The Obama Reelection Strategy: Increase Gas Prices to Crash Economy to Lower Gas Prices

Posted by PITHOCRATES - April 29th, 2011

The 2nd Largest Oil Reserves in the World

Saudi Arabia has the largest oil reserves in the world.  Take a guess who has the 2nd largest oil reserves in the world.  Kuwait?  Iraq?  Iran?  Libya?  Nigeria?  Venezuela?  Qatar?  Angola?  Algeria?  Ecuador?  United Arab Emirates?  No.  No.  No.  No.  No.  Uh…um, no.  No.  No.  No.  No.  No.  Could it be the United States?  It could be.  But it’s not.  With so much U.S. land off limits to drilling who knows how much oil they have.  So who has the second largest oil reserves in the world?  Here’s a hint.  Think Wayne Gretzky.  Who used to play on a team called the Oilers.  In the city of Edmonton.  In the province of Alberta.  In, of course, Canada.

Yes, Canada has the second largest oil reserves in the world.  But this oil reserve isn’t in pools underground waiting for someone to pump it up.  It’s in the Athabasca oil sands.  Think of hot oil spilled into sand which then cools into a thick tar.  Once upon a time this type of oil was worthless.  Because you just couldn’t drill for it and pump it.  You have to process this tar into useful oil.  And the cost to do this used to be prohibitive.  But with the price of oil today, this once worthless tar is now a very valuable form of crude oil.

America, the world’s largest economy, imports the majority of her oil from Canada.  In fact, the Canadians export more oil to the U.S. than they consume themselves.  Which is rather interesting when you consider Canadian gas prices are higher than American gas prices.  Now oil is oil.  And one would assume that the Canadians make their gasoline from the same oil we make our gasoline from.  Canadian oil.  Yet their gas prices are higher than in the U.S.  Why?  Because when it comes to their gasoline, they’re a lot like the Europeans.  They tax the bejesus out of it.  Taxes average about a third of the price at pump.

Even with all that Oil Canadian Gas Prices are High

With the world’s second largest oil reserves, one can’t blame the lack of supply for high prices.  They have supply.  So much that they export more than they use.  Could they have a refinery shortage?  If they did, they could fix that easily by building more refineries.  I mean, with the domestic oil reserves, the Canadians are in the driver’s seat when it comes to their gasoline prices.  It would be pretty darn hard for their gas prices to be ‘too high’ to affect their economy.  So how are the little guys doing in Canada?  The small business owners (see Rising fuel costs hit small businesses by Anita Elash posted 4/29/2011 on The Globe and Mail)?

Steak is off the menu, comfort food is in and prices are up by as much as 20 per cent at the Yellow Belly Brewery in St. John’s, Nfld., this spring, partly because of rising fuel costs.

Owner Brenda O’Reilly says her expenses have increased steadily since she opened her micro-brewery and gastro pub three years ago, but the sudden price hike at the gas pumps this year has been “the straw that broke the camel’s back.”

In addition to coping with higher labour costs and escalating commodity prices, her main supplier has slapped a steadily rising fuel surcharge, now up to $3.50, on every delivery – a cost that significantly cuts into profits.

I guess the price of Canadian gas can be ‘too high’. 

Forced menu changes and higher restaurant prices are just one of the ways record-high fuel costs are affecting small business this spring. Surveys for the Canadian Federation of Independent Business show that fuel costs are now the biggest concern for small business owners. Seventy-five per cent of members said they’re worried about rising fuel prices, compared to 50 per cent who were worried two years ago.

CFIB chief economist Ted Mallett said wide fluctuations in fuel prices over the past few years have created a lot of uncertainty for business owners and make planning especially difficult. Many have signed contracts or service agreements based on costs several months ago, and “if they guessed wrong about fuel prices, it comes out of their bottom line.”

