Saudi Arabia... Screw You Wall Street!

There is not one person that knows the oil business better than the folks in Saudi Arabia when it comes to supply and demand on the world oil market. Even Saudi Arabia is wondering how the world of oil market speculation has the price of a barrel of oil tempting at the hundred dollar mark. With that thought in mind the nation of Saudi Arabia is exploring for new oil fields with all of the new technology available to ramp up production thus saying to oil market speculators in the market, SCREW YOU!

Wall Street can play the game and pocket the cash but I’m thinking that the producers of oil in the world are looking at the bigger picture and alternative energy sources are more than attractive with oil at one hundred dollars a barrel. That is and will be a direct effect to the bottom line of all oil producing exporting countries, aka OPEC. Oil has only been the main source of heating and vehicle power because it was cheap and affordable to the masses. That is no longer the case.

Then again, I have to give the nation of Saudi Arabia credit for bumping up the supply to offset the non stop rumor mills on Wall Street that speculate that the oil supply to the world is limited thus driving the price up into Never Never land. Peter Pan and Tinker Bell have nothing to worry about as long as Wall Street believes in Fairies and an oil market with a supply problem. Over at the Washington Post they have this amazing post on this very subject…

Saudi Arabia Works the Vast Desert To Pump Out More High-Quality Oil

By Steven MufsonWashington Post Staff Writer
Saturday, November 17, 2007; Page D01

SHAYBAH, Saudi Arabia -- For a decade, Hussain al-Obaid has been working in the soft red dunes that stretch across the vast desert known as Rub al-Khali, or the Empty Quarter. In summer, temperatures climb as high as 130 degrees and sandstorm winds gust up to 80 mph, though on a mild fall evening the stars shine and the air is mild.

A graduate of the University of Oklahoma at Tulsa, Obaid is the engineering superintendent of a project that pumps half a million barrels of crude oil a day from beneath the sand and delivers it through a 400-mile pipeline. The oil is some of the world's purest, highest-quality crude, easily refined into gasoline.

To complete the project, construction crews built a road across the desert and moved 100 million cubic feet of sand to make way for an airplane runway.

Next year, Saudi Aramco, the state oil company, plans to boost production by 250,000 barrels a day, one step in an effort to expand the kingdom's oil-production capacity to 12.5 million barrels a day from the 11.3 million barrels. The new production is part of a strategy that could ease market tension and is designed to preserve Saudi Arabia's ability to produce 1.5 million to 2 million barrels a day more than its actual output in the face of rising world oil demand, said a senior Saudi Oil Ministry official who spoke on condition of anonymity.

"Tell me of any other country that's made commitments this broad on its own," Prince Abdulaziz bin Salman, the deputy minister of petroleum and natural resources, said during preparations for this weekend's summit of the Organization of the Petroleum Exporting Countries in Riyadh, the Saudi capital. "We are the only country with a policy of maintaining excess capacity."

Snip-sa-doozey

… it costs Saudi Arabia about $2 to produce a barrel of oil. Developing new fields is also cheap, he said, running about a quarter or less of exploration and development costs elsewhere. - Washington Post

Unless the Washington Post is making things up… Did that say $2 cost to produce a barrel of oil? Where else in the world can you get a cost to market price mark up like that? This sort of thing only happens when the market is let loose to run wild and around the corner is the market crash. That is where the end of the line is because the bottom of this feeding frenzy is the consumer all around the world and when they can no longer afford the product they will not buy it.

Thus is the major investment in renewable energy like wind power, solar power and of course Ethanol or bio fuels. That is why Saudi Arabia is ramping up production. It is in fact to the better interest of the Kingdom for the price of their product to be affordable. Where President Bush sees a free market the Saudi’s see a market out of control that will eventually threaten the bottom line of their nation.

It does not take a rocket scientist to figure out the oil market is raping the market. What it takes to offset the overblown cost of oil is chemists and creative minds to invent alternatives to oil that will make that profit driven market as much as yesterdays news as whale oil is for lighting your home at night. That process has already begun.

