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By Robert Rapier on Apr 25, 2011 with 54 responses

The Witch-Hunt Begins as Gas Prices Continue to Climb

The Usual Suspects

Summer is approaching, and that typically means rising gas prices. And when gas prices rise, our political leaders generally start looking around for someone to blame. Over the past few years it has become a regular ritual that as gas prices rise, the CEOs of our biggest oil companies will be marched to Washington D.C. for a public shaming that involves Congress grilling them on why they are doing such horrible things to the American public.

Inevitably, we will spend tax dollars investigating the matter. And as was the case after Hurricane Katrina, one FTC investigation after another has found no conspiracy to fix prices; that supply and demand are in fact the primary reasons that gas prices rise and fall. But while the investigations are always launched with press conferences, the exonerations don’t involve the same sort of fanfare, and the public is left with the impression that someone is taking advantage of them. Of course when record oil company profits come on the heels of record gas prices, it is easy to understand why people feel that way.

I was asked during a recent radio interview who is responsible for high gas prices. While that is a complex answer with many factors contributing, mostly consumers of oil-based products are responsible. If you drive a car that is made from numerous plastics and consumes diesel or gasoline, then you are partially responsible for high gas prices. After all, there are a whole lot of people just like you, and we enjoy the conveniences that oil has brought us. But that convenience has made us very dependent, and other countries want those same conveniences. Growing demand of a depleting resource is a prescription for higher prices.

The 2011 Dog and Pony Show

But, unsatisfied that we could possibly be the ones to blame, our politicians take the easy way out and launch investigations. And now President Obama, responding to pressure that he isn’t doing enough to combat high gas prices, has launched a new one:

LOS ANGELES (KABC) — President Barack Obama has ordered the Justice Department to investigate potential price gouging at the pump.

Attorney General Eric Holder will appoint a task force to examine both gasoline sales and potential manipulation in oil markets.

“Based upon our work and research to date, it is evident that there are regional differences in gasoline prices, as well as differences in the statutory and other legal tools at the government’s disposal,” Holder said in a memo accompanying a statement announcing the task force.

I can save them some time and explain why there are regional differences in gasoline prices. I have seen it many times firsthand. Neighboring regions often have different requirements for their gasoline. This can mean that a shortage in one area can’t be easily alleviated by shipping in gasoline from another area. Further, sometimes there are no pipelines to easily get fuel from one area into another. I experienced this when I worked in a refinery in Montana. Gasoline prices at one time were very high in Utah, but we had no easy way to get fuel into that market. We also sometimes saw very low oil prices in North Dakota, but once more no easy way to get that oil into our refinery due to lack of pipelines.

President Obama went on to admit that it’s all a dog and pony show:

Neither the president nor Holder have offered any evidence of actual fraud, and both admit there are legal, logical reasons for the rising price of gas. But Obama says he wants to make sure that no one uses the current market as an opportunity for criminal activity.

So, no evidence of fraud, and logical reasons for the price increase. Then let’s waste taxpayer money by launching an investigation. Maybe we will find a small group of speculators this time pulling the strings. While we are at it, I can think of a few more things we should investigate.

Additional Investigations to Consider

Standard & Poor’s lowered the outlook on its triple-A rating of U.S. debt from stable to negative. The U.S. dollar has been incredibly weak against most major foreign currencies. This has been cited as one of the biggest factors behind increased oil prices. Shouldn’t we launch an investigation to determine who is responsible for the debasing of our currency?

Corn prices have doubled over the past year. Corn farmers in Iowa are celebrating Christmas in April. Doesn’t this mean they are taking advantage of us? Given the importance of corn in the food supply, shouldn’t we launch an investigation into this gouging? Or shall we nominate Donald Trump to tell corn farmers to lower prices?

Easter candy was marked half off the day after Easter. Doesn’t that mean I was being gouged and taken advantage of prior to Easter? This warrants an investigation into the pricing policies of Cadbury’s, as well as the retail outlets who sell it. I demand cheap chocolate, and I see no reason why I should have to pay more for it before Easter.

Conclusions

It seems that this political merry-go-round of investigations is part of the very fabric of our lives. Gas prices go up, and politicians start looking for scapegoats. It can’t possibly be the policies they have passed, nor can it be the world’s insatiable demand for oil. Someone, somewhere must be pulling the strings and taking advantage of people.

There are many factors behind the increase in gas prices, and one of them is in fact speculation. But we place far too much emphasis on this speculation bogeyman. Speculation goes on in all commodity and stock markets. Corn prices are up partially because of speculation. The price of metal is driven up by speculators. All of these things impact consumers. But speculation works in both directions, which is why oil fell so sharply from $147 in mid-2008 to the $30′s by the end of 2008 (and why stock price bubbles lead to stock price crashes).

The single-biggest factor behind the price rise, though, is simply growing demand for oil. Donald Trump can pontificate about there being so much oil that they don’t know where to dump it, but he simply doesn’t know what he is talking about. There is very little spare capacity in the world, and demand is growing. A more productive investigation would be to figure out how to increase supplies and curb demand. But that of course would require a bit more effort on the part of our political leaders.

Disclosure: The author holds no oil contracts, and never has.

  1. By Walt on April 25, 2011 at 6:02 am

    Robert Rapier said:

    Additional Investigations to Consider

    Standard & Poor’s lowered the outlook on its triple-A rating of U.S. debt from stable to negative. The U.S. dollar has been incredibly weak against most major foreign currencies. This has been cited as one of the biggest factors behind increased oil prices. Shouldn’t we launch an investigation to determine who is responsible for the debasing of our currency?


