Wednesday, April 27, 2011

Oil Prices and what is causing them to rise

I was included on an email thread by a friend about the reason oil prices are going up.  I know my good Friend Rick Jensen (1-4PM on 1150WDEL has a bug up his butt about "speculators" and that he's had numerous "money people" from Peter Schiff to Stephen Schork on his show in an effort to prove his theory right and they have all pretty much said the same thing: Speculators ARE driving up the price...but that's their job.  They are not the CAUSE and regulating them more won't do anything to reduce the price, in fact it might increase it.  Anyway, back to the original thread, the email contained a piece by Brian Wesbury (click here to read the piece) in which he calls the theory of speculators to task.

Brian makes excellent points and points that I have been making for a long time.  Stop looking at the difficult answers...the easy ones are where the "beef" is.  Here is my response to the email thread:

Amen! I’ve been talking about this for a LONG time now. There are three main causes of the spike in oil prices: The Fed, lack of domestic drilling and the Middle East

The Fed – I think all of us on this thread understand that more money printed, drives down the value of the money in circulation just like more widgets drives down the price of all widgets (unless you add in union labor…but that’s another story ;]) which is nothing more than SIMPLE Econ 101 (most of our problems would be solved if we just went BACK to Econ 101) and the law of Supply and Demand. In the currency markets (again as you know) this is called inflation. The more you print, the less it’s worth. The reason is because our dollar isn’t BACKED by anything…really since the Fed was created, the dollar, that is to say the federal paper note, has been unpegged from hard assets like Gold. It’s no different than a personal loan, if you have collateral, for instance, you ask the bank for a loan for $100,000 to make a large purchase… if you give them the deed to your home in case you don’t pay it back, you are far more likely to get the loan than if you showed up with nothing. Why? You’re less likely to walk away from your home than you are from a promise alone. Our currency was once issued based on the amount of gold we had. The denomination of the currency was changed based on the finite resources of gold. Since paper notes relied on the issuing bank (remember, we had no central bank for large chunks of our history…currency was issued by local banks and based on their gold supply) maintaining gold reserves, bank runs and travellers redeemed their notes in physical gold (more often coins and bullion than gold nuggets). Now, our dollars are backed by what? The word of Congress. The word of politicians who lie to their wives, who lie to their GODS and who lie to US. Heck, the word of politicians who don’t even UNDERSTAND these basic truths. If there’s nothing behind the paper, what stops them from printing as much as they want? Nothing, and that is EXACTLY what they are doing now. They’ve gotten to the point where we now have more printed dollars in circulation than we create in revenue each year. That means we are actually backing up our money supply not with gold, or with revenue, but with IOU’s from the government. This is what they call “monetizing the debt”. This causes commodities that are PEGGED to the dollar, like oil, gas, food, etc. to rise in price as it takes more of the dollars to buy the commodity but what will happen is that intrinsically valuable items (gold, silver, etc.) will eventually replace the dollar as the peg for commodities and the market will reset. Speculators will shift to the gold market.

Lack of Domestic Drilling – Simply put, if we CREATED more supply at home, where WE had a stable source, and for that matter if our energy policy relied on proven sources of energy instead of Wind/Solar/Battery tech that doesn’t even yet exist, speculators would have no gloom to doom about. Or at least less. American energy RESOURCES are actually keeping speculators from driving the price up FURTHER because we do HAVE the coal, oil and natural gas that we can use for power if we need it (and we need it bad!) in an emergency and in the longer term with an administration with a better energy policy. Next time you drive by an oil derrick, coal mine or gas well, thank a gas company for keeping America running (even if the engine DOES need some work).

Middle East – If you don’t think the instability in the Middle East is contributing to speculator concerns, I’ve got some Oceanfront property in Arizona for you to check out ;) and it’s goin cheap! The Middle East is on fire, not just one or two countries either, I mean the ENTIRE thing. Iran, Iraq, Syria, Jordan, Yemen, Bahrain, Saudi Arabia, Egypt, Libya, Somalia (pirates) are all on fire and taking anti-American/anti-Europe/anti-Israel positions. It’s counter intuitive to think that people buying a product for the long term, wouldn’t look at what’s going on over there and say “Gee, oil might be hard to come by later, I think it’s going to be something I should take a chance on.” Any smart business person would plan for the future. So what goes on in the Middle East makes a difference, of course it doesn’t help that our American economy is also on fire and our credit limit is being downgraded.

It’s absolutely THIS simple. If we had a decent energy policy, drilled for our own oil, fixed our economy, got out of debt, cut spending and stopped printing money, the price would shrink.

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