Green Energy Policies raise the Cost of Heating this Winter in the UK

Posted by PITHOCRATES - October 19th, 2013

Week in Review

You can either fight ‘manmade’ global warming or you can have low energy prices.  But you can’t have both (see British Gas to raise prices by 9.2% posted 10/17/2013 on BBC News Business).

British Gas is to increase prices for domestic customers, with a dual-fuel bill going up by 9.2% from 23 November.

The increase, which will affect nearly eight million households in the UK, includes an 8.4% rise in gas prices and a 10.4% increase in electricity prices.

The company said it “understands the frustration” of prices rising faster than incomes. The average annual household bill will go up by £123 [$198.89]…

The company said that the cost of buying energy on the global markets, delivering gas and electricity to customers’ homes, and the government’s “green” levies, were all factors in the decision to put up prices.

With a focus on renewables we bring fewer fossil fuels to market.  Coal, oil and natural gas.  And with the war against clean nuclear power we’re shutting down our reactors.  So instead we focus on the more costly wind and solar power.  Because it takes a lot more costly infrastructure to capture the ‘free’ energy from the sun and the wind.  So much that the taxpayer has to subsidize them.  To bring us that ‘free’ energy.  When the sun is shining and the wind is blowing, that is.  Which brings us to that costly distribution system.

People can put solar arrays on their home to use that ‘free’ solar power during sunny days.  But what about cloudy days?  And night?  Wind farms can generate ‘free’ wind power when the winds are blowing right.  But what about when they are not blowing right?  Either too fast?  Too slow?  Or not at all?  What then?  Fossil fuels.  That’s what.

Baseload power (typically coal that takes hours to bring on line) is a funny thing.  To be cost effective power plants run at full capacity 24/7.  When demand rises they can bring on some ‘peaker’ units (typically gas that are quick to bring on line) to add additional capacity.  So power companies have to maintain baseload power even if the people aren’t buying any to be available when solar and wind aren’t.  And if all the homes disconnected from the grid and ran on solar power during the day the power companies would still have to keep them physically connected to the grid.  So these homes can use their power at night.

This is why energy prices are rising.  Revenue at power companies are falling due to that ‘free’ wind and solar power while their expenses are not.  And because they are selling to fewer customers they have to charge them more to cover their expenses.

Affordable energy for the people lies with fossil fuels.  Not renewables.  Governments have to choose.  All the people.  Or their liberal base.  Less costly power from fossil fuels.  Or more costly power from renewables.  It’s that easy.  For you can fight ‘manmade’ global warming or you can have low energy prices.  You just can’t have both.

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Bretton Woods, Nixon Shock, OPEC, Yom Kippur War, Oil Embargo, Stagflation, Paul Volcker, Ronald Reagan and Morning in America

Posted by PITHOCRATES - October 1st, 2013

History 101

(Originally published September 18th, 2012)

Under the Bretton Woods System the Americans promised to Exchange their Gold for Dollars at $35 per Ounce

Wars are expensive.  All kinds.  The military kind.  As well as the social kind.  And the Sixties gave us a couple of doozies.  The Vietnam War.  And the War on Poverty.  Spending in Vietnam started in the Fifties.  But spending, as well as troop deployment, surged in the Sixties.  First under JFK.  Then under LBJ.  They added this military spending onto the Cold War spending.  Then LBJ declared a war on poverty.  And all of this spending was on top of NASA trying to put a man on the moon.  Which was yet another part of the Cold War.  To beat the Soviets to the moon after they beat us in orbit.

This was a lot of spending.  And it carried over into the Seventies.  Giving President Nixon a big problem.  As he also had a balance of payments deficit.  And a trade deficit.  Long story short Nixon was running out of money.  So they started printing it.  Which caused another problem as the US was still part of the Bretton Woods system.  A quasi gold standard.  Where the US pegged the dollar to gold at $35 per ounce.  Which meant when they started printing dollars the money supply grew greater than their gold supply.  And depreciated the dollar.  Which was a problem because under Bretton Woods the Americans promised to exchange their gold for dollars at $35 per ounce.

When other nations saw the dollar depreciate so that it would take more and more of them to buy an ounce of gold they simply preferred having the gold instead.  Something the Americans couldn’t depreciate.  Nations exchanged their dollars for gold.  And began to leave the Bretton Woods system.    Nixon had a choice to stop this gold outflow.  He could strengthen the dollar by reducing the money supply (i.e., stop printing dollars) and cut spending.  Or he could ‘close the gold window’ and decouple the dollar from gold.  Which is what he did on August 15, 1971.  And shocked the international financial markets.  Hence the name the Nixon Shock.

When the US supported Israel in the Yom Kippur War the Arab Oil Producers responded with an Oil Embargo

Without the restraint of gold preventing the printing of money the Keynesians were in hog heaven.  As they hated the gold standard.  The suspension of the convertibility of gold ushered in the heyday of Keynesian economics.  Even Nixon said, “I am now a Keynesian in economics.”  The US had crossed the Rubicon.  Inflationary Keynesian policies were now in charge of the economy.  And they expanded the money supply.  Without restraint.  For there was nothing to fear.  No consequences.  Just robust economic activity.  Of course OPEC didn’t see it that way.

