Why Did Oil Prices Drop?

People keep asking me this, but I have no idea. I'm not an economist... but here is what some guy at MSNBC thinks...

MSNBC.com

Answer Desk: Explaining the oil bust

Also: Is the U.S. government borrowing money from China to buy oil?

By John W. Schoen

Senior producer

updated 3:57 p.m. CT, Sun., Nov. 30, 2008

With oil prices down to roughly a third of peak levels last summer, OPEC oil producers met over the weekend to try to agree on cutting production to get prices back up again. So far, those efforts haven't succeeded.

If OPEC can't push oil prices higher, doesn’t that mean this year's price spike was driven by greedy speculators after all?

I know everyone is worried about the financial issues right now, but why isn’t anyone talking about the falling oil prices and speculation? It seems like just another "bubble" that burst. In retrospect was the recent run-up caused by people/organizations looking for a double-digit return, just like housing, tech stocks, etc.?
— Jim E., Chesapeake, Va.

Falling oil prices are a financial issue at the moment. The sharp reversal in oil prices — which recently fell below $50 a barrel after peaking at roughly three times that level less than six months ago — is adding to worries about deflation.

The concern is that the price drop, along with the continuing drop in housing and stock prices — could touch off a downward spiral that would severely hamper the government’s efforts to get the economy moving again. (You can read more about deflation here.)

It’s true that speculators helped fuel the price run-up when billions of dollars piled into the futures market trying to find big returns. The recent exodus of that money helped accelerate the collapse. But these investors didn’t cause the spike — nor did they burst the bubble.

Investors are a powerful force in commodity markets and, on balance, a positive one. If you’re buying or selling something — whether because you intend to use it or just trade it for a profit — you want to deal with as many buyers and sellers as possible. That’s true whether you’re trying to sell junk from your attic on eBay, or buy a house, or sell a stock. The more bidders, the closer you can get to a true “market” price — whether you’re a buyer or seller.

This only works, however, if the market is functioning properly. The current financial mess is a result of a breakdown in the markets that supplied money for home loans; the people making the loans bore no risk because they sold them to investors (who didn’t take the time to look closely at what they were buying).

The river of money flowing from this broken credit market washed over the housing market and lifted house prices to unsustainable levels. Now that the bubble has burst, the market is still broken; lenders won’t lend until they’re convinced they’ve seen the worst. As long as house prices keep falling, we’re not there yet.

Some readers suspect that when oil prices spiked, that market was also broken. And some members of Congress favor tighter regulations on futures traders. If evidence can be found that the oil spike was the result of a broken market, more regulations may be needed. But, so far, we haven’t seen any proof of that. (Please forward any evidence to the contrary.)

There are, however, much better explanations for the oil price spike and subsequent collapse. Strong global growth brought a surge in demand for refined fuels, especially diesel fuel needed to move goods and power the machinery behind a global building boom.

Demand for diesel fuel also played a role that got little attention during the run-up. A number of readers at the time wondered why diesel had become more costly than gasoline — a reversal of the traditional price trend. The reason was that in 2007 new air quality regulations required refiners to dramatically cut the levels of sulfur and produce so-called Ultra-Low Sulfur Diesel.

For most refiners, that meant using light, sweet crude, which is low in sulfur. Though overall crude supplies kept up with demand, much of the new crude coming to market was too sour (too high in sulfur) for diesel refiners. That added to the demand for light, sweet crude — the most widely used benchmark for oil prices. (Lower grades of crude sold for less.) Government purchases of light, sweet crude for the Strategic Petroleum Reserve tightened demand further.

Other factors played a role in this year's price spike. A falling dollar boosted the price of crude in dollar terms. Political tension between Middle East oil producers and Western consuming countries raised fears that crude might be used as a weapon.

Many of these trends have made an about-face in the course of a few months.

Today, the dollar is soaring as investors seek the shelter of U.S. Treasuries. A big drop in consumer spending and manufacturing has cut demand for refined fuels. Until recently, the high price of gasoline forced many people to cut back.

