Lisa Margonelli Interview: Strategic Reserves and NY Mercantile Exchange

In this part of our interview with Lisa Margonelli, author of Oil on the Brain: Adventures from the Pump to the Pipeline, we examine the fragility of oil markets.

Complex versus Simple Solutions

Bradley Berman: Do you think people are placated by the Strategic Petroleum Reserve? You paint a picture that it’s a mirage.

Lisa Margonelli: In reality, there are 700 million gallons of crude oil in the SPR. The question is would they get out and would they get to the right places? And would the pipeline survive some sort of attack or hurricane that would allow us to use them? People think of the Strategic Petroleum Reserve as comfort and backup, but we’re not justified in feeling that way.

BB: In the book, you suggest that there are better ways we can protect ourselves. No-nonsense, low-tech things like lowering the speed limit, carpooling…

LM: Dumb stuff like tire inflation.

BB: Telecommuting. Why do you think we go to such measures to dream up incredible new technologies, or elaborate plans like the Strategic Petroleum Reserve, when the most immediate things we can do, which require some thought or inconvenience, we’re not ready to do.

LM: Leaders are very hesitant to ask people to sacrifice. In fact, Jimmy Carter’s and Gerald Ford’s insistence on CAFE standards, and their fuel-switching initiatives, and some of the other things they did to decrease the amount of oil the country uses, actually resulted in very low oil prices in the 1980s. But people did not like Jimmy Carter’s message, “Wear a sweater.” I acknowledge that gas prices were not lowered by wearing sweaters. (Laughs). The issue was not a virtuous sacrifice. The issue was retooling the incentives for industry.

During the 1990s and this decade, we’ve paid for everything we’ve wanted with gasoline. Safety and freedom and changing jobs. All of these things have been paid for with increasing amounts of gasoline, but we haven’t been willing to acknowledge the risk we are taking.

Real Trends Lost in the Nonsense

BB: In certain ways, it’s a race between coming to our senses about what we’ve been paying for, and the fragility of the markets and infrastructure which could break. You went to the Mercantile Exchange where gas futures are traded, and wrote that “prices are determined more by muscle twitches than logic.”

LM: I don’t think it’s totally illogical. I think markets have a moment-to-moment logic of their own. They can tell you a lot. The ability to aggregate the twitches is a very important signal. The people who are making the decisions to buy and sell are not on the trading floor. They work for refineries. They work for hedge funds. They work for oil traders. And some of them work for gasoline sellers. They are making trades based on various metrics of their own. They are taking a longer view, looking out one or two months, figuring out how to make profits on the short-term.

BB: But you describe the Exchange as “the central control room for the world economy, full of a nonsense of jumping rodents, and random headlines generated by a squad of monkeys banging on typewriters.”

LM: When you first view the thing, it appears to be extremely random. It appears to have no logic. It appears to be anything but reasonable. But when you step back and look at its overall trends, markets are an exuberant way to aggregate the twitches all over the world into numbers you can grasp. When you look at the prices from 1983 to 2004, there are real reasons for the ups and the downs. You see trends.

When you’re standing in the middle of the market, and you don’t understand what’s going on, it looks like a nonsense of jumping rodents and news generated by monkeys typing on typewriters. But there is this overall logic. The twitches aggregate into meaningful numbers, and they are reactions to real things. And we all have to live with the ups and downs of the market.

BB: You’re saying that the sum total of all those twitches adds up to something that’s relatively stable.

LM: It’s relatively stable. It’s meaningful. However, you can’t look at today’s market and think that it’s telling you something about tomorrow. Because you never know what the reality is going to be tomorrow. Simply relying on today’s prices to tell us what kind of car we need to buy tomorrow, that we are going to hang on to for 15 years, is the wrong way of looking at it. One of the trends in terms of government involvement in gasoline use, for example the President’s council of economic advisors has said, “Well, if gas prices get high enough, people will buy more efficient cars, the market will be rewarded for efficient cars, auto companies will change their procedures, and we’ll get a different kind of car." That’s actually not going to happen until the prices are so high that they are really hurting people.

The price of gasoline today is one story, but the price of gasoline tomorrow is another one. And we don’t know what it’s going to be. But we can assume that it’s going be high. What we need is someone to take the role of predicting, saying we want to protect our economy, and therefore what we need are more efficient cars, ways to reward less driving, we need to do something different. The market itself is not going to provide the signals in time.

BB: Do you think the new interest in climate change and green things also plays into a shift in consumer behavior?

LM: I think that climate change will change the way we calculate future costs of fuel and of different economic strategies. This is a period where we are going to figure out what to do. However, people just want to do the same old thing, but feel better about it. (Laughs). That’s what buying carbon credits or even buying a Prius…you know, I can buzz all around and I’m just the most virtuous person around. It doesn’t mean that it’s not virtuous not to use fuel. It means that we need a big systematic strategy and it’s going to affect everybody.


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