Part of the Bretton Woods system was that other nations used the dollar as a reserve currency.  Because it was as good as gold.  As our trading partners could exchange $35 for an ounce of gold.  Which is why we priced international assets in dollars.  Like oil.  Which is why OPEC had a problem with the Nixon Shock.  The dollars they got for their oil were rapidly becoming worth less than they once were.  Which greatly reduced what they could buy with those dollars.  The oil exporters were losing money with the American devaluation of the dollar.  So they raised the price of oil.  A lot.  Basically pricing it at the current value of gold in US dollars.  Meaning the more they depreciated the dollar the higher the price of oil went.  As well as gas prices.

With the initial expansion of the money supply there was short-term economic gain.  The boom.  But shortly behind this inflationary gain came higher prices.  And a collapse in economic activity.  The bust.  This was the dark side of Keynesian economics.  Higher prices that pushed economies into recessions.  And to make matters worse Americans were putting more of their depreciated dollars into the gas tank.  And the Keynesians said, “No problem.  We can fix this with some inflation.”  Which they tried to by expanding the money supply further.  Meanwhile, Egypt and Syria attacked Israel on October 6, 1973, kicking off the Yom Kippur War.  And when the US supported their ally Israel the Arab oil producers responded with an oil embargo.  Reducing the amount of oil entering America, further raising prices.  And causing gas lines as gas stations ran out of gas.  (In part due to Nixon’s price controls that did not reset demand via higher prices to the reduced supply.  And a ceiling on domestic oil prices discouraged any domestic production.)  The Yom Kippur War ended about 20 days later.  Without a major change in borders.  With an Israeli agreement to pull their forces back to the east side of the Suez Canal the Arab oil producers (all but Libya) ended their oil embargo in March of 1974.

It was Morning in America thanks to the Abandonment of Keynesian Inflationary Policies

So oil flowed into the US again.  But the economy was still suffering from high unemployment.  Which the Keynesians fixed with some more inflation.  With another burst of monetary expansion starting around 1975.  To their surprise, though, unemployment did not fall.  It just raised prices.  Including oil prices.  Which increased gas prices.  The US was suffering from high unemployment and high inflation.  Which wasn’t supposed to happen in Keynesian economics.  Even their Phillips Curve had no place on its graph for this phenomenon.  The Keynesians were dumfounded.  And the American people suffered through the malaise of stagflation.  And if things weren’t bad enough the Iranians revolted and the Shah of Iran (and US ally) stepped down and left the country.  Disrupting their oil industry.  And then President Carter put a halt to Iranian oil imports.  Bringing on the 1979 oil crisis.

This crisis was similar to the previous one.  But not quite as bad.  As it was only Iranian oil being boycotted.  But there was some panic buying.  And some gas lines again.  But Carter did something else.  He began to deregulate oil prices over a period of time.  It wouldn’t help matters in 1979 but it did allow the price of crude oil to rise in the US.  Drawing the oil rigs back to the US.  Especially in Alaska.  Also, the Big Three began to make smaller, more fuel efficient cars.  These two events would combine with another event to bring down the price of oil.  And the gasoline we made from that oil.

Actually, there was something else President Carter did that would also affect the price of oil.  He appointed Paul Volcker Chairman of the Federal Reserve in August of 1979.  He was the anti-Keynesian.  He raised interest rates to contract the money supply and threw the country into a steep recession.  Which brought prices down.  Wringing out the damage of a decade’s worth of inflation.  When Ronald Reagan won the 1980 presidency he kept Volcker as Chairman.  And suffered through a horrible 2-year recession.  But when they emerged it was Morning in America.  They had brought inflation under control.  Unemployment fell.  The economy rebounded thanks to Reagan’s tax cuts.  And the price of oil plummeted.  Thanks to the abandonment of Keynesian inflationary policies.  And the abandonment of oil regulation.  As well as the reduction in demand (due to those smaller and more fuel efficient cars).  Which created a surge in oil exploration and production that resulted in an oil glut in the Eighties.  Bringing the price oil down to almost what it was before the two oil shocks.

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President Obama goes out of his way to Raise the Price of Gasoline

Posted by PITHOCRATES - September 14th, 2013

Week in Review

Why is gasoline so expensive?  Because of President Obama.  He has shut down drilling wherever he can.  Reducing the American supply of oil (and increasing its cost) to refine into gasoline.  And he has been depreciating the dollar with his quantitative easing.  The Federal Reserve’s stimulus that is doing nothing to stimulate the economy.  But because oil is priced in U.S. dollars per barrel this devaluation of the dollar results in higher oil prices.  Because it takes more of a devalued dollar to pay for the same amount of oil those dollars once bought.  And then there’s this (see Valero Asks Obama Administration to Waive Ethanol Mandate by Mario Parker posted 9/10/2013 on Bloomberg).

Valero Energy Corp. (VLO), the world’s largest independent refining company, called on the Obama administration to waive the country’s biofuel target immediately, saying the cost to reach it has skyrocketed…

Refiners are required by law to use 13.8 billion gallons of ethanol in 2013. Renewable Identification Numbers are attached to each gallon of ethanol to track compliance. Once the additive is blended into gasoline, refiners can retain the certificate to show compliance or trade it to another party. RINs prices have risen more than eight-fold so far this year.

RINs have increased because of falling gasoline demand and higher biofuel consumption targets, Klesse said in the letter.

Gasoline demand will drop 0.5 percent next year, according to a forecast today from the Energy Information Administration, the Energy Department’s statistical arm. The Renewable Fuels Standard, set in 2007, calls for 14.4 billion gallons of ethanol to be used in 2014, up 4.3 percent from this year. The target increased 4.5 percent this year from 13.2 billion in 2012…

Ethanol is typically blended in a formula of as much as 10 percent in gasoline. While the EPA has approved blends of 15 percent, refiners haven’t adopted the higher concentration, citing engine damage concerns.