     

    That is where I would start and investigate it using the entire muscle of the justice department.  Anything outside this issue, which will ultimately come back to our compromised Treasury Department, the Federal Reserve, the Congress, the Administration and the Wall Street untouchables, is a waste of time and money.  Outside of support for government “State Owned Banks” like in North Dakota, I think transparency would be another good positive step.  http://abcnews.go.com/Business…..d=10142189

    Without transparency, which will never happen with our own federal reserve member owned institution, it would not work either. The open transparency in government spending and investments would be a good place to begin…here is a start:

    Comprehensive Annual Financial Report Transparency bill signed into law by Governor Brewer on April 14th 2011

    http://www.azleg.gov//FormatDo…..ion_ID=102

    “The database
    shall include the information as prescribed in the comprehensive annual
    financial report of a budget unit that has been made by a certified public
    accountant or public accountant who is currently licensed by the Arizona state
    board of accountancy and who is not an employee of the local government.”

    Just think about this:

    The State Governments moved all their investments and money from Wall Street to their own State Owned Bank and supported local communities, businesses and institutions through basic sound lending principles!  Would this strenghten the economy from the ground up?

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  2. By KLR on April 25, 2011 at 10:50 am

    Holder is such a tool. Regional studies on gasoline prices will clue anyone in on why local markets are priced the way they are, which many will find contradictory to expectations. One example I like telling people about is how in Washington state the second highest prices statewide are to be found in Anacortes county – where almost all of the state’s refining capacity is located. Obviously shipping isn’t the major factor driving prices. Canada bordering the county means a lot of Canucks take advantage of lower prices in the US; a lack of alternative supply drives them up further.

    Lowest prices in WA are in the NE corner, where lower prices in Idaho aid to arbitration, and gas can be brought in via two pipelines (including one from the MT refineries Robert mentioned), or barged/trucked as well. All of that competition drives prices down, as jobbers attempt to outbid one another. But it’s hundreds of miles from the state’s refineries.

    The same holds true worldwide. More diverse sources of fuel will have suppliers attempting to lowball each other in an attempt to gain greater market share; those sources just aren’t there anymore. Speculation in markets is just froth. Where were Obama etc praising speculators for driving the price through the floor 2 years ago?

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  3. By Wendell Mercantile on April 25, 2011 at 10:58 am

    While that is a complex answer with many factors contributing, mostly consumers of oil-based products are responsible.

    Really not complex at all. Just observe the rush hour traffic into and out of any city. Cumulatively across the country, everyday there are millions of cars shuttling people back and forth between home and workplace, and most of those cars have only one person in them — and that one person is surrounded by two tons or more of steel, glass, plastic, and rubber.

    If we conservatively say each car weighs 4,000 lbs, and each commuter weights 180 lbs, the actual payload makes up only 4% of the weight we burn energy to push around. It’s terribly inefficient when the carrier outweighs the payload by a factor of 24 to 1.

    If we ever figure out we don’t have to surround a 180 lb payload with 4,000 lbs of steel, glass, rubber, and plastic, we could use the fuel we burn much more efficiently.

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  4. By Walt on April 25, 2011 at 11:09 am

    KLR said:

    The same holds true worldwide. More diverse sources of fuel will have suppliers attempting to lowball each other in an attempt to gain greater market share; those sources just aren’t there anymore. Speculation in markets is just froth. Where were Obama etc praising speculators for driving the price through the floor 2 years ago?


     

    I suggest people look at the currency 2 years ago, as well as demand.  There is both currency devaluation as well as inflation that is coming, and the markets know this well.  Although mainstreet and Washington operate as though everything is generally fine, I think traders work a totally different set of numbers than what American’s are fed on the nightly evening news, or 24-7 news channels.  I think the real (serious) problem is coming in QE3 and will cause other rating agencies to downgrade our ability to sustain a global reserve currency.  2 years ago is totally different than today.

     

    “Despite throwing vast amounts of money at the system, the Fed has been
    unable to control where that money actually ends up. As much as Bernanke
    may want to generate house price inflation to bail out all those
    consumers underwater in their mortgages, house prices have continued to
    stagnate. The money has shown up somewhere, however: one of the
    implications of the Fed’s continued easy monetary policies is that many
    other asset prices have moved up in tandem. From stocks to corporate
    bonds to commodities and natural resources, we have seen large upswings
    in price, combined with increased correlations. At the same time, the
    U.S. dollar has continued to weaken. In such an environment, it may be
    evermore important for investors to add uncorrelated asset classes to
    their portfolios, to protect against downside movements in price, while
    managing U.S. dollar risk.”

    http://www.merkfunds.com/merk-…..04-14.html

     

    Politicians (like Obama) know exactly what is going on with the monetary policy.  It is the American people who are blind and foolish screaming about “Washington should do something about those evil gasoliine stations and producers!!!”

     

    Once the American people figure out it is the bankers on Wall Street and their playboys (opposite of a cowboy) in DC, things will change.  However, they are not called the untouchables for no reason.  They are fast, smart and well protected.  When I was in Russian in 1994 working, and the currency was worthless paper, people never new it was the bankers that were behind the devaluation.  Today all the evidence has been disclosed, but only a couple insiders got their hand slapped.  Watch what happens to American currency…you can bet nobody is going to get their hand slapped on this side of the pond.  The treasury and all Wall Street got complete immunity in the financial crisis of 2008.

     

    Smooth sailing from here on out until the State governments get control of all their money, and into their own banks.  Otherwise, let’s party!  That seems to be the only thing the American people understand unless you are one of the few buying gold.

    http://dshort.com/articles/201…..z1KSqYZ1jn

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  5. By thomas398 on April 25, 2011 at 11:36 am

    Wendell Mercantile said:

    If we ever figure out we don’t have to surround a 180 lb payload with 4,000 lbs of steel, glass, rubber, and plastic, we could use the fuel we burn much more efficiently.

    Wendell the vast majority of a car’s weight is the ICE and its various appendages. Not the steel “frame, glass, rubber and plastic”.  Much of an EV’s weight is the battery.   Are you saying we should all be riding motorcycles and mopeds?  Ideally any transportation system would receive power from without so that almost all of its weight could be devoted to payload. Then no energy would be “wasted” accelerating inactive fuel in a fuel tank.
     

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  6. By Wendell Mercantile on April 25, 2011 at 11:59 am

    Thomas398,

    What do you call it when we spend energy moving 4,000 lbs in order to move a payload of only 180 lbs? And yes, a large portion of that mass carrying the small payload is the ICE. (Which is an already notoriously inefficient Carnot cycle heat engine.)

