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The Mystery Behind Rising Oil Prices Solved

CrownThomas's picture




 

From Michael Pento:

 

The Mystery Behind Rising Oil Prices Solved

Everything I’ve been warning about regarding the fallout from global central bankers’ love affair with inflation is coming to fruition. Consumers are once again dealing with the fact that the cost of filling up their gas tank is eating a significant portion of their disposable income. The price of a barrel of oil is now soaring above $100 a barrel; just as it always has done when the Fed has gone on one of their counterfeiting sprees. And it’s not just dollars that have been eroding in value because the price of oil in Euros is now at a record high. The sad truth is that with each iteration of QE, either in the U.S. or around the globe, it has sent oil prices skyrocketing, inflation rising and the economy into the tank.

But our nation’s Treasury Secretary continues to display how very little he understands about markets and the economy. Timothy Geithner said last week that there is “no quick fix” to higher oil prices and that there’s no easy solution for spiraling energy prices. What he does recommend is a long-term approach, “…to encourage Americans to be more efficient in how they use energy." My guess is what Mr. Geithner means by “encouraging Americans to be more efficient” is to make sure our economic growth is anemic.

In contrast to what Geithner believes, there are two things he, the Fed and the Obama administration could do today to bring oil prices down below $75 per barrel in less than 30 days. First, is to raise the Fed Funds rate to 1% and repeal Bernanke’s pledge to keep interest rates at zero until the end of 2014. The second is for the president to proclaim that the U.S. does not support, in any way, a preemptive military attack on Iran. These two simple measures would dramatically strengthen the dollar, backing out at least $25 from the crumbling currency premium; and removing the $15 war premium built into the price of oil.

But seeing as neither of those things is likely to happen, we can look to recent history for what we can expect from soaring oil prices. In the summer of 2008, oil prices hit an all-time record high of $147 per barrel and gas prices hit a record $4.16 per gallon. This helped send the global economy into the Great Recession. Then in Q1 of 2011, QEII sent oil prices back to $114 per barrel and gas back above $4 a gallon. Predictably, U.S. GDP once again plummeted, falling from 2.3% in Q4 2010, to 0.4% in the following quarter. Today, oil prices are back to $110 per barrel and gas prices are surging back to $4 per gallon. Expect a slowdown in the economy similar to what occurred every other time gas prices hovered around the $4 level. We received a taste of that slowdown with the release of the Durable Goods and ISM manufacturing report. Orders for U.S. durable goods fell in January by the most in three years and capital goods expenditures, less aircraft and defense fell 4.5%. And the Institute for Supply Management’s factory index fell to 52.4 in February from 54.1 a month earlier.

The main reason why oil prices are rising is the same reason why food and import prices are soaring as well. Paper currencies across the world are losing their purchasing power against real assets that cannot be increased by fiat. Of course, the Pollyannas on Wall Street will tell you that oil is rising because of a rebounding economy. However, the facts are that gasoline demand is down 6% YOY, while oil inventories are at a six month high. If the global economy was indeed recovering why is the demand for gas at the pump falling? In reality, the global economy is very weak and the U.S. is very far removed from a sustainable recovery.

Japanese GDP dropped 2.3% in Q4 and the European Union is in recession, with last quarter’s GDP falling 0.3%. And Greece has entered into a depression with GDP down 7% last quarter and falling sharply. Emerging market economies will be hard pressed to keep up their ebullient growth rates when the developed world’s demand for foreign made goods is collapsing.

Meanwhile, the U.S. continues to run trillion dollar annual deficits and the unemployment rate is 8.3%. Inflation is destroying the nation’s desire to save and invest, as the economy is suffering through a protracted period of stagflation. But perhaps