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Saturday, March 12, 2011

Obama Wants Five Dollars per Gallon — and More

"Do not bite at the bait of pleasure, till you know there is no hook beneath it." — Thomas Jefferson

During his campaign for president Barack Obama stated he would like to see gasoline priced at ten dollars per gallon so Americans could be weaned off their addiction to oil and we would be a “green nation.” Well we are almost half way there and Obama is allowing it to rise.

I say allowing it to rise for two reasons, one an action and the other a lack of action. During his press conference on Friday he blamed the rising economy, turmoil in the Middle East, speculators and our addiction to oil for the rising price of crude. You see Obama can never be a leader and take responsibility for anything. That’s what a street organizer does. He gets other to do his will than claims he is not responsible.

The one thing he could have done would have taken less than thirty seconds. All he had to do was say we are going to open the Artic Refuge for drilling, not exploration, and that all federal leases off the coast of California and the Gulf were now open to drilling. He did not even have to mean it; all he had to do was to say it!

You see speculators are merely investors in the marketplace, the commodities market — just like hog bellies, corn, wheat, platinum or orange juice. They try to buy low and sell high, duh! They are like any other stock or bond investor. Just like you and me in our 401ks. The difference is that in the commodities market you are buying and selling futures based on your best estimate of the real price 30, 60 or 90 days in the future.

Several years ago there was a great movie starring Eddie Murphy, Dan Aykroyd, Ralph Bellamy and Don Ameche. It was called Trading Places. The story line goes something like this. Randolph Duke (played by Ralph Bellamy) and Mortimer Duke (played by Don Ameche) are rich brothers engaged in commodity trading on the Philadelphia Commodities Exchange. The Duke brothers have a very well educated and sophisticated employee, Louis Winthorpe III (played by Dan Aykroyd) who is a rising star in the Duke’s business.

One day the Dukes see a street hustler and con artist, Billy Ray Valentine (played by Eddie Murphy) and make a bet of one dollar that it is nurture rather than nature that makes a successful peso. Mortimer claims that it is nature while Randolph believes it nurture. As the plot continues the Dukes frame Winthorpe for fraud, narcotics trafficking and cause him to lose everything. While they are doing this to Winthorpe they take Billy Ray under their wing and give him all of Winthrope’s possessions including his house and butler. Eventually Billy Ray and Winthorpe get together and realize they have been duped by the Dukes with the help of their agent Clarence Beeks (played by Paul Gleason).

Now comes the part of the film most like what is going on with oil today. The Dukes want to corner the orange juice market so they can make millions in one day. To this they need an advance copy of the USDA orange juice estimate for the next year. To this end the Dukes engage Beeks to obtain a copy of the report. Valentine notices a large payment made to Beeks and he and Winthorpe devise a plan to upset the Dukes apple cart (orange cart). They ambush Beeks, get his report, alter it and deliver it to the Dukes in dimly lit parking structure.

On the day trading opens, the Dukes believing that there will shortage of orange juice for the coming year begin buying futures and driving the price up. Louis and Billy Ray know better. They buy, but begin selling as the price keeps going up. There is a pause in the trading while the Secretary of Agriculture releases the true orange juice report. The Dukes are horrified to learn that there will be a bumper crop of orange juice the next year and begin selling as the price the price keeps dropping.

Eventually by the close of trading the Dukes have lost $394 million while Winthorpe and Valentine have made a fortune. The Dukes confront Valentine and Winthorpe who mockingly explain that they made a wager on whether they could get rich while making the Dukes poor simultaneously. Valentine collects $1 from Winthorpe while Randolph collapses holding his chest from a heart attack and Mortimer Protesting over the loss of all their money as well as their personal holdings (very likely their property including their house) as well as their seats on the Exchange are taken from them.

