High Gas Prices may be Keeping some of Us in Recession, but the Rich and our Elected Leaders are doing Okay

Posted by PITHOCRATES - June 27th, 2011

The Oil Supply determines Gasoline Prices

President Obama will release approximately 30 million barrels of oil from the U.S. Strategic Reserve to try and bring down gasoline prices for this summer driving season.  Because the high cost of gasoline is leaving consumers with little disposable income.  Or a reason to reelect him in 2012 (see U.S. Consumer Spending Stalled in May by The Associated Press posted 6/27/2011 on The New York Times).

Americans in May spent at the weakest pace in 20 months, a sign that gas prices are taking a toll on the economy, according to a government report Monday.

Recessions don’t reelect presidents.  Because people don’t like recessions.  People have little money to spend on the ‘luxuries’ (dinner out, movies, vacation, etc.) in life.  And barely have enough to pay for the necessities of life.  So the high price of gasoline does not make a happy constituent.  And if you need a happy constituent to reelect you, the smart money is bet on making the constituency happy.  By bringing down gasoline prices.  Which we know how to do.  President Obama has shown us.  You simply Increase the amount of oil in the market. 

So far, drawing down the Strategic Reserve is the only thing his administration has down to increase the supply of oil.  He stopped drilling in the Gulf of Mexico.  And new drilling permits have not exactly been flying out of Washington.  But there’s still hope.  Thanks to our good friends to the north.  Who have some of the largest oil reserves in the world.  And only need a way to get it to the American refineries.  Which Obama can make happen.  By saying ‘yes’ to an oil pipeline (see China eyes Canada oil, US’s energy nest egg by Rob Gilles, Associated Press, posted 6/26/2011 on Yahoo! News).

In the northern reaches of Alberta lies a vast reserve of oil that the U.S. views as a pillar of its future energy needs.

China, with a growing appetite for oil that may one day surpass that of the U.S., is ready to spend the dollars for a big piece of it.

The oil sands of this Canadian province are so big that they will be able to serve both of the world’s largest economies as production expands in the coming years. But that will mean building at least two pipelines, one south to the Texas Gulf Coast and another west toward the Pacific, and that in turn means fresh environmental battles on top of those already raging over the costly and energy-intensive method of extracting oil from sand.

Uh-oh.  Environmental battles.  You know what that means?  No relief at the pump.  Not from this administration that set green energy as the cornerstone of its economic recovery.  I mean, lowering the price of gasoline so people don’t remember the vacation that wasn’t come election time is one thing.  But making gasoline cheap and plentiful?  In an administration with Steven (somehow we have to figure out how to boost the price of gasoline to the levels in Europe) Chu as Energy Secretary?  Not going to happen.

Critics dislike the whole concept of oil sands, because extracting the oil requires huge amounts of energy and water, increases greenhouse gas emissions and threatens rivers and forests. Keystone XL, the pipeline that would bring Alberta oil to Texas Gulf Coast refineries to serve the U.S. market, compounds the issue…

Environmental groups want [President Obama] to reject it, seeing it as a test of Obama’s will to fight climate change.

The Chinese may likely get their pipeline.  But the environmentalists will be pressuring Obama to just say ‘no’.  So get used to those high prices.  They’ll probably be around for a long time to come.  At least until 2012.

The Rich get Richer, We get Poorer and Senators get Bigger Offices

People are getting richer than ever before.  Even during the Great Recession.  Some feel it’s not fair.  Especially those who hate corporate America (see The rich aren’t like you and me by Michael Winship posted 6/27/2011 on Salon).

The annual wealth report by Merrill Lynch and Capgemini finds that the assets of these so-called “high net worth individuals” reached $42.7 trillion in 2010, a rise of nearly ten percent from the previous year at a time when, as The Guardian observed, “austerity budgets were implemented by many governments in the developed world…”

Ernest Hemingway claimed that when F. Scott Fitzgerald once said to him, “The rich are different from you and me,” he archly replied, “Yes, they have more money.” Whether it’s true or not, the Hemingway in the story got it wrong. The rich not only have more money, they have more power, more clout — and more to hide.

