McCain's Plan to End Oil Crisis

[Paulie]

This is amusing.

On one hand we have the oil companies swearing that they have nothing whatever to do with the high cost of energy.

But if we're willing to cut their taxes to nothing, then the price of energy will go down.

What's wrong with that picture?

Cutting oil company taxes will not even appear on the radar, as far as lower prices are concerned.

There are 3 main aspects that will have a noticeable positive impact on oil prices: Stop devaluing the dollar any further, drill more oil/build more refineries here in the states, and less speculation LONG. Although, I've been seeing where many investors are shorting oil as well, so I'm not so inclined to believe speculation is causing more than 30-40% of the damage.

Speculation of course, can change overnight. Either there is more shorting, or the long speculators simply drop out. But then we're still left with the long-term problems of Dollar devaluation and minimal US supply/refining. These two aspects are going to take political testicular fortitude within Congress, which in case anyone hasn't noticed, is severely lacking these days.

When the speculation long stops, we still have the problem of a devaluing Dollar that is going to continue causing a rise in oil prices. I'm not sure how anyone can poo-poo the idea of the Dollr being a culprit, when oil has been pegged to the Dollar since at least the 70's.

Take a look at how oil trends with gold, for instance. I've posted charts here that show how the Dollar and Oil have trended almost in mirror fashion, while gold stays horizontal across the board. It seems the oil exporters are producing an amount of oil that keeps the price pegged with the price of gold. And why SHOULDN'T they? It's THEIR oil, and they are smart enough to know that the value of gold never diminishes throughout history. Why let a failing dollar cause you profit loss on your own main export?

I'd be pegging my oil to the price of gold TOO, if I was them.

Look down at the USD vs. Euro chart, with Dollars in Blue and Euro in red. Look at how the Euro has trended at almost the exact same pace as the Dollar, with the Euro being slightly less inflated. Gold is below them both in purple. Notice how gold never really changes vs. Oil, while the currencies continually go up.

http://www.usmessageboard.com/economy/53981-maybe-ron-paul-was-right.html

 

[editec]

Cutting oil company taxes will not even appear on the radar, as far as lower prices are concerned.

Absolutely right.

There are 3 main aspects that will have a noticeable positive impact on oil prices: Stop devaluing the dollar any further, drill more oil/build more refineries here in the states, and less speculation LONG. Although, I've been seeing where many investors are shorting oil as well, so I'm not so inclined to believe speculation is causing more than 30-40% of the damage.

Yup!

Yup! right down to the 30-40% guesstimate, too.

I'd say when the bubble bursts oil will go down to about $80-$90 a barrell (for a while, until something else spooks the markets, I mean)

But I suspect we both know that the pressure on the price of oil to go up is constant, and that relative to other things, the price of oil is going to outproform most other specualtive investments.

Right NOW it's too damned high.

But in the long run? It's going up until industrialized nations find alternative source sof energy.

Speculation of course, can change overnight. Either there is more shorting, or the long speculators simply drop out. But then we're still left with the long-term problems of Dollar devaluation and minimal US supply/refining. These two aspects are going to take political testicular fortitude within Congress, which in case anyone hasn't noticed, is severely lacking these days.

Yup! again.

When the speculation long stops, we still have the problem of a devaluing Dollar that is going to continue causing a rise in oil prices. I'm not sure how anyone can poo-poo the idea of the Dollr being a culprit, when oil has been pegged to the Dollar since at least the 70's.

Sometimes the price of gold and the price of oil move concurrently.

There was a long time (in the late 80s) when they seems totally disconnected though.

Perhaps that had more to do with the spike in gold prices falling back into reality land, than any other fundamental. Remember that Saudi Arabia had driven up the price of gold when it elected to take 10% of its petro dollars and covert them to gold in the late 70s' thus driving gold from about $135 to the startling price of over $800 in about six months. Meanwhile the price of oil didn't go up nearly so much.

So those two commodities seem to move in tandem more when there is an element of international tension to connect them.

I SUSPECT that is because people inthe REST of the world (much more than US citizens) have a tradition of hording gold when they think the world is getting tense.

Take a look at how oil trends with gold, for instance. I've posted charts here that show how the Dollar and Oil have trended almost in mirror fashion, while gold stays horizontal across the board. It seems the oil exporters are producing an amount of oil that keeps the price pegged with the price of gold. And why SHOULDN'T they? It's THEIR oil, and they are smart enough to know that the value of gold never diminishes throughout history. Why let a failing dollar cause you profit loss on your own main export?