These trends could reverse course again. If the Fed floods the system with too much money, confidence in the dollar could weaken. OPEC is working to cut crude production and tighten up the world’s supplies. Pirates are seizing oil tankers on the high seas. A sharp cold snap in the U.S. and Europe could bring another spike in demand.

And now that pump prices have fallen sharply (roughly $1.90 a gallon last week — about half the peak last summer), drivers have been getting back into their old routine, and demand is returning to pre-spike levels.

If that keeps up, it may not take long for prices to begin heading higher again.

I keep reading about how the U.S. borrows $700 billion from China to buy oil from countries that don't like us (Middle East). Is it the federal government (taxpayers) buying the oil? And, do we then give it to ExxonMobil, BP, et al so they can refine it and sell it to us as fuel? If that's the case it's pure profit for Big Oil! Also, concerning the Strategic Oil Reserve, who owns it and who refines it if it's needed? I've never heard or read answers to these questions.
— Ralph T., Michigan

You got the flows of money and oil going more or less in the right direction. But they’re not directly connected.

As the biggest foreign holder of U.S. Treasury debt, China has been a big lender to U.S. taxpayers. As of September, China owned about $585 billion in U.S. debt, followed by Japan ($573 billion) and Britain ($338 billion). Oil-exporting countries hold about $182 billion.

A very small portion of the money raised by our government is spent to stockpile crude oil for emergencies. This Strategic Petroleum Reserve is held in large underground formations near the Gulf Coast, where about half of U.S. refining capacity is based. But at 700 million barrels, it’s pretty well topped off. Last year, the government bought about 7.8 million barrels. So even at an average price of, say $100 a barrel, Uncle Sam only spent about $780 million on crude, compared with the billions raised by selling debt.

And no, the oil is not handed over to oil companies if the government taps the reserve in emergencies. In the past, companies have paid for the oil — or borrowed it and replaced it when the emergency was over.

In any case, it’s not a lot of oil. With U.S. demand for crude oil running at about 20 million barrels a day, the SPR would last us a little over a month before it ran out.

© 2008 msnbc.com

URL: http://www.msnbc.msn.com/id/27929740/

Energy & The Economy with Christopher Marciano: Collusion

While the current big story has been the financial crisis, let’s step back and see what happened to the last big story. It was not 6 months ago that the US was facing oil prices that were over $140 per barrel. The conventional media wisdom was that oil companies were price gouging and colluding to raise the price of oil to whatever price they wanted. The left-wing blogosphere fully believed that the fix was in. In a July CNN/Opinion Dynamics Poll, 68% of people thought the oil companies had a major impact on the price of oil. The CEOs of “Big Oil” were brought before Congress multiple times to defend their “windfall profits.” The Federal Trade Commission investigated collusion (and found nothing). Even Bill O’Reilly put some blame on the major US oil companies.

Now that the price of oil has dropped to about $50/barrel in the span of a few months, the media has dropped charges of collusion. If they were all powerful, like they were portrayed to be, the price of oil certainly wouldn’t have dropped almost 70% in such short order.

Of course, regardless of whether or not oil has recently plummeted, the next time oil prices rise, the accusations of price gouging will be just as strong. Remember: when oil prices go down is market forces; when they go up, it is collusion.

Welcome to the Fake World

This week the New York Times realized something important: "Martin Eisenstadt doesn’t exist. His blog does, but it’s a put-on. The think tank where he is a senior fellow — the Harding Institute for Freedom and Democracy — is just a Web site. The TV clips of him on YouTube are fakes." Kinds makes you wonder who is credible these days? And why the New York Times with all of its resources was not able to figure this out sooner. The lack of phone number and address on the "institute's" website should have at least been somewhat of a clue. It seem like MSNBC and the Los Angeles Times were some of the big guns that fell for this... both organizations that one would think could spend a few minutes to validate the credibility of a source. Heck, had they just checked Sourcewatch this mess wouldn't have happened, they knew it was a fake thanks to Shakesville who figured it out back in June!

