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Thursday, July 7, 2022

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America’s Commodity Crisis – 2010 Edition

Ouch!

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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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. 

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!!

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

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!!

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, et.al 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.

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.

Phil, spot on, as always…..

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.

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