Yeah, very true. See the above about what happened to the price of gold when Saudi Arabia decided to turn their petrodollars to gold.

I'd be pegging my oil to the price of gold TOO, if I was them.

Gold IS the refuge one takes when the money gets funny. I horde silver because I'm not welathy enough to play the gold standard.

Look down at the USD vs. Euro chart, with Dollars in Blue and Euro in red. Look at how the Euro has trended at almost the exact same pace as the Dollar, with the Euro being slightly less inflated. Gold is below them both in purple. Notice how gold never really changes vs. Oil, while the currencies continually go up.

Why it's almost as though investors have more confidence in GOLD than they do in national goverments committment to protecting their species, isn't it?

Smart investors, methinks.

The devaluation of national specie seems to be as inevitable.

Government even found ways to inflate the specie when the specie itself was metal based.

They'd debase their coins with cheaper metals.

Much like WE DID in the 1960s when after moving off the gold stardard, we elected to make our coins out of base metals.

I am told that purchasing power an ounze of gold really hasn't changed since the time of Augustas.

Back then we're told an ounze of gold would buy you a beautiful toga.

Today, I'm told that the same ounze of gold would buy you a beautiful suit in Rome.

 

[Paulie]

Absolutely right.



Yup!

Yup! right down to the 30-40% guesstimate, too.

I'd say when the bubble bursts oil will go down to about $80-$90 a barrell (for a while, until something else spooks the markets, I mean)

But I suspect we both know that the pressure on the price of oil to go up is constant, and that relative to other things, the price of oil is going to outproform most other specualtive investments.

Right NOW it's too damned high.

But in the long run? It's going up until industrialized nations find alternative source sof energy.



Yup! again.



Sometimes the price of gold and the price of oil move concurrently.

There was a long time (in the late 80s) when they seems totally disconnected though.

Perhaps that had more to do with the spike in gold prices falling back into reality land, than any other fundamental. Remember that Saudi Arabia had driven up the price of gold when it elected to take 10% of its petro dollars and covert them to gold in the late 70s' thus driving gold from about $135 to the startling price of over $800 in about six months. Meanwhile the price of oil didn't go up nearly so much.

So those two commodities seem to move in tandem more when there is an element of international tension to connect them.

I SUSPECT that is because people inthe REST of the world (much more than US citizens) have a tradition of hording gold when they think the world is getting tense.



Yeah, very true. See the above about what happened to the price of gold when Saudi Arabia decided to turn their petrodollars to gold.



Gold IS the refuge one takes when the money gets funny. I horde silver because I'm not welathy enough to play the gold standard.



Why it's almost as though investors have more confidence in GOLD than they do in national goverments committment to protecting their species, isn't it?

Smart investors, methinks.

The devaluation of national specie seems to be as inevitable.

Government even found ways to inflate the specie when the specie itself was metal based.

They'd debase their coins with cheaper metals.

Much like WE DID in the 1960s when after moving off the gold stardard, we elected to make our coins out of base metals.

I am told that purchasing power an ounze of gold really hasn't changed since the time of Augustas.

Back then we're told an ounze of gold would buy you a beautiful toga.

Today, I'm told that the same ounze of gold would buy you a beautiful suit in Rome.

Yes, your last part hit it on the head. Gold never really increases or decreases in value over time. It stays constant while paper money loses value. The best part of the Gold Standard was governments were restrained in spending. They couldn't just print more money out of thin air to fund new spending programs. You can only have as much money as there is gold to back it. Now, they can simply adjust interest rates to where they want them and either raise or lower the money supply. Right now, the Fed has sold off many of their Treasuries to the point of them only occupying about half their balance sheet, and probably less at this point. They typically only hold Treasuries, but now they've taken on a lot of debt. There's a great thread here which discusses this: http://www.usmessageboard.com/economy/53547-interesting-fed-intervention.html

This is simply to combat the money supply expansion/inflation, only the inevitability is going to be more inflation anyway.

Hoarding precious metals is often viewed as kooky, but I'd like for someone to explain to me why you shouldn't have some of your wealth locked up in PM's to preserve its value. Diversification, right? Well, PM's are a necessary part of your portfolio.

My silver and gold are going to be worth more than the Dollars I paid for them in 5 years. While the ones laughing at me are wondering why they're buying a loaf of bread for $10.

Watch for Zoomie1980 to chime in about how gold is silly and that it's a horrible gain investment, as if that's what PM's are even for. While I expect to realize gains on my gold and silver, my main purpose for owning them is to hedge against inflation. I've got other investments for the purpose of earning gains.

