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$200 Oil – Who’s Going to Pay For It?

In March of 2005, Goldman Sachs kicked off the oil speculation boom by releasing a report that "Oil Could Spike to $105."

At the time oil was around $55 a barrel, already up considerably from $25 a barrel before the Iraq war (the second one, George Bush the First caused the last US recession by invading Iraq, spiking oil prices as a payoff to his Arab pals and left the country (this one, not Iraq) in greater a state of economic disaster than the First George Bush’s Financial crisis already had us in) surprisingly caused oil prices to spike.

  • Interesting note: The first Iraq war is what made our current President his first millions as he sold his stock the same month his dad invaded Iraq and spiked oil from $18 a barrel in July 1990 to $27 in August.  After bankrupting his first company (aptly called Arbusto Energy), in which he was partners with Salem Bin Laden (Osama’s Father) through James Bath (who also worked with BCCI who conducted the largest bank fraud in US history while laundering gun money for George I in the 80s), Junior merged Arbusto with Spectrum 7, became the CEO and bankrupted them.  Spectrum 7 was then sold to Harken with the financial help of BCCI’s Kalid bin Mahfouz, who took over for Bin Laden on his death and bought 17% of Harken in exchange for the Bush bail-out which ended up giving him 400,000 shares of Harken stock (Bush was investigated by the SEC but was cleared – how would he know his dad was going to invade Iraq?!?)..

Anyway, so there was no way our President could have foreseen the impact that invading Iraq (again) would have on the American economy (or his family’s extensive oil holdings) but Goldman Sachs was on top of the situation as they were the largest trader of energy derivatives.  Goldman’s 2005 report cited " Thin spare capacity in the energy supply chain, and long response times for bringing on supply additions, as well as robust demand in the United States and in developing heavyweights China and India, despite the recent rapid increase in energy costs."  

Now that the mission has been accomplished at $105, Goldman (who has made record income on the massive increase in energy prices and energy trading even while losing their shirts on the other bubble, housing) has now upped the anti and is boosting their low-end range to $80 and says: "$200 a barrel could be a reality in the not-too-distant future in the case of a "major disruption."

This report, released this morning by the same guy who was right about $105 (even though he said that would be a super-spike, not the norm), drove oil to $108 a barrel in today’s trading and knocked the markets right off their early morning recovery and sent them back towards the 1/22 lows.

What Goldman doesn’t explain though, is who is going to pay for this $200 a barrel oil?  I pointed out to members this afternoon that today’s $2 rise in oil prices will cost US consumers $280M next week.  At 20M barrels a day of consumption, $200 a barrel oil would be $4Bn a day spent just on oil!  That’s about $2Bn a day more than we’re paying now, $730Bn a year or four times what Bush is dumping into the economy in order to shut us all up while oil goes over $105 a barrel while the dollar "super spikes" below 73.

That’s right, our own US dollar finished the day today at an all-time low of 72.96, down 40% since Jan 2002 so the joke is on OPEC, who is only getting $60 worth of our 2002 currency for their $100 barrels of oil.  Unfortunately, the joke is also on us as that dollar you have in your pocket is worth just 60 cents while the average American is making LESS money than he did in 2002.

Couple stagnant wages with declining home prices, increased property taxes (because local governments actually have to BALANCE their budgets), rising food and other commodity prices and you have to wonder where Goldman, and their investors, think US consumers are going to scare up an extra $1Bn a day to pay for oil.  By herding investors into commodities at this level, Goldman is leading sheep to the slaughter as spikes that look like this rarely end well for the latecomers:

Perhaps if oil were the only thing going up in price Goldman could squeeze another $2Bn a day out of US consumers, but let’s keep in mind that the rest of the world has to fork over $6Bn a day as well in order to support $200 a barrel oil.  That’s on top of the $8Bn a day we are all paying already – that’s a lot of money.  Oil is not, however, the only thing that’s affected as food and other goods rise along with the price of oil. 

The CRB index should be at around 308 (220 in 2002 x 140% to adjust for the dollar) but has outpaced the dollar decline by a whopping 33%, a nice toppy little number that’s just begging for a retracement to 370 very soon.  While a 40% decline in the dollar may have helped Goldman and Bush achieve their primary goals, it’s hard to see how we are going to manage enough of a decline in our currency to push oil and the CRB up another 100% from here.

