Open Mic February 24

park­sie,

Nice rebut­tal in the WSJ to Obama’s whin­ing about gas prices

How nice is it, really? Let’s look a lit­tle more deeply, shall we?

To wit, that a) gaso­line prices are beyond his con­trol, but b) to the extent oil and gas pro­duc­tion is ris­ing in Amer­ica, his energy poli­cies deserve all the credit, and c) higher prices are one more rea­son to raise taxes on oil and gas drillers while hand­ing even more sub­si­dies to his friends in green energy.

a) is accu­rate. Obama has claimed that gaso­line prices are beyond his con­trol and the WSJ agreed with this. At first.

b) mis­rep­re­sents his posi­tion. The point is that, if peo­ple want to blame Obama for a cur­rent reduc­tion in oil pro­duc­tion, the num­bers don’t bear it out. Sure, we can give Bush all the credit for increased pro­duc­tion if we want. But if that’s true, then Obama can’t be respon­si­ble for cur­rent supply-​​related prices. Per­haps we can blame him in another half-​​decade.

c) also mis­rep­re­sents his posi­tion. The point is that, if prices are ris­ing due to demand out­strip­ping sup­ply, and the US is con­sum­ing 20% of the world’s pro­duc­tions while pos­sess­ing only 2% of the world’s reserves, then in the long run we have no choice but to use less oil. That means either extreme aus­ter­ity or shift­ing our econ­omy to a dif­fer­ent energy source…one that doesn’t require that we import it from other countries.

it’s worth recall­ing that Mr. Obama also blamed the last oil-​​price surge, in spring 2011, on the Libyan upris­ing. Moam­mar Gad­hafi is now gone and Libyan oil pro­duc­tion is com­ing back on stream, yet oil prices dipped only briefly below $90 a bar­rel and have been ris­ing since October.

And, indeed, WTI oil last spring was over $110/​bbl. Before the Libyan upris­ing, it was $85/​bbl. So with Gad­hafi gone, the prices dropped below $90/​bbl, at the pre-​​Libya trend­line. In other words, his blame appears to have been well-​​placed.

Mr. Obama yes­ter­day blamed ris­ing demand from the likes of Brazil and China, and there is some­thing to that as well. But this energy demand is also not new

Any writer of The Wall Street Jour­nal should be capa­ble of dis­cern­ing between spot prices and futures. If demand is grow­ing, even if it’s grow­ing slowly, then one should expect, ceteris paribus prices to rise. It doesn’t have to be a new rise in demand; old ris­ing trends work just as well.

Oil is traded in dol­lars, and its price there­fore rises when the value of the dol­lar falls, all else being equal…Prices sta­bi­lized when QE2 ended. But in recent months the Fed has again sig­naled its com­mit­ment to near-​​zero inter­est rates first through 2013, and recently through 2014. Com­mod­ity prices, includ­ing oil, have since begun another surge,

As I pointed out when GROG brought this up, com­mod­ity prices (other than oil) were ris­ing at the same rate before the Fed’s sig­nal as after the signal.

As for a weak­en­ing dol­lar, the dol­lar had strength­ened through­out the sec­ond half of 2011 (com­par­ing the dol­lar against all other major world cur­ren­cies), even as oil prices rose nearly 25%.

Fed offi­cials and Mr. Obama want to take credit for easy money if stock-​​market and hous­ing prices rise, but then deny any respon­si­bil­ity if com­mod­ity prices rise too, caus­ing food and energy prices to soar for con­sumers. They can’t have it both ways, as not-​​so-​​stupid Amer­i­cans intu­itively under­stand when they buy gro­ceries or gas. This is the double-​​edged sword of an eco­nomic recov­ery “built to last” on easy money rather than on sound fis­cal and reg­u­la­tory policies.

But, of course, they can have it both ways. The author is try­ing to pin the stock mar­ket and hous­ing price rises on infla­tion, but it’s pretty clear if you look at the broader pic­ture that they’re not being dri­ven by infla­tion. Yes, infla­tion will cause prices to nom­i­nally rise, but we’ve seen real stock and house price rises. And, yes, an improv­ing oil-​​based econ­omy will cause an increase in oil con­sump­tion, and increased oil con­sump­tion will cause infla­tion, and increased infla­tion will cause prob­lems. But all of that is com­pletely sep­a­rate from currency-​​devaluation-​​based infla­tion. Obama doesn’t men­tion currency-​​devaluation-​​based infla­tion because the big pic­ture doesn’t show it.

Mr. Obama yes­ter­day also repeated his pro­posal that now is the time to raise taxes on oil and gas com­pa­nies, as if doing so will make them more likely to drill.