    Are you saying we should all be riding motorcycles and mopeds?

    Perhaps, plus walking and riding bicycles where appropriate. I walk three miles one way to work, every-day, year-round, even last winter at -17^F. (And I’m in my mid-60s. And look at how many people in the Netherlands ride bikes to work year round.)

    Perhaps it would actually be a good thing (for us and for the nation’s health care system) if high gas prices encouraged more people to walk and bike.

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  7. By Wendell Mercantile on April 25, 2011 at 2:31 pm

    An interesting observation: Gas prices have risen almost $1-a-gallon since the Deepwater Horizon oil spill

    Gas prices have risen almost $1-a-gallon since the Deepwater Horizon oil spill, yet President Obama’s drilling moratorium and other anti-oil policies have barely been mentioned by the networks in that time span.

    Gasoline cost $2.73 per gallon when Obama instituted his sixth-month moratorium on deepwater and shallow drilling on May 30, 2010. Prices are now more than a dollar-a-gallon higher.

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  8. By Benny BND Cole on April 25, 2011 at 2:32 pm

    In general, I believe in free markets and price signals. You want less gasoline consumption in the USA, then tax gasoline. Go the CNG cars or PHEVs through tax incentives.

    That said, I suspect the NYMEX, and explosion ETF funds, and explosion of huge sovereign wealth funds, and private-equity funds, has set up a dynamic that could allow for the gaming of the NYMEX.

    The short-term demand for oil is inelastic–that means even if gasoline doubles, we still have to buy to get to work etc. So gaming up the NYMEX crude price works for a while.

    It would make sense for Russia’s Putin to game NYMEX higher. Indeed, his political future rests upon high oil prices, as he provides very little bona fide leadership. He is a thug. We can assume Putin has no scruples about gaming the NYMEX, and has nearly unlimited capital through sovereign wealth funds to do so. As do many oil thug states.

    I would be surprised if the oil thug states were NOT gaming the NYMEX. It is in their interest to do so. Why would an oil thug state NOT game the NYMEX?

    It is easy to trade through the NYMEX throughed cloaked identities, and it is legal to float stories to the media, or fund websites, that hype oil threats, shortages, Peak Oil etc. All legal.

    So, Putin has the money, the will, the scruples to game the NYMEX. It is in the Russian natioanl interest for him to do so. It is patriotic for Putin to game the NYMEX. Oil demand is inelastic, so gaming the NYMEX is extremely lucrative.

    But you don’t think Putin is gaming the NYMEX?

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  9. By Wendell Mercantile on April 25, 2011 at 2:34 pm

    Or shall we nominate Donald Trump to tell corn farmers to lower prices?

    ROFL. Good idea. If Trump were the president, he could send the 82nd Airborne Division to Des Moines to take control of the Corn Belt.

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  10. By tw on April 25, 2011 at 3:24 pm

    It is of course ironic that politicians constantly “speculate” on the reason for the high price of anything,…or that the price of a given currency is too low etc., amongst other things.

    Perhaps if they examined the myriad of rules, regulations and policies, both foreign and domestic, crafted by various “lawmakers”, they would find that the bogeyman they seek….is themselves.

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  11. By Margaret on April 25, 2011 at 3:38 pm

    Interesting take on politicians’ response to rising gas prices. . .I’m a part of Yale Environment 360, an online magazine associated with Yale School of Forestry and Environmental Studies, and we just put up a similar critique of politicians’ role in energy policy (written by law professor Michael Graetz).

    I would love to get your take on his opinions: http://e360.yale.edu/feature/e…..cies/2395/

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  12. By Optimist on April 25, 2011 at 5:36 pm

    In general, Americans aren’t partial to crazy conspiracy theories. However, when the topic of discussion is Big Oil (or the Liberal Media), no theory is too crazy to be considered valid. Take for example Benny’s stupid theory about Putin speculating oil prices into the stratosphere via the NYMEX (or whatever the unexplained conspiracy theory is). Hint: Benny, you’re going to have to offer more than 1) Putin is an evil man (most would agree), 2) Putin would benefit from high oil prices (all informed people would agree) and 3) it is easy to game NYMEX (few would agree). You can start by putting together a plasable theory and expand with some proof. If there is proof…

    Why would an oil thug state NOT game the NYMEX?

    Oil prices are high enough due to supply and demand. Why bother?

    And now President Obama, responding to pressure that he isn’t doing enough to combat high gas prices…

    Another spineless jellyfish babyboomer president? Eech…

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  13. By Benny BND Cole on April 25, 2011 at 6:27 pm

    optimist:

    The Hunt Bros. manipulation of the silver futures market is a matter of historical record.

    How did they accomplish it?

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  14. By Optimist on April 25, 2011 at 6:44 pm

    Small market. Few players. Huge investment relative to the total market.

     

    Almost impossible to repeat in today’s oil market.

     

    No proof in support of your wild theory, Benny?Wink

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  15. By rrapier on April 25, 2011 at 6:51 pm

    Optimist said:

    Small market. Few players. Huge investment relative to the total market.


     

    It also bankrupted them. As they kept bidding up the price, more people put silver on the market. They couldn’t buy it all up, and their attempt failed.

    RR

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  16. By Rob Ryan on April 25, 2011 at 6:55 pm

    But that of course would require a bit more effort on the part of our political leaders.

    It would also require telling the people that elect them things that they don’t want to (and, frankly, refuse to) hear.

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  17. By mac on April 25, 2011 at 7:01 pm

    Optimist,

    J.P. Morgan used to “game:: the market all the time. He used to call it “Shearing the Sheep” One of his favorite tricks was………….

    Morgan would buy stock in solid companies, then drive up the price with continuous purchases. At some point Morgan would “dump” his stock on the exchange, creating a temporary “panic”. Individual investors, afraid they were going to loose everything would see the recently posted stock prices and panic and sell their stock at discounted prices.

