THE CURMUDGEON CHRONICLE - #239

THE CURMUDGEON CHRONICLE ©

AN IRREVERENT VIEW


Time Line: June 29, 2008
Date Line: Flemington New Jersey

If a politician tells you that a condition is “totally unacceptable” be prepared to live with it forever. The pronouncement is usually followed by twelve talk shows; a shot on Meet the Press, and no change in the condition that is totally unacceptable.

If we citizens are lucky, there will be no Congressional committee hearings or legislation. If we are not so fortunate, laws will be enacted that will exacerbate the situation and we will move from “totally unacceptable” to “crisis”. (Experience has demonstrated Government’s ability to deal with crisis.)

The price of oil and its refined products are disproportionately high even considering the decline in the value of the dollar. The situation as you can guess is “totally unacceptable”. Politicians have offered the following proposals to rectify what is about to become an “economic crisis”:

Open our offshore sea -beds for drilling
Switch to alternative energy sources
Make automobile manufacturers achieve better mileage targets within the next five years,
And so on.

Items 1, 2, and 3 are so far into the future and so meaningless in today’s environment that they cannot be considered solutions except for “totally unacceptable conditions”. Item 4 is more of the same but less specific.

Anyone can look at the way the commodities market has acted over the past year and figure out why oil is selling at $140 instead of $70 per barrel. The trading community has found a sweet spot in oil futures.

Your friendly Trader, Banker, Hedge Fund or Pension Plan have discovered that, (without any controls by Government), they can own contracts for the commodity and never have to take delivery. All they have to do is sell the contracts into a rising market before the delivery date and take a profit. The rising market is caused by their own churning activities which do not include use of the commodity they contract for. The trader probably wouldn’t recognize a barrel of oil if it fell on his big toe.

I am not going to presume to tell the commodities markets how they are supposed to function, but I can tell you that your cost at the pump would be halved if speculation in oil futures were eliminated. Oddly, no politician running for high office has said he would make that an immediate order of business. (That might alienate some contributors, and create a “truly unacceptable” condition instead of one that is merely totally unacceptable.)

It is odd that current oil prices are cut to the same pattern we witnessed in the Enron energy trading scheme. That scheme raised the cost of energy in California exponentially and bankrupted dozens of major enterprises. Enron was on every front page and on every radio and TV station for almost a year. We should have learned a lot, but adoption of a mechanism to control that kind of scheme was not even suggested. As a result we have the current oil pricing abuse and are reliving Enron once again.

If some politician had a testosterone shot and exhibited the courage to end oil speculation, there would be trading losses. The Government should not lift a finger to bail out the losers. The speculators have made the public pay and they have no right to any of those gains.

If speculative activities ended, the public and business at large could get back to reality-priced oil and the color code would change from red to yellow. I fear that solution is “truly unacceptable”.

I am learning to use Pedi-cab and burn blubber as defensive measures.

Howard Stamer