Ironically, on the same day that the NYT finally "broke" this story, there was a 14 page "special edition" of the New York Times hot off the presses. "A group of pranksters handed out more than 1.2 million fake New York Times newspapers mainly in New York City and Los Angeles on Wednesday with a front page story declaring "Iraq War Ends." The scary thing was how long it has taken some people to realize that it was fake, despite the date printed on top of July 4, 2009. The hoax was conducted by The Yes Men who are now one of my favorite activist groups for being able to pull off something of this magnitude and I am waiting for them to go head to head with Bureaucrash in the near future.

Fake newspapers, fake experts, what next... fake political candidates? Naw...

Where Does All the Money Go?

So I've been asked to talk about the debt, taxes and the economy more... boring I know... but I live to serve! See some specific concerns and my replies to them below:

1) Where(when) did this debt come from (U.S. debt overtime)? But its not fair to compare George W's debt to Andrew Jacksons. Perhaps to put our recent decades in a fairer light, debt should be represented by the burden it puts on the economy/ the U.S. ability to pay it off. Debt as a % of GDP over time.

Well, the US started with debt. In fact it was a selling point to the states in order to form the union, a trade off, give up some freedom and we'll take on your debt. Arguably its in our nature... but amazing we did manage to pay it all off at one point (a la Adrew Jackson). A quick look to the graph on the right will show you where (when) this current debt came from. But long story short, its debt from post WWII (held relitively constant till the late 70s early 80s) that has taken off in the last 25 years to crazy high ammounts. Due to poor planning, budgeting, and all arround bad fiscal policy. The biggest issue we face is entitlement spending. Entitlement spending (primarily Medicare, Medicaid, and Social Security) is growing considerably faster than the economy as the population ages.

(2) The debt is a function of the accumulation of each years taxes revenue and spending. As I understand the constitution, congress is responsible for our spending, the president just signs finished works. A quick glance at our debt history (as % of GDP) will tell you there is more to the picture than congress. A review of the burden of the government on our economy (federal spending as a % of GDP) over time might help to make sense of the puzzle. What policies/direction was the U.S. going in during our ups and during our downs?

You can blame whomever you want... but at the end of the day only congress has power to do anything about it. A president can Veto, but a congress can over ride. Also this is not West Wing... so the Veto is only so strong. Clinton risked the government freeze over the budget and it worked... but only to a small extent. (Note the small dip in the graph) A budget surplus would help... but in time, with increases in entitlement spending, it will only help so much. Every President SHOULD be smart enough to ask for less and to work with congress on ways to figure out to to reduce entitlement spending. (No easy task, but the true problem).

(3) The other half of the equation is taxes. Is it a good idea to cut taxes (in general) with our current debt, and deficit problems? This leads to two things (i) merits/lack of merits of Reagan's famous supply side economics principles and (ii) effects of raising and lowering the different taxes. (Such as capital gains tax, should it be lowered/raised? Is it a temporary fix or a long term solution?) No president has ever cut taxes in war time except George W., which he did twice (primarily for the very wealthy). Is this a good idea? Would further tax cuts while we are still at war be a good idea?

Tax cuts arn't going to solve long term problems. But neither will raising taxes unless its done to a significant degree... which would just lead to more people trying to hide their tax dollars, use off shore accounts, and perhaps have some of the highest earners just leave the country. I like the idea of working with a consuption based tax... but again, taxes are not the solution to the larger problem, they are just a way to get the people to be on your side. Notice how both parties were giving tax cuts or incentives of some kind to potential voters. No one runs on the campaign of "I'm gona raise taxes, but only because if I don't do it the government will fall apart."