They only blend ethanol with gas so the percentage of ethanol in the gas doesn’t exceed 10-15%.  Because putting more into the gas could damage the engine.  So for every 10 gallons of gasoline they only need one gallon of ethanol.  For if they bought more than one gallon per every 10 gallons of gas they would have more ethanol than they could use.  With a fixed amount of ethanol required (14.4 billion gallons) instead of a percentage these refineries have a problem.  Because they need to buy 600,000 gallons more of ethanol in 2014 (a 4.3% increase over 2013) while gasoline demand will fall 0.5% in 2014.  Because of President Obama’s horrible economy.  Which means they will be blending less ethanol with gasoline in 2014.  Despite having to buy 600,000 gallons more.

They can’t use this extra ethanol.  And they sure don’t want to buy it just so they can store it someplace.  So instead they want to buy these Renewable Identification Numbers (RINs).  That certifies a gallon of ethanol has been blended with gasoline as required.  Even if it has not.  Which becomes a pretty handy thing to have (these RINs).  As you can avoid buying ethanol that you can’t use to meet the new higher requirement.  For people are buying less gas because of President Obama’s horrible economy.

These government regulations are greatly distorting the free market.  Increasing the costs of the refineries.  Who pass it on to the consumer in higher gas prices.  Which hurts Americans because they have to put more of their paycheck into their gas tank instead of using it on food or clothing for their children.  Pulling more money out of the economy.  Which helps to make President Obama’s economy so bad.  So why doesn’t he lower the number of gallons required when the number exceeds the amount the refineries need to blend with gasoline?  Because he doesn’t care about the cost of gasoline.  The higher the better for him as fewer people will be driving.  Which will create a greater demand for mass transportation.  Which will create more union jobs filled by people who will vote Democrat.  Also, the higher the price of gasoline the greater the tax revenue the governments collect at the state and federal level.  Which is what’s really important to governments.  Not food and clothing for children.

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Despite the Left’s Opposition to Fracking even the Environmental British are Joining In

Posted by PITHOCRATES - August 4th, 2013

Week in Review

One of the reasons the government tells us we must ‘invest’ in clean energy is to wean us off of costly foreign oil.  To give us energy independence.  And so we stop sending out money to nations in the world who don’t much care for us.  That’s why we must spend enormous amounts of tax dollars on things like solar and wind power.  Because we need them.  But because they are such poor business models they can’t operate without government subsidies.  So is there another option to give us that energy independence?  That doesn’t require government subsidies?  While even lowering our energy costs?  Yes there is.  And the British are now trying to play catch up to the United States (see The potential prize from fracking is huge by Michael Fallon posted 7/31/2013 on The Telegraph).

North, south, east and west, shale gas represents an exciting new potential resource for Britain that could contribute to our energy security, growth and jobs.

We only have to look across the Atlantic to see how it has reinvigorated the US economy: gas prices have halved, cutting costs for industry and consumers, and creating thousands of jobs and billions in new investment. Countries from India to Australia have looked on in envy at this boom – and are now joining in.

For its part, this Government is serious about shale. We are encouraging industry to find out how much is recoverable in all parts of the country. Given increasingly volatile international gas and oil prices, and our commitment to helping hard-pressed families with their bills, it would be irresponsible to ignore a new energy source right underneath our feet…

…residents understandably want reassurances that their water will not be contaminated. The facts are that around 2.5 million wells have now been fracked worldwide, more than 27,000 of them in the US in 2011. There is no evidence from America of fracking causing any groundwater contamination.

Other than in Hollywood movies.  And on television shows.  There it’s contaminating groundwater like there’s no tomorrow.  But with all that fracking going on in the United States the news is surprisingly barren of contaminated groundwater reports.  And you know they’d be leading all the news programs if there were.  Because the left hates fracking.  And the mainstream media leans left.  Way left.

That energy boom is a private boom.  It’s not because of the government.  It’s in spite of the government.  Who has launched a war on coal and oil.  Shutting down oil production on the Gulf of Mexico.  And on all federal lands.  Or making it very difficult for those who try.

Much of the global warming nonsense came from the University of East Anglia.  Making Britain near ground zero in the battle against global warming.  And here they are.  Wanting to frack to bring energy costs down for households.  Create jobs.  And reduce dependency on foreign oil.  Pity the United States government doesn’t care enough about the American people to do the same.

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The Poor and Middle Class see their Incomes Still Falling in the Obama Recovery

Posted by PITHOCRATES - March 3rd, 2013

Week in Review

If you listen to the president, his press secretary, the mainstream media and just about anyone on the political left the economy is doing super.  Sure, we can make improvements.  But over all everything is just swell.  If you’re rich, that is. People with money are doing very well in the Obama recovery.  Those who aren’t as rich aren’t.  No.  All they see is high unemployment, rising prices and falling incomes (see Americans see biggest monthly income drop in 20 years by Annalyn Kurtz posted 3/1/2013 on CNNMoney).

Personal income decreased by $505.5 billion in January, or 3.6%, compared to December (on a seasonally adjusted and annualized basis). That’s the most dramatic decline since January 1993, according to the Commerce Department.

It’s something of a combination of one-time events, though.

Monthly income was unusually high in December because companies paid out early dividends to avoid upcoming tax hikes.

