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 www.wdel.com) 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.

America's Energy Policy

If it weren't such a serious subject, America's energy policy would be a lot like that old skit "Who's on First"?

 

 

The problem is that our situation is serious and it impacts every single American and beyond that, the vast majority of the world.  I'll explain.  IT's pretty obvious that our own energy policy affects all of us:

 

An increase in energy costs drives up the price of all of our goods and services as well.  It costs more to make the goods because energy prices for corporations are higher, it costs more to ship those goods because transportation requires fuel.  It costs more to keep the products on the shelf because the retailer is paying more for their energy usage. Therefore, when we get to the product, the price is increased.  Sound crazy?  Check the price of corn.  Since last year, the wholesale May delivery of corn has more than doubled from $3.67 to $7.23 per bushel and the crisis in Japan will push those numbers higher.  If the Middle East continues to rage and as Japan turns to rebuilding, we could see the price of a bushel at $10.  By the time we see that cost it's going to be up around $2 per lb (I saw them this weekend at Shoprite in Newport for $1 per lb). 

While the government doesn't include food and energy in their analysis of inflation, both of those commodities have been rising.  We've all seen a difference in our electric bills but we pay it withoutreally understanding why there is such a change.  There are many factors that go into it but I will try to make it simple.

1. The electric company must make a profit to stay in business.  This means it must pay employees, pay loans for the upkeep of their offices, buildings, vehicles, transmission lines, pay for land it owns and cover all of its expenses with a little extra left over.  This also includes paying the salaries of many workers who are unionized.
2. The state government puts regulations on energy companies and sometimes more than one state regulates an energy company.  For instance, a coal fired plant in Delaware is regulated by Delaware to comply with air quality standards, that same company (or another related company who passes the cost on to it) is regulated in West Virginia where the coal mines are located.  These regulations encompass anything from air quality to worker safety.  These regulations are not free and their cost is passed through the company.
3. The federal government puts regulations on energy companies for various reasons as well.  Again, these regulations encompass everything from bookeeping to air quality and worker safety.  Likewise, these regulations are passed through the company as well.
4. Electric companies are regulated by federal/state governments in terms of what KIND of power they are allowed to use as well.  That means they may be mandated (as we are in Delaware) to use wind/solar/nuclear/geothermal power in certain levels.  This can drive the cost of energy up depending on the unit cost of the energy. 
5. Delaware has joined the Regional Greenhouse Gas Initiative which is nothing more than regional Cap and Trade.  It mandates certain energy usage levels and other price controls that drive up the cost to power companies.

 From all of those calculations (and more) we come up with a final number.  That's why President Obama said that energy rates would necessarily skyrocket under his Cap and Trade plan.  Because he understood that all of the costs would increase once they created a new trading market for carbon credits (which are an abstract concept).  So, after all of this, what is our energy policy?
We can't drill off of the coasts because we might spill oil like we did in that MASSIVE BP oil spill off the coast of Louisiana (the cleanup they thought would take maybe 100 years) took less than 90 days before they couldn't even FIND any oil to clean and that was after it took WEEKS to get the cleanup started. 

• We can't use oil, coal or natural gas because they are fossil fuels that the government believes causes climate change (a natural cyclical event that has occured many times throughout the planets history).  But we can send hundreds of billions of dollars to the Middle East, Brazil and other countries who don't like us very much for THEIR fossil fuels. 
• Ethanol usage drives up the price of corn and diminishes our supply of food.
• We can't build more wind farms because bird migrations and bat movements are affected.
• Nuclear technology is clearly too dangerous (despite the fact that in 50+ years there have been (now) 3 major accidents.  3-Mile Island (where 0 people were killed)....Chernobyl, Russia (4,000 died in a plant where safety precautions were not taken and in fact a plant that was not built properly)...Japan (the plant withstood an earthquake more than 10 times as powerful as it was built for and the current reactor leak has yet to kill anyone and radiation levels, while higher than normal, are still WELL below (about 4,000 times lower) the "safe" limit.
• Solar is ok, as is geothermal but both combined provide about 6% of our needed power WITHOUT any growth.

