Reasons for the Oil Hike: Supply-Demand Economics or Energy Index Funds or Individuals Like Moi?

The price of a gallon of gas crossed the $4 mark in Ames, Iowa this weekend. Many pundits are predicting higher prices as the price-per-barrel of oil is expected to reach $150 by the end of the summer. Each barrel produces 42 gallons of oil but there are taxes and surcharges added which raise the end-price per gallon for the consumer.

What is driving this exorbitant price of gas? I looked up some textbooks on economics and here is a brief summary of some of its basic principles. Equilibrium occurs at the intersection of a commodity’s market demand curve and market supply curve. Ceteris paribus, the equilibrium price and the equilibrium quantity tend to persist in time. An increase in demand causes an increase in both the equilibrium price and the equilibrium quantity. An increase in market supply causes a reduction in the equilibrium price but an increase in the equilibrium quantity. The opposite occurs for a decrease in demand or supply.

Let’s look at some data to which we can apply these principles. In 2006, the U.S consumed 20.7 million barrels of petroleum per day of which 9.3 million barrels per day went towards motor gasoline. In 2007, the average consumption of petroleum was 20.7 million barrels per day and in 2008 the numbers for January through May are not significantly different from the earlier years.

The total world consumption over the last three years has remained steady at about 86 million barrels of petroleum per day.

So the demand for oil has not changed significantly at all. And very surprisingly, the OPEC supply has in fact increased this year. Therefore, economic theory should predict a reduction in the equilibrium price. There has been no significant change in the oil market demand and supply over the last three years to warrant the skyrocketing prices in existence today.

Why then has the price of oil gone up so dramatically? The answer lies in the number of hedge funds in the energy markets over the last two years. Today, more money is flowing into commodities as a hedge against the falling value of the dollar and as an investment alternative to a volatile stock market. These funds are not traditional speculators but index speculators who have heavily influenced oil prices.

In simple terms what’s happening is the following. The OPEC countries are overcrowded with super tankers chartered by oil-producing governments to hold inventories of oil they have pumped but cannot sell. There are fewer buyers for this oil cargo at today’s prices, but there are plenty of buyers for pieces of paper linked to the price of oil next month and next year.

Sound familiar? This is exactly the bubble that burst in the home foreclosures that occurred earlier this year. Nobody wanted to buy sub-prime mortgage bonds, but there was plenty of demand for financial derivatives that allowed investors to bet on the future value of these bonds.

We are headed towards another financial meltdown in the coming months. There are now 634 energy hedge funds, out of which 210 are strictly energy commodity funds trading oil or oil futures, as opposed to the stocks of traditional energy companies like ExxonMobil. Large financial institutions like Goldman Sachs, Morgan Stanley, and Merrill Lynch have stepped up their participation in the energy markets.

The price of oil, therefore, is not being fueled by supply-demand economic factors, but by the value of the dollar and the interest rates in the oil markets. The investment in index funds has grown 20-fold from $13 billion to $260 billion during the last five years.

Upon further analysis, a new reality begins to emerge. I am as guilty in causing the hike in oil prices as anyone else. Why, you may ask? Because my pension fund and corporate and government pension funds and university endowments¹ are all managed by the large financial institutions, which are allowed unlimited speculation in these markets. The Commodity Futures Trading Commission has allowed loopholes in its regulations that exempt investment banks from reporting requirements that are required of other investors.

Do I like the high price of oil? NO (Politically correct answer).

Do I like a high return on my pension fund? YES (Personally correct answer).

Certainly it is in my self interest that my pension fund does well as I approach retirement.

Notes

1. The financial geniuses at Iowa State University see good economic sense in sending out their Parking Division SUVs into every lane of half-vacant parking lots to issue $15 tickets to about a dozen or so illegally parked vehicles per day while spending about $500 per day or more on gas and salaries. Unfortunately, such expenses come from the taxpayers instead of the university’s lucrative endowments.