These are the kind of problems they’re having in the U.S.  Because the Americans have no control over gas prices.  They are at the mercy of the oil exporters.  Exporters like Canada.  Which begs the question.  How can both the United States and Canada have such high gas prices?  If the Canadians are getting rich off of the Americans, they should be able to lower their own gas prices.  If they’re giving the oil away, then the Americans should be able to lower their gas prices.  It’s hard to imagine how the second largest oil reserves in the world results in high prices in both the U.S. and Canada.  Unless they’re both taxing the bejesus out of their gasoline.

High Gas Prices Kill Anemic Economic Recovery

The Canadian consumer is making things hard for Canadian small business.  And it’s no different in the U.S. (see Gas costs siphon off much of March rise in incomes by Martin Crutsinger, Associated Press, posted 4/29/2011 on USA Today).

Consumer spending had been expected to post solid gains this year, helped by stronger employment growth and a two percentage-point cut in Social Security payroll taxes. But Americans are paying more for gas, prompting economists to scale back their growth forecasts…

“The increase in prices is absorbing pretty much all of the windfall from the payroll tax cut,” said Paul Dales, an economist with Capital Economics. “If gasoline prices were to stop rising, real consumption could bounce back in the second quarter. But even then, jobs growth and wage growth are not strong enough to result in a significant and sustained acceleration in consumption growth. This economic recovery is going to continue to disappoint both this year and next.”

Consumers are spending more.  But they’re getting less.  Any extra disposable income is just paying for the higher cost of gasoline.  Which means consumer spending is flat.  And will remain flat.  For another two years.  Or more.  Because of the cost of gasoline.  The environmentalists may be happy.  But high gas prices are making the rest of us make a lot of sacrifices we’d rather not.  And it’s killing off what anemic economic recovery there was.

The Weak U.S. Dollar Increases World Oil Prices

There is a reason gasoline prices are soaring.  And it’s just not demand outpacing supply.  Though that is a huge part of it.  But it’s another government policy that is compounding the supply problem (see Oil edges up, but choppy, as weak dollar supports by Robert Gibbons posted 4/29/2011 on Reuters).

“Oil is reacting to the dollar…,” said Richard Ilczyszyn, senior market strategist at Lind-Waldock in Chicago.

Higher interest rates in Europe compared to the U.S. have undermined support for the U.S. dollar, pushing up the euro by 11 percent so far this year.

The weak dollar also helped push spot gold to a new record as investors continued to seek alternative assets to hedge against inflation.

Thursday’s report that growth in the U.S. gross domestic product slowed more than expected to an annual rate of 1.8 percent in the first quarter from a fourth-quarter pace of 3.1 percent, reinforced the perception that the U.S. central bank will continue with its loose monetary policy.

It’s not the greedy oil companies.  Or their record profits driving up prices.  It’s Federal Reserve policy.  All that quantitative easing.  Printing money.  They just increased the money supply so much that they devalued the dollar.  Which gives us price inflation.  Where everything costs more because our money is worth less.  And we price oil in U.S. dollars in the international markets.  Which means American monetary policy is increasing world oil prices.  Not the oil companies.  Their getting obscenely rich is just a byproduct of loose U.S. monetary policy.

Oil’s price rise could be tempered by increasing evidence that high prices will erode demand.

U.S. consumer spending rose as households stretched to cover the higher cost for food and gasoline as inflation posted its biggest year-on-year rise in 10 months.

But all is not lost.  Oil prices will come down.  Like they did in 2008.  Because that’s what recessions do.  They lower prices.  When people don’t have jobs they don’t buy gas.  Which lowers demand.  And this lower demand will bring down gasoline prices.

If you Like Stagflation and Misery, Vote Obama

Perhaps this is the Obama reelection strategy.  Ramp up inflation to crash the economy.  Thus lowering gas prices.  It may work.  If people don’t mind another ‘worst recession’ since the Great Depression.  As long as gas is more affordable.  It’s a risky plan.  And it hasn’t had a successful track record.  It made Jimmy Carter a one-term president.  But perhaps Obama can succeed where Jimmy Carter failed. 