    Morgan would then step in, re-buy the stock and collect his manipulated windfall.

    Don’t tell me that markets aren’t “gamed”.

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  18. By klr on April 25, 2011 at 7:43 pm

    Benny BND Cole said:

    optimist:

    The Hunt Bros. manipulation of the silver futures market is a matter of historical record.

    How did they accomplish it?

    Are you being rhetorical, or lazy?  I Google ‘Hunt Bros’ and this helpful article shows, after a few hits for a pizza company:  FSK’s Guide to Reality: The Hunt Brothers’ Silver Corner.  They had 77% of the silver in the world on hand at one point; I don’t think that even GS or the Putster are going to stash away whatever the equivalent in crude stocks are – 2k bbo?  There just isn’t a comparision to be made.
     

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  19. By Benny BND Cole on April 25, 2011 at 8:34 pm

    With roughly 20 barrels of crude being traded “on paper” for every barrel of real crude, it is not hard for single entities to control large percentages of trading. There is no need to control physical product, as with the Hunts.

    The Hunts were pygmies next to sovereign wealth funds.

    So, the position of ome here is that
    1. Yes, Putin is trying to game the NYMEX.
    2. Yes, he can shield his identity.
    3. He is unable to influence prices, even so.

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  20. By mac on April 25, 2011 at 9:48 pm

    Optimist

    Stock Market Guru Jim Cramer admits to manipulating the Market while acting on behalf of hedge funds saying “It really doesn’t take that much money”

    http://www.youtube.com/watch?v…..MShFx5rThI

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  21. By Optimist on April 25, 2011 at 9:57 pm

    J.P. Morgan used to “game:: the market all the time. He used to call it “Shearing the Sheep” One of his favorite tricks was………….

    Morgan would buy stock in solid companies, then drive up the price with continuous purchases. At some point Morgan would “dump” his stock on the exchange, creating a temporary “panic”. Individual investors, afraid they were going to loose everything would see the recently posted stock prices and panic and sell their stock at discounted prices.

    The game continues today, usually with penny stocks where a few $1,000 can cause huge movement of price.

    Quite different from crude where there are $1 millions being traded everyday.

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  22. By Walt on April 25, 2011 at 10:12 pm

    Benny BND Cole said:

    With roughly 20 barrels of crude being traded “on paper” for every barrel of real crude, it is not hard for single entities to control large percentages of trading. There is no need to control physical product, as with the Hunts.

    The Hunts were pygmies next to sovereign wealth funds.

    So, the position of ome here is that

    1. Yes, Putin is trying to game the NYMEX.

    2. Yes, he can shield his identity.

    3. He is unable to influence prices, even so.


     

    The “naked” line is drawn beyond the physical markets.  In the late 1980′s after loosing money to a stock broker who was “investing” my money, I made the business decision to focus on hard assets rather than the markets.  A couple years ago a very close friend told me that I absolutely had to put money in a company that was in the resources business, with some of the largest diamond claims on the planet in Canada.  Against my best judgment, I invested in a company called CMKX Diamonds.  Of course, I lost everything, but I learned a ton about what naked shorts were, and how they work.

     

    They are extremely dangerous to the average investor, and so reading the mountains of depositions, legal opinions from general counsel of some of America’s top brokers and trading companies, I quickly learned how naked shorts operated.  I wish I would have known about naked shorts BEFORE I lost all my investment in CMKX…but since it was cheaper than going through a 4 year University education to be a securities lawyer, it was worth the loss.  For those who game the system using naked shorts, and take millions from investors, it is indeed very very sad.  It happens daily, and it happens often…watch the silver and gold markets…carefully if you don’t believe in physical delivery.

     

    My recommendation to anyone…study Mr. Madoff and how a former ex-chairman of the NASDAQ made it possible to run naked shorts.  Fortunately, the Madoff investors will likely recover most of their money.  The CMKX investors will likely never see anything.  Madoff took $65 billion from investors, and the world has been in a freenzy.  Families on TV heart broken watching this scandel unfold.  However, the $3.87 Trillion lawsuit involving CMKX and their investors won’t get the same coverage.  Here is a little coverage…for those wanting to learn the “markets”.

     

    There is nothing wrong with learning how supply and demand works in the markets…whether they are gasoline, crude or currency.  I hope America wakes up because the international investors I certainly waking up to a broken system in need of integrity and honesty again!

    —————————–

    [Complaint paragraph
    31] During the period of June 1, 2004 through October 28, 2005 a total
    of 2.25 Trillion “phantom” shares of CMKM Diamonds Inc, was sold into
    the public market through legitimate brokers, illegitimate brokers and
    dealers, market makers, hedge funds, ex-clearing transactions and
    private transactions. The sales of the majority of such shares were at
    all times known to the Securities and Exchange Commission, including
    Defendants herein.

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  23. By Optimist on April 25, 2011 at 10:13 pm

    Crud, Benny, you are really trying to prove my point about believing ANYTHING when the topic is Big Oil, aren’t you?

    With roughly 20 barrels of crude being traded “on paper” for every barrel of real crude, it is not hard for single entities to control large percentages of trading. There is no need to control physical product, as with the Hunts.

    No, it makes it 20 x harder for a single entity to make a dent. All those traders ensure smooth pricing: if somebody bids the price up, a bunch of sellers will step up to the plate, and that would tend to let the price go down. When the price goes down, buyer will step up and reduce the severity of the drop.

    It really does not matter whether a barrel is traded twice, 20 x or 200 x before delivery. In the end it sells for a price that a real user is willing to pay for it.

    The only way traders could distort the market, would be if there were a lot of new traders (or new money) coming to the market every day, which would be like artificial demand. Obviously that can only go on for a limited time, as with any pyramid/Ponzi scheme.

    So, the position of ome here is that
    1. Yes, Putin is trying to game the NYMEX.
    2. Yes, he can shield his identity.
    3. He is unable to influence prices, even so.

    I still see no proof of hypothesis #1. BTW, I think you’re alone on that one. #2 may be true, but of little relevance. How does hypothesis #3 flow from #1 and #2? The liberal media?