Okay, you say: what does this movie have to do with the price of oil? It works the same as orange juice. As the investors believe there will be a shortage, for whatever reason, the price oil futures will keep going up. If Obama had stated that we will begin drilling and the supply would increase the investors, wanting to cut their losses would begin selling. With a falling price other investors would not buy oil futures until they were confident the price would stabilize. This happened several years ago when oil went from $140 dollars a barrel to less than $40 dollars in 30 days. Gasoline went from over four dollars a gallon to well under two dollars in the same period. I recall paying $4.01 for regular and just before Christmas 2008 paying $1.67 for a gallon. This is how it works.

There is no evil cabal of oil speculators, only international traders buying and selling oil like the Dukes bought and sold orange juice. Even the Organization of the Petroleum Exporting Countries (OPEC) is subject to the same pricing pressures. They can, however dictate the supply by regulating how much oil they pump. As of November 2010, OPEC members collectively hold 79% of world crude oil reserves and 44% of the world’s crude oil production, affording them considerable control over the global market. The next largest group of producers, members of the OECD and the Post-Soviet states produced only 23.8% and 14.8%, respectively, of the world's total oil production.

As for the crisis in the Middle East it has little or no effect on the price of oil in the United States. According to the CIA Factbook, Libya is the 15th largest oil exporter in the world and exports a little more than 1-1/2 million barrels of oil per day Libyan petroleum exports amount to about 4% with the bulk of their sweet crude going to Europe for refinement into diesel fuel. The U.S. imports about 1.5% of Libyan oil while our major oil trading partner is Canada (200 million barrels of crude oil annually) with Saudi Arabia being second at 160 million

So now you can see why I claim if Obama had said during Friday’s press conference that we were going to begin increasing the supply of oil the commodities investors would have begun selling so hey cut their losses. It’s a simple matter of supply and demand. The process may be a bit complicated but it is still a supply vs. demand issue. Raise the supply and the price goes down. Conversely lower the supply and the price goes up. I guess this is too difficult for a once common street organizer to understand — or perhaps he does understand, but doesn’t care. He is more concerned with his “green agenda.”

Alex Epstein of the Ayn Rand Center for Individual Rights, wrote a good opinion piece for Fox News on the six myths about oil. One of the myths is this constant harangue we are hearing about our addiction to oil. Epstein writes: “Every American consumes an average of three gallons of oil a day. Republicans and Democrats call this reliance on oil an “addiction”—an irrational, self-destructive habit that must be broken as soon as possible. This year's BP oil spill disaster is only making the chorus to “end our addiction to oil” louder. But if we examine the most common arguments for this idea, we see that they are myths. Oil is a vital, viable, and desirable part of our energy future.”

Myth #1: America’s reliance on oil is an “addiction”— an irrational, self-destructive habit. “America is addicted to oil.” – George W. Bush, 2006”

The Reality: America’s use of oil brings indispensible value to our lives.

“Addiction” implies an intense desire for something harmful, such as heroin. But we do not desire oil irrationally; we consume it because it is a beneficial, life-sustaining product. Oil is unmatched as a concentrated, safe, and

Oil powers the industrial farm equipment that brings us abundant food; oil powers the mobile machinery that we need to extract the raw materials like iron, lumber, uranium, or natural gas from the earth.

Oil powers the construction equipment we need to build new buildings, dams, levees, factories, and homes.

Oil powers the hundreds of millions of vehicles that move people, materials, and products around the world to make possible the efficiency of our integrated, global economy.

Oil is also the vital raw material for thousands of different petroleum products: from the carpet on your floor to the insulation inside your walls; from the synthetic rubber of your tires to the asphalt of the roads; from the pesticides and fertilizers that magnify crop yields and make food affordable to billions, to the pharmaceuticals that save millions of lives.

We are not "addicted" to oil any more than we are addicted to the myriad values it makes possible, like fresh food, imported electronics, going to work, or visiting loved ones.

Without oil, or something just as potent, abundant, and affordable, life as we know it would be impossible.

You can read Epstein’s full opinion piece by clicking here. It’s worth your time.

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