Papamoka

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ECONOMIC VORTEX FORMING IN GULF OF STUPIDITY (WHY IT AIN'T LOOKIN' A LOT LIKE CHRISTMAS)

BY MICHAEL LINN JONES

Recently I wrote about the possibility that an economic Nathan Bedford Forrest would come charging in on some economic experts and badly upset their applecarts. And cause a stampede.

This morning I am scanning the business section of news.yahoo.com and three stories are lined up one after the other. The Federal Reserve dropped interest rates another 1/4 point yesterday, despite the fact that the GDP grew at a rate of 3.9%. Ordinarily a cut would be strongly resisted....but...but...there are those issues to deal with involving the collapse of the subprime mortgage market and its spreading effects.

This AP article by Alex Veiga, FORECLOSURE FILINGS SOAR IN 3RD QUARTER, is one part of the equation.

LOS ANGELES - A soaring number of U.S. homeowners struggled to make mortgage payments in the third quarter, with properties in some stage of foreclosure more than doubling from the same time last year, a mortgage data company said Thursday.

A total of 446,726 homes nationwide were targeted by some sort of foreclosure activity from July to September, up 100.1 percent from 223,233 properties in the year-ago period, according to Irvine-based RealtyTrac Inc.

The current figure was 33.9 percent higher than the 333,731 properties in foreclosure in the second quarter of this year.

There was one foreclosure filing for every 196 households in the nation during the most recent quarter, RealtyTrac said.

Next, Oil above $96 on drop in US supplies by John Wilen, AP Business Writer:

SINGAPORE - The price of oil rose to a new record above $96 a barrel Thursday after a surprise drop in U.S. crude stockpiles raised concerns about supplies for coming winter demand. Other energy futures also gained.

It was the second week in a row the U.S. Energy Information Administration reported a sharp and unexpected drop in oil inventories.

"The decline in U.S. crude oil inventories has been a key driver of oil prices," said David Moore, commodity strategist at the Commonwealth Bank of Australia in Sydney.

SNIP,

Much of that decline was due to a big drop in crude supplies at a closely watched oil terminal in Cushing, Oklahoma.

Cushing supplies have been under pressure in recent months due to differences in the price between front-month oil contracts and those for delivery in future months. This price difference, or spread, has given storage tank owners a financial incentive to sell their oil, rather than hold it in inventory. Analysts have also blamed falling Cushing supplies, in part, for the rally in which oil prices have jumped 35 percent since August

Finally, Stock Investors Fear End To Rate Cuts, again an AP story by Joe Bel Bruno.

Mindful of a warning from the Federal Reserve Wednesday about inflation, the market nervously watched the price of oil, which passed $96 a barrel overnight for the first time before dipping on profit-taking. The Fed, which cut interest rates a quarter point, said in a statement that inflation remained a concern, and oil's ascent to another record raised the possibility not only that the Fed might stop cutting rates, but that it might even consider raising them if inflation accelerates.

These, of course, are just snippets from the articles. I strongly recommend reading each in full. After reading what I've done so far I thought of renaming this "That 70's Show (Again)." If one were to take into account the three stories listed above...and Jimmy Carter was President instead of George W. Bush, there would be hell to pay. We would be talking in terms of a "malaise" or some such. But we're not, because we are being reassured (again) that everything is A-okay.

Am I crazy? Okay, don't answer that...but even if that's been established it doesn't take away the sense of wrongness when I read that oil prices go up because stocks are down because oil price "spreads" caused by the commodities markets give an incentive to keep oil storage tanks dry. Which information is used to further increase the price of oil, etc., etc. It's a nasty circular logic that does three things: makes some people a lot of money, costs many more to spend what they don't have, and screws the pooch on retail sales.

