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Tuesday, May 24, 2011

O-buma Wants $8 a Gallon Gas Prices

O-buma and company are simultaneously committing so many grievous economic errors that it cannot be mere coincidence.  Percipient thinkers recognize that unlikely coincidences are so rare that they seem to require careful planning.  Based upon these understandings, it is easy to conclude that the mess left after more than two years of The One’s mismanagement is no accident.

In this article, Jim Johnston points out that we should have used our Strategic Oil Reserve, as was done after Katrina, to increase the supply of oil and moderate its price after recent price shocks.  However, the O-bumites would rather we twist in the wind because we are an arrogant nation.  Government likes discretion in energy policy in order to obtain political advantage. 

The chart below of the last year's OVX (oil price volatility index) shows there were two occasions when the index exceeded 40.  One was a result of the BP oil spill in April 2010.  The other episode coincided with the 2011 revolutions in Middle Eastern oil-producing states.  In this pair of cases the volatilities rose because of unexpected increases in oil prices.  The jump in volatilities would have been a signal to release from the SPR.  That is what a private owner of stored oil would have done.

There is a frequently ignored connection between the Fed's increasing the money supply and increases in oil prices.  When inflation is anticipated, as it is now, one of the defenses is to switch out of dollars and into commodities.  This pushes nominal oil prices higher.  Thus the Fed is contributing to the high oil prices about which President Obama is complaining.  As with oil, Washington is ignoring several market indicators of future inflation.  Commodities such as gold, silver, and copper are all near historic high levels.  Foreign exchange futures are also higher, as are interest rate futures.

In another article, Chuck Roger exposes Federal Reserve Chairman Ben Bernanke’s Quantitative Easing as folly.  QE derives from the Keynesian economic hypothesis that government spending helps end recessions.  But reality refuses to comply with theory...the $800 billion stimulus passed by Democrats and signed by Obama in 2009 will generate a paltry 5 percent boost in Gross Domestic Product.  Furthermore, each government dollar injected between 1947 and 2007, via deficit spending, stimulated only forty-six cents of additional GDP.  Negative returns and higher debt make for crummy investment karma.

The Fed Chief is inclined to give in to the insanity reflex: expecting repeatedly-failed tactics to succeed.  Bernanke's strategy will ram into reality.  His tactics will create conditions like those which caused the Great Recession in the first place.  Worse still, to compound the conditions that existed when the subprime mortgage gravy train derailed, today we have $2.35 trillion from QE1 and QE2 ready to flood the economy.

In “Four More Dollars?” author Pete du Pont asserts that America's energy policy is as bad as our fiscal policy.  The federal government is focused on producing not more energy but less of it, on making costs higher rather than lower, and on expanding regulation.

As for oil production, our government is limiting it, and over the years domestic drilling has been declining. In 1970 the U.S. produced 3.5 billion barrels; by 2010 that figure was down to two billion. The federal government has prohibited oil and natural gas drilling on 83% of federally owned land and increased the importation of foreign oil. In 1970 only 500 million barrels were imported; last year it was 3.3 billion barrels. That means that in 1970 U.S. oil production was 88% of consumption, and today it is only 37%.

[C]onsider the statement of Energy Secretary Steven Chu in The Wall Street Journal: "Somehow we have to figure out how to boost the prices of gasoline to the levels in Europe."  The current gasoline price is about $8.50 a gallon in England and $8.80 in France and Germany.  Increasing the price of gasoline increases the costs of all essential commodities, driving more and more people to turn to the Corruptocrats’ theft-welfare state.  Who could possibly benefit from that?

May your gods be with you.

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