    The Hunts were pygmies next to sovereign wealth funds.

    So?

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  24. By mac on April 25, 2011 at 10:36 pm

    “The game continues today, usually with penny stocks where a few $1,000 can cause huge movement of price.”

    It’s a question of decimal points and zeros. The “leverage” or ,manipulation is the same, whether it’s 10.000 dollars, or $10 million..

    And the Russians and Arabs have lots of decimal points and zeros.

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  25. By rrapier on April 25, 2011 at 10:36 pm

    mac said:

    Optimist

    Stock Market Guru Jim Cramer admits to manipulating the Market while acting on behalf of hedge funds saying “It really doesn’t take that much money”

    http://www.youtube.com/watch?v…..MShFx5rThI


     

    It is well known that markets can be manipulated, but that is specifically over very short time periods. For instance, someone starts a rumor that sends share prices down. They recover when the rumor turns out not to be true. But oil prices aren’t over $100 because of manipulation. You couldn’t sustain that kind of manipulation at that volume for that length of time.

    Well, let me clarify one point. OPEC does manipulate the market to the extent that they withhold supplies from the market. That can indeed drive prices very high. But a bunch of speculators just bidding prices up? That won’t have a lasting impact.

    RR

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  26. By russ on April 26, 2011 at 1:43 am

    I remember a quote from one of the Hunt brothers after their little fiasco, ‘A billion dollars just ain’t what it used to be’. They ran out of funds and suffered greatly – along with their partners including an Arab prince.

    All the large stock brokers game the market – buying for the house account when prices are low and then putting all the brokers to work unloading that stock – driving the price up as they sell off. The last guy in line is screwed – that being the small account holder which included me.

    Merril Lynch used to do that with the Mexican telephone company – TFONY – stock. It varied between 3/16 and 13/16. Every six months or so the company brokers got instructions to start to sell off the accumulated stock in the house account – recommending it to their accounts. One of the few penny stocks I ever made money on when I realized what was going on. That was back in the 80′s and I wasn’t in the states enough to benefit a whole lot.

     

     

     

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  27. By mac on April 26, 2011 at 2:11 am

    RR,

    I don’t think OPEC is on a mission to “destroy” the nations that depend upon them for oil. Quite the contrary, I think the economic well-being of The OCED countries is tied to oil availability and prices, and I don’t think the Arabs have any ultimate intention of “killing the goose that laid the golden egg.”

    Without Western oil demand, the Arabs might still be riding around on camels.
    No more gold-plated Rolls Royce automobiles from Mother England, groovy electronics from Japan or “Promissory Notes” from the U.S.

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  28. By Walt on April 26, 2011 at 7:47 am

    Robert Rapier said:

    mac said:

    Optimist

    Stock Market Guru Jim Cramer admits to manipulating the Market while acting on behalf of hedge funds saying “It really doesn’t take that much money”

    http://www.youtube.com/watch?v…..MShFx5rThI


     

    It is well known that markets can be manipulated, but that is specifically over very short time periods. For instance, someone starts a rumor that sends share prices down. They recover when the rumor turns out not to be true. But oil prices aren’t over $100 because of manipulation. You couldn’t sustain that kind of manipulation at that volume for that length of time.

    Well, let me clarify one point. OPEC does manipulate the market to the extent that they withhold supplies from the market. That can indeed drive prices very high. But a bunch of speculators just bidding prices up? That won’t have a lasting impact.

    RR


     

    Optimist,

    You are right on the button.  It reminds me of the near total (as they called it) collapse of our economic system in 2008 by two wall street traders.  The markets can be manipulated by traders, and in the case of 2008, we learned permanently and totally.  How soon many forget what reality looks like when traders can take an entire system to its knees without government intervention.

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  29. By Benny BND Cole on April 26, 2011 at 2:01 pm

    Dudes-

    A sovereign wealth fund can buy and sell the same contract on the NYMEX, through two separate entities. They endure no risk for such a trade. Since they have only transaction costs, they can trade almost limitless amounts of “paper” oil. They can trade to higher prices, making their physical asset–oil in the ground or in tanks–more valuable. We know that in 90mpercent of contracts, no delivery is taken. Money is settled up

    Really–have fundamentals changed much in the last four months? Yet oil has gone from $70ish to $110-ish. The cost of production is roughly the same, the amount produced is roughly the same, the amount demanded roughly the same. Yet oil has surged.

    It can’t be on the fundamentals. Indeed, Cushing is swamped with oil.

    Yes, the fundamentals will eventually return. When the oil tanklers are sitting in Malta again, full to the brim and no place to unload. It does not help that Suadi Arabia is cutting oil production. But we will see a glut in a year or so. Then a price moderation, or collapse, like before.

    No, I am not privy to Putin, or anyone else. But concede the obvious–futures markets have been gamed in the past, will be gamed in the future, and probably are being gamed right now.

    If I were Putin, I would game the NYMEX. I would have the money to do do. I would have the mechanism to do so. I would have the need to do so. It would be in my nation’s and personal interest to do so.

    So oil shoots from $70 to $110–but it is fundamentals. Gee, lucky Russia, lucky Kuwait, lucky Saudi Arabia. Things just happen to go their way, eh?

    Yeah, sure.

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  30. By Optimist on April 26, 2011 at 2:27 pm

    Weak, Benny! Very weak!
    You presume Putin et al guilty, and now we must prove their innocence? Weak! Just because Ghadfi is making money at $110/bbl does NOT prove he is gaming the system. As RR stated before: if you had sold your CA home for a huge profit you didn’t work for, it does not imply that you were guilty of market manipulation. Ditto for the various oil producers that are currently raking it in.

    Really–have fundamentals changed much in the last four months? Yet oil has gone from $70ish to $110-ish.

    Careful now, Mr. Know-it-all. The fundamentals haven’t changed? How do you know what has changed and what hasn’t? Care to provide a list? In a free market everything is in a continuous state of flux.