Interestingly, this hasn’t changed during the Obama administration.  In fact, crony capitalism has never been better.  Bailouts for friends on Wall Street.  GE with a booming green energy business thanks to Obama’s green energy initiatives (and who are NOT, by the way, paying any income taxes).  Automotive bailouts that favored the UAW over actual stakeholders.  Oh, it’s good to be king.  And part of the ruling elite.  Now it’s time to reward them for a job…done (see Senators Stay Put in Hideaways by Daniel Newhauser posted 6/27/2011 on Roll Call).

A number of long-serving Senators are sitting out this year’s draw for coveted hideaways…

It’s a Senate tradition that is a cross between “Trading Spaces” and the NBA draft. Every two years, after some of the longest-serving lawmakers retire or pass away, the remaining Senators start the process of shuffling spaces, seeking to enhance their status with a coveted secret office.

The Great Recession lingers on because of high gasoline prices caused by government policies that hinder bringing more oil to market.  George W. Bush and Dick Cheney never did anything like this to drive up the price of oil.  And they were oilmen.  Who would have profited handsomely from high oil prices.  As the Democrats and the mainstream media pointed out endlessly as gasoline prices entered $4/gallon territory.  No such accusations now.  Just silence.  As the Obama policies leave a swath of destruction across the fruited plain.  Congress could do something about this.  But there is more important business to attend to.  Namely, showing other senators who has a bigger office.

Four of the 10 longest-serving sitting Senators decided it was time for an upgrade, including Hatch, who snagged the legendary space once occupied by the late Sen. Edward Kennedy (D-Mass.), and Levin, who moved into the impressive hideaway of former Sen. Chris Dodd (D-Conn.).

Hatch said his elegant new third-floor office, with a fireplace, large windows and high arched ceilings, is a significant upgrade, especially because it is just paces from the Senate floor.

And a nicer office.  Elegant?  Fireplace?  High arched ceilings?  What is this?  Imperial Rome?  Some get so upset when the rich get richer but when the people’s representatives, our servants, live just as good as the rich there is barely a whisper of disapproval.

Leahy, meanwhile, said he was in no hurry to move.

“Why would I want to give up mine?” he asked. “I’ve got the most beautiful view probably in the whole Capitol.”

An avid photographer, the second-most-senior Senator, brandishing a professional-grade digital camera, scrolled to a freshly snapped photo to prove his case.

“Recognize that guy?” he asked Wednesday, pointing to a man clad in familiar orange-tinted sunglasses, his arm casually resting on a balcony ledge looking out on a spectacular view of the Washington Monument. “It’s Bono.”

The seven-term Senator is the proud inhabitant of a first-floor hideaway, formerly the stomping grounds of the late Sen. Ted Stevens (R-Alaska). With a fireplace, built-in bookshelves, a private bathroom and a balcony, it is a rare gem among the Capitol’s hidden offices, and certainly enough to impress even a rock star.

This is your U.S. Senate.  Taking care of the people’s business.  Totally insulated from the Great Recession.  While taking the time to swoon over celebrities.  From the balcony of a gem of a hidden office.  It would appear that the rich are not the only ones who have more money, more power, more clout — and more to hide.

Out of Touch with American People

The Left attacked Ronald Reagan and George W. Bush as being out of touch with the American people.  Tax breaks for the rich.  And spending cuts for the poor.  That neither saw the suffering masses their policies created.  Well, President Obama is addressing this income disparity.  By making everyone poorer.  Except, of course, his cronies who are generous with the campaign cash donations.

The high cost of gasoline is hurting Americans and keeping the Great Recession alive and well.  And we can blame Barack Obama now for the high cost of gasoline.  By restricting the supply of oil to the market.  Because more oil means lower gas prices.  (Obama proved he knows this by drawing down the Strategic Reserve to do just that.)  His administration placed a moratorium on drilling in the Gulf of Mexico.  His administration is making it difficult to get drilling permits.  And now his administration may say ‘no’ to that pipeline from the Alberta oil sands to the Texas Gulf Coast.  Or delay saying ‘yes’ for as long as possible to appease the environmentalists.  Meanwhile, the Chinese will move ahead and do whatever it takes to get that Canadian oil.  Because without oil a modern economy will grind to a halt.  And no amount of windmills or solar panels will change that. 

The Chinese know this.  And they’ll probably get that Canadian oil while the Obama administration is still dithering over the environmental impact of the proposed pipeline.  Completely indifferent to the plight of struggling American families.  And quite happy to sit by and watch the price of gasoline get to European levels.  To advance their green energy policies.  So they can reward their most generous cronies.