Further proof that people change their behavior when the government increases taxes.  The surge in December that made January look so bad was due to one-time distributions of profits to avoid higher taxes.  So December wasn’t that good, either.  Just an aberration as people tried to avoid the higher taxes coming their way.

The payroll tax cut’s expiration also played a role in January’s drop, because most workers have to pay 2 percentage points more in taxes this year…

Meanwhile, economists are closely watching consumer spending, which accounts for about two-thirds of the U.S. economy…

Economists think that rising gas prices in February could cut into consumer spending temporarily. Gas prices rose 10% in February, according to AAA, but are expected to fall in coming weeks…

The Social Security tax break helped consumers at the 2012 election.  Allowing them more disposable income in the year before the election.  And helping them feel things weren’t that bad.  Of course this Social Security tax holiday drew down the Social Security surplus to a dangerous low.  Something they will have to make up for with even higher taxes than the 2% temporary cut used to help the president’s reelection.

Regulatory costs, environmental policies that have shut down oil drilling on public lands and inflation (the incessant quantitative easing of the Fed putting more and more dollars into circulation) are keeping gas prices high.  For you can hide inflation in some consumer goods by reducing package sizes but you can’t do that with gasoline.  Because you sell gas by the gallon.  So the full cost of the Fed’s inflationary policies hit gas prices hard.  And, of course, high gas prices increases prices for everything else that uses fuel.  A large factor in the rise in our grocery bills.  Taking a bigger bite out of family budgets.  Leaving little for other consumer spending.

All of that said, consumers are benefiting from a housing recovery and rising stock prices…

They’re not able to save much, though. On average, people saved about 2.4% of their disposable income in January, down from 6.4% in December. That marks the smallest saving rate since November 2007.

Rich people are benefitting from the housing ‘recovery’ and stock prices.  Those who have a lot of money left over after meeting the living expenses.  Who can save a lot of money.  And invest it into housing.  Or stocks.  In fact, that’s why the stock market does well on news of the Fed continuing their quantitative easing.  For the rich are taking advantage of that cheap money to borrow it.  So they can invest it.  Trading on the interest.  Borrowing at low interest rates.  And investing in something that earns a higher rate of return.  People struggling to make their paycheck buy everything it once did as prices rise everywhere aren’t enjoying any benefits from that cheap money.  As they have no money left over to even save up a down payment on a house.  So they can take advantage of those low housing prices.  No.  The poor and middle class are not reaping anything in the current economic ‘recovery’.  Only the rich are.

Under President Obama the rich are getting richer.  And the poor are getting poorer.  Because of his economic policies.  Especially the Keynesian policies.  Keynesians look at personal savings as leaks out of the economy.  For if people aren’t spending money they are wasting money.  Which is the point of low interest rates.  To get people to borrow money to buy things.  Thus stimulating economic activity.  And generating more consumer spending.  But all that quantitative easing has raised prices so much that consumers are left with less and less money to spend.  The poor and middle class aren’t borrowing money to buy new houses.  They’re just trying to get by on what little they have.  Hoping for good economic times to return when their personal incomes rise once again.

Keynesian economics don’t work.  Just as Keynesian stimulus does not stimulate.  If it did we wouldn’t still have fewer jobs in the U.S. economy than when President Obama took office.  And he spent about $8000 billion on a stimulus bill.  The American Recovery and Reinvestment Act of 2009.  Some critics said it failed as an $8000 billion stimulus wasn’t big enough.  Even though the Obama administration declared the summer of 2010 the Recovery Summer.  Proof that the American Recovery and Reinvestment Act of 2009 restored economic prosperity.  Even though it didn’t.  For things still haven’t returned to where they were under George W. Bush.  Despite 4 years of Keynesian policies.  That haven’t raised personal incomes.  The true measure of any economic recovery.  And when personal incomes are the lowest they’ve been in 20 years, there hasn’t been any economic recovery.  Despite $800 billion in stimulus.  And 4 years of President Obama’s Keynesian economic policies.

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Timberlake loves the Pontiac GTO even though His Presidential Candidate wants to put us in Electric Cars and Hybrids

Posted by PITHOCRATES - October 6th, 2012

Week in Review

Justin Timberlake is an incredible talent.  One of the best hosts of Saturday Night Live ever.  He’s a true triple threat.  He can sing, dance and act.  And he’s funny.  He probably could go far on Dancing with the Stars.  And no doubt be a huge ratings getter for them.  His talent has made him super rich.  Which is okay.  He earned it.  The only thing to take issue with him is in his political endorsements.  He supports President Obama.  Despite his love for things the Obama administration and the Democrat Party want to take away from ordinary Americans (see Justin Timberlake falls for old Pontiac GTO by Bryan Alexander posted 10/5/2012 on USA Today).

Eastwood drives a classic Ford Mustang in the flick, while Timberlake drives a 1967 Pontiac GTO convertible. Their happy expressions inside the vehicles isn’t just acting. Timberlake loved his so much, that he just had to have it.

“I kept driving that car around, and driving it around and finally I just said, ‘yeaaaaahh,’ ” Timberlake tells USA TODAY.

Yeah, that’s a feeling a lot of Americans have had with their love of muscle cars.  But, alas, most Americans can no longer indulge in these passions.  First of all, the federal government has an all out war on cars with big engines.  And, secondly, they’re running up the price of gasoline so high that only rich people can enjoy these toys anymore.  Instead they push us into electric cars and hybrids that we don’t want.  While the super rich, like Timberlake, and other Democrat supporters in Hollywood and in the entertainment world and the mainstream media, can enjoy the cars they tell us not to drive.  Something isn’t right about that.