 

[Zoomie1980]

What's their profit percentage compared to other industries?

Oil's operational cost is 90% of revenues. By comparisons the large railroads operated about 75-80%. That means, basically oil makes one dollar profit for every 10 in overall revenue. That's not very good. It's just the enormous SIZE of the oil company's business in terms of dollars, makes the raw numbers seem big.

 

[Zoomie1980]

There's been many posts here with stats and charts showing oil's trend with the Dollar.

For you to sit there and say the Dollar isn't a cause, is disingenuous at best.

The dollar is down about 13-14% compared to other currencies in the past two years. Oil has doubled. It's not the dollar.

 

[Zoomie1980]

I didn't say it would help us TOMORROW. But more drilling and more refining WILL HELP US EVENTUALLY. More so than doing NOTHING.

But you're not going to sit there and tell me the only reason oil is so high is becasuse of speculation, and we're all supposed to just accept that because your family is in the business.

You constantly post numbers and opinions, and never have a damn thing to back them up.

You ignorantly neglect the fact that much of the speculation within the market right now is shorts as well, which of course isn't going to raise the price.

USD vs. Oil trends have mirrored each other, and when you look at the Dollar in 2000 vs. Oil, you see they trend almost exactly the same from then until now. You saying the USD is down 13% doesn't explain the way the two have been trending.

Gold has corrected, and oil hasn't yet. I suspect oil will correct soon enough, and be down around $100 where it belongs. But there's no telling what will happen after that though. My suspicion is we haven't even started to see the inflation in this country yet, and Oil and Gold will definitely be back up, and higher than they have been this year.

You're quite bullish on the Dollar considering the fundamentals.

Just wait until some more banks collapse, maybe then you'll realize. WaMu is on the brink, as well as Fannie, Freddie, and others. They're all hanging on by a thread right now, but they take comfort in knowing that the government will come along and bail them out with more inflated Dollars.

I'm not sure how with as much debt as there is in this country, and as much money supply inflation there is, that you can be that bullish about the Dollar long-term.

We'll see, I guess.

Oil BELONGS at $45. It costs about $2 to get it out of the ground, $10 to pipe and store it at the terminal. $15 to transport it, about $10 to deliver it from terminal to refinery. Add in the producer's profit and it's REAL supply-demand value is about $42-$45 or so.

Over 50% of the money in the oil market today is speculative. That means HALF the contract owner and sellers do not intend to deliver or accept delivery of a single barrel of oil. Traditionally, in normal times, less than 10% of the market is speculative.

Runaway SPECULATION is the cause of oil prices, not supply, not demand, not the dollar. And as soon as the Wall St lemmings and their European and Asian counterparts find some other hot investment vehicle that will be it and oil will go a LOT lower than $100...

 

[Zoomie1980]

This is amusing.

On one hand we have the oil companies swearing that they have nothing whatever to do with the high cost of energy.

But if we're willing to cut their taxes to nothing, then the price of energy will go down.

What's wrong with that picture?

And they are right. Commercial oil companies control less than 15% of the world's oil. The rest are state run enterprises. Flush the speculators out of the market and you solve the problem. Put very tight limits on daily ups and downs, and limit the number of contract availability to only those who actually produce, ship and consume oil with about 10% added in for market liquity and you run all the speculators off. That's exactly what Congress did in 1990 to run the speculators out of the corn and soybean markets in a severe drought year, it's what they need to do again.

Shoring up the dollar would help as well. The second biggest impact has been the falling dollar, relatively small compared to speculation but still significant.

And finally, reducing DEMAND by moving away from gasoline and diesel powered transportation. Supply, long term, is going nowhere. The best we can do there is hope new drilling keeps the pace with the rapidly declining current oil fields until alternative energy sources become widely available

 

[Zoomie1980]

Yes, your last part hit it on the head. Gold never really increases or decreases in value over time. It stays constant while paper money loses value. The best part of the Gold Standard was governments were restrained in spending. They couldn't just print more money out of thin air to fund new spending programs. You can only have as much money as there is gold to back it. Now, they can simply adjust interest rates to where they want them and either raise or lower the money supply. Right now, the Fed has sold off many of their Treasuries to the point of them only occupying about half their balance sheet, and probably less at this point. They typically only hold Treasuries, but now they've taken on a lot of debt. There's a great thread here which discusses this: http://www.usmessageboard.com/economy/53547-interesting-fed-intervention.html

This is simply to combat the money supply expansion/inflation, only the inevitability is going to be more inflation anyway.