    Also: who says in the current market $70/bbl is a fair price, but $110/bbl is not? If $110/bbl is too much, the buyers will stop buying and the suppliers will supply more, until a lower price is reached. The rise from $70 to $110 suggests that there is some unfulfilled demand somewhere. Can you prove otherwise?

    If I were Putin, I would game the NYMEX. I would have the money to do do. I would have the mechanism to do so. I would have the need to do so. It would be in my nation’s and personal interest to do so.

    Weak! In effect you are admitting that you accusations are based on your fantasies. Enough of those, already!

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  31. By mac on April 26, 2011 at 2:32 pm

    :How soon many forget what reality looks like when traders can take an entire system to its knees without government intervention.”

    The Justice Department has railroad cars full lawyers (hired at public expense) but not nearly enough to prosecute even the tip of the iceberg in regard to suspected stock fraud, insider trading, unregulated short selling, , etc., that are common practices and occur daily on Wall Street.

    The problem for the Justice Department and its prosecutors is that the super-rich bankers and wall street types also have railroad cars full of lawyers and attempts to prosecute offenders usually end up being dropped or result in negotiated (slap on the wrist) settlements through plea bargaining,

    Stock fraud (in one form or another) occurs daily on the NYSE Get used to it.

    There used to be an SEC up-tic regulation regarding short sales., but that was eliminated before the Great Crash. After all, the mega-rich must have their “freedom” to dump into the market at will, destroying the value of Joe American’s 401K in the process.

    Could the U.S. stock market be “gamed” or manipulated by foreign interests. Of course…

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  32. By Benny BND Cole on April 26, 2011 at 4:47 pm

    Okay, I knew I had ths somewhere–if 81 percent of NYMEX contracts can be controlled by a few entitioes, I suspect the odds of gaming the market are rather high…

    A Few Speculators Dominate Vast Market for Oil Trading

    By David Cho
    Washington Post Staff Writer
    Thursday, August 21, 2008

    Regulators had long classified a private Swiss energy conglomerate called Vitol as a trader that primarily helped industrial firms that needed oil to run their businesses.

    But when the Commodity Futures Trading Commission examined Vitol’s books last month, it found that the firm was in fact more of a speculator, holding oil contracts as a profit-making investment rather than a means of lining up the actual delivery of fuel. Even more surprising to the commodities markets was the massive size of Vitol’s portfolio — at one point in July, the firm held 11 percent of all the oil contracts on the regulated New York Mercantile Exchange.

    The discovery revealed how an individual financial player had gained enormous sway over the oil market without the knowledge of regulators. Other CFTC data showed that a significant amount of trading activity was concentrated in the hands of just a few speculators.

    The CFTC, which learned about the nature of Vitol’s activities only after making an unusual request for data from the firm, now reports that financial firms speculating for their clients or for themselves account for about 81 percent of the oil contracts on NYMEX, a far bigger share than had previously been stated by the agency. That figure may rise in coming weeks as the CFTC checks the status of other big traders.

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  33. By OD on April 26, 2011 at 4:59 pm

    I firmly believe the price is mostly due to the weakened dollar. We are hovering around 2008 USDX lows and 2008 oil highs, surprise surprise. We are lucky oil is as low as it is with the middle east blowing up and China going full steam ahead with their America part II highway experiment(they are buying more cars than the US last I heard?!). There’s no conspiracy or blame it on the speculators needed here. But please, let’s waste more $$ looking for the boogeyman. It will all be used as spin for the elections when gas prices are even higher.

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  34. By Optimist on April 26, 2011 at 10:13 pm

    Good point, OD.

    I guess the ME blowing up was one of the fundamentals that Benny conveniently overlooked, in order to keep Mr. Putin in the crosshairs.

    Think of it this way, Benny: we need $110/bbl to keep Peak Demand going. It was seriously slacking off at $70/bbl and below…Wink

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  35. By armchair261 on April 27, 2011 at 3:01 am

    Russia produces about 20% of the world’s nickel and about 11% of the world’s oil. In the last 6 months, nickel is up 18%, while oil is up 47%.

    Between July 2007 and July 2008, nickel was down 40%, while oil was up 80%.

    Why is it that Putin can’t successfully game the nickel market, a much smaller market in which he has twice his market share of oil?

    If sovereign wealth funds can trade at very low risk, then I would think that it would be in the interests of large oil importers with massive sovereign funds (China for example, Japan? Germany?) to game the market in the opposite direction, countering Putin’s moves which, if it were widely known to be true, would be a priority issue for the UN. After all, Putin’s gaming would be costing countries like China, Germany, Japan, and the US billions in cash.

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  36. By A Barrel Full on April 27, 2011 at 8:53 am

    I wish someone could explain to me the mechanism by which high volume paper trading translates into higher prices at the pump.

    If you trade against the fundamentals of the market, you will lose. Only changes in actual physical demand and supply can actually effect the price. The only way that futures can impact that balance is through increases / decreases in inventories.

    The fact that Vitol held 11% of outstanding trades is a function of their market knowledge. They have vast physical trading infrastructure which gives them a huge knowledge advantage over the likes of you and me.

    The reason that penny shares are so often manipulated is that they represent illiquid markets. The very size of the oil markets makes it much more difficult to manipulate, a fact that Optimist points out.

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  37. By russ-finley on April 27, 2011 at 9:30 am

    The “witch hunt” analogy is appropriate and they were very real. The masses are ignorant and politicians put that fact to good personal use.

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  38. By Walt on April 27, 2011 at 9:42 am

    A Barrel Full said:

    The reason that penny shares are so often manipulated is that they represent illiquid markets. The very size of the oil markets makes it much more difficult to manipulate, a fact that Optimist points out.


     

    Bloomberg did a study on this very issue in the NASDAQ several years ago.  Why would anyone go public on the NASDAQ when traders can destroy your value, bankrupt your company and make your life miserable as a CEO as proven in this Bloomberg documentary?

    http://video.google.com/videop…..797746038#

     

    I understand there are those who reject the idea that the government should be involved in any level of enforcement or regulation of the markets, but when we promote a “free market” let’s make sure to dig deep before blanket statements the oil, gold, silver, stock markets are not manipulated.