No, it’s “as if doing so will make it more likely that we shift to a purely domes­tic source of energy”. Dif­fer­ent goal entirely.

It’s easy to knock down some­one else’s posi­tions when you hand those posi­tions to the oppo­nent. It’s harder when you take the opponent’s true positions.

rgbact,

when oil spikes under Obama it means evil spec­u­la­tors are at work and govt reg­u­la­tors need to crack down on them.

I’m pretty sure I was clear that it’s being caused by the Iran sit­u­a­tion. Yes, there are those who blame it on spec­u­la­tors (and on the futures mar­ket, spec­u­la­tors do tend to increase the size of com­mod­ity price swings), but I’m not among them.

sky high oil prices, 3 straight years of $1T+ deficits, 3 straight years of 8%+ unem­ploy­ment. Impres­sive stuff.

And I assume you blame all three on Obama, right?

DC,

Mis­an­thropy has champions.

I dated Miss Anthropy once, but I didn’t care much for her. She wasn’t really a peo­ple person.

GROG,

Your 2% fig­ure is based only on what is open for drilling.

What per­cent of total global eco­nom­i­cally fea­si­ble reserves does the US have?

I don’t directly blame Obama for higher gas prices, but he hasn’t done any­thing to help the mat­ter either.

What could he have done that would make gaso­line $2/​gallon today?

GROG,

Remem­ber the reac­tion from the left when Bush lifted the ban on off­shore drilling?
Pelosi called it a “hoax”.

Yes. The hoax to which she referred was that it was sold as a means of low­er­ing short-​​term gaso­line prices. Clearly, it didn’t deliver on that promise.

Obama’s cam­paign said: “It would merely pro­long the failed energy poli­cies we have seen from Wash­ing­ton for 30 years,”

Which it does. It did noth­ing to encour­age a shift to alter­na­tive energy sources.

And now they want to take credit for it.

I haven’t heard claims of credit, so much as abso­lu­tion of blame. There’s a dif­fer­ence. That said, if one of them wishes to take credit for it, I wouldn’t join them.

In 2008, Obama blamed high gas prices on Wash­ing­ton and the fact that we didn’t increase fuel effi­ciency for 30 years.

That was cer­tainly a con­tribut­ing fac­tor to the long-​​term trend.

Today it’s the fault of spec­u­la­tors and Iran.

Those are con­tribut­ing fac­tors to the short-​​term trend. The two trends are not mutu­ally exclusive.

Nancy Pelosi and her friends on the far left want to blame Repub­li­cans for high gas prices, because of “Wall Street prof­i­teer­ing” and “Wall Street spec­u­la­tors”. It’s a joke.

It’s no joke. The short­age from Iran hasn’t hap­pened yet. The imme­di­ate price rise is from spec­u­la­tion. To the extent that she blamed Repub­li­cans, it’s for refus­ing to return to the days when the oil mar­ket excluded those who were not pro­duc­ers or con­sumers. That would reduce the price swing on the spec­u­la­tive side, though not on the sup­ply short­age side.

They want to claim credit for the DOW reach­ing 13,000 due in large part to spec­u­la­tors, but want to blame Repub­li­cans for high oil prices because of speculators.

Peo­ple can eas­ily opt out of the stock mar­ket. They can­not eas­ily opt out of the oil mar­ket. This does make for a dif­fer­ence between the two markets.

We have a dan­ger­ous Fed pol­icy which is cre­at­ing this mess by actively encour­ag­ing speculators

How is the Fed pol­icy “actively encour­ag­ing speculators”?

GROG,

Why don’t we write into the con­tracts that the oil, or a cer­tain per­cent­age, stays here domestically?

Because oil is fungible.

Jean,
Thanks for that. Max saw the same thing I saw when look­ing at those graphs…the num­ber of rigs seems to have a huge cor­re­la­tion to the price of oil. I might take the num­bers and run a regres­sion on them, but it seems rather unnec­es­sary given how closely they align visually.

GROG,
OK, I looked at the source. Let’s revisit what you said:

If you don’t think ZIRP has any effect on com­modi­ties, look at futures vol­ume since 2008.
Open inter­est futures went from 124k in 2008 to 920k in 2011.

Open inter­est futures went from 164k in 2004 to 1.4m in 2006.
By the way, the Fed rate rose from 1% to over 5% dur­ing that time, the most rapid rise since 1995.

Max,
Yes.

GROG,

why did you sin­gle out open-​​​​interest futures and not aver­age daily futures volume?

