U.S. Policies, Especially Energy, Should Be Much More Strategic

Ouch that auction left a mark. We had a Treasury auction yesterday that is pretty much continuing the ramp in yields. There is a little bit of a psychological game going on because of comments from Russia and China endorsing a move to IMF backed bonds as they raise concerns about the large increase in US spending.

That said, I wouldn't be surprised to see a big ramp down in rhetoric from China at least given that it's huge surplus is in large part driven by its efforts to devalue the Yuan in order to keep Chinese exports humming. Right now the Chinese need stability as much or more than we do and they can't really afford a big plunge in the dollar.

For the Russians, they get paid in dollars so to the extent they cause a run on the currency they get a lot more dollars for their oil and meet their own hard currency demands. Both Chavez and Putin have avoided any real reform as low prices in oil have simply not stayed low long enough to induce reform. That's unfortunate both economically and politically.

Concurrently, you have a rising US current account deficit today which is due in large part to increased imports of oil. We absolutely positively need a tax on oil here to try and restrain US demand. It's hugely unpalatable but it's absolutely necessary. Right now, we have got deja vu all over again with rising oil prices as people move into the asset class as a hedge on the falling dollar.

Given we consume 25% of the world's oil (and produce 25% of economic output), a tax on demand here would make a huge difference. The dollar, treasury yields, risk based assets and oil are all tied up here in one big Gordian Knot. The cycle needs to be broken or the dollar will continue to fall, and oil will continue to rise until something breaks (again). Continuing the same old energy policy isn't going to do the trick here. We need to get creative.

The US government has two options right now. 1) Do nothing and allow devalued dollars to flow into the coffers of oil exporters like Venezuela and Russia or 2) Tax oil as it is imported and use those proceeds to fund general government spending. As a US taxpayer, would you rather the US government get the money, or would your rather a de facto oil tax go to keep Chavez afloat?

Additionally, as these yields rise they will continue to drive up mortgage rates. Mortgages rates really have not been low enough for long enough to bring real estate prices into a "safety zone". So does the Fed intervene and up the amount of agency paper it buys? It may be in a box here as any big increase in intervention by the Fed could hurt the dollar even further. Bernake also has to consider his renomination and that means he is going to try and tighten a lot of the Fed's special lending programs where he can. Not a pleasant box for any central banker and the give here probably has to come in some measure of fiscal discipline.

Just for Disclosure: short treasuries, long Oil-Still, and not super happy about it. To get a long term rise in equities we need this cycle to break and we need to change our country's energy policy to be a lot more strategic.

Comments

[doubleguns:]

Drill, drill, drill and spend the money at home. A tax will simply put money in the govt's pockets AND the oil producers.

We have no energy plan because Washington has no clue. A strategy implies intelligence which congress completely lacks.

We could solve both the present job crisis and the energy crisis with just a teeny bit of intellectual talent in Washington.

Washington lives for crisis to look important and SPEND MONEY. They will pass some new bills loaded with pork only when the public begins to squeal.

I am afraid that by then there will be no money left to implement a solution. We cant even sell our treasuries for todays problems let alone tomorrows.

Washington will be very late to this horror show.

Jun 11 08:04 AM

[happycajun:]

Son, you are clueless if you consider slapping a tax on any commodity a "strategic" step. At best, such a move would be considered tactical, albeit foolish. At bottom, energy is a component of all production. To the extent that a tax is placed on a form of energy, that tax becomes a part of the cost of production. Because other players in a global economy (the Chinese?) do not add this element of cost into their cost of production, they have an advantage. At the moment, the supply of oil and natural gas is more than adequate, but the US economy is in a major recession. NOW, you advocate the brilliant STRATEGIC step of slapping a major tax on a fundamental commodity? Nice "strategic" plan ace.

Jun 11 08:41 AM

[Ferdinand E...:]

I spend a few minutes every day thinking about writing a brilliant paper on the need for a comprehensive energy policy for the United States. As it happens I never get around to that project because it is clear to me that President Obama's energy team would not be interested in my precious work - especially if they read my lovely energy economics textbook. I will however give myself credit for one thing; I cannot remember a single book, paper or lecture of mine in which I suggested or thought seriously of a tax on oil. Why should a government that sponsors two senseless wars on the other side of the world be given more money to spend on nonsense?

Jun 11 09:34 AM

[Alan von Al...:]

Thank you, happycajun. Always glad to follow your comments. I agree with doubleguns that Washington is marching on the road to serfdom.

