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America’s Commodity Crisis – 2010 Edition


We did not expect to break higher this week.  After a stellar week last week where we had 49 winners in 56 trades, I’m dreading this week’s review as I really feel like my picks were too bearish overall.  Of course, the bulk of our trading is in bullish long-term positions that are doing very well but that doesn’t mean I don’t like to win the short game as well.  As I said at the close of last week’s review: "I’ll be in a foul mood if we have a commodity rally that moves the Dow up on Monday but it will be my own fault – as I often say to members – CASH is so much more flexible!"  And you know what – we did have a commodity rally and I AM in a foul mood! 

Commodities are a TAX.  They are the worst kind of tax because they flatly (not progressively) charge every man woman and child in this country more money for the same food, fuel, shelter and clothing that they had to have last week in order to live.  It doesn’t matter if those people are trying to save or trying to tighten their belts or trying to get out of debt – high commodity prices are a shake-down that rips money out of the pockets of the middle class and funnels it to the very, very small class of commodity producers, commodity speculators and the people who finance them and collect the fees.

Over 99% of the people in this country do not own mines or oil wells (and I’m not counting small farmers because they are literally raped by speculators and bankers, often leaving them worse-off than the consumers) or huge plantations and they do not buy futures contracts on margin with cash they borrow at prime plus 0.5% nor do they own tankers filled with 2M barrels of crude that they arbitrage along the crack spread, looking for an opportune moment to deliver their goods (hopefully during a crisis) at a maximum profit. 

So 99% of the people in this country don’t even own a commodity ETF – they have no way to profit from high commodity prices and they need to eat, and they need to buy clothing and have shelter and they need fuel to heat or cool their homes and go from place to place.  There is a word for people like that, at the bottom end of a transaction they have no control over – VICTIMS! 

The American people are the victims of a $2.5Tn commodity scam – 50 times bigger than the Madoff scandal, pretty much one Madoff PER WEEK yet they sit there and take it because those same commodity pushers are major advertisers in the media – so there are no stories about it and the commodity pushers are massive campaign contributors with armies of lobbyists so our Government does nothing about it other than show up to partys and go on junkets.  In fact, do you know who the single largest hoarder of oil was in the last decade?  It was the US Government as George the Second purchased 240 MILLION barrels of oil AT ANY PRICE, creating a spike in demand that averaged 2.5M barrels per month for all 8 years of his term (over 10% of US consumption) that enriched OPEC and the Saudis on a level not seen since Reagan/Bush/Bush/Quail (1978-1990).


Those are inflation-adjusted prices, of course.  Filling and releasing oil from the SPR isn’t the only reason oil goes up and down in price but, WOW – I’d say there’s a pretty strong correlation, wouldn’t you?  Both Clinton and Bush I effectively used the SPR to crush speculators and depress oil prices, putting more money back into the pockets of the American people than any tax refund possibly could.  We also have our little global incidents that drive up the price of oil from time to time and here’s a chart illustrating that effect since WWII:


When the US consumes 18Mb of oil per day and the President of the US orders and EXTRA 2.5Mb per day to stick in the ground (and pays for it with YOUR money), what would we think would happen to the price of fuel?  What if that same President declares a war and sends 200,000 troops and 200,000 support people overseas with tanks and planes and helicopters and jeeps and aircraft carriers and destroyers that use, as a group, over 1Mb of additional oil per day (also at your expense)?  What if that same President declared a war on one of the World’s top producers of oil and knocks over 1Mbd off their production numbers?  You can see where these little things can add up

The math is easy.  The average driver drives 15,000 miles a year and gets 20 miles per gallon so they use 750 gallons of gas a year.  The average family has 2 cars so 1,500 gallons of gas per American family per year.  At $30 a barrel, we have $1 gas.  At $70 a barrel, we have $3 gas (refining and speculative markups multiply the effect).  So we’re looking at the difference between a family spending $1,500 a year or $4,500 a year on gasoline alone – depending on how we manage our oil prices. 

But it doesn’t stop there, oil is the basis of a supply chain that flows through most of our industrial society so that 200% increase in your family’s spending on gasoline also increases everything from the price of grains and cattle to the toys that are delivered for Christmas and the plastic they are made out of to the electricity that lights the tree and the gas that heats the home.  Oil is the basis for a massive inflationary surge that attacks the consumer over and over and over – hitting them in both their discretionary and non-discretionary spending – there is no escape, only endless suffering as prices climb higher. 