     

    Read the documents here, and the admissions by the traders on settlements.  Gives a CEO like myself pause in defending our markets when I go to Moscow or London explaining the virtues of “free market” capitalism without government regulation.  Supply & Demand exchanges (what some call a pure trading exchange) are not going to be regulated by the market, or by the SEC in my opinion.  I thought differently 3 years ago.

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  39. By Benny BND Cole on April 27, 2011 at 12:14 pm

    Optimist-
    I agree; I think if oil can be sustained above $100 a barrel, then we saw Peak Demand in 2008. Freddy Hutter says this too, amid all the nuttiness that is his website.
    That is quite a statement, and correctly implies the whole “Peak Oil” bla-bla is misplaced handwringing.
    BTW, I stand by my statement that there is shenanigans on the NYMEX or other related exchanges, and that means we will see yet another price crack in oil, perhaps by next year. I don’t know if we do a $147 to $40, but maybe a $115 to $65.
    The world is now swamped in oil; Cushing is full, Saudi Arabia is cutting back production. There ain;t no place to store the stuff.

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  40. By Walt on April 27, 2011 at 1:03 pm

    Benny BND Cole said:

    Optimist-

    I agree; I think if oil can be sustained above $100 a barrel, then we saw Peak Demand in 2008. Freddy Hutter says this too, amid all the nuttiness that is his website.

    That is quite a statement, and correctly implies the whole “Peak Oil” bla-bla is misplaced handwringing.

    BTW, I stand by my statement that there is shenanigans on the NYMEX or other related exchanges, and that means we will see yet another price crack in oil, perhaps by next year. I don’t know if we do a $147 to $40, but maybe a $115 to $65.

    The world is now swamped in oil; Cushing is full, Saudi Arabia is cutting back production. There ain;t no place to store the stuff.


     

    I heard some analysts say that not only did the US government have large storage, but the industry has massive storage of oil currently in America.  I did not write down the storage numbers, but he was saying that he did not believe oil supply was tight in America, nor did he believe we had to release more oil out the of SPR to reduce oil prices.

     

    Where do we find how much oil is currently in storage in America?  If supply/demand shortage is the cause of the price spike, is the crude and gasoline demand coming from inside the USA or outside the USA?

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  41. By rrapier on April 27, 2011 at 1:17 pm

    Walt said:

    Where do we find how much oil is currently in storage in America?  If supply/demand shortage is the cause of the price spike, is the crude and gasoline demand coming from inside the USA or outside the USA?


     

    The EIA maintains those numbers, and crude storage in the U.S. is currently fine. Gasoline inventories, on the other hand, have been falling sharply since February and are at the low end of the average for this time of year.

    RR

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  42. By Optimist on April 27, 2011 at 2:30 pm

    The world is now swamped in oil; Cushing is full, Saudi Arabia is cutting back production. There ain;t no place to store the stuff.

    Keep repeating it, Benny, may you’ll eventually believe yourself. Hands over the eyes! Louder! LOUDER!

    The rest of us would look at the real numbers, courtesy of the good Mr. Rapier.

    BTW, I stand by my statement that there is shenanigans on the NYMEX or other related exchanges, and that means we will see yet another price crack in oil, perhaps by next year. I don’t know if we do a $147 to $40, but maybe a $115 to $65.

    Where to start? There will always be some shenanigans, just as there will always be theft. It’s a broken world. The SEC is far from flawless, unfortunately.

    The good Mr. Rapier believes that oil is key to the health of the US economy, and, as such, high oil prices leads inevitably to recession, which leads to low oil prices and [cycle repeats into infinity].

    Yours truly, OTOH, believes that oil is a shrinking part of the US economy, and that higher oil prices serve to keep shrinking the part that oil plays. Oil does, of course, exert some influence, but it does not determine the health of the US economy, by and of itself. High oil prices can be considered a blessing in disguise, as long as Washington does not interfere.

    BTW, Benny, I’m touched that you stand by your statements. In the absense of supporting evidence it doesn’t mount to a hill of beans, though.

    Those ranges are large enough to be meaningless. Might as well tell us who is going to win the World Series.

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  43. By Optimist on April 27, 2011 at 2:32 pm

    maybe you’ll eventually believe yourself

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  44. By rrapier on April 27, 2011 at 2:58 pm

    Optimist said:

    Yours truly, OTOH, believes that oil is a shrinking part of the US economy, and that higher oil prices serve to keep shrinking the part that oil plays.


     

    Only if the rate at which we use oil falls faster than the price of oil rises. And I don’t believe that will be the case.

    RR

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  45. By Benny BND Cole on April 27, 2011 at 4:49 pm

    US traders use river transport to profit from oil glut

    By Gregory Meyer in New York
    Published: April 27 2011 19:42 | Last updated: April 27 2011 19:42
    Barges laden with crude are set to make their way to the oil-rich Gulf of Mexico in the latest sign of how price anomalies have reconfigured energy markets.

    Petro Source Terminals, a storage tank operator, plans to start filling vessels with crude oil at the river port of Catoosa, Oklahoma, to sell to refiners in Louisiana, hundreds of miles downstream.

    The company is hiring barges because the price of West Texas Intermediate crude, the US oil benchmark, has been weighed down by record 40m-barrel stocks at its delivery point in Cushing, Oklahoma.

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  46. By Optimist on April 27, 2011 at 7:18 pm

    Only if the rate at which we use oil falls faster than the price of oil rises.

    That does not sound like an economic principle that I’m familiar with. Care to explain/expand?

    US traders use river transport to profit from oil glut

    Benny, that sounds like the free market working the way it was supposed to, not so? If the high prices are artificial, these guys will rake it in for a while, and then prices will subside. If not, their cheap source may soon be charging them more. Keep us posted.

