Archive for the 'Econ 101' Category

16
Jul
08

President Bush: “Big Oil!”

Let’s face it … it’s very hard to find a politician who understands anything today.  They’re driven by campaign fund raising, sound bytes, and vote pandering.  Some days … I think they’ll just say anything … but then on other days … I realize they just plain don’t know/understand what they’re talking about.Vintage_Oil_Cans_Service_Station_Lights

Well, I found a politician who does understand, at least some things.  His name is President George W. Bush.

The following is from the Q&A session that followed the President’s Press Conference on July 15, 2008 with a few of my own comments thrown in.  Any text highlighted was done by me.

Q Gas prices are now approaching $5 a gallon in some parts of the country. Offshore oil exploration is obviously a long-term approach. What is the short-term advice for Americans? What can you do now to help them?

THE PRESIDENT: First of all, there is a psychology in the oil market that basically says, supplies are going to stay stagnant while demand rises. And that’s reflected somewhat in the price of crude oil. Gasoline prices are reflected — the amount of a gasoline price at the pump is reflected in the price of crude oil. And therefore, it seems like it makes sense to me to say to the world that we’re going to use new technologies to explore for oil and gas in the United States — offshore oil, ANWR, oil shale projects — to help change the psychology, to send a clear message that the supplies of oil will increase.

Secondly, obviously good conservation measures matter. I’ve been reading a lot about how the automobile companies are beginning to adjust — people — consumers are beginning to say, wait a minute, I don’t want a gas guzzler anymore, I want a smaller car. So the two need to go hand in hand. There is no immediate fix. This took us a while to get in this problem; there is no short-term solution. I think it was in the Rose Garden where I issued this brilliant statement: If I had a magic wand — but the President doesn’t have a magic wand. You just can’t say, low gas. It took us a while to get here and we need to have a good strategy to get out of it.

theClassicLib: There has been a lot of hyperbole about “speculators” lately (see here), however, the President clearly understands the law of supply and demand.  He understands that even the idea of increased world oil supplies will reduce the price of futures contracts currently being bought.  This is no different than when shares of company XYZ decline on a rumored earnings warning some time off in the future.

Bush also points out that consumers, not government drive markets (aka supply and demand), and that nobody in government has a magic wand to make economic changes on demand.

Q But you do have the Strategic Oil Petroleum Reserve. What about opening that?

THE PRESIDENT: The Strategic Oil Petroleum Reserve is for, you know, emergencies. But that doesn’t address the fundamental issue. And we need to address the fundamental issue, which I, frankly, have been talking about since I first became President — which is a combination of using technology to have alternative sources of energy, but at the same time finding oil and gas here at home. And now is the time to get it done. I heard somebody say, well, it’s going to take seven years. Well, if we’d have done it seven years ago we’d be having a different conversation today. I’m not suggesting it would have completely created — you know, changed the dynamics in the world, but it certainly would have been — we’d have been using more of our own oil and sending less money overseas.

theClassicLib: Right!  Everyone today is so focused on the immediate (which requires the use of that magic wand), that they can’t see the forest through the trees.  Now is the time to start drilling, so we don’t have the same (or worse) conditions a mere 7 years from now.

Q Mr. President, understanding what you say about energy supplies being tight and the debate over energy … one thing nobody debates is that if Americans use less energy the current supply/demand equation would improve. Why have you not sort of called on Americans to drive less and to turn down the thermostat?

THE PRESIDENT: They’re smart enough to figure out whether they’re going to drive less or not. I mean, you know, it’s interesting what the price of gasoline has done, is it caused people to drive less. That’s why they want smaller cars, they want to conserve. But the consumer is plenty bright, Mark. The marketplace works.

So no question about what you just said is right. One way to correct the imbalance is to save, is to conserve. And as you notice my statement yesterday, I talked about good conservation. And people can figure out whether they need to drive more or less; they can balance their own checkbooks.

theClassicLib: This Q&A addresses a fundamental difference between today’s Left and Right.  On the Left, they simply don’t believe people can and/or will make good choices in their lives without the explicit direction (and regulatory authority) of the Federal Government.  On the Right, there is trust in individuals to make wise choices for themselves and their families.