Why then, is controlling the price of oil through use of the SPR, development of alternate energy sources and conservation not THE MOST IMPORTANT ISSUE that we have in this country?  Giving America’s 200M drivers a $1 per gallon break on gas prices amounts to $150Bn a year in direct savings and another $150Bn a year in other commodity savings.  That’s $300Bn a year or 6M $50,000 jobs!  That is cash money that is taken out of US consumers pockets every single day with a large portion of it funneled overseas with Billions of those dollars ending up in the very hands of the people who are funding the other side of the wars we are fighting.  They are killing us with our own money!  How is this allowed to happen? 

You know, it’s not so much the fact that our politicians CAN be bought that bothers me, it’s HOW CHEAPLY they can be bought that makes me mad.  In the past 20 years, the oil industry has given "just’ $185M to Republicans along with $60M to Democrats and that has been enough to derail this country’s energy policy away from a sensible mix of conservation and alternate energy towards empty sloganism like "drill baby, drill" – which follows the same logic as helping a fat person to get healthy by finding them more food

Do you remember when Vice-President Al Gore wanted to have a 4.3-cent per gallon gas tax to be used for funding public transportation and investing in alternative energy in 1993 and the Republicans went insane, claiming that a 4.3-cent per gallon increase in gas (then under $1) would cripple the American consumer?  Well, we are 50 4.3-cent increases up from that point – where is the concern for the American consumer now?  According to the studies done at the time, each penny of tax generates $1.7Bn in revenues.  $1.7Bn was a lot of money in 1993 – today it’s 1/10th of the bonus pool that Goldman Sachs alone gave out to the 36,000 employees who work so hard all year long to create the commodity nightmare that is destroying this country, costing US consumers over $600Bn last year and $3Tn globally.  

That is $3Tn EXTRA – over and above the fair value of the commodities so middle men like GS, JPM, MS, CS, C, BCS et al can skim their $16Bn each.  On the whole, it would be cheaper if we just gave the damn money to them – that way they wouldn’t have to play these silly games, funneling 5% of our GDP out of the country, creating huge trade imbalances and driving the country and it’s people further and further into debt – all so they can skim their cut off the top.  The used to call it treason, now they are just called "the smartest guys in the room" by the lap-dog media they’ve co-opted

How is it that the American people have allowed ourselves to get this distracted about an issue that affects every single on of us for over a decade?  Of course we, in the top 10%, don’t sweat an extra $6,000 a year spent on food and fuel – maybe we take one less vacation or fly coach or something but not enogh to get upset over.  It’s the stupefaction of the masses that I don’t understand.  $6,000 is a lot of money to the average American family that makes $48,000 yet Joe 6-pack and Joe the Plummer will go out and rally to support the very same people who sold them out to OPEC in exchange for a few shekels of their own.   

More oil is not the answer to using too much oil.  The best case scenario for ANWR is 6 months worth of US consumption.  Perhaps if we go after every drop around the continental US we could find about 6 years worth of oil.  It is thought that, at the current rate of global production (32Bn barrels a year), there is enough oil in the World to last 40 years so whether we take it out now or in 2050, it’s going to be the same 6 months worth.  If, however, we were to cut our consumption of oil by 50%, then we would have enough oil to last us until 2090.  As Ben Franklin once observed - A penny saved is truly a penny earned!   

That would give us a little more time to develop alternate energy sources and, also, it would IMMEDIATELY cut the amount of money we spend on oil in half.  Even if you are to assume that Goldman, JPM and the usual suspects make their OPEC pals happy and keep oil prices at $80, despite our cutting back 1/2 of our consumption – we’d still be buying 1/2 as much gas per year.  In reality, if we conserve and knock just 8Mbd off of global consumption – that would be a 10% reduction in oil demand globally, very likely leading to lower prices and freeing up all those Trillions of dollars to be spent on other consumer goods – preferably ones we don’t destroy on the first use that will leave a lasting value for our well-spent GDP dollars.  

Do I actually have a plan?

That all sounds great but how do we get from here (200M US cars that average 20 mpg) to there (200M US cars that average 40 mpg)?  It’s really very simple other than step one, which is put me in charge and declare Marshall Law so I don’t have to waste time with Congress.  Once we get that done, the rest is quite easy:

Step 1) An immediate .50 per gallon tax on gas and a .50 per gallon equivalent tax on all fuel – Revenues $170Bn a year. 