(4) The short term consequence of debt is also important: the interest we pay each year on the federal treasury debt. How much did the U.S. pay in interest in fiscal year 2008? (I can't wait for next years, once interest on that sweet $850 bailout is added) Put that in perspective, how does it compare it to the cost of things that are of current issue, the Iraq war, things of national pride that struggle with budget problems NASA, and controversial cost that depend on what a person feels the proper role of government is such as welfare.

In Fiscal Year 2008, the U. S. Government spent about $412 Billion of your money on interest payments... thankfully we do tend to pay off the interest! It is significantly more than we spend on MANY other programs and departments. If we took the time to start paying down the debt, we'd have more to spend later on other things. Debt interst + entitlement + defense spending = most of the federal budget. Check on the graph on the right. So the money we "have to spend" each year is a fair part of the budget. Where can we trim? All over! But DoD looks like a good place to start demanding better fiscal managment!

So we have a new President comming into office... most important priorities for long term financial security would be for him to figure out a solution to entitlement spending, lower the amount we have to pay in debt interest (ie, pay debt), and keep us all happy while doing it.

Our National Debt, Government Spending, and Taxes.

"I just don't get it..." (<--actual comment)

Don't worry Corey, neither do most politicians. But I'll try to walk you through it...

These three things are very closely correlated, so let me explain how they work together to make your life hell, while they could all be fixed quite simply.

Our National Debt:

All good American's understand the system. Spend all you have, cause you can't take it with you. In fact, spend what you don't have, cause once you are dead... who cares! It would seem that the government has bought into this bullshit as well. Or at least the 435 people you elected to represent your will on capitol hill. (yes, the rhyme was intentional) Basically this debt is caused because we do not have a law that forces Congress to pass a balanced budget, and despite the fact that Congress is supposedly made up of learned individuals, they don't seem to understand why spending money you don't have is bad. Thankfully none of them serve as your financial adviser. In the meantime, Congress is free to spend as much money as it wants, and if there is not enough money in the treasury, they can always just print more. Sounds like a sound business plan to me!

This leads to your money being worth less, but thankfully we have found plenty of foreign countries who are willing to buy up our debt. Now lets just hope they never try to cash in the debt, or that we have a large enough military to ensure that we don't have to pay them.

So why do we have such a high national debt? It's simple, cause congress is stupid and waste our money! Okay, maybe not that stupid. They know they are doing it... they just don't care... its evident in government spending.

Government Spending:

The only reason we have a national debt, is due to government spending. The government could spend less and in theory we could even pay down or of the national debt. But it seems no one is quite sure if there is 1) a reason to do this 2) a value for doing this 3) what will happen to the world economy if we did do this. In the meantime though we probably should look at preventing the rapid increases in government spending that we have seen in the last few years. Sure, some will be quick to blame it on Iraq, Afghanistan, and 9/11... but I blame it on poor management. Yes yes, the Department of Defense is a HUGE budget issue... and I agree that money their could be spent better! Too much bureaucracy is one of the problems.

The business system of government is non-existent. The Secretary of each department or head of each agency has no reason to try to cut spending. In fact, if a government agency head does not spend all the money that is budgeted, the agency gets less money next year... so that just encourages spending! This would obviously be a simple fix... impeachment of agency and department heads who can't work within their assigned budgets. Just like a board of directors would fire the CEO for not being able to bring down costs, Congress could get rid of these executive branch business idiots and find good people who can increase productivity and decrease spending at the same time!

Also, we could cut spending by cutting programs. Seriously folks, what has the Department of Education done for you? What about Housing and Urban Development? Can you even tell me what these people spend their combined $100,000,000,000 ($100 billion) budgets on without going to their websites? I'm sure I can find money fat to trim if you gave me a chance!

Its important to realize why this money gets wasted. It's not their money! So where does the government get this money? From the taxes it collects from you!