Why it is Imperative to vote for a Democratic President

On the basis of polls conducted across various groups of voters, many columnists have expressed the view that Barack Obama can lose the Presidential election in November in a year in which the Democrats are heavily favored to win many seats in both houses of Congress. The most important factor in this loss is attributed to the Clinton voters that Obama may not be able to win over in uniting the Democratic party.

I offer a compelling reason as to why such voters should vote for a Democratic President.

The two most important legacies left by a President are the consequences of war and the appointments of justices to the Supreme Court. Congress has an important say in whether or not to authorize a war, thus providing “checks and balances” of the Founding Fathers so that “no one man can run the government the way he sees fit.” The fact that this was not fully adhered to in the Iraq War will be a matter for historians and constitutional scholars to debate in the future.

But the appointment of justices to the Supreme Court can have a long-standing effect on the rights of all citizens.

John McCain has said, “For decades now, some federal judges have taken it upon themselves to pronounce and rule on matters that were never intended to be heard in courts or decided by judges.”

President Bush has often expressed contempt for judges who “legislate from the bench.” But Bush expressed no contempt whatsoever against the Supreme Court justices who legislated from the bench and put him into office as President with a 5-4 margin in the 2000 elections. His contempt for activist judges occurred after that ruling.

John McCain has gone on record stating that John Roberts and Samuel Alito have “met my high standards” for a Supreme Court justice. Roberts and Alito join conservative justices Antonin Scalia and Clarence Thomas who in the last three years are moving the Supreme Court in a direction opposite to that of the Court’s history under Chief Justice Earl Warren.

Jeffrey Toobin writes in the May 26, 2008 issue of The New Yorker:

“. . . the Roberts court has crippled school desegregation efforts; limited the reach of job-discrimination laws; and made it more difficult to challenge the mixing of church and state.”

Justice Stephen Breyer’s assessment of his new colleagues is very disturbing to say the least: “It is not often in the law that so few have so quickly changed so much.”

The next President will most likely have one certain appointment when 88-year-old Justice Stevens retires and possibly another if 75-year-old Justice Ginsburg decides to retire. It is very clear in which direction McCain will take the Supreme Court.

Therefore it is imperative that ALL Democratic voters check their “emotional baggage” at the door and let their heads rule in November in voting for the Democratic Presidential nominee. Failure to do so will cause lasting damage to the progress that has been made in civil and individual rights over the last fifty years.

Diamonds Are a Guerrilla's Best Friend

The debate about how to combat poverty in the developing world has been fueled in the last couple of years by two New Yorkers. On one side of the argument is Professor Jeffrey Sachs of Columbia University and author of “The End of Poverty.” On the other is Professor William Easterly of New York University and author of “The White Man’s Burden.” Both are excellent, well-researched books that should be by your bedside.

Into this debate, there now enters another white man, Paul Collier of Oxford University and author of “The Bottom Billion.” If Sachs’s book appears too optimistic and Easterly’s too pessimistic, then Collier’s book does an excellent job of capturing the middle ground. Its analysis of the causes of poverty is compelling and the remedies it offers are more reasonable.

Collier argues that with the phenomenal growth in Asia, the world will soon consist of a top one-sixth (one billion) of rich people, a middle two-thirds (four billion) who are O.K., and another one-sixth (one billion) who will be poor. Collier refers to the bottom one billion as people living in “trapped countries, clearly heading toward what might be described as a black hole.”

He suggests that there are four traps into which really poor countries tend to fall: internal conflict or civil war, possession of natural resources, landlocked with bad neighbor, and bad governance.

It’s the second trap that provides the motivation for this article. Collier is the one who first came up with the phrase “diamonds are a guerrilla’s best friend.” A substantial part of his book concerns itself with this “resource curse.” As he sees it, the real problem about being a poor country with mineral wealth, like Nigeria, is that “resource rents make democracy malfunction”; they give rise to “a new law of the jungle . . . the survival of the fattest.”

In resource-rich countries there is little pressure for government accountability, and hence fewer checks and balances.

Looking back at the last eight years, it seems like the U.S has had fewer checks and balances and almost no government accountability. Halliburton and a few select owners of “resource diamonds” have become “fat” and while democracy is not malfunctioning I am not sure whether it has functioned the way the Founding Fathers intended it to.