Americans should be able to enjoy cars like Justin Timberlake can without being as rich as he is.  Like our fathers did by working a job after high school so they could put gasoline into their beloved muscle cars.  That’s the America we want.  Not what the Left wants to impose on us.  We just want to enjoy the simple things.  Like Timberlake can.  Driving the open road with the top down.  With the noise of the engine playing sweeter music than any sound system has ever played.  But these sweet instruments are lucky to get 12 miles to the gallon.  Which makes it expensive to drive them when Democrat policies have raised gas prices up to $4 a gallon.  Or more.

The Democrats say they are for the working man.  But their policies definitely favor the super rich.

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FT138: “High gas prices mean high food prices.” —Old Pithy

Posted by PITHOCRATES - October 5th, 2012

Fundamental Truth

We use Diesel Fuel in our Ships, Trains and Trucks to move Food from the Farm to the Grocery Store

People don’t like high gas prices.  When the price at the pump goes up more of our paycheck goes into the gas tank.  Or, more precisely, in everyone’s gas tanks.  For even if you don’t drive a car when gas prices go up you’re putting more of your paycheck into the gas tanks of others.  Thanks to oil being the lifeblood of our economy.  And unless you’re completely self-sufficient (growing your own food, making your own clothes, etc.) everything you buy consumed some petroleum oil somewhere before reaching you.

Gas prices go up for a variety of reasons.  The purely economic reason is the market forces of supply and demand.  When gas prices rise it’s because demand for gasoline is greater than the supply of gasoline.  Which means our refineries aren’t producing enough gasoline to meet demand.  And the purely economic reason for that is that they are not refining enough crude oil.  Meaning the low supply of gasoline is due to the low supply of crude oil.  Which brings us to how high gasoline prices consume more of our paychecks even if we don’t drive.  The reason being that we just don’t make gasoline out of crude oil.  We also make diesel fuel.

Diesel fuel is a remarkable refined product.  It just has so much energy in it.  And we can compress an air-fuel mixture of it to a very small volume.  Put the two together and you get a long and powerful power stroke.  Making the diesel engine the engine of choice for our heavy moving.  We use it in the ships that cross the ocean.  In the trains that cross our continents.  And in the trucks that bring everything to where we can buy them.  To the grocery stores.  The department stores.  To the restaurants.  Everything in the economy that we don’t make for ourselves travels on diesel fuel.  Which is why when gas prices go up diesel fuel prices go up.  Because of the low supply of oil going to our refineries to refine these products.

Oil is at a Disadvantage when it comes to Inflation because you just can’t Hide the Affects of Inflation in the Price of Oil

And there are other things that raise the price of gasoline.  That aren’t purely economical.  But more political.  Such as restrictions on domestic oil drilling.  Which reduces domestic supplies of crude oil.  Political opposition to new pipelines.  Which reduces Canadian supplies of crude oil.  Special ‘summer’ blends of gasoline to reduce emissions that tax a refinery’s production capacity.  As well as our pipeline distribution network.  Higher gasoline taxes.  To pay for roads and bridges.  And to battle emissions.  The ethanol mandate to use corn for fuel instead of food.  Again, to battle emissions.  All of which makes it more difficult to bring more crude oil to our refineries.  And more difficult for our refineries to make gasoline.  Which all go to adding costs into the system.  Raising the price at the pump.  Consuming more of our paychecks.  No matter who is buying it.

Then there is another factor increasing the price at the pump.  Inflation.  When the government tries to stimulate economic activity by lowering interest rates they do that by expanding the money supply.  So money is cheaper to borrow because there is so much more of it to borrow.  Hence the lower interest rates.  However, expanding the money supply also causes inflation.  And devalues the dollar.  As more dollars are now chasing the same amount of goods and services in the economy.  So it takes more of them to buy the same things they once did.  One of the harder hit commodities is oil.  Because we price oil on the world market in U.S. dollars.  So when you devalue the dollar it takes more of them to buy the same amount of oil they once bought.

Oil is at a particular disadvantage when it comes to inflation.  Because you just can’t hide the affects of inflation in the price of oil.  Or the gas we make from it.  Unlike you can with laundry detergent, potato chips, cereal, candy bars, toilet paper, etc.  Where the manufacturer can reduce the packaging or portion size.  Allowing them not to raise prices to reflect the full impact inflation.  They still increase the unit price to reflect the rise in the general price level.  But by selling smaller quantities and portions their prices still look affordable.  This is a privilege the oil industry just doesn’t have.  They price crude oil by a fixed quantity (barrel).  And sell gasoline by a fixed quantity (gallon).  So they have no choice but to reflect the full impact of inflation in these prices.  Which is why there is more anger about high gas prices than almost any other commodity.

Perhaps we can lay the Greatest Blame for the Current Economic Malaise on the Government’s Inflationary Monetary Policies

Current gas prices are hitting record highs.  And this during the worse economic recovery following the worst recession since the Great Depression.  Gas prices and the unemployment rate are typically inversely related to each other.  When there is high unemployment people are buying less gasoline.  This excess gasoline supply results in lower gas prices.  When there is low unemployment people are buying more gasoline.  This excess demand for gasoline results in higher gas prices.  These are the normal affects of supply and demand.  So the current high gas prices have little to do to with normal economic forces.  Which leaves government policies to explain why gas prices are so high.

