Thursday, April 24, 2008

Oh NO! Even Bill O’Reilly Doesn’t GET IT!!!

Bill O’Reilly is generally a pretty fair minded commentator in my view and I say that despite the fact that he’s far more Liberal than I am (he opposes the death penalty, supports a guest worker program for illegal immigrants, etc.).

He’s an Ivy League New Yorker, after all, so how “Conservative” is he really going to be?

He has been a stalwart crusader for tougher sanctions against pedophiles, although I surmise he opposes the death penalty for repeat child sex offenders, which I support, and his crusade in favor of Megan’s Law and Jessica’s Law are admirable.

One area that I’ve always had a huge problem with Bill O’Reilly over is his views on “energy policy.” For a long time, he’s advocated American companies selling American oil to U.S. consumers at slightly above cost – it supposedly costs appx. $20/barrel for Energy Companies to take oil from America’s reserves, so Bill O’Reilly would suggest selling it to the American people at $25 to $30/barrel.

What’s wrong with that?

What’s wrong with it is that we exist within a global economy. Should Exxon-Mobil and Chevron be forced to sell U.S. at below world market prices (currently nearly $125/barrel), foreign oil companies would still sell theirs at world market prices, still reap huge profits AND eventually buy out/take-over America’s energy companies!

When O’Reilly interviewed Ben Mezrich this past Wednesday night (4/23/08), the author of the book Rigged about how the oil futures market sets world oil prices, Bill O’Reilly showed a startling degree of ignorance by asking, “OK, so who’s the guy who sets the world price of oil? Somebody has to set it at $125/barrel, it just doesn’t arrive at that number.”

Ben Mezrich replied, “It would be great if there were one such person-”

O’Reilly then stated, “Look, there’s got to be that one person. If you don’t know him, that’s fine, neither do I.”

What Mr. Mezrich didn’t get a chance to say was that there is NO ONE person! Commodities futures markets are an open auction, where the price of various commodities are bid up and down according to various investors/speculators “bets” based on the exiting information at hand.

Commodities futures markets are as open an economic democracy as you can get. Anyone can come in and invest on futures of any given commodity from corn to unleaded gasoline.

People of all kinds, from all economic strata are free to bid, invest, speculate on the price of any given commodity. You can “Buy” or bid, or invest/speculate on the price of that commodity going up, or “Short” and bid, invest/speculate based on the belief that that commodity will go down.

Behind those bids or investments/speculation are the market parameters (supply and demand for each commodity) and those market parameters play the same role in the mercantile exchange/commodities markets as do corporate fundamentals (the fiscal health of a given company) in the stock market. When more and more people believe that the market parameters for oil and unleaded gasoline point to a price rise for those commodities, the price of those commodities is bid upward until such a point, where no one will bid it any higher.

Right now, the U.S. has huge reserves of petroleum in shale oil, oil sands and both offshore in huge underwater deposits and in ANWR in the Artic, that it is not bringing to market.

Over the past decade or so, both India and China have modernized and industrialized and are now using far more oil than they did before.

That growing DEMAND amidst an artificially tightened SUPPLY has created market parameters for oil and gasoline futures that would indicate rising prices.

Even though world oil supply has risen sharply over the past decade, world demand has far outstripped that supply.

In the U.S. outrageously high federal and local gasoline taxes, federally mandated “summer blends” and policies that have (1) made building new refineries both more expensive and less profitable and (2) limited access to our huge supplies of oil and natural gas have all conspired to raise gasoline prices.

And yet, if even Bill O’Reilly, who’s father worked as an accountant for a major Energy Company, doesn’t get how this system works, how can we expect regular folks or even lowly politicians to get it?

Right now the world market is acting exactly as it should. In the face of rising demand outstripping the supply of a given commodity, the price of that commodity rises.

That is GOOD!

What it does is it makes the cost of that commodity so prohibitive that we are forced, as consumers, not to waste any of that commodity we own.

When government moves in to artificially lower the price of a commodity under those conditions, it winds up SUBSIDIZING waste, and ultimately makes the problem WORSE, by further driving up demand!

