“As an old oilpatch brat, I am now convinced that oil prices are being manipulated downward.”

Ditto, Dave. Me: Sumatra, Saudi (E. Prov.), W. Aus., Iran (Khargh Island).

Back when we began our invasion of Baathist Iraq, I figured that a crucial part of Bush/Cheney’s Iraq plan was to alleviate the financial toll of Operation Iraqi Freedom on our nation’s treasury and citizens by coordinating a major energy price-reduction timed to coincide with our clear progress there.

[Then came the financial crash, and the sudden need to shore-up consumer spending in the face of the pending recession this Christmas added more impetus to this price-tinkering.]

The good news is, this price reduction (coordinated or not) may last awhile, no matter what Bush and his team do. After our defeat of Iraq’s Baathists, Iraq’s oil exports are surging on target, a new respect is evident in the region for both energy-production and America’s role in protecting its global transport…and I noticed that Bush filled our strategic reserves earlier in the year (the fed’s presence in the market in January and March drove prices up, BTW).

This foresight permits his administration to buffer our market further through Winter 2008/09. And he leaves P.E. Obama in a very strong position as he takes Bush’s seat in January 2009.

This has been said before; the lesson of Hiroshima and Nagasaki has been forgotten, or never learnt – after all, most of those who were adults in 1945 are now dead. The lesson ought to be taught again. Choose an unwanted bit of desert or an island somewhere, invite everyone to watch, especially including the TV companies and all world leaders – and set off a nice big H-bomb. In fact, this ought to be a regular event, possibly at the same site once a decade or so. What’s the point? To show said world leaders just how bad things can get, if they screw up badly enough.

Why aren’t there Western vigilantes already?

Wrong question, there already have been Western vigilantes in the near past. They merely used small arms and little bombs. I was responding to a post by Whiskey about the near future use of WMD’s by Islamic groups against the West.

Look up Belmont Club’s post on the “Fourth Conjecture” (it was before his blog became part of Pajamasmedia).

Any attempt to smooth the price spikes will cost way more than is ever saved. For the US the best way to avoid another one if for the US consumers actively purchase nuclear, wind and natural gas as energy sources.

If you analyze oil prices and exchange rates from 1 Jan 2007 through 16 Dec 2008, the correlation is 0.93. This doesn’t speak directly to causality of course (see AGW discussion above), but it strongly suggests these two variables are not independent.

L3

The key here is exchange rates and the impact of increased consumer spending driven by the housing bubble and foreign investment by US investors.

From 2005-2007, the driving force of global economic expansion was increasing US consumption driven by mortgage equity withdrawals.

MEW is the money cashed out by both refinancings and home equity loans. Historically, this number hovered around 1% of GDP. Starting in 1998, it started to rise due to easier underwriting standards for mortgages, which drove up home prices and created more “equity” which could then be withdrawn. By 2003, it was up to 5% of GDP, and stayed there until early 2008, when it started to plummet – recently going negative. This represents trillions of dollars of consumer demand.

Lots of this demand was met by foreign suppliers, most notably China. To buy something from China, US consumers had to sell US dollars and buy Chinese yuan. This meant that dollars got cheaper, and commodities (like oil) got more expensive. Since dollars were worth less, it simply took more of them to buy a barrel of oil.

You can also see these goods and capital flows in our current account deficit, which continued to balloon throughout this entire period. We were buying more stuff from overseas, and our trade deficit expanded.

At the same time, investors, concerned about the weakening dollar, began moving more and more capital overseas. This put further pressure on the dollar, as every time a US investor wanted to buy, say, stock in a Turkish company, they had to sell dollars and buy lira.

The bottom line is that the dollar got cheaper and cheaper, and oil got more and more expensive. You can see this in the Euro-USD exchange rate, which rose from about 1.19 in 2006 to about 1.59 in July 2008, a rise of 33%. During this same time, oil rose from the $55-75 range to about $90-110 range, which more than like 60%. So about half of the price increase was simply due to exchange rates.

The rest of this increase was due to rising demand, again driven by US consumption driving increased production in China, etc. As we cashed out home equity and bought more stuff, that stuff had to be produced, and this drove up energy demand around the world. Supply is pretty inelastic, so prices rose. This, of course, led to efforts to increase supply, but those efforts take a long time to bear fruit.

Finally, towards the end of this run-up, you had the normal financial speculative excess that one normally sees in asset bubbles. That’s probably what drive the price from $100 to $140 per barrel in the 100 days between late February and mid-June.

Then the wheels started coming off. Oil prices fell from $145.31 on 7 July 2008 to $91.45 on 17 Sept 2008. During this period, we saw the failure of Fannie and Freddie (late August), Lehman Brothers (15 Sept 2008), and AIG was taken over (17 Sept 2008). The world suddenly realized that the financial markets were in deep doo-doo.

At this point, financial investors the world over made a collective (though uncoordinated IMHO) decision that the only asset that was a safe store of value was US Treasuries. In a so-called “flight to safety,” everyone and their dog started selling whatever they could and bought T-bills, which means that the entire world started buying dollars. On 11 Sept 2008, 1-month T-Bills had a closing yield of 1.525%. On 17 Sept 2008, they had a closing yield of 0.01%. Other term securities saw similar (though less severe) drops in yield. This is a breathtaking flow of capital into US Treasuries, and therefore dollars.

At the same time, the high crude prices starting hitting the consumer in the gas tank. Gasoline peaked at $4.16 per gallon in August 2008 (it takes a while for oil inventory to get processed and distributed, which accounts for the lag between oil price peaks and gasoline price peaks). Consumers started throttling back (so to speak) their consumption of gasoline, which accounts for a huge portion of oil consumption (about 2/3rds according the DoE). Energy costs also started to hit overall economic growth, especially in distribution and transportation businesses.

Consumers, faced with higher costs and less money (falling mortgage equity withdrawals), pulled back dramatically. The result was a sharp drop in demand, and therefore prices.

All of this goes back to the mortgage debacle, in which Jack and Jill went up the hill to fetch a big new home. Eased underwriting standards drove up home values (money flowing into housing faster than supply expanded); rising home values created phantom equity; phantom equity was converted by consumers into cash through additional debt; consumers spent that cash on stuff made overseas, driving down the value of the dollar and increasing global energy demand; the falling dollar and rising demand drove oil prices into the stratosphere.

Then Jack fell down and broke his crown, and Jill came tumbling after. Debt markets seized up; mortgage underwriting standards dramatically tightened; home prices fell as buyers left the market, unable to borrow on the same terms; existing mortgages went “under water”; mortgage equity withdrawals fell to zero (or negative); with no cash to spend, and lots of debt to pay off, demand for goods fell; falling demand led to falling production and the threat of deflation; the threat of global recession and deflation led to a financial flight to quality; the flight to quality led to a dramatic strengthening of the dollar; the strong dollar and falling demand led to plummeting energy prices.

It might be more satisfying to believe oil prices have been manipulated by the malevolent hand of Soros, Faisal, or Putin that pulls the puppet strings.

But it seems to me that the only hand manipulating all this is the invisible hand of Adam Smith, with the assistance of Frank, Dodd, and Raines.

L3

A wise parasite would try to make sure his present host doesn’t die before some other host becomes available.

The fact that the wackos could care less about the rest of the world means they really are just a bunch of anti -American hypocrites.

Russia, China and much of the third world produce not only a ton of CO2, but a huge amount of actually harmful gases and pollutants that the US largely cleaned up years ago. China is already the leading producer of CO2 and is expected to double its production within 8 years. Allegedly, one in ten babies born in Siberia is deformed from the all crap the Russians haven’t cleaned up.

If the Carbon Dioxide were really the problem the wackos say it is , and the US stopped producing it tomorrow, there still would be a ongoing problem. But CO2 and Global Warming have clearly been proven not to be the problem the Warming Alarmist’s proclaim.