Environmental concerns have greatly increased regulatory policy.  Increasing regulatory compliance costs.  Which has greatly discouraged the building of new refineries.  And making it very difficult to build new pipelines.  Which tax current pipeline and refinery capacities.  A problem mitigated only with their restriction on domestic oil production.  The current administration has pretty much shut down oil exploration and production on all federal lands.  Reducing crude oil supplies to refineries.  These environmental policies would send gas prices soaring if the economy was booming.  But the economy is not booming.  In fact the U-6 unemployment rate (which counts everyone who can’t find a full time job) held steady at 14.7% in September.  So an overheated economy is not the reason we have high gas prices.  But the high gas prices may be part of the reason we have such high unemployment.

Perhaps we can lay the greatest blame for the current economic malaise on the government’s inflationary monetary policies.  Inflation increases prices.  Especially those things sold in fixed quantities priced in dollars.  Like oil.  And gasoline.  The price inflation in refined oil products is like a virus that spreads throughout the economy.  Because everyone uses energy.  Especially the food industry.  From the farmers driving their tractor to work their fields.  To the trucks that take grain to rail terminals.  To the trains that transport this grain to food processing plants.  To the trucks that deliver these food products to our grocery stores.  From the moment farmers first turn over their soil in spring to the truck backing into to a grocery store’s loading dock to consumers bringing home groceries in their car to put food on the table fuel is consumed everywhere.  Which is why when gasoline prices go up food prices go up.  Because we refine gasoline from the same crude oil we refine diesel fuel from.  Oil.  Creating a direct link between our energy policy and the price of food.

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Bretton Woods, Nixon Shock, OPEC, Yom Kippur War, Oil Embargo, Stagflation, Paul Volcker, Ronald Reagan and Morning in America

Posted by PITHOCRATES - September 18th, 2012

History 101

Under the Bretton Woods System the Americans promised to Exchange their Gold for Dollars at $35 per Ounce

Wars are expensive.  All kinds.  The military kind.  As well as the social kind.  And the Sixties gave us a couple of doozies.  The Vietnam War.  And the War on Poverty.  Spending in Vietnam started in the Fifties.  But spending, as well as troop deployment, surged in the Sixties.  First under JFK.  Then under LBJ.  They added this military spending onto the Cold War spending.  Then LBJ declared a war on poverty.  And all of this spending was on top of NASA trying to put a man on the moon.  Which was yet another part of the Cold War.  To beat the Soviets to the moon after they beat us in orbit.

This was a lot of spending.  And it carried over into the Seventies.  Giving President Nixon a big problem.  As he also had a balance of payments deficit.  And a trade deficit.  Long story short Nixon was running out of money.  So they started printing it.  Which caused another problem as the US was still part of the Bretton Woods system.  A quasi gold standard.  Where the US pegged the dollar to gold at $35 per ounce.  Which meant when they started printing dollars the money supply grew greater than their gold supply.  And depreciated the dollar.  Which was a problem because under Bretton Woods the Americans promised to exchange their gold for dollars at $35 per ounce.

When other nations saw the dollar depreciate so that it would take more and more of them to buy an ounce of gold they simply preferred having the gold instead.  Something the Americans couldn’t depreciate.  Nations exchanged their dollars for gold.  And began to leave the Bretton Woods system.    Nixon had a choice to stop this gold outflow.  He could strengthen the dollar by reducing the money supply (i.e., stop printing dollars) and cut spending.  Or he could ‘close the gold window’ and decouple the dollar from gold.  Which is what he did on August 15, 1971.  And shocked the international financial markets.  Hence the name the Nixon Shock.

When the US supported Israel in the Yom Kippur War the Arab Oil Producers responded with an Oil Embargo

Without the restraint of gold preventing the printing of money the Keynesians were in hog heaven.  As they hated the gold standard.  The suspension of the convertibility of gold ushered in the heyday of Keynesian economics.  Even Nixon said, “I am now a Keynesian in economics.”  The US had crossed the Rubicon.  Inflationary Keynesian policies were now in charge of the economy.  And they expanded the money supply.  Without restraint.  For there was nothing to fear.  No consequences.  Just robust economic activity.  Of course OPEC didn’t see it that way.

Part of the Bretton Woods system was that other nations used the dollar as a reserve currency.  Because it was as good as gold.  As our trading partners could exchange $35 for an ounce of gold.  Which is why we priced international assets in dollars.  Like oil.  Which is why OPEC had a problem with the Nixon Shock.  The dollars they got for their oil were rapidly becoming worth less than they once were.  Which greatly reduced what they could buy with those dollars.  The oil exporters were losing money with the American devaluation of the dollar.  So they raised the price of oil.  A lot.  Basically pricing it at the current value of gold in US dollars.  Meaning the more they depreciated the dollar the higher the price of oil went.  As well as gas prices.

With the initial expansion of the money supply there was short-term economic gain.  The boom.  But shortly behind this inflationary gain came higher prices.  And a collapse in economic activity.  The bust.  This was the dark side of Keynesian economics.  Higher prices that pushed economies into recessions.  And to make matters worse Americans were putting more of their depreciated dollars into the gas tank.  And the Keynesians said, “No problem.  We can fix this with some inflation.”  Which they tried to by expanding the money supply further.  Meanwhile, Egypt and Syria attacked Israel on October 6, 1973, kicking off the Yom Kippur War.  And when the US supported their ally Israel the Arab oil producers responded with an oil embargo.  Reducing the amount of oil entering America, further raising prices.  And causing gas lines as gas stations ran out of gas.  (In part due to Nixon’s price controls that did not reset demand via higher prices to the reduced supply.  And a ceiling on domestic oil prices discouraged any domestic production.)  The Yom Kippur War ended about 20 days later.  Without a major change in borders.  With an Israeli agreement to pull their forces back to the east side of the Suez Canal the Arab oil producers (all but Libya) ended their oil embargo in March of 1974.