A 40% decline in the dollar led to a 33% increase in the CRB and the dollar is at 72 against a global basket of currencies so it will take 3 more 40% declines in the dollar to get us to $200 oil,  Following the same path we’ve been on to get to $100 oil, that would be going from 72 to 43 to 26 to 16, giving us a US inflation rate of roughly 450% overall.  This is the dream of starry-eyed energy traders who are too bad at math to realize that if they do successfully drive oil prices up to $200 a barrel and double their money, that the money they have will only be worth 1/4 of what it was when they started.

Really people, think about it – we are talking about $8 per gallon gas.  We are talking about $160 to fill up your tank and $1,000 a month to heat a home.  We’d better start giving people monthly raises now as it’s going to be really hard to know if our employees will be able to afford to drive the car to work with projected increases of .10 per gallon per month for the next 4 years

The average US driver has a car that gets 20 miles a gallon and drives 15,000 miles a year.  That’s 750 gallons a year.  $4 more per gallon is $3,000 more dollars of what used to be disposable income going up in smoke.  Even if we conservatively assume that all the other increases in the CRB translate to "just" another $3,000 in forced spending and we cap utility increases at $500 (super conservative numbers) then we still have the average US wage earner needing $6,500 more in net wages to support $200 oil.

That would be roughly $10,000 pre-tax or roughly a 40% increase in the average person’s salary JUST TO STAY EVEN WITH WHAT THEY ARE SPENDING NOW.  So I ask Goldman Sachs, I ask the commodity bulls and I ask our President – who is going to pay for this?

We are talking about the destruction of the very fabric of our society here, not a "rally."  The rise of oil is a crisis and needs to be treated as such as it will do more to destroy your way of life than a hundred terrorist attacks could possibly hope to do and it won’t change unless you demand that it change.  Our "leaders" set their agendas based on the polls, maybe it’s time we start setting the agenda

It’s time to get mad!

 


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  1. Andy

    BA Protest
    BMW moving jobs to the US
    Seems BMW already started the outsourcing process to the US… lol

  2. Steven Place

    Heh. Barry Ritholtz made it on the front page of Reuters.com
     
    http://bigpicture.typepad.com/comments/2008/03/reuters-quote-o.html

  3. CMan

    Phil,
    Small Portfolios:
    Do you think it is best to liquidate and sit on sidelines – you too ( normally a perennial bull ) have painted worse than gloomy picture in this post.  I am really frustrated with the market at this point and am feel like capitulating. What do you see on the near term horizon?
    Thanks!

  4. Andy

    Small guide for adding links on PSW..
    Find the site url, copy it from the URL header.
    Write a text string on the comments, highlight the text, click the hyperlink icon in the comment tool, when it open paste your link in the URL text box, click ok.
    This is better
    Than this: http://money.cnn.com/news/newsfeeds/articles/newstex/AFX-0013-23678687.htm

  5. Phil

    I’m not throwing in the towel yet but I am keeping my eye on the basket I need to throw the towel into!

  6. dilbert

    not the time to be short

  7. fredrang

    Fed
     
    A really smart move.  Now they need to keep interest rates right where they are & threaten to release oil from the strategic petroleum reserve (even though there isn’t a shortage) combined with an announcement that they are going to develop 150 nuclear power plants on an expedited schedule. 

  8. fredrang

    Bought some Thornburg in pre-market for a quick trade as this may save the company and shoud give it a quick bump. 

  9. herbert brust

    Futures are way up

  10. fredrang

    My prediction is people will look back at this time period and recognize that Bernanke was the right guy for the job.  Very creative solution from Ben & company.  Much better than Greenspan’s base capabilities. 

  11. tlsvet

    Ok, anybody knows what happened to catapult the DAX +2% in 5 minutes? And the premarket DOW to jump +1%?

  12. fredrang

    Fed announcement….

  13. tlsvet

    "After bankrupting his first company" he is well on his way to also bankrupt US Inc.
     
    Sorry, couldn’t resist :)

  14. Della Carr

    Phil, are we going up from here, or will there be profit taking on the spike?  any views?
     

  15. Andy

    Should help rutterfly…
     

  16. fredrang

    TMA,
     
    Sold 1/2 my Thornburg in pre-market, up 70% in just 1/2 hour. 

  17. Andy

    fredrang, well done… good for you.

  18. fredrang

    Phil,
     
    What do you think of Applied Materials AMAT given their big solar deal? 

  19. dilbert

    WED coming early????

  20. Andy

    dilbert… lol, We do get set in our habits it seems… I hope the callers I took out yesterday will pay off.. let’s see, I guess selling into the initial excitement is the thing to do.

  21. orion

    something doesn’t seem right with this ‘rally’.  I’m just watching today.

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