Regardless of your views on the candidates running for the Democratic Presidential nomination and their fairly contentious campaigns, you should NOT make the mistake of continuing the present “guerrilla leadership” under John McCain. If you do so, then we may find ourselves headed toward the same poverty black hole like many other bottom billion nations.

Scatological Research

A DNA analysis of fossil feces found in a cave in Oregon indicates that humans lived in North America 14,340 years ago – “1,000 years before Clovis,” the previously known earliest inhabitants.

These “coprolites” yield valuable clues about diets that may have influenced the thinking and strategies of our nomadic ancestors.

Key officials in the current administration should immediately start “going in designated locations” to petrify their poop for posterity. Fifteen thousand years hence, this may provide the only clue to explain the thinking and strategies behind their delusive policies.

Parsing Paulson's Proposal

Treasury Secretary Henry Paulson has just released his blueprint for financial reform. Two things are very disturbing about this proposal. First, it gives the Feds increased authority to regulate a limited number of institutions that are already regulated but not the cause of today’s economic crisis. Secondly, all the proposals require the approval of Congress – a body that did not even read the Patriot Act before passing it into law is going to read and understand the economic mumbo-jumbo of the Feds?

Woe-begone to us when it’s Congress and the Feds watching the henhouse.

Might as well trust me with your money. Like all our presidential candidates, I, too, am a born-again political-cum-economic-cum-whatever change agent you want me to be. The tax rebate amount that you receive in May should be wired in full to the Swiss bank account of Dave Westfall, Esq. In return, Mr. Westfall and I promise you a WORRY-FREE and ECONOMICALLY-FRUGAL European vacation this summer.

By not even leaving your home and being hassled at the airport, you will automatically be worry free. By not spending twice as much on food in Europe, you will continue to remain economically frugal. Please e-mail me at once if you are interested and I will provide you with the details for the wire transfer. Although we are change agents, once we collect your payment, we cannot give you back any change. But we will send you a DVD on the intangible benefits of this brand new financially reformed vacation package – ABSOLUTELY FREE.

NOTE:

This offer is not affiliated with the NBA – Nigerian Banking Association. Participants must be over the age of 18 and sign waivers for forms OCC, OTS, CFTC, PFRA, CBRA, and LTCM, all in duplicate. Form SR (Scam Release) ought to be signed in triplicate. The vacation is completely tax-exempt and no details, especially Mr. Westfall’s, should ever be reported to the IRS.

Iraq War: 4,000 US deaths vs the Flip Side

Today marks the day that the number of US deaths in Iraq exceeds 4,000. But there is also a flip side to this tragedy on the Iraqi side as outlined in the article by Faruq Zaida, a former Iraqi ambassador. We do not hear this reportage from any of the US media outlets. Excerpts from Faruq’s article are reproduced below.

Saddam Hussein was a dictator, and Iraqis did want true democracy, a good life, and a change that would elevate and advance their country, which once had great wealth and thousands of highly-qualified professionals.

But the line that US soldiers are in Iraq to save the Iraqis from dictatorship, liberate the country, and propel it forward is a big lie. They are there to protect US greed for oil and for establishing strategic military bases. They are not there for the Iraqi people.

The real reason for the US invasion and occupation of Iraq, as cited by Alan Greenspan, former Federal Reserve chairman, was to secure and control Iraq's oil. The actions of the US government under the Bush administration have resulted in genocide; their greed to steal Iraq's oil has led to the country's destruction.

US actions and imposed sectarian policies have created the "killing fields of Iraq." More than 1.2 million non-combatant civilians have been killed, according to British polling agency ORB. In what the UN has called the biggest civilian displacement catastrophe in both the 20th and 21st centuries, 2.5 million Iraqi civilians, including the majority of the educated middle class, have sought refuge in Syria and Jordan, while two million have become refugees inside Iraq.

Prompted by a political process that was introduced and enforced by the Bush administration, Iraq has become a war-torn nation with a society that has been ripped apart by sectarian fighting.