This is further illustrated in the following Q&A …

Q But you don’t see the need to ask — you don’t see the value of your calling for a campaign —

THE PRESIDENT: I think people ought to conserve and be wise about how they use gasoline and energy. Absolutely. And there’s some easy steps people can take. You know, if they’re not in their home, they don’t keep their air-conditioning running. There’s a lot of things people can do.

But my point to you, Mark, is that, you know, it’s a little presumptuous on my part to dictate to consumers how they live their lives. The American people are plenty capable and plenty smart people and they’ll make adjustments to their own pocketbooks. That’s why I was so much in favor of letting them keep more of their own money. It’s a philosophical difference: Should the government spend their money, or should they spend their own money? And I’ve got faith in the American people.

And as much as I regret that the gasoline prices are high — and they are — I also understand that people are going to make adjustments to meet their own needs. And I suspect you’ll see, in the whole, Americans using less gasoline. I bet that’s going to happen … And as you notice, the automobile industry is beginning to adjust here at home as consumer demand changes. And the great thing about our system, it is the consumer that drives our system; it’s the individual American and their collection that end up driving the economy.

theClassicLib: Yes, it’s a philosophical difference.  No additional comment needed.

Q `You never mention oil companies. Are you confident that American oil producers are tapping all of the sources they have out there, including offshore?

THE PRESIDENT: What about them — do I think they’re investing capital to find more reserves with the price at $140 a barrel? Absolutely. Take an offshore exploration company. First of all, it costs a lot of money to buy the lease, so they tie up capital. Secondly, it takes a lot of money to do the geophysics, to determine what the structure may or may not look like. That ties up capital. Then they put the rig out there. Now, first of all, in a federal offshore lease, if you’re not exploring within a set period of time, you lose your bonus; you lose the amount of money that you paid to get the lease in the first place.

And once you explore, your first exploratory, if you happen to find oil or gas, it is — you’ll find yourself in a position where a lot of capital is tied up. And it becomes in your interest, your economic interest, to continue to explore so as to reduce the capital costs of the project on a per-barrel basis. And so I — I think — I think they’re exploring. And hopefully a lot of people continue to explore so that the supply of oil worldwide increases relative to demand.

theClassicLib: Are oil companies investing in oil exploration?  LOL!  That’s what they do! That’s their business!  I’m sorry, but whoever the journalist is that asked this question, isn’t even bright enough to ask questions of the local class C softball team, let alone the President of the United States of America.

Yet … The Mainstream Media can’t figure out why their losing money and market share … um, uh … well … maybe it has a lot to do with insulting your customers intelligence with such ridiculous questions.

14
Jun
08

McCain’s War on Oil

McCain's War on OilMaybe there should be a requirement that anyone who runs for office in America be required to pass a stringent economics exam. Seriously! Politicians are morons!

At a town hall meeting in the old Federal Hall (New York City) last night, Senator John McCain had this to say:

“I believe there needs to be a thorough and complete investigation of speculators to find out whether speculation has been going on and, if so, how much it has affected the price of a barrel of oil. There’s a lot of things out there that need a lot more transparency and, consequently, oversight.”

“I am very angry, frankly, at the oil companies not only because of the obscene profits they’ve made but at their failure to invest in alternate energy to help us eliminate our dependence on foreign oil. They’re making huge profits and that happens, but not to say, ‘We’re in this so we can over time eliminate America’s dependence on foreign oil,’ I think is an abrogation of their responsibilities as citizens.”

It may sound like the bumbling argument of a drunk down at the corner bar, but no, these are the words of a Presidential contender. Let’s take a closer look at McCain’s mis-education.

What is a speculator? What does a speculator do?