We were spending $4 last year and now it’s $2.50 so $3 isn’t going to kill anyone and, hopefully, it will encourage you to use 20% less fuel and drive down the price. 

Step 2) If you buy a car that gets less than 30 mpg, you get a penalty.  If you buy a car that gets more than 30 mpg, you get a bonus

In a good economy, the US sells 15M new cars a year, lately it’s been 10M.  Currenly our fleet gets 20 mpg while Europe’s gets 35 mpg.  Why do they get 35 mpg?  BECAUSE GAS IS $6 per gallon over there!  So we’re not going to MAKE you buy an economy car – that would be un-American.  What we will do is tax you $1,000 for every mile under 30 mpg your new car purchase gets and we will bonus you $1,000 for evey mile over.  Suddenly we are penalizing 15 mpg gas-guzzlers $15,000 while people buying hybrids that get 45 mpg will get $15,000 towards the purchase. 

Can I pay for it?

How do we fund the program?  In step 1 we collected $170Bn – that’s enough money to hand out $11,333 on 15M cars.  At that rate it will take us just 7 years to flip the whole US fleet to double the mileage (and, each year, we are 15% closer to our goal, saving +1MBd/year).  As a bonus, we revitalize the auto industry with our perpetual "cash for clunkers" - type program (which we already know works).  Of course I will ramp up the penalties each year and raise the bar for mileage as we try to nudge everyone away from gas guzzlers.  Since our incentives will skew the demand curve towards high-mileage cars, it will be in the interest of auto-makers to crank them out.  

Any unused funds will go to funding alternate energy research and fuel conservation programs.  A $10Bn program will be set up to foster a national competition for individuals, businesses and universities to come up with the best energy-saving solutions with $100M prizes given out in all 50 states  ($2M per month and a $50M grand prize each year).  With a $100M monthly National prize for the solution that saves the most fuel and a $1Bn grand prize to the best energy-saving idea of the year.  Having monthly competions (televised) will keep energy efficiency on everyone’s mind and give schools and businesses constant motivation to think green. 

Our goal is to develop solutions that will create jobs with new American energy products that can be exported to an energy-hungry planet.  A constant, significant incentive to drive our country back towards research and development while encouraging kids to get back into the sciences is going to be $10Bn a year very well spent! 

We will add 10 more cents a year more to the tax until it’s $2 per gallon.  By then people should be using 50% less fuel and we will be funnelling more and more money into alternate energy research, working to get homes and businesses off the grid with wind and solar solutions.  To the extent that this is able to put off the estimated $3Tn upgrade we need to make to the energy grid in the near future – that program will pay for itself many times over.  Notice all this money is essentially INTERCEPTED – it WAS going to go to OPEC and the Banksters - now it is being recycled in our own country - putting the Auto Industry back to work.  We will be funding a new American Alternative Energy Initiative that plays off both our entrepreneurial spirit AND our love of game shows with big prizes!


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  1. Phil, come on, you must be in a bad mood; way too political.  To review the first graph and come to your conclusions isn’t reasonable.  The first oil shock came under Carter in 1973 and wasn’t it a reasonable response to develop the strategic reserve (the first large spike which then tapers down); second large spike came in 2002 (mmmm let’s see, did anything important happen in 2001 that might make us want to juice up our reserves in preparation for a potential global conflict).  The rest in just noise and trying to turn it into a Dem-GOP show is disingenuous.  I could go on, but I respect you too much. 

  2. Too political/Humvee – That’s funny I was trying not to make a big political thing out of it.  Actually, I think it’s very clear hear that Carter’s filling of the SPR got the ball rolling on the spike and I specifically said that Bush the First USED the SPR to lower prices – unlike his (expletive deleted) son.  Bush 1 was a CIA guy and took America’s strategic interests into account when he went to war (a necessary one) and used the SPR wisely to quickly knock back the spike in oil.  Bush 2 bought oil against the advice of every economist and drove the prices to insane levels and it has nothing to do with 9/11 because 9/11 depressed the price of oil significantly and, unlike Carter, we already had an SPR with 500Mb in it and there was NO interruption of supply. 

  3. Phil, I hope you are forwarding this to Forbes et al. It is a real workable  solution, but not a new one to PSW readers. BUT MY RANT is how do we get this done? We need to find the Congressman to carry this thru. Perhaps we can get T Boone and the natural gas ceo’s on this side.
    But we are all equally guilty if we don’t get this done, taljing is not enough!!