And it was Ronald Reagan and George W. Bush who were out of touch with American people?

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Can’t see the Fiscal Forest for the Monetary Trees

Posted by PITHOCRATES - June 24th, 2011

He won’t Drill but he will Draw from the Strategic Reserve

The Great Recession lingers on.  As high oil prices hit consumers hard.  Gas prices are back to $4/gallon territory.  Leaving consumers with less disposable income.  Home values are declining in a deflationary spiral.  Wages are stagnant.  Unemployment is high.  And there’s inflation in food and consumer goods.  All driven by the high price of oil.  And all that quantitative easing (QE) that has depreciated the U.S. dollar (which we buy and sell oil with in the global market).

The demand for oil is soaring.  And yet President Obama put a moratorium on drilling in the Gulf of Mexico.  In fact, the U.S. isn’t drilling anywhere.  Which has forced the U.S. to import more foreign oil.  Because of this squeeze on supply.  Economics 101 tells you when demand increases supply should increase to meet that growing demand.  When it doesn’t, prices rise.  Like they are.  And the QE just compounded that problem.  When the dollar is worth less it takes more of them to buy the same amount of oil it used to.  Which means higher prices at the pump.  From demand outpacing supply.  And a weaker dollar.

The president’s solution to the high gas prices?  Blame the oil companies.  Because their profits were too high.  It had nothing to do with his policies that restricted the supply of oil on the market.  Of course, with an election coming up and gasoline prices too close to $4/gallon, he’s changed his position on that (see Loss of Libya oil bigger disruption than Katrina: IEA by Simon Falush and Zaida Espana posted 6/24/2011 on Reuters).

On Thursday, the International Energy Agency which represents the major oil consumers agreed to release 60 million barrels from emergency stockpiles, sending crude prices tumbling.

Imagine that.  Increase supply.  And prices fall.  For awhile, at least.  Because once these 60 million barrels are gone, the prices will just go back up where they were.  Unless there is a real increase in supply.  Like more drilling in the Gulf.  The Atlantic.  The Pacific.  In Alaska.  We know it works.  Increase supply.  And prices fall.  So why not just increase supply with more drilling?  Instead of drawing down our strategic reserves (America’s share being 30 million of the 60 million barrels).  Which, incidentally, we’ll have to replace.

Energy Policy Driven by the 2012 Election

Even the White House is all but admitting this move is purely political (see The wrong reason for depleting the strategic oil reserve posted 6/23/2011 on The Washington Post).

So on Thursday Obama administration spokesman Jay Carney argued that oil demand is likely to rise over the summer. In other words: It’s vacation season, and the White House is worried about high prices through the summer driving months.

Therein, perhaps, is a political emergency, at least in the White House view: President Obama’s reelection prospects will be harmed if national discontent over high gasoline prices continues. The oil release could be seen as a way for the president to take credit for gas prices that are falling anyway, or as an indirect, pre-election stimulus.

Personally, the president doesn’t have a problem with the high cost of gasoline.  His administration wants it high.  The higher the better.  They’d like to see it European high (see Times Tough for Energy Overhaul by Neil King Jr. and Stephen Power posted 12/12/2008 on The Wall Street Journal).

In a sign of one major internal difference, Mr. Chu [who became Obama’s Energy Secretary] has called for gradually ramping up gasoline taxes over 15 years to coax consumers into buying more-efficient cars and living in neighborhoods closer to work.

“Somehow we have to figure out how to boost the price of gasoline to the levels in Europe,” Mr. Chu, who directs the Lawrence Berkeley National Laboratory in California, said in an interview with The Wall Street Journal in September.

To make the more expensive green energy less expensive in comparison.  And an easier sell to the American people.  Pleasing his liberal base.  But there’s an election coming.  And high gas prices don’t help you win elections.  Especially during record long-term unemployment.  Even though it goes against every fiber in his body to act to bring down the cost of gasoline, he will.  If it’ll help his reelection chances.  It’s not like he’s going to lose his liberal base.  Who else are they going to vote for?  The conservative?  Not likely.  They’re always going to vote for the most liberal candidate in the race.  And that will still be him.  Despite encouraging more oil consumption.