In the commodities market, there are two types of traders – hedgers and speculators. What hedgers do, is attempt to reduce the risk of price uncertainty. For example, Henry, a potato farmer has another six months before he can harvest his crops and take them to market. He has fixed costs, so he wants to make sure he can get a profitable price on his potatoes, otherwise he may (literally) lose the farm.

So what does he do? He buys a futures contract which guarantees him today’s market price. If the price of potatoes falls when its time to harvest, he has no worries because his price has already been guaranteed. His downside is that if the price of potatoes goes up, he doesn’t earn any additional profits, but he’s happy because he already locked-in the profit he desired.

The speculators take the opposite approach. Instead of locking in today’s price, they attempt to predict the price in the future. The speculator is willing to buy Henry’s potatoes at today’s price, EVEN IF THE PRICE OF POTATOES FALLS THROUGH THE FLOOR! In other words, the speculators guarantee Farmer Henry the price he desires, and shoulder the risk of a potential fall in price for him. Without speculators, Farmer Henry wouldn’t be able to take this risk adverse action of hedging his crops.

BOTH the hedger and speculator are buying and selling the commodity. The difference is that the hedger is selling at a fixed price, while the speculator is buying at a fixed price. Quite frankly, without speculation, ALL markets would collapse.

“I believe there needs to be a thorough and complete investigation of speculators to find out whether speculation has been going on …”

Duh! Should there be a thorough investigation of accountants, because there’s been a lot of accounting going on? Also, it should be noted that many of the speculators are the big state pension funds of teachers, police, and firefighters! This guy doesn’t have a clue of what he’s talking about.

“I am very angry … at the oil companies … failure to invest in alternate energy to help us eliminate our dependence on foreign oil.”

McCain should start a company to create this MAGIC Alternate Energy Source! Can we be candid for a moment? You, me, the guy down the street … all the CEO’s in the world, Algore, and everyone else would LOVE to discover an energy source better than oil! It’d be a bigger deal than the invention of the light bulb and the computer. You’d be able to hire Bill Gates as your butler!

War on OilRight now, however, this “alternate energy source” doesn’t exist. And all the bumbling speeches of Politicians and their accompanying Rube Goldberg regulation schemes won’t change that fact. So instead of blaming BIG OIL for our dependence on foreign tyrants for energy, Mr. McCain should look himself in the mirror, and then take a good look at his “Good ol’ Boy” network in Congress … because America needs to be producing oil!

It is YOU and your cronies in CONGRESS who keep Americans dependent on foreign oil!

The 2008 Presidential Election has set a new low in America. We have the choice between a radical socialist in Obama, and an economic dunce in McCain.

God save us all. God save the U.S.A.!

07
Jun
08

there’s gold in them there hills

June 6 (Bloomberg) — Gold jumped the most in six months after the U.S. jobless rate had the biggest gain in more than two decades, spurring a drop in the dollar. Silver also rose.

The unemployment rate increased to 5.5 percent in May from 5 percent in April, marking the biggest increase since February 1986, the U.S. Labor Department said today. The dollar dropped as much as 1 percent against the euro. Gold has gained 33 percent in the past 12 months as a slump by the dollar boosted demand for the metal as an inflation hedge.

“The dollar is much weaker, and that’s what is creating the bounce in the market,” said Leonard Kaplan, the president of Prospector Asset Management in Evanston, Illinois.

Gold futures for August delivery rose $23.50, or 2.7 percent, to $899 an ounce on the Comex division of the New York Mercantile Exchange. That marks the biggest gain for a most- active contract since Nov. 23.

The jump in the jobless rate was higher than every forecast in a Bloomberg survey of 79 economists, who had estimated a median gain to 5.1 percent. U.S. payrolls dropped by 49,000 last month after a 28,000 drop in April.

“The dollar took a nose dive as soon as this jobs data came out, and that’s a big reason we’ve seen gold move up,” said Matthew Zeman, a trader at LaSalle Futures Group in Chicago.

Click here for full story.