It was Morning in America thanks to the Abandonment of Keynesian Inflationary Policies

So oil flowed into the US again.  But the economy was still suffering from high unemployment.  Which the Keynesians fixed with some more inflation.  With another burst of monetary expansion starting around 1975.  To their surprise, though, unemployment did not fall.  It just raised prices.  Including oil prices.  Which increased gas prices.  The US was suffering from high unemployment and high inflation.  Which wasn’t supposed to happen in Keynesian economics.  Even their Phillips Curve had no place on its graph for this phenomenon.  The Keynesians were dumfounded.  And the American people suffered through the malaise of stagflation.  And if things weren’t bad enough the Iranians revolted and the Shah of Iran (and US ally) stepped down and left the country.  Disrupting their oil industry.  And then President Carter put a halt to Iranian oil imports.  Bringing on the 1979 oil crisis.

This crisis was similar to the previous one.  But not quite as bad.  As it was only Iranian oil being boycotted.  But there was some panic buying.  And some gas lines again.  But Carter did something else.  He began to deregulate oil prices over a period of time.  It wouldn’t help matters in 1979 but it did allow the price of crude oil to rise in the US.  Drawing the oil rigs back to the US.  Especially in Alaska.  Also, the Big Three began to make smaller, more fuel efficient cars.  These two events would combine with another event to bring down the price of oil.  And the gasoline we made from that oil.

Actually, there was something else President Carter did that would also affect the price of oil.  He appointed Paul Volcker Chairman of the Federal Reserve in August of 1979.  He was the anti-Keynesian.  He raised interest rates to contract the money supply and threw the country into a steep recession.  Which brought prices down.  Wringing out the damage of a decade’s worth of inflation.  When Ronald Reagan won the 1980 presidency he kept Volcker as Chairman.  And suffered through a horrible 2-year recession.  But when they emerged it was Morning in America.  They had brought inflation under control.  Unemployment fell.  The economy rebounded thanks to Reagan’s tax cuts.  And the price of oil plummeted.  Thanks to the abandonment of Keynesian inflationary policies.  And the abandonment of oil regulation.  As well as the reduction in demand (due to those smaller and more fuel efficient cars).  Which created a surge in oil exploration and production that resulted in an oil glut in the Eighties.  Bringing the price oil down to almost what it was before the two oil shocks.

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The Fed believes the Third Time’s the Charm when it comes to Printing Money so here comes QE3

Posted by PITHOCRATES - September 16th, 2012

Week in Review

The Keynesians will print more money.  QE3 is on its way.  The third round of quantitative easing.  Because QE3 will pull this economy out of recession.  Just as they said QE2 would.  Just as they said QE1 would before that.  And just because they failed the last two times they tried this doesn’t mean it will fail this time, too (see Fed Pulls Trigger, to Buy Mortgages in Effort to Lower Rates by Jeff Cox, CNBC, posted 9/13/2012 on Yahoo! Finance).

The Fed said it will buy $40 billion of mortgage-backed securities per month in an attempt to foster a nascent recovery in the real estate market. The purchases will be open-ended, meaning that they will continue until the Fed is satisfied that economic conditions, primarily in unemployment, improve…

Enacting the third leg of quantitative easing will take the Fed’s money creation past the $3 trillion level since it began the process in 2008.

According to the Wall Street Journal the Fed balance sheet stood at just below $1 trillion prior to the Great Recession.  That is, pre QE1.  Since then the Fed has increased that to $2.8 trillion prior to QE3.  An increase of 180%.  QE3 will take that above $3 trillion.  And increase from the level before the Great Recession of over 200%.    Meaning the monetary base after QE3 will be more than three times the monetary base prior to QE1.  And all during the Obama presidency.  In less than four years.  And just like QE1 and QE2 this latest quantitative easing won’t work either.  For like so many are saying if quantitative easing worked there would not have been a need for QE2 let alone QE3.  So it won’t help the economy.  But it will have an effect.

In addition, he addressed concerns that savers are being penalized from low interest rates, saying that the policy has allowed for growth in other areas.

“While low interest rates impose some costs, Americans will ultimately benefit most from the healthy and growing economy that low interest rates promote,” he said.

Small business owners have no idea of the full impact of Obamacare on their businesses.  So they are not hiring anyone anytime soon.  And then there’s Taxmageddon.  The largest tax increase in history to occur 1/1/2013.  Environmental policy.  And so on.  These are the things preventing people from hiring new employees.  And no amount of cheap money will change that.  Some people understand this.  Keynesians don’t.  In fact, the only thing they understand is spending money.  The key to economic activity is putting as much money into the hands of spenders as possible.  So they spend it.  And the people that get this money spend it, too.  And the people that get this money spend it after they get it.  And so on.  According to the Keynesian multiplier.  Where spending begets more spending.  Spending is good.  But savings is not.  According to Keynesians.  They see saving as lost economic activity.  Leakage from the economy.  So they want people to save as little as possible.  So they like low interest rates.  Because it provides no incentive for people to save.  So Keynesian policies penalize savers.  They understand this.  And they approve of this.