The other day I heard George Will say a couple of things. Bear in mind I admire Mr. Will's logic and prose even when I don't agree with him. He said (and I'm paraphrasing here) that even if crude oil reaches inflation-adjusted levels of the early 80's it doesn't matter that much since the influence of oil as a part of the economy has shrunk since then.

Oh yeah? Well what is the minimum wage when inflation-adjusted? I'm not arguing for the minimum wage, but rather using it as a standard of sorts since many jobs offer compensation that is compared to the minimum wage. Besides, gasoline at $3 or $4 a gallon is still that....money that would otherwise go elsewhere.

He also made the point that a lot of the subprime mortgage failures were by people speculating in 2nd or 3rd homes. Again, what difference does that make? Whether for a 1st, 2nd, or 5th mortgage, those subprime deals were sold as securities that have evaporated in value. The end effect is the same no matter WHO held the paper.

I'm a capitalist. I once lived in what once euphemistically called a "semi-state" environment and it was terrible. Capitalism is indeed the only form of economic activity that works. But, it is quite caustic in nature and also self-destructive if left unregulated. I live in a fairly stable neighborhood. I never ordinarily have contact with law enforcement. But I know that if a wildman was trying to walk off the property with everything I own I would call the police. They would intervene between stability and chaos. I think they call it the "Thin Blue Line."

For the last twenty years or so we've had one politician after another cutting that thin blue line of economic regulation like a local mayor with oversize scissors opening a county fair. Our nation has changed, as all things change, but not all change is necessarily good.

And the result is that our economic neighborhood is overrun with wildmen gleefully filling their stockings because the police are now forbidden to even look for crime. It is a sad fact that the first Chairman of the Securities & Exchange Commission, Joseph P. Kennedy (himself a notorious Wall St. speculator) had to have bodyguards while on the floor of the stock exchange.

Kennedy's job was to pour some unpalatable liquid into many bowls of cornflakes, and the consumers of said cornflakes did not like it a bit. They still don't and that's why they pay out a lot of money to ensure their meals taste sweeter every year.

So if the bottom falls out of the bucket we all can rest assured that in the long run things will straighten out. But like Harry Hopkins once told a Senate committee, " the problem is, people have to eat in the SHORT RUN."

And they have to drive cars to work so as to keep the economy going. And they have to heat their homes (those who still have them).

And they have to hold their noses next November to elect people who like the taste of their cereal and aren't about to allow any cops in THEIR neighborhood.
*********************
Cross-posted at Michaellinnjones.com

WHY I AM NOT AN ECONOMIST

Picture courtesy of Wikipedia

BY MICHAEL LINN JONES

On the surface, the answer is simple: I don't have a degree in economics. It's a fascinating subject, though, with many differing opinions influencing how we all live. And how healthy a republic we have, also.

Having been denied by fate the intellectual capacity to understand the myriad of details tossed about by economists, I can only rely upon the "big picture" to a certain degree. And the great thing about economics is that, like psychology, it is a profession of opinion. Despite many learned prognostications, economists are constantly stuck with explaining why the opinion expressed several years ago was found invalid by events.

There is that old saying, "The main thing is to keep the main thing the main thing." Nathan Bedford Forrest understood that. No, not as an economist but as a soldier. Despite the fact that he never received any formal military training, and despite being looked down upon as a lucky rube by West Point-educated soldiers, it is HIS tactics used in the Civil War that are studied to this day.

Forrest was not an economist, of course. But he is illustrative of the fact that there are times when a lack of formal training does not detract from someone's ability to think, and think quite well. It might never occur (and would be refuted heatedly) that common folk might actually have a grasp on the essentials, particularly when they are self-evident.

One of the problems associated with reading is that one can quite inconveniently remember things. One example is during the 1960's....Lyndon Johnson was bemoaning the fact that he wanted low taxes, the Great Society, and the Vietnam War, all at once. LBJ always liked everything all at once. When an aide suggested approaching Wilbur Mills (then chairman of the House Ways & Means Committee) LBJ balked. He said that Mills would give him all the money he wanted for war, but the Great Society would be de-funded. So Johnson did what he was very good at: he lied.