  4. Phil, To get the Natural Gas CEO’s on this side, perhaps you could add that the taxes raised could be used to finance the diesel to LPG conversion costs for the truck fleet, then you would have a winner

  5. Hell I live in OKC, if we had a PSW effort I would try to get the Aubrey M, the Chesapeake CEO on our side!!

  6. Gosh, so much material. Where to start.
    Let’s see – this is a new "blame Bush" approach. It’s a stretch, but I like it. Right out of Despotism 101; every new Head Poobah needs a boogie man to demonize/divert and Dunce Bush is easy pickings. I suppose we can blame him for growing obesity next but let’s not get ahead of ourselves.
    So,  let’s start at the top.
    World consumption of crude is approx. 85MBD; US consumption is 18 MBD; The SPR was in creased 240 MB over the 8 Bush years which is 30 MB/yr; which is 2.5 MB/ month; which is .08MB/day which is .4% of US consumption and .09% of world consumption. That is 4 tenths of 1 percent US; less than 1 tenths of 1 percent world. Wow, that is some buying power to drive up the crude price to "record" levels.
    But let’s not let arithmetic  get in the way of a good story.
    So, we can all agree that the evil Bush lined the pockets of his oil cronies by jacking up the price. No problem there. Now, who is sitting atop the current SPR? President Obama. Ergo, he must be in the pocket of Exxon, Haliburton, also since by a stroke of the pen he could bring the SPR right back down to 500, right? We are going to have to work on that one.
    Wow, planning world domination is hard work and I’m hungry. Think I’ll go order a pizza.

  7. Forbes/Jamie – They chose not to even publish the watered down version of this with no "Bush Bashing" – Perhaps it didn’t match with the ad for the Lexus SUV at the top of the page or the BMW ad on the front page or the "Gold Stock Strategist" newsletter they are pushing…

    As to Congress – I know for a fact they’ve seen some of my past articles on the oil scam but, really, they get so much crap that they don’t know what to think – even if they were smart, which many of them are not.  How do we compete with people who are taking them to dinners where their paid VIP speaker gets up and does a brief, well-designed Power-Point demonstrating that Oil is their friend and pulling a thread on commodities trading can unravel all of American society.

    Do you remember that "deer in the headlights" look that the Congresspeople had after Paulson and Bernanke met with them in Nov 2008 – hell, they handed Paulson $700Bn AND a get out of jail free card with little delay, very much like the way Congress was steamrolled into the Iraq war.  That’s the way you get something done in this country, use a crisis to scare the crap out of people and then sieze power!

    So if we want to really make some changes, we have to weasel our way into power, then either casue or, through inaction, allow a crisis to occur, at which point we ride to the rescue with our plan but we have to make sure we are well-prepared to present the DIRE consequences of not IMMEDIATELY giving us what we want because (as we’ve seen), if you give Congress time to think about anything, you can pretty much guarantee nothing will happen.

    I do like the idea of lobbying Nat gas and others to join our cause but why stop there?  What really drives me nuts is how the 450 Fortune 500 companies that DON’T make their money pimping commodities don’t understand that the commodity pushers are diverting all the discretionary income away from their businesses before the consumer has a chance to spend.  The 450 companies that rely on selling optional items to people are reduced to fighting amoungst each other for the table scraps that the commodity clan haven’t been able to squeeze out of the consumers – yet!   How do they not get this?  

    Blaming Bush/Pstas – I don’t blame Bush, he’s just the visible tip of the iceberg that this country was steered into.  You’re right about the 2.5mb per month – I mixed it up with the daily figures but also it was simplified because the great GWB actually jammed 125Mb in one year, which certainly helped to double oil prices while we barreled into war that knocked 2Mbd off Iraq’s production and spent another 1Mbd on military fuel, both of which are the gifts that keep on giving from our beloved ex-leader. 

    I do blame Obama for not using the SPR and even more so for not making energy independence a top priority of the adminisration.  The problem was that, when he took office, oil had come back down to $35 so the lobbyists were conveniently able to convince Congress that energy should not be a priority as we had so many other more pressing problems.  You can make an excellent case for why $40 oil is a very fair bottom and why even $60 oil is a fair prce given the various uncertainties in the market but that’s the slippery slope that leads to $80 and the $11Bn monthly raping of US citizens on the spread between $60 and $80 that doubles as the price of oil flows through to gasoline and other commodity costs.  That’s $264Bn of discretionary spending dollars out of the pockets of consumers and more dollars flowing out of this country in exchange for a product we set fire to.