Matt Simmons made a speech at Yale recently where he spoke of a crisis in the oil business because so many senior people are nearing retirement and so few have been trained to find and produce oil. That's the scariest problem of all. Most of the pipelines and offshore rigs are rusting, and need to be replaced. But without explorationists who can actually bring in new production, we're in real trouble.

Jun 11 03:05 PM

[midwestguystl:]

Hey
Tax the hell out fuel are you really proposing that.
That would continue to sink the economy and put a additional cost on everything of 30 to 50% NO THANKS

In my opinion the only course to control the run away cost of a price of a barrel of oil is take it off the commodities market so it cannot be traded to make the shares go up the commodities market is the WRONG place for oil to have the price set
its to vunerable to the whims and whispers and made up non truth heresay of future events.

Oil prices should be set not by commodities markets and brokers
but by actual producers and users
coal and hydoelectric power are not on the commodities
so why is oil ?????????????

The price structure is not uniform for all the world nations
why does Saudi Arabia, Veneuzuala Et.pay far less for oil than we do and do not follow the market price of oil we pay WHY NOT ?

Under the proposed Energy Markets Emergency Act of 2008
The commodities and futures trading commisssion could start an effective oversight to control the crooks ((oil traders) on NY Wall St. Use all its authority, including its emergency powers, immediately to curb the role of excessive speculation in any contract market trading energy futures or swaps, and
Use its most potent emergency tools – including the immediate powers to set new position limits (size of the stake that each speculative investor can hold in a given market), increase margin requirements (the money needed to trade), and impose other corrective actions as necessary – to eliminate excessive speculation, price distortion, sudden or unreasonable fluctuations, or unwarranted changes in the price of energy commodities or other unlawful activity causing major market disturbances that prevent the market from accurately reflecting the forces of supply and demand for energy commodities

Jun 11 03:14 PM

[Jimbo:]

I understand HappyCajun's reasoning about an energy tax. But what if it is earmarked to produce alternatives? For example rebates to car owners who buy conversion kits for natural gas which we have a great amount and is cheap.How about rebates to truckers and truck stops to install natural gas units? The prophet Obama seems to be deliberately starving the conventional domestic energy companies of raw supplies in the expectation that the Martians will show up with a magic powder that will run everything and release no CO2.

Jun 11 03:33 PM

[doubleguns:]

It matters not what you ear mark it for it would make everything made in America that much more expensive leaving us less capable of competing in the open market. DO YOU REALLY BELIVE WASHINGTON WOULD NOT TOUCH THIS MONEY FOR THEM SELVES. HAHAHAHAH

Look at how much money they left in social security. HAHAHAHAHA

They are like drug addicts they just could not help them selves..


On Jun 11 03:33 PM Jimbo wrote:

> I understand HappyCajun's reasoning about an energy tax. But what
> if it is earmarked to produce alternatives? For example rebates to
> car owners who buy conversion kits for natural gas which we have
> a great amount and is cheap.How about rebates to truckers and truck
> stops to install natural gas units? The prophet Obama seems to be
> deliberately starving the conventional domestic energy companies
> of raw supplies in the expectation that the Martians will show up
> with a magic powder that will run everything and release no CO2.

Jun 11 05:55 PM

[happycajun:]

Hi Alan, I met Matt several years ago when he was on the board of Kerr-McGee. As you & I have both personally experienced, the "oil patch" suffered a great depression between 1985 and 2000 that makes the current general economic setback look like a mere correction. More than half of the oil & gas professional population permanently left the industry, and the university programs in petroleum geology and petroleum engineering were decimated. Only recently have Pet E programs started to garner interest from folks other than South American and Middle Eastern nationals who intend to return to their homelands for a career. I know a number of physicians and attorneys who have degrees in petroleum engineering and geology from the late 1980's.

Jimbo - doublegun answered you question quite well - I don't trust government to allocate funds efficiently. Never have and never will. When it comes to "incentives" I prefer some form of tax credit or special deduction which prevents the funds from flowing through the politician's sticky fingers. I also firmly believe that "incentives" should be a catalyst that facilitates some initial resistance then goes away. If the economics are terminally bad - then as my daughter would say - DOHHH let's not do it! If the economics WILL be there once the inertia is overcome to get things rolling, then MAYBE an incentive is a good idea. Many have seemed to confuse incentive and subsidy (or as we used to say a HANDOUT).

Jun 11 11:50 PM