Folks, something has got to give.  Our current "energy policy" is a recipe for disaster and if we don't change it, we face a huge energy crisis on top of everything else that is going on.  We need to have a common sense energy policy that responsibly turns over energy creation to the private sector while ensuring basic saftey and clean air/water safety.  With our safety standards, even a massive Gulf spill created a MINIMAL problem for fishing, coastlines and animal life.  We can also safely build nuclear plants, mine for coal and utilize alternative sources of energy to conserve and supplement our energy needs.  The only way that's going to happen is if we stop letting special interest groups and faulty science scare us into dismantling all of our sources of energy.

Obama Says We Can "Ride Out" Libyan Crisis - Oil Tops $100

Yes you read that right, in an ABC News Report today, as oil prices reached $100 today (before closing down at $97.23 per barrel) President Obama told reporters that “We actually think we'll be able to ride out the Libya situation and it will stabilize,”.  I suppose $100 per barrel is no big deal to Obama:

The ABC News report is chocked full of interesting things from our President.  I thought it would be a good idea to go line by line through some of them:

“We have substantial capacity across the major economies in the strategic reserves of the major economies to deploy those reserves in the event we faced some particular risk of sustained supply disruption," Geithner said.

Across the major economies?  I'll admit Timmy...I'm not from the banking industry...or large corporate leadership...maybe I'm just dumb but this sounds like you don't just mean here in America but in other nations as well.  Are you tying us all together as though we were part of a single worldwide unit?  Which economies did you mean exactly? 

“I expect this to be a working group in which we are coming up with some concrete deliverables,” Obama said, “I don't think that we have to be trying to hit home runs every time. I think if we hit some singles and -- and doubles, if we find some very specific things that this group can help us on and we can work on together, then we can build on that success, and in the aggregate over time this will have really made a difference at a critical juncture in our economy.”

Mr. President, with all due respect.  You're in the 9th inning now.  You're down by 15 runs and you've got no one on base with 2 outs and 2 strikes.  You're going to need a couple of long balls (home runs for those of you who are not baseball fans) to stay in the game there partner.  So far all you've done is commit errors.  WE THE PEOPLE...some of whom have been unemployed for more than 3 years (your whole time in office) are sick of your sports analogies, your REALLY bad jokes and your belief that this is some sort of regular job where you get time off.  I'm not against you taking a vacation now and again, but when you go on 8 of them in just a few months, when your wife and kids eat up millions in taxpayer dollars jaunting around the world like Hollywood starlets, I begin to wonder if you take your job seriously. 

The president said that while the economy is growing in many sectors the biggest challenge is that unemployment is still “way too high” all across the country.

Didn't we hear last year that the economy was growing faster than expected?  Maybe it's growing everywhere but Delaware (that would be consistent with the conservative wave that swept the nation but washed up on the Delaware beaches).  Most of the major reports show markets like the housing and retail markets shrinking or staying flat so it appears that liberals are grasping at any straw they can for "good news".  Listen Mr. President, while you and your bookworm friends like Timmy G. look at statistics from obscure sources and try to dig for any good news you can make up...in the real world we see through it.  We are on to your lies and we can see that there are no jobs.  Where are the jobs Mr. President?  Create private sector jobs, THEN tell us the economy is growing.

“So what we wanted to do was retool,” he said, “It's critical for us to have input from folks who are actually hiring, putting people to work, making payroll, making the products and services that make our economy so powerful.  But we want to make sure that we narrowed the focus to think about how do we ensure, A, that we're putting people to work right now, but also how do we lay the foundation for us to win the future over the long term.”

Soooo, did you NOT think to ask the people who are doing the hiring what they were looking for in the first place?  By the way, any of those folks from Delaware?  I think there are a few thousand people in Delaware looking for work at one of those places that is hiring, putting people to work, etc.  As for narrowing the focus, as I've said before, you sir, are out of time.  We don't have any more time for you to noodle around.  We need jobs and we need them yesterday.  PERIOD.  So have your "Brain Frame" there look into creating private sector jobs immediately and then look into sustaining them.