Interestingly, stagflation and economic misery are not the only things these presidents have in common.  Both were/are engaged in the Middle East, too.  Carter brought peace between Israel and Egypt while Obama has…

Perhaps they should consider another reelection strategy.

www.PITHOCRATES.com

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FUNDAMENTAL TRUTH #63: “There is no such thing as a monopoly in free market capitalism.” -Old Pithy

Posted by PITHOCRATES - April 26th, 2011

There is always Competition

Once upon a time, back in my youth, I sat in a seminar on venture capital.  I learned that venture capitalists are very wise.  And very careful about where they invest their money.  For them it’s not so much as making a return on an investment.  They could do that easier by just buying stocks and bonds.  No, the venture capitalist wants more.  They’re often people who went from rags to riches on a great idea.  And they want to recapture that feeling.  By taking big risks with their money.  On something that could be the next big thing.  And if you got the next big thing, they have that important seed capital you need.  But you have to sell them first.  Really sell them.

All these years later, I still remember this one example about a small startup company that had the next big thing in security systems.  Or so they thought.  Theirs took advantage of the latest in technology.  Motion sensors.  Glass-break sensors.  Sound sensors.  You name it.  If anything happened that shouldn’t be happening, the system would detect it.  But it did more.  It made noises. Flashed lights.  To scare off would be thieves.  Because thieves like to break into quiet, empty places.  Not places where lights went on and off.  And sounds moved around.  It was a pretty impressive system.  And costly.  It would set a business owner back quite a bit to install such a system.  But it would be worth it.  They knew they could sell it.  And, best of all, they would have a monopoly.  For no one else had anything close to what their system could do.  This was brand new.  And there was no competition.

 The venture capitalist smiled and thanked them for their presentation.  But he would not invest.  For they did have competition.  He said there is always competition.  They just failed to identify it.  They were sure there wasn’t.  They did their homework.  No security company out there had a system remotely close to theirs.  Then the venture capitalist smiled and said politely, “Perhaps not.  But I could buy a dog to do the same for less.”

High Gas Prices keep Gas Available

There is always competition in a free market.  If there is a market sector that is making high profits, other businesses will try to enter that sector.  To get a share of those high profits.  And when they do, there’s competition.  And prices come down.  That’s why gasoline prices are so close to each other at gas stations in the same geographical location.  One could raise their selling price by a dollar.  But if they did, their customers would just go to their competitors.  That’s what competition does.  Keeps prices down.  And makes people figure out how to sell the same thing for less.  Because if they can, they gain customers.  While their competitors lose customers.

Even oil companies feel the heat of competition.  High gas prices may hurt the wallet at the gas pump, but they are an incentive to them.  When the demand of oil grows greater than its supply, prices soar.  Why?  Because oil is becoming a more scarce commodity.  And the scarcer a commodity is the higher its price.  Simple supply and demand of economics.  These higher oil prices allow the oil companies to go after oil in the ground that was before too costly to bring to market.  Deep water drilling is more expensive than conventional drilling.  It simply wasn’t cost feasible before.  As was extracting oil from oil sands.  But high oil prices allow this extraction.  Bringing more oil to market.  Which ultimately will reduce the price of gasoline.  Or at least reducing the increase in the price of gas.  Simply by increasing the supply of oil to more closely meet the demand.  More importantly, even though prices may go up, gasoline will be available.  Unlike it was during the 1973 Oil Crisis.  Where OPEC cut oil deliveries to the U.S.  Instead of letting market prices rise to match the supply to the demand, the Nixon administration implemented price controls and rationing.  It seemed the kind thing to do for the consumer.  But by selling below the market price a lot of gas stations simply ran out of gasoline.  Resulting in further rationing.  Long lines at gas stations.  And scenes of people pushing their out-of-gas cars to the gas pump.