Ironically enough, the U.S. government could do something to bring down the price of oil and gasoline, by moving to INCREASE global supply, by bringing more of our own oil to market!

But we’re NOT doing that.

Looking for “the one man to blame” for setting the world price of oil so high” is as foolish and fruitless an endeavor as searching to find Santa Claus or the Easter Bunny.


RockStar said...

Right on! I normally enjoy watching O'Reilly, but he really showed ignorance here and it has been bugging me all day for some reason! I wonder if Ben Mezrich had a chance to school Bill after the segment on the way it really works!

JMK said...

That was the hardest interview I've seen in a very long time. Ben Mezrich tried very hard to get BOR to catch on, but it seems that Bill's convinced that there's some "evil mastermind" somewhere rigging the price of oil!

As usual, "the enemy" is US. It's largely regular people who buy corn, wheat and gasoline futures.

But even the idea that "it's all market pyschology" isn't quite correct. If it were, all one would have to do, at any time, would be to bet/speculate with the crowd, BUT speculating with the crowd is no sure pathway to success.

Market parameters change and those who base their speculation on the parameters that hold WIN and those who don't lose.

Right now, with India and China industrializing and creating a HUGE surge in demand that has even swamped the increased supply, the market parameters for oil and unleaded gasoline point to rising prices.

With America refusing to drill in ANWR, or offshore OR tap its huge oil sands and shale oil reserves AND making it all but impossible to build new refineries,the market parameters for unleaded gasoline appear to be headed nowhere but UP.

It seems so obvious. I wonder why BOR can't seem to grasp it.

Anonymous said...

Excellent points, JMK.

The stupidity of our pols has exacerbated the problem with their obeisance to ethanol - a scam that apparently even some greens are starting to realize.

There IS a reason that Iowa insists on being the first primary state and that is that the pandering pols kiss the ass of the Iowa farmers. Have no doubt that is the main reason for a state which is decidely atypical of the American electorate to insist on the lead-off spot.

As to the oil companies - HOW many times has congress drag the Big Oil execs before congress?

And how many times have they failed at proving price gouging?

Oh, and how many times has the MSM failed to report that no gouging was found?

Here's what I would like to see:

a) an open discussion about ethanol and its irrelevancy towards a goal of energy independence (I believe that the number is 15% impact if ALL farmland was converted to corn which was then applied 100% to ethanol!)

Then discuss eliminating the farm subsidies which are an anacronysm today given crop prices.

Then disclose how much crude lies within our reach both inland and offshore.

Then, put it to the American people to decide whether to drill or not for that oil after a fair debate.

Hey, I can dream, right?

JMK said...

I share that same dream anonymous, but before that dream could have a chance of coming to fruition, people need more information, and the fact that even national commentators like BOR get it so woefully wrong, doesn't bode well at all.

There is no "one man" setting the price for oil, just as Ben Mezrich said, there is only the economic democracy of the mercantile exchange! In the end, we are our own enemies.

BUT, there really isn't a "shortage" of oil, there IS incredibly increasing demand amidst a rising supply.

I don't discount Energy Company manipulation. Do the Energy Companies really want drilling in the ANWR or offshore, or are they surrepititously funding some in the environmental movement to advance a more profitable agenda for themselves, the way Dow Chemical used the Greens a few years back to advance the CFC-free A/C?

Still, the ethanol plan is a real scam.

First off, WHY corn???

We can make ethanol from anything (the Brazilians use sugar-based ehtanol, not an option here). Why not saw grass? It's cheap, abundant and you don't have to convert miles of farmland to grow it!

I fear that we're being skinned alive again...a few years back it was Enron, before that it was the S&Ls and before that the BCCI, NOW it seems to be ADM (and big agriculture) and Exxon-Mobil (and big energy) combining to run a "Go Green" agenda on us, that's really all about putting MORE green in their pockets and LESS in ours, by using many true believers in the environmentalist movement to accomplish that end.

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