Hoarding precious metals is often viewed as kooky, but I'd like for someone to explain to me why you shouldn't have some of your wealth locked up in PM's to preserve its value. Diversification, right? Well, PM's are a necessary part of your portfolio.

My silver and gold are going to be worth more than the Dollars I paid for them in 5 years. While the ones laughing at me are wondering why they're buying a loaf of bread for $10.

Watch for Zoomie1980 to chime in about how gold is silly and that it's a horrible gain investment, as if that's what PM's are even for. While I expect to realize gains on my gold and silver, my main purpose for owning them is to hedge against inflation. I've got other investments for the purpose of earning gains.

An ounce of gold buys about roughly the same amount of bread today it did 5000 years ago. It's a great PROTECTOR of wealth, but a LOUSY way to ACCUMULATE wealth.

 

[Toro]

An ounce of gold buys about roughly the same amount of bread today it did 5000 years ago.

Sorry Zoomie, this has to be wrong.

To assume that it costs the same amount as it did 5000 years ago means that there have been no technological improvements in the making of bread during that time. As we know, this has not been the case.

The rate of productivity growth in food production has far outstripped the rate of currency debasement of the dollar relative to gold.

 

[Zoomie1980]

Sorry Zoomie, this has to be wrong.

To assume that it costs the same amount as it did 5000 years ago means that there have been no technological improvements in the making of bread during that time. As we know, this has not been the case.

The rate of productivity growth in food production has far outstripped the rate of currency debasement of the dollar relative to gold.

Gold has not increased in value, over the long haul, in terms of what it can buy, in all of human history and never will. That is why is it is so good of an inflation hedge. For most of the past 20 years it has done nothing but again, as in the 70's, when inflation hits hard, gold follows, thus preserving wealth. Typically when inflation flattens, so does gold. It NEVER has been much of choice for wealth creation, being outperformed, over the long haul, by most other investment vehicles.

 

[BaronVonBigmeat]

Sorry Zoomie, this has to be wrong.

To assume that it costs the same amount as it did 5000 years ago means that there have been no technological improvements in the making of bread during that time. As we know, this has not been the case.

You forgot that there were also technological improvements in mining gold.

 

[Toro]

You forgot that there were also technological improvements in mining gold.

That's true, but

The real price of gold isn't that much different over the past 400 years. The technological innovations to bring more gold out of the ground has not been fast enough to offset the rate of debasement of the currency.

If it were true that bread priced in gold has not changed, that would mean the technological improvements in food production have trended at rates similar to gold mining.

We know, however, this not to be the case. Around 1900, ~40-45% of Americans worked on a farm. Today it is ~3-4%. However, (and I cannot remember the exact number) food output is ~30x higher since the turn of the last century.

Also, the average American family spends far less of their income on food than a century ago. Again, I cannot remember the exact numbers, but in 1900, about 50% of income went towards food. Today, it is 10-15%. This is due in part to rapid technological adoption.

Think about it. Most loaves of bread in this country are made in a vast manufacturing process. 100 years ago, almost all bread was made locally and the cost of inputs was much higher relatively because the country had no where near the transportation infrastructure today nor the efficiencies in farming.

 

[editec]

While I completely agree that the GOLD STANDARD prevented governments from debasing the specie, a gold standard in a growing economy won't work either.

I realize I am probably preaching to the choir, since those of you posting in this thread seem to understand econ, pretty well, but this needs to be said, anyway.

A simple gold standard is counter-productive to a growing economy.

A simple gold standard in a growing economy causes DEflation and stagnation of the economy.

Nobody is going to buy anything if the costs will be lower tomorrow.

Nobody can afford to borrow money if the dollars they have to pay back tomorrow are wildly more valuable than the dollars they borrowed yesterday, either.

And if production increases, but the amount of specie does not (as happens in a simple gold standard economy, I mean) then the DEFLATION of the value of the specie is even more destructive to the economy than the INFLATION we are all so familiar with.

What we really need is a government which has the dicipline NOT TO INCREASE THE MONEY SUPPLY faster than REAL GROWTH in the economy.

What we've got now is a FRACTAL BANKING SYSTEM which gives every bank the option to increase the money supply every time anyone borrows ...which really means CREATES new money in our system.

I found it chilling when I read that the government is not longer posting the M3 number.

Those of us who understand the true point of this tool we call money understand how significant it is that our government is no longer telling us how much of it is REALLY in circulation.

That decision, I think, far more than the oil shortage (or our economy's state of health) explains why currency arbitragers are shorting the dollar.