  8. Phil
    I know the price of oil currently is a bug-a-boo with you, as you feel it is a burden on the working class that considers oil derivitives a large part of their budget. There is an answer to this perceived imbalance, and it is not in regulation from our government. The solution is timeless and has been a catalyst for solution to so many imbalances that have occurred in the past relating to commodities, and that is free market enterprise. Our current government  takes the position everything that is considered to be out of balance can quickly be resolved by their genius, and they will legislate a quick solution. These people know very little about anything! Just let the free market forces, in sinq with our entrepreneurial profit incentivized well educated populace find a solution, and our capatist, market driven economy will do very well. Need is the mothers milk of innovation, and will find the best solution long before some out of work lawyer  desireous of a new job can acomplish in Congress. Currently we have a 100 year supply of NG in the country, in the form of proven reserves, which could reduce the need for oil in a huge way, and it is not imported.  Why not allow the entrepreneurial spirit to evolve in this sector naturally, and keep the government out of it ? Seems logical to me.

  9. Phil, spot on, as always…..

  10. Nat gas/Gel – Because the reason we use oil in the first palce is that Standard Oil Company, who actually were the definition of monopoly that the laws were written to prevent – used their power to destroy public transportation, buying up and scrapping trolly lines in every city and they also bought up all electric car patents (in 1900 most cars were electric), pushed for highway legislaiton and subsidized the price of model Ts (Ford was a subsidiary of Standard Oil) while putting up gas stations all over the country - it’s the same pattern a heroine dealer uses to hook his clients early on…

    So for nat gas to work, we need nat gas fueling stations and that just can’t happen without legislation.  And why should there not be a consumption tax on energy when one man’s wasting of energy, even if he can afford it, only serves to increase the cost for everyone else.  If I drive a Hummer and you dont, then I use 2x more gas than you and I pay 2x more, which is fine and fair but if enough people drive a Hummer, lets’ say 25% of the population, then we Hummer drivers cause the entire country to use 125% more oil than before and our 50%, which we can afford (so that makes it OK) drives up the cost of the other 75% by 50% so now America is using 25% more gas but is paying 50% more – which upsets the entire nations balance of trade and places a disproportionate burden on the poor.

    Not only that, but look how often I hear – well if you don’t like it, just invest in oil!  That’s fine for the top 10%, who have the means to invest in oil but then that allows them to consume even more energy (and the speculaiton itself drives new demand) and now we top 10% ers are USING 100% more oil than we used to but we have offset most of the cost through hedging so the cost triples and we continue to pay it because we hedged just for that purpose.  That’s great for us as our 25% jumps to 75% but we hedged the 50% increase by speculating in oil so we don’t cut consumption one drop.  In fact, things are going so well, we go out and buy some boats and suck up even more gas!

    The other 75% of the users didn’t get to hedge and they end up paying 225% for their share.  Perhaps they try to cut back but oil and derivatives are a necessity so they can only knock 10% off their bills which leaves them paying 200% of the old costs and we top 10% ers’ who use 1/4 of the fuel pay 75% of the old cost and WOW, oil is selling for 3x and people still "want" it so it MUST be by their own choice because if it was really hurting them, they’d cut down wouldn’t they?

  11. Your points are well taken and I see your frustation when considering the potential free-market imbalances. This scenario will always play out in this manner, as some of our bretheren are aggressive in their pursuit of profits in order to advance their status, compared to others who are passive in the pursuit of advancement. I do not believe it makes a lot of difference in the end, because those who are innovators, and are successful in their endeavors, can consume only so much ( how much food can one consume, or how many miles can one drive in a year? ). The end result of ones productivity excesses, eventually is absorbed by others who benefit, regardless of their participation in the enterprise. A classic example is the evolution of the automobile – at the outset, only the wealthy could afford this luxury. With innovation through free markets and profit motivation, this has allowed the ownership of an automobile to be taken for granted. This is true of all consumer products for the most part, that at one time were restricted to only the "rich". The so called rich can only consume so much, and the bulk of these former luxuries are consumed by the 90% who previously could only dream of it. The entrepreneurial efforts of Standard Oil and the Rockefeller family may have been perceivied by many as maybe greed for the allmighty dollar, but this benefited many through an increase in everybody’s standard of living.  Ford was able to produce a form of transportation that became affordable to most, but the Ford family through their efforts created more benefit proportionally to the many who received value , compared  to their wealth receipts. The government had nothing to do with this trade off that turned out well for everybody.