So, yes, even high gas prices can be a good thing.  It’s simply the market setting the price to make sure gas is available to buy.  We may not like the price.  And think the oil companies are gouging us at the pump.  But they’re not.  Even when they have record profits.  Though it is tempting to hate them after they post some of those record profits.  They sound huge.  And unfair.  But are they any bigger than other corporate profits?  Not really.  Oil companies have huge revenues.  So their profits are huge.  But as a percentage of sales revenue, they’re actually not that huge.  Here are some examples of net profit averaged over five years.  Chevron (8.22%).  BP (4.94%).  ExxonMobil (8.79%).  And how does that compare to other corporations?  Here are some from various sectors.  Home Depot (4.86%).  Sony (0.82%).  General Electric (9.93%).  Apple (17.60%).  Microsoft (28.20%).  If you look at net profit, the oil companies aren’t really making more profits than other corporations.  (For source of net profit information see YCharts.)

The Federal Government is a Monopoly

Of course, when gas prices go up we tend to feel that more than other commodities.  Because we use a lot of gas in our daily lives.  Which leaves us less money in the wallet to buy those other commodities.  Which are more expensive because of the higher energy costs to bring these other commodities to market.  Few things affect prices like energy.  And oil is the big player in the energy market because it is the energy of choice in transportation.  Ships, planes, trains and trucks all use oil-based fuels.  And no matter how green we get this isn’t going to change.  Because there is no other portable fuel with such a large energy content available.  And won’t be in the conceivable future.  You just aren’t going to replace any of these with electric versions.  And that’s just not in the U.S.  It’s in all of the advanced and emerging economies in the world.

This is why oil prices are going up.  It’s not the greed of a small cartel of oil producers.  It’s the exploding demand.  And the high oil prices are allowing these companies to bring oil to market that was simply impossible a decade or two go.  And there’s more oil out there.  But we have to get it out of the ground.  And we need to be doing this some 5 years before we need it.  Because it takes about 5 years to bring new oil onto the market.  And they would be drilling exploratory wells like there is no tomorrow in the U.S.  If it wasn’t for the hurdles they have to jump through to get a permit from the government.  An oil company can spend 5 years or more in the permitting process.  They can spend millions of dollars in the process.  And yet the government can still deny them the permit.  Without any compensation for their investment to date.

This isn’t unique to any one oil company.  They all go through this.  It is very difficult indeed to start drilling a new well in the U.S.  Which means it costs more to drill a well in the U.S.  So some oil companies eventually give up and go elsewhere to look for oil.  Taking with them good oil jobs.  Which reduces domestic oil supplies.  Making us more dependent on foreign sources of oil.  Which increases the cost of oil-based fuels in the U.S.   But it’s not any oil cartel doing this.  Although it is a monopoly.  It’s the federal government.  The oil companies will still go out there and find oil and bring it to market.  It’s what they do.  They just don’t do it here.  Because the U.S. government just makes it too difficult to do this in the U.S.

Getting Oil out of the Ground is not Easy

Only the power of government can interfere with the free market.  Because it takes legislative authority to restrict the free market.  Create cartels.  And monopolies.  It’s not one big oil company keeping the others out of the U.S. market.  It’s federal regulation keeping all of the oil companies out of the U.S. market.  And this is what is increasing the price at the gas pump.  And in commodity prices across the board.  Because the high oil prices are just begging for them to come in and find oil and bring it to market.  Even in sources once considered too costly (oil sands, deep wells, arctic climates, etc.). 

And just like every business has competition, so do markets.  Getting oil out of the ground is not easy.  It is a very costly and speculative industry.  And as oil becomes more costly to bring to market, fewer are able to do it.  You need deep pockets.  And deep experience.  Those who can and do so at a profit are in great demand.  So if they can’t drill in the U.S. they can drill someplace else.  And do.  Because of the big U.S. monopoly, the federal government, has shut them out of the U.S. market. 

But as people look forward to the summer driving season, they will curse Big Oil.  Not the federal government.  Even though the former fights to bring oil to market.  While the latter fights against it.

www.PITHOCRATES.com

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