2007) of  $96.70.

Since oil is traded in US dollars we can see that this reflects a price increase of 48.59%.  You can do the math yourself with this formula:

Or for US Dollars

I’ll be rounding to two decimal places, so this becomes 48.59%

 As you can see, Americans who are already working in US dollars saw a nearly fifty percent increase in the cost of a barrel of oil between June 1st, and November 6h of 2007.

To work with the other currencies, I first converted them into US dollars at the exchange rate for that day.  So for the June 1 figures, I looked at the exchange rate for June 1st, for November 6th, I looked at November 6 rates.  This should put everyone onto a common level since we will be comparing apples to apples instead of juggling back and forth between currencies.  I will start with those who have benefited the least from the weak dollar and work up from there.  I am including graphs of these other currencies’ exchange rates with the US dollar so people can better understand that the term "weak dollar" is a bit euphemistic compared to the reality of just how weak it is at the moment.

Great Britain (GB Pound)

120 day graph of the GB Pound to Dollar exchange rate (June 1 – Nov 6, 2007)

On June 1st, it took 32.86 pounds to purchase enough Us dollars for a barrel of oil.  On November 6th, it took 46.36 to buy a barrel.  Based on the formula outlined above we can see that the increase for Great Britain is 41.08%.  In other words, the British are suffering from higher oil prices, but not as much as we are in the US. 

Japan (Japanese Yen)

120 day graph of the Yen to Dollar exchange rate (June 1 – Nov 6, 2007)

On June 1st, it took 7946.26 Japanese Yen to purchase enough Us dollars for a barrel of oil.  On November 6th, it took 11073.11 to buy a barrel.  Based on the formula outlined above we can see that the increase for Japan is 39.35%.  The Japanese are also suffering from higher oil prices, but not as much as we are in the US.

European Union (EURO)

120 day graph of the Euro to Dollar exchange rate (June 1 – Nov 6, 2007)

On June 1, 2007, it took 48.42 Euros to buy one barrel, and on November 6th, it took 66.43.  This is a 37.19% increase.  Bad, but not as bad as it is here.  

Australia (Australia Dollar)

120 day graph of the Australia Dollar to Dollar exchange rate (June 1 – Nov 6, 2007)

On June 1, 2007, it took 78.29 Australian dollars to buy one barrel, and on November 6th, it took 104.51.  This is a 33.49% increase. 

Canada (Canadian Dollar)

120 day graph of the Canadian Dollar to Dollar exchange rate (June 1 – Nov 6, 2007)

On June 1, 2007, it took 68.99 Canadian dollars to buy one barrel, and on November 6th, it took 89.37.  This makes Canada the big winner with an increase of "only" 29.54%.   Canada’s currency is making great strides against the US dollar lately and this current trend has not only increased their buying power in purchasing Us goods, its also given them a steep discount on the price they pay for oil.  It’s probably worth noting that Canada is a net exporter of oil, unlike the rest of the countries mentioned in this post.

We have had two terms of Bush spending his ass off, usually with the backing of a Republican congress that couldn’t be more eager agree with the president’s belief that the "war on terror" and economic growth and tax cuts justified running up massive deficits that everyone knows we can never repay.   More recently we have seen  two consecutive interest rate drops from the Fed while watching our housing sector tank and mortgage backed securities result in huge losses for financial institutions worldwide, we should not be surprised that nobody really wants US dollars to play a big roll in their portfolios.  I don’t think we are near  the end of this cycle and if we do see oil hit $100.00 USD a barrel we need to remember that we may be alone in paying the full price.

Notes: Graphs courtesy of www.x-rates.com and thanks to Lorianne for helping me find the formula I needed.