Taxes:

There is nothing wrong with paying taxes. We, the citizens of these United States have decided that we want to have a strong national system of government and it takes money to run said government. Now why we waste so much money on the whole IRS system of collection is beyond me! One would think there would be an easier way to tax. Perhaps just tax businesses based on their income rather than individuals... not that this would change the money in your pocket, as you would just get paid less and things would cost more... but you would not have the headache of paying taxes! Another option is to move to a consumption based tax, which would eliminate the need for a vast majority of the IRS as well as many of the accountants that gouge you at tax time to help you fill out a form that you should be able to fill out yourself. I'm not going to go into the conspiracy theory that tax companies are the ones who lobby against making the tax system simpler... I'm sure the money they give to congressional campaigns is to... um... just ensure the best person gets elected.

In the meantime, if the government was a little better with managing money, then our taxes could be lower and we could get the same if not more services. It's a simple trade off, paying for services. If as a country we decide we need less services, we can pay less taxes. Or more services more taxes. Neither of these is necessarily bad... so long as we understand the trade off.

In Conclusion:

Congress wastes your taxes through poor spending decisions and the inability to budget properly. We can fix this by passing a law that requires Congress to not spend more than they bring in. We can also do a better job of holding holding Congress accountable for spending by electing new people into office. We as individuals only have the ability to affect the elections of 536 people on the national level. 101 of them are hardly reliant to the budget/spending process. But if we would stop electing the 435 in congress on party lines and instead put in people who actually care about the country... we just might have ourselves a worthwhile government!

Operation Freedom of Expression

The following is an account of a special mission undertaken by operatives of the United States that most people will never get the opportunity to hear about... I only know about it as I took part in it first hand. The execution of the mission lasted less than 45 minutes, but freedom as we know it was persevered today...

Situation:
Between 1530 and 1730 CST on 6 November 2008 a small metal device that holds the purpose to ensure the freedom of expression in the United States went missing.

Response:
Upon this finding the team responsible for the recovery of the device discussed the incident and possible explanations with great minds in the academic community as well as private contractors. Over night intelligence from multiple sources was compiled and a plan of attack was formulated on how to recover the device. Intelligence reports led to the identification of those involved as well as a primary and secondary location of where the device was likely to be. In the pre-dawn hours of 7 November 2008 operatives went over the plan at an undisclosed location.

Action:
At 0740 the team left the undisclosed location to assault the primary location, where the device was being held. After multiple interactions with foreign agents as well as unsuspecting members of the public, at 0801 access to the primary location was achieved. After a sweep of the area, it was clear that the device was not at the primary location. At 0803 the assault on the secondary location began. All guards present at the secondary location were quickly subdued and a in-depth search led to the recovery of the device. By 0830 all those involved with the mission had returned to a safe location.

Conclusion:
Those involved in Operation Freedom of Expression with to remain nameless, but this account must be told so that we can better understand the risks American's are willing to take to ensure our freedoms!

To the right is the only known picture of the device...

Star Wars and the Election

So I could blog about the election, but since everyone else is doing that I've decided to point your attention to a much more important election...

See more funny videos at Funny or Die

Also enjoy this "Star Wars" - an a capella tribute to John Williams

Christopher Marciano: Election Predictions

My prediction for the election is hopeful, yet grounded in rational analysis. There are three main justifications for my prediction.

1) As a starting point, McCain will win all the states Dole won in 1996, Colorado withstanding. McCain is a better candidate than Dole, and Clinton was a better candidate in 1996 than Obama is today.

2) McCain will win all the states that Bush won by a healthy margin (9%-10%) in 2004. The demographics and opinion haven’t changed so significantly. That means Virginia and North Carolina will go for McCain.

3) McCain will win the battleground states that Hillary won by a significant margin in the primary. While many Hillary supporters will vote Democrat, even if 10% stay home or vote McCain, then Obama can lose roughly 5% of the vote. Hillary won Ohio and Pennsylvania by 9% each.

All of this translates in a 283-255 McCain victory.

Disagree with Chris? Let him hear it! You can also check out the expanded version of his predictions at Purveyors of Truth.