Of course with all the money the Fed is printing there will be inflation.  It’s just a matter of time.  We’d have double digit inflation right now based on the growth of the monetary base if there weren’t worse economies than the U.S. economy.  Some Eurozone countries are so bad no one wants to invest in their economies.  So they’re parking their money in the U.S.  Even at these low interest rates.  Even paying banks (i.e., negative interest rates) to hold their money.  Because it is the safest alternative.  But how long can this last?

The stock market, which had been slightly positive prior to the decision, shortly after 12:30 p.m., surged while bond yields, particularly farther out on the curve, jumped higher. Gold and other metals gained at least 1 percent across the board while the dollar slid against most global currencies…

Washington conservatives have been critical of the central bank’s money creation, which has caused its balance sheet to swell to $2.8 trillion. They worry that the growing money supply will lead to inflation, which has reared its head in food and energy prices but has remained tame through the broader economy.

Bill Gross, who runs bond giant Pimco, said the new round of easing would take the Fed’s balance sheet up to nearly $3.5 trillion if the purchases continue for a year.

“That potentially is reflationary,” he told CNBC. “We’re just to have to see if it works.”

Bonds issued when interest rates were higher have increased in value.  Because you can’t buy bonds today at such a high interest rate.  So older bonds (with higher interest rates) are worth more than newer bonds (at lower interest rates).

Gold increases in value when the value of the dollar drops.  Because the price of gold is in dollars.  So when you put more dollars into the monetary base you depreciate the dollar.  And raise prices.  Because it takes more weaker-dollars to buy the same things the once stronger-dollars bought.

So far inflation has been confined to food and energy.  Where it is harder to hide.  Especially oil.  Because it’s sold by the barrel for dollars.  So when you make the dollar weaker you send up the price of oil.  And everything you make from oil.  Like gasoline.  Which is why gasoline prices are approaching record highs.  Not because of a booming economy.  But because of inflation.

There is inflation in food, too.  But you can hide this a little.  You can keep prices steady while reducing portion sizes.  So the price per unit portion sold is higher.  But people don’t notice this as much as they do the price at the pump.  Where they cannot reduce the portion size.  Because gas is sold by the gallon.  Which means the full effect of Keynesian inflation monetary policy is reflected in the gas price.  Which is why high gas prices anger us more than just about everything else.

So inflation is here.  And at the rate they’re printing money it’s going to explode sooner or later.  For they’re printing it at a far greater rate than they did during the stagflation of the Seventies.  Giving Jimmy Carter that high misery index (unemployment rate plus the inflation rate).  A policy that did not help Carter’s economy.  Nor will it help the current economy.  In fact, it will only take a bad economy and make it worse.

If printing money worked the Seventies would have been a decade of unprecedented growth.  But they weren’t.  In fact all nations that printed money suffered from high inflation.  And poor economic growth.  Yet they pursue the same policy today.  Why?  Because if they don’t it’s an admission that their policies have been failures.  At the same time admitting that the Republican policies are better policies.  And they would rather throw the country into another depression before admitting that.

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Gas Prices continue to Rise as the Number of Working Oil Rigs in the U.S. Fall

Posted by PITHOCRATES - September 15th, 2012

Week in Review

The law of supply and demand tells us when prices rise demand rises.  Causing supply to rise to meet that demand.  And it typically works when the free market is left to market forces.  Apparently that isn’t happening in the U.S. oil business.  So if you ever wonder why gasoline prices are so high this is the reason (see U.S. rig count unchanged at 1,864 by The Associated Press posted 9/14/2012 on USA Today).

The number of rigs actively exploring for oil and natural gas in the U.S. remained unchanged this week at 1,864.

Houston-based oilfield services company Baker Hughes reported Friday that 1,413 rigs were exploring for oil and 448 were searching for gas. Three were listed as miscellaneous. A year ago, Baker Hughes listed 1,985 rigs…

The rig count peaked at 4,530 in 1981 and bottomed at 488 in 1999.

The president may say we are drilling for more oil than ever before but the number of active rigs fell this year to 1,864 from last year’s 1,985.  A drop of 121 rigs.  At a time of increasing gasoline prices.  The rig trend appears to be trending in the wrong direction.  Rising prices mean demand is greater than supply.  So the number of rigs should increase not decrease.  To meet that rising demand.

The last time gasoline prices were soaring like this was during the Carter years.  Because gas prices were so high oil companies rushed in to meet that demand.  So that by 1981 (the first year of the Reagan administration) the number of rigs peaked at 4,530.  Which gave us the steepest fall in gas prices in U.S. history.  Falling from a high of $3.31 to about $1.75 a gallon (prices are in 2007 dollars).  All of those rigs (as well as others throughout the world) created a glut of oil in the market.  And that glut of oil brought gas prices down.

Gas prices are about as high as they were in 1981.  And yet we have fewer rigs drilling for oil.  Far fewer.  President Carter may have asked us to turn down our thermostats and wear a sweater to help in the energy crisis.  But he at least allowed the oil companies to drill for oil.  And they would drill today like they did under Carter for gas prices are as high as they were under Carter.  And the only reason that they are not can be that it is not as economically beneficial for them today as it was under Carter.  Or that the Obama administration is just not letting them drill.  And with prices and demand being as high as ever it suggests the latter.

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