The Fed doesn’t know why the Economy is in the Toilet

The president needs to get the price down at the pump.  Where people really feel the full weight of his economic policies.  Because the economy isn’t going to get better anytime soon (see Serial disappointment posted 6/23/2011 on The Economist).

THE Fed attracted attention this week for downgrading its forecast not just for this year, but for 2012, as well. More striking is how often it does this. As my nearby chart shows [follow the above link to see chart], the Federal Open Market Committee has repeatedly ratcheted down its forecasts of out-year growth. The latest downward revision is particularly large, and in keeping with the pattern: when the current year disappoints, they take a bit out of the next, as well.

There’s been a steady downward progression of economic projections.  Despite the stimulus.  And the quantitative easing.  Nothing has worked.  When the chairman of the Federal Reserve, Ben Bernanke, was asked why the economy was not responding to the government’s actions his reply was rather Jeff Spicoli: I don’t know.  And he’s supposed to be an expert in this field.

Mr Bernanke does not need lessons about the painful deleveraging that follows crises. His pioneering work with Mark Gertler on the Great Depression introduced the “financial accelerator”, the mechanism by which collapsing net worth crushes the real economy. This concept has been rechristened the “balance sheet recession” by Richard Koo. Stephen Gordon admits he is new to the term and notes (with some nice charts contrasting America with Canada) “it’s not pretty”. (HT to Mark Thoma). Yet until now Mr Bernanke seemed to think America had learned enough from both the 1930s and Japan to avoid either experience. Reminded by a reporter for Yomiuri Shimbun that he used to castigate Japan for its lost decade, Mr Bernanke ruefully replied, “I’m a little bit more sympathetic to central bankers now than I was 10 years ago”…

Mr Koo has argued that quantitative easing cannot help in a balance sheet recession; only fiscal policy can. Does Mr Bernanke secretly agree? He may believe as strongly as he did a decade ago that sufficiently aggressive monetary policy can prevent deflation, but not that it can create enough demand to restore full employment. This does not rule out QE3; it only means it will be pursued with less hope about the results than a year ago.

The Great Depression (during the 1930s) is a complex topic.  And monetary policy played a big role in making a bad situation worse.  In particular, the numerous bank runs and failures can be blamed on the Federal Reserve.  Starving the banks for capital when they most needed it.  But there was a whole lot more going on.  And it wasn’t the stock market crash that caused it.  World War I (1914-1918) is probably more to blame.  That war was so devastating that it took the combatants a decade to recover from it.  And during that time America exploded in economic activity and fed the world with manufactured goods and food.  We call it the Roaring Twenties.  But eventually European manufacturing and farming came back.  Those lucrative export markets went away.  And America had excess capacity.  Which had to go away.  (A similar boom and bust happened in the U.S. following World War II.)  Then all the other stuff started happening.  Including the Smoot-Hawley Tariff.  Kicking off a trade war.  It was all too much.

Japan’s lost decade (the 1990s) followed their roaring Eighties.  When the government partnered with business.  And interest rates were low.  The economy boomed.  Into a great big bubble.  That popped.  Because they stimulated the economy beyond market demand. 

The lesson one needs to take away from both of these deflationary spirals is that large government interventions into the private market caused most of their woes.  So the best way to fix these problems is by reducing the government’s intervention into the private market.  Because only the private market knows how to match supply to demand.  And when they do, we have business cycles.  That give us only recessions.  Not depressions.

Like a Dog having Puppies

The market is demanding more oil.  But the U.S. is not meeting that demand.  So gasoline prices are up.  To lower those prices we need to bring more oil onto the market.  And you don’t do that by shutting down the oil business.

We have high unemployment.  And excess capacity.  That’s not a monetary policy problem (interest rates).  It’s a fiscal policy problem (tax and regulation).  No one is going to borrow money to add jobs to build more stuff when no one is buying.  But if you cut taxes and reduce regulations to make running a business highly profitable, people will build businesses here.  Create jobs.  And hire people.  Even if they have to ship everything they make halfway around the world to find someone who is buying. 

Running the economy is not rocket science.  Because it runs itself.  Like a dog having puppies.  Everything will be fine.  If greedy politicians just keep their hands out of it.  But they don’t.  And they love printing money.  Because they love to spend.  But the problem is that they can’t see the fiscal forest for the monetary trees.

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