Women's rights, which were the most protected among developing countries, have severely deteriorated to such an extent that most can no longer leave their houses. They are forced to wear a veil - even Christian women - and have stopped working in government offices or attending schools and colleges.

The Iraqi education system, which comprised advanced university and college levels, was among the best in developing countries. Now, it is one of the worst. Most teachers have fled the country; those who remain are constantly under the threat of student abuse, according to the UN. Many students do not attend for fear of kidnapping and they shun religious rituals which are now carried out on campus grounds during study hours.

The US embassy in Baghdad's report on corruption, issued last September, concluded that "currently, Iraq is not capable of even rudimentary enforcement of anticorruption laws." Compared to other developing countries, Iraq had one of the best and finest professional civil service staffs. These professionals were able to keep the country from collapsing during the 13 years of harsh economic sanctions imposed on Iraq. Most of these qualified people have now fled to neighbouring countries. Hundreds others have been assassinated.

The medical services sector is perhaps one of the most harmed by the invasion and occupation. Before the war, hospitals and doctors, though impeded by the imposed sanctions since 1991, provided a better health system than those of other developing countries. Now, the medical system is completely shattered. According to the Ministry of Health's 2007 official report, more than 18,000 doctors have fled the country since 2003.

When electricity, water and sanitation infrastructure were destroyed in the 1991 Gulf War, they were completely restored in less than one year. Today, after five years of war, the public services are nearly non–existent, although more than $140 Billion have entered the Iraqi government's coffers since 2003.

Most of the destruction was caused immediately after the fall of Baghdad in April 2003, when the US army allowed rioters to loot and burn government buildings.

Five years ago, Iraq was free from drugs. Iraq today is rampant with drugs and drug addicts.

As my cousin Ranganath pointed out, this begs the question:

“Where is the national and international outrage on this catastrophic humanitarian crisis? How can any religious person tolerate this?”

War on Economy

In the orchestrated prelude to the war in Iraq, here are some of the statements that were made as part of the misinformation campaign by the current Administration.

Dick Cheney, Aug 2002: “Simply stated, there is no doubt that Saddam Hussein now has weapons of mass destruction. There is no doubt he is amassing them to use against our friends, against our allies, and against us.”

George Bush, Sept 2002: “The Iraqi regime possesses biological and chemical weapons, is rebuilding the facilities to make more and, according to the British government, could launch a biological or chemical attack in as little as 45 minutes after the order is given. . . . This regime is seeking a nuclear bomb, and with fissile material could build one within a year.”

George Bush, Jan 2003: “The British government has learned that Saddam Hussein recently sought significant quantities of uranium from Africa.”

George Bush, May 2003 (in an interview given to Polish TV): “We found the weapons of mass destruction. We found biological laboratories.”

George Bush, March 2008: “Removing Saddam Hussein from power was the right decision–––and this is a fight America can and must win. Defeating this enemy in Iraq will make it less likely we will face this enemy here at home.”

A similar misinformation campaign has been started on the economy by viewing it through ideologically tinted glasses.

George Bush, Jan 2008: “There is a lot of uncertainty in the economy. I think actually the spending in the war might help with jobs . . . because we’re buying equipment, and people are working. I think this economy is down because we have built too many houses and the economy’s adjusting.”

George Bush, Feb 2008: “I don’t think we’re headed to a recession, but no question we’re in a slowdown. . . . I’m coming to you as an optimistic fellow,” Bush said as he joked his way through an address given to the country’s top bankers at the Economic Club of New York.

George Bush, March 2008: “One thing is for certain –– we’re in challenging times. But another thing is for certain –– that we’ve taken strong and decisive action. . . . Right now we’re dealing with a difficult situation.”

As the steady drumbeat of alarming economic news increases the possibility of global financial havoc, how much longer do we have to wait before the White House and its Panglossian Press Corps unleash the “War on Economy” on an unsuspecting public? At the very least, the President can claim that this war will “increase jobs and spending, and ensure that the markets are functioning efficiently and effectively.”