Wednesday, May 21, 2008

Oil Tantrum

Oil prices spiked to another new high today and while oil at $132 is scary, it's not nearly as scary as the economic ignorance being displayed in the Senate today. Several politicians have appeared on CNBC today and their arrogance is frankly amazing. Here's an interview from today on CNBC with Sen. Ben Cardin, D-MD:

CNBC Interview

Sen. Cardin apparently believes that the profits of US oil companies are "obscene" and that he should have the authority to decide how to invest those profits. Those profits belong to shareholders, but the Senate seems to believe that it is okay to confiscate them in the name of "national security" and invest them in "alternative fuels". Considering the results of the last Congressional "investment" in alternative fuels - ethanol - I can't think of a worse idea.

Everyone is looking for the bad guy in the oil price run up. Businessweek has an article that blames pension funds.
Congress is trying to blame speculators:

"This unbridled growth raises justifiable concerns that speculative demand - divorced from market realities - is driving food and energy price inflation, and causing a lot of human suffering," said Sen. Joseph Lieberman, I-Conn., chairman of the Homeland Security and Governmental Affairs committee that held the hearing.

The Connecticut senator said index speculators are "partly responsible for hurting a lot of individuals and businesses."

"I think it's important to limit the options that people have to maximize their profits, because a lot of us end up paying through the nose," he added.

Huh? Does Lieberman believe it is good for the economy to "limit the options that people have to maximize their profits"? How exactly would that be a good thing?

I suppose I'm part of the problem here. I put commodities in all our portfolios so apparently Lieberman wants to limit my ability to do that. Of course commodities are what has enabled me to make money for clients over the last 6 months while stocks have been cooling their heals. I suppose Lieberman thinks it would be better if my clients were losing money. Who would benefit from that I'm not sure.

The House, meanwhile has decided the bad guys are at OPEC and the answer lies in, where else, court:

WASHINGTON (Reuters) - The House of Representatives overwhelmingly approved legislation on Tuesday allowing the Justice Department to sue OPEC members for limiting oil supplies and working together to set crude prices, but the White House threatened to veto the measure.

The bill would subject OPEC oil producers, including Saudi Arabia, Iran and Venezuela, to the same antitrust laws that U.S. companies must follow.

The measure passed in a 324-84 vote, a big enough margin to override a presidential veto.

Who do they think is going to enforce any court order they might get from a friendly US judge? The majority of the House is Democratic, anti war and accused the Bush administration of invading Iraq for oil, so they must not mean the military. Maybe they think Bill Clinton will get more out of the Saudi royal family than Bush.

Why is oil at $132? I can think of a number of reasons:

1. Demand from emerging markets is increasing as they create a middle class. I would think liberals especially would be happy that the world economy is lifting some out of the ranks of the poor, but maybe not.

2. The Fed's monetary policy has destroyed the value of the dollar. Congress has an oversight function that they could use, but I guess that's too hard to understand.

3. US politicians have limited supply by placing big oil fields off limits. We've been extracting oil in the Gulf of Mexico for years with no accidents but Congress won't allow drilling off the continental shelf where there is even more oil. They also won't allow drilling in ANWR even though the majority of Alaskans are in favor.

4. Increase in the use of commodities as a permanent asset class by investors. I've been doing this for a number of years but others are new to the game. Of course, I wouldn't invest in commodities if the Fed didn't habitually print too many dollars; I wouldn't need to protect myself and my clients from inflation if it didn't exist.

Polticians are like children. They want to have their cake and eat it too. The things they claim to want are many times mutually exclusive:

1. They want low gas prices and they want people to use mass transit.
2. They want to low energy prices and they want investment in alternative fuels.
3. They want to become energy independent but they won't allow companies to drill for oil in places where we know it exists.
4. They want low oil prices but they want to take profits away from oil companies who will cut their exploration budgets in response.
5. They claim to want to use ethanol to reduce greenhouse gases, but won't remove tariffs on more efficient ethanol produced from sugar cane in Brazil.

The market will take care of high oil prices. History tells us that Congressional action will merely prolong the process.

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