Phil Anthropy

Introduction to a Long Lecture on Oil

This is an excellent article with interesting perspectives. It is clear that oil prices are not determined by supply and demand. The growth curves of demand, showing the gradual reduction of spread between supply and demand, have been available for years, yet futures prices have not soared previously. Unless there is some nonlinearity in the mathematics that has suddenly manifested itself under a variant of chaos theory, prices should increase slowly until the point of actual shortage, at which time they will spike until demand slackens. The recent extreme fluctuations in oil prices do not reflect the reality, which is that there are no actual shortages. Therefore, it is logical that traders (or speculators, if you prefer) are driving prices up and down relentlessly, making money coming and going. The same thing happens, by the way, in the financials, where stocks like Bears Stearns, Citigroup and others can move 10% or more in a single day, which does not correspond to changing valuations. However, a consequence of laissez-faire free market capitalism is the cavalier manipulation of the markets by the capitalists, isn't it? For the Ayn Rand enthusiasts, there should be nothing surprising or malevolent about oil price manipulation. Money is being made, and if the rich are the ones making it, then presumably they will hire more of the poor to work for them. I'm not a fan of that approach to social evolution, but many are.

One it has been established that supply and demand are factors, but at this point not the major factors, affecting oil prices, the rest follows. We know that it is not OPEC manipulating prices, because if they had wanted to do that, they could have done it long ago by cutting production. There has been so sudden political epiphany by the Arabs that ruthlessly milking the rest of the world for dollars is a good thing. They know that if their customers become disgruntled enough, it could lead to violence.

The Arabs perforce must be recycling many of their petrodollars into our treasury bonds to help keep our interest rates low and our economy growing despite our massive budget and trade deficits, which flood the world with dollars. This, of course, is the answer to Greenspan's "conundrum" about how our interest rates could be so low; he gave an answered, which translated from Greenspeak, means, "If you think I'm going to tell you the truth about that, you're crazy."

Therefore, OPEC are actually the "good guys." They (plus China and other exporters) buy our debt and equities, buy our businesses and support our profligate economy. We shouldn't blame them for wanting oil prices that are at least at parity, relative to dollar inflation, with years past. Had they want to exploit us beyond the pale, they could have done it long ago.

So let's ask ourselves who benefits from higher oil prices. Wait a minute, I think I've got it. The banks benefit. The critical element of our economic future is that interest rates must not be allowed to go up. If they do, mortgages will reset higher, defaults will increase, and the banks will actually lose money for a change, as compared to their huge profits in years past from the immense leverage of their derivatives and CDO holdings.

So how do we hold interest rates down when we are continuing to inflate the currency with easy credit and budget/trade deficits? We have to take money out of circulation somehow, worldwide. Simple. Raise the price of oil.

Oil is priced in dollars. The dollars are sucked out of the world economy into the coffers of OPEC (but more important, into the coffers of the intermediaries, whoever they are). As long as OPEC and these intermediaries recycle their enormous oil profits into our treasury bonds, interest rates can stay low. The recent spike up in the price of oil corresponds remarkably to the payment of the "economic stimulus." Somehow, we had to soak up that excess currency before it boosted inflation. High oil prices did the trick.

We needed to slow the economy slightly, perhaps to a mild recession, which would also impede inflationary trends. There won't be much labor cost inflation if unemployment is increasing. The amount must be moderate, because we need the people who have mortgages to keep paying them, but we don't need inflation. What does it all? Higher oil prices.

Therefore, in the long run, the people who benefit most from higher oil prices are the American people -- or rather, the American banks, with hopefully a little trickle down for the rest of us. We continue to export our debt and inflate our currency without ill effects, as the dollars get sucked into oil prices. We finally have oil at the level it needs to be to bring us back to the 50 mpg cars of the mid-1970s (yes, nearly 50 mpg in the small Datsuns, using conventional engines, not hybrids). In our hour of desperation, we will develop "alternative energy," which means the nuclear companies will get rich (all part of the plan), since there is no viable alternative to nuclear power to meet our energy needs, barring a breakthrough in physics.

One actual solution, which is not likely to survive the political process has been suggested for a long time. Simply require all engines to be built to flexfuel standards, using anything from 0% to 100% ethanol. Lift the ban on imports of ethanol from other countries. Let imported and locally produced ethanol from switch grass, sugar cane and other sources compete head to head with gasoline. By dramatically reducing our gasoline requirements, we will reduce our oil requirements as well. I have heard that the engine techonology is already available and proven. If I recall correctly, the estimates for Department of Transportation certification of the modified engines would be several million dollars per engine, which the government could subsidize. We would save that much in oil dollars in a few weeks. However, this would be politically unpalatable to the oil and refining companies, and will therefore probably not happen.

So, as Pogo once said, "We have met the enemy, and he is us."

Deregulate Transportation to Beat 100 MPG

It is quite clear that there will be no innovation in the United States. ARCO Petroleum bought up solar businesses in the 1970s and touted their research efforts. If there are any ARCO solar panels in use today, it would surprise me. I saw the same turbo car at the 1965 World's Fair in NY. That engine, and many fuel efficient engines, have been kept off the market through regulatory barriers to entry or through simple "burying" of the technology. The British have so much innovation in biodiesel that they have had to pass and enforce laws against using supermarket vegetable oil in cars with modified engines. The Prius is not made by GM or Ford. If there is any innovation, it will be done by the Japanese, not us, since they are more dependent on oil than we are. In the U.S., the oil companies control transportation, and no one in Washington will dare to confront them. It's bad for political careers. Therefore, we should expect to see a severe economic downturn, following which the oil companies, foreign sovereign funds and other holders of large amounts of capital can buy up the country for pennies on the dollar. People who believe in free market capitalism without government "interference" should not complain, because this is how it works.