Sim­ple. You pro­vided a hypoth­e­sis. You also pro­vided some data that you claimed sup­ported the hypoth­e­sis. Given that some of your sup­plied data did not sup­port your hypoth­e­sis, I merely stopped there.

Are you argu­ing that the cost of money has no influ­ence on spec­u­la­tors and com­mod­ity pricing?

I’m argu­ing that it has far less to do with it than you allege. As I asked you before, why aren’t you tak­ing advan­tage of that free money?

Aver­age daily futures vol­ume has increased 650% since 2008. Are you argu­ing that ZIRP has had noth­ing to do with that?

Mighty close to noth­ing, yes.
Aver­age daily futures vol­ume did rise sig­nif­i­cantly from 2008 to 2011. And it has dropped this year, by 40% from last year. Did the Amer­i­can money sup­ply sud­denly tighten up the past two months with­out us hear­ing about it?

curi­ous jane,

This Pres­i­dent or any other Pres­i­dent has lit­tle influ­ence on the price of gas.

Yes, at least in the short term. In the long run, a Pres­i­dent may have influ­ence, but the effect is so far removed from the Pres­i­dent by that point that nobody can really show the causal relationship.

Derugual­tion of the spec­u­la­tors, in the mar­ket, has made it a more open and prof­itable ven­ture with low tax­i­ble profits.

Yes, though plenty of spec­u­la­tors lose money.

Another get rich quick for the few and con­se­quences for the rest of us.

That’s an over­sim­pli­fi­ca­tion. The real­ity is far more com­plex. Spec­u­la­tors do, how­ever, tend to mag­nify price swings by cre­at­ing feed­back loops that would not oth­er­wise be sup­ported by the “nat­ural” sup­ply and demand.

The oil drilled on USA soild does not directly help the peo­ple of the USA because it goes on the World Mar­ket to the high­est bidder.

That’s some­what true. Keep in mind that trans­porta­tion costs raise the effec­tive cost of a prod­uct, so there is some nat­ural incen­tive for it to stay in the US. But the fun­gi­bil­ity of oil makes it hard to tell if a bar­rel of oil pumped in the US ends up stay­ing in the US or not.

The dis­puted pipeline will not directly ben­e­fit the USA other than tem­po­rary jobs and pos­si­ble risks to the environment.

In terms of oil prices it would, at best, lower oil prices in the US by such a tiny frac­tion that we wouldn’t notice its sig­nal rel­a­tive to the noise of, say, China’s increased demand or Iran’s decreased sup­ply. For those who live in the mid­west, it would have the effect of actu­ally increas­ing gas prices. This accord­ing to the pipeline’s pro­po­nents, incidentally.

If the Pres­i­dent was really as lib­eral as his accusers say, he would not have agreed to drilling at all.

True, but hyper­bole is com­mon in today’s polit­i­cal environment.

Cap­i­tal Gains have a very low tax rate and get that rate on the prof­its of their risk and prof­its forever.

That’s the the­ory behind stock val­u­a­tion, though there are times when it’s clearly not reflected in real prices. There are some com­plex machi­na­tions going on beyond the tra­di­tional stock val­u­a­tion theory.

Mitt’s income yearly gets the tax ben­e­fits over and over despite no risk.

There’s risk. But when you have the kind of money that he has, it would take a cat­a­strophic col­lapse of the global econ­omy to take him from “amaz­ingly wealthy” to merely “com­fort­able”. Mean­while, those of us with more com­pre­hen­si­ble net worths would find our­selves des­ti­tute. So it all depends on what you mean, I guess.

The President’s dis­ap­proval is for being the most lib­eral and dan­ger­ous ever and for being too con­ser­v­a­tive and not being lib­eral enough.

That’s some of it. Keep in mind that many who voted for Obama did so because he promised to end the divi­sive­ness in our gov­ern­ment. He did not deliver on that promise. Plenty of Obama’s sup­port­ers will point to the Repub­li­cans as the cause of this, but that doesn’t change the fact that Obama promised to deliver some­thing that he didn’t deliver.

Imag­ine how upset peo­ple would be at Pres­i­dent Bach­mann or Pres­i­dent Gin­grich when the price at the pump is $6/​gallon and they both promised to deliver $2 gas. If that was the core rea­son for them vot­ing for Bach­mann or Gin­grich, they’ll be very angry.

The USA is hated by peo­ple, in the Mid­dle East, because of things like sup­port­ing despots, Iraq crazi­ness, etc.

That’s an over­sim­pli­fi­ca­tion, but it has a lot to do with it. You may recall that sev­eral other nations have been tar­geted by extrem­ists as well. The US just hap­pens to be the one that gives the most reasons.