The stagflationary pressures LBJ started were passed on to Nixon, Ford, and Carter. Economically they were interesting times.....for everyone, including the very wealthy.

We have another Texan in the White House, who also wants it all....and all at once. Unlike LBJ however, George W. Bush hasn't much regard for the powers of Congress, or the Constitution, or common sense for that matter.

A nation can no more live beyond its means than an individual can. Borrowing money to invest in an enterprise that will generate a profit makes sense. Anything else is asking for trouble. One weird thing about economics is, analigous to a pond, sometimes a tossed pebble can create a tsunami.

For years the practice of subprime mortages made a lot of money in a speculative manner. It's all right, though, said the experts. Other experts with similar degrees said otherwise. Events have borne out the naysayers. But with a house of cards collapsing, what is the remedy? Save the speculators, of course....our economy is held hostage by the notion that to let (otherwise) sacred "market forces" correct the stupidity of some would hurt us all. It goes back to that old saying that pigs get fed and hogs get slaughtered.

Except in some cases the hogs just keep getting fatter. The Federal Reserve lowered interest rates in order to shore up the mortgage market...to protect the stupid. This resulted in a lower dollar, which encouraged a lot of money to flow into the oil commodities market, which is resulting in higher oil/gas/heating oil prices.

It's fair to say that when we now fill up our cars or heating oil tanks we are in essence paying a tax. Or more accurately, a penalty for others' screw-ups. Many bemoan the fact that such things hurt the middle class. Well, you have to wonder sometimes what the middle class is. I've known people who are millionaires who wear scuffed shoes and torn jeans and claim they are middle class. That doesn't jibe with the fact that such people have the OPTION of donning far more expensive clothing. Many others do not.

So if one starts contemplating the wisdom of reining in the excesses of the hogs, the first cry of "class warfare" is heard. It sounds good; we don't want any of that envy or Bolshevik stuff in our country. No, in America we're all in this together, right? With grim humor I listen to statistics being poured forth about how the top 1% pays more than the bottom 50% in taxes; how the so-called "rich" (no one in America is rich, you know, just middle class) are being burdened with the greater cost of ensuring our government works.

Okay, the government works, but for whom? And is it rude to ask what percentage of the top 1% of income earners in the U.S. are represented in Afghanistan or Iraq? An economist can explain, in cold economic terms, that those less well-off who perish in military ventures are quickly replaced by a constantly expanding population. Not so with the rich; they are of a magic world where sacrifice is only financial and isn't money all that matters in the end?

That's why I wouldn't make a good economist: financial matters affect everyone, but not equally. I'd have to make a living justifying the ever-increasing appetites of the hogs. The institutions that require cold justification for their existence depend upon constantly concurring opinions.

In any complex interaction between humans, there is always a keystone; that one thing that holds everything else in place. From time to time that keystone is nudged, and sometimes it's knocked out completely. It's happened before and will happen again because in the blind and self-justified pursuit of wealth accumulation the whole damned thing collapses.

There is not one economist alive today who could truly understand the old French saying, "The castle is safe as long as the cottage is happy." Right now the cottages have cable, they have baubles to distract from the boring yet critical decisions being made without their knowledge or consent.

There is an economic Bedford Forrest out there, unrecognized by the elite. Whatever form that phenomenon takes, it will perform the same function of that brilliant soldier. "Keep the skeer on 'em" was one of his tactics. Once the "skeer" starts it is amazing how a group of financiers convert themselves into a herd of panicked cattle.

No economist will stop the stampede; they can only explain it (again). It will require a political personage, one able to command the attention and respect of everyone.

We haven't had anyone like that in a long time, and we certainly don't have anyone like that right now.

*************************

Cross-posted at Michael Linn Jones.com

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