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  47. By mac on April 27, 2011 at 8:19 pm

    Walt,

     

    Thanks for the  reference movie on “naked short selling” 

     

    I knew the minute the SEC threw out the up-tic rule (July 2007) that this would eventually beat the market into the ground, taking some good companies into bankruptcy, hostile mergers, etc.

     

    Besides destroying millions of 401K plans.

     

    AND IT WASN’T VERY LONG BEFORE IT ALL HIT THE FAN IN 2008.

     

    In 2007 the up-tic rule regulating short sales is tossed out.  In 2008 there is a  major recession/depression as short sellers clean up. (i.e. get rich riding the market down as it collapses right along with the U.S. economy.) 

     

    Wow!!!  What a POSTIVE INVESTMENT STRATEGY…….my rich friends all have ——Watching the economies of the world “tank” as they get rich betting that things might just get even worse.

    http://video.google.com/videop…..797746038#

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  48. By Optimist on April 27, 2011 at 8:44 pm

    From the WSJ: “It’s obviously a very bad development to see gas prices rise so much,” said Mr. Bernanke. Still, he added, “The Fed can’t create more oil.”
    And: But traders and analysts say the Fed’s policy to keep rates low has led to a flood of investment into commodities, which are considered a safer store of value in periods of rising prices. Gold futures rose 0.9% to set a new record of $1,516.70 an ounce.

    “Oil prices have soared for the simple reason that the dollar is weak, and that’s going to be the case until they raise rates,” said Rich Ilczyszyn, an oil market strategist at Lind-Waldock. “We’re going to continue to go upward.”
    Mr. Bernanke admitting that Wall Street genius financial whizbangery can’t be used to solve ALL problems? What is the world coming to?

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  49. By Optimist on April 27, 2011 at 8:45 pm
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  50. By Walt on April 27, 2011 at 9:57 pm

    mac said:

    Wow!!!  What a POSTIVE INVESTMENT STRATEGY…….my rich friends all have ——Watching the economies of the world “tank” as they get rich betting that things might just get even worse.

    http://video.google.com/videop…..797746038#


     

    Mac,

    As we know, wealth is never lost in the markets, but only transferred.  While the value of the asset on one personal family balance sheet is destroyed, there is somewhere where it is absorbed free or without much loss.  We have seen this in the mortgage industry where literally dozens of banks have been made 100% whole on foreclosure “losses” by the taxpayer on paper, and still they hold the assets.  I’m sure we have heard of the large number of banks holding prime real estate (at least in key areas) that refuse to sell it even to cash buyers.  Derivatives is the ultimate test.  The Editor’s analysis below is from another site, but summarizes very nicely what came out today on the $600 Trillion derivatives…which much of it is packaged “debt” and “losses” hedged by Wall Street untouchables.  If you sold that into the “markets” you would be in jail.

     

    EDITOR’S ANALYSIS: Here is
    the problem: $600 TRILLION in swaps seems like a big number. It is. And
    it is only an estimate, so we can assume there is some variance. How big
    is it? Well the combined currency issued across the world by all
    governments is $50 TRILLION. So it doesn’t take a rocket scientist to
    know that there is 12 times the amount of the world’s currency sitting
    out there masquerading as securities based upon paper whose value is
    derived from some debt which is to be paid, you guessed it, in
    currency.”

     

    http://dealbook.nytimes.com/20…..tal-rules/

     

    Our focus is on fuel, food and carbon technologies…without required government support or mandates for economic survival.  These lobbies and Wall Street bankers will be able to keep things going for a long-time, but there will be casulties along the road.  As more wealth (like they did in the Soviet Union after the collapse) is transferred to our own class of oligarchs, the middle and senior class (baby boomers) will continue to see waves of struggles.  It is sad, but if only the State governments could establish their own banks and get control of the wealth, it would not be transferred into the $600 Trillion (and growing) financial hole created by Wall Street.  State owned banks managing our money is one major key!  Get it out of Wall Street “naked short selling” derivative/mortgage/madoff economic operation.

     

    Once you understand naked short selling…you will understand what $600 trillion means in reality!

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  51. By arnchair261 on April 28, 2011 at 2:17 am

    Optimist said:

    “Oil prices have soared for the simple reason that the dollar is weak


     

    Oil is up about 35% in dollar terms over the last 6 months, but is also up against the euro by 29%, and against the yen by 38%. So I don’t think the recent gains can be attributed to the weak dollar alone.

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  52. By rrapier on April 28, 2011 at 3:51 am

    Optimist said:

    Only if the rate at which we use oil falls faster than the price of oil rises.

    That does not sound like an economic principle that I’m familiar with. Care to explain/expand?


     

    You had said that you felt oil would be a shrinking part of the U.S. economy. It can be true that the volume of oil we use shrinks, but the overall price we pay grows. So in that case it wouldn’t actually be a shrinking part of the economy, even though it may be a shrinking part of our energy portfolio.

    In fact that has been the case over the past five years. We are using less oil, but paying twice the price for it. So the cost of oil has grown relative to our economy.

    RR

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  53. By Optimist on April 28, 2011 at 1:55 pm

    True, enough. The cost of oil relative to the economy also grew due to the spectacular collapse of the US economy. Even if oil prices held steady, it would make up a bigger share of the economy.

    Which raises a whole other debate: which yardstick should we be using? If we ever get agreement on that, what should we aim to do with it? Eg. try to spend less on oil imports every year?

    Unfortunately, due to price instability, the proper effect of the high price has been diminished: a high price of oil would lead to lower demand, and, ideally, demand that keeps shrinking. Get it high enough and we might even find a feasible alternative!

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  54. By paul-n on April 29, 2011 at 1:16 am

    Worse still, in my opinion, is that the amount of oil imports continues to climb – that money is never seen again (except when Saudi buys some military hardware).   At least with domestic (and Canadian) oil production the money stays here.

    It would be interesting to know what difference in the economy there would be if all the current oil spending went only on domestic (+Cdn) production. half the volume at twice the price, but imports are zero, and a massive reduction in the trade deficit.  Even uder that scenario, with current fuel taxes, retail prices would be no more than euro levels of about $8/gal.

     

     

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