A nation's specie is only as valuable as the world's confidence in that nation's economy, folks.

If you can't KNOW how much of that nation's specie is in circulation, you can't really know its value relative to everything else.

 

[Toro]

You can have a gold standard in a growing economy as long as the supply of gold grows at the same rate as the economy. However, it is no longer practical because the supply of gold cannot be calibrated with the growth in the economy.

If the economy grows at a faster rate than the money supply, real interest rates will rise, which restricts the growth in the real economy unnecessarily. The supply of gold is dependent upon many factors having nothing to do with the general economy, i.e. mining technology, environmental permitting, politics in third world countries, etc. Gold is a poor currency today, though it is still wise central banks carry at least a portion of their reserves in gold since it is nobody's liability.

 

[editec]

Toro,

Where is this chart from?

Am I reading it right?

It seems to suggest that the price of gold was $2,150 an OZ around 1970-something.

This chart, is, I think more accurate, although it doesn't give us that long historical view that I'm sure we'd all appreciate having a look at.

 

[editec]

If the economy grows at a faster rate than the money supply, real interest rates will rise, which restricts the growth in the real economy unnecessarily

I don't think I understand your meaning.

If the sum of all goods and services avaialable in growing economy greatly outpaces the increase in specie in circulation "real interest rates" go UP?

Wouldn't the interest charged for borrowing money have to drop like a stone to entice people to borrow under those circumstances where the value of the dollars they are playing back is much higher than the dollars they borrowed?

 

[BaronVonBigmeat]

Nobody is going to buy anything if the costs will be lower tomorrow.

Better notify the computer and electronics industries before they go bankrupt!

Nobody can afford to borrow money if the dollars they have to pay back tomorrow are wildly more valuable than the dollars they borrowed yesterday, either.

Not really, it's just another factor to consider when markets of borrowers and lenders set the interest rate. If money is slowly becoming more valuable for everyone, then we would expect banks to have lower stated interest rates* than they do now, which was the case in the 1800's.

* Stated interest rates: The actual number quoted by the bank. As opposed to the real interest rate, which takes inflation/deflation into consideration. ie 3% interest rate + 2% deflation = 5% real interest rate.

And if production increases, but the amount of specie does not (as happens in a simple gold standard economy, I mean) then the DEFLATION of the value of the specie is even more destructive to the economy than the INFLATION we are all so familiar with.

There are different types of deflation just like there are different types of inflation. The slow, steady decline of prices due to productivity improvements and technological breakthroughs (for example, mass-produced bread ) is a good thing. That's how the standard of living increases.

Now if you're talking about deflation brought on by a recession, where stores are liquidating inventories because they don't have enough customers anymore, that's something else entirely. And finally, you've got the truly dangerous type of deflation, where the fed shrinks the money supply and causes a depression. But they only did that once.

Of course, federal reserve policy doesn't make distinctions like this; they just lump everything together, and decide how much to inflate, in order to combat the evils of manufactured goods becoming cheaper/better.

 

[BaronVonBigmeat]

Tax breaks will not induce oil companies to spend more looking for oil. Exxon buys back $8 billion of its stock every quarter.

I don't understand how this would be the case.

High oil price = bigger profits = more money that can be spent on exploration, as we can see right now

vs.

Lower taxes = bigger profits = not spending more money on exploration?

 

[Toro]

Toro,

Where is this chart from?

Am I reading it right?

It seems to suggest that the price of gold was $2,150 an OZ around 1970-something.

This chart, is, I think more accurate, although it doesn't give us that long historical view that I'm sure we'd all appreciate having a look at.

This chart is correct in nominal dollars. The chart I posted was after inflation.

 

[Toro]

I don't understand how this would be the case.

High oil price = bigger profits = more money that can be spent on exploration, as we can see right now

vs.

Lower taxes = bigger profits = not spending more money on exploration?

Okay, I'm exaggerating somewhat.

However, the increase in cash flow to major integrated oil companies has gone primarily to share buybacks. Increases in dollar capital expenditures are due primarily to soaring costs to rent equipment. For example, the cost of a drillship has risen from $120k a day to $600k a day over five years. Reserve growth has been nominal, ~2-3%, and is no different than it was over the past 2 decades. Smaller companies have definitely increased their E&P spend, but the majors not so much.

The point is, however, that the oil companies have seen massive increases in cash flows this decade. I think windfall taxes are a bad idea but they don't need further tax breaks when their primary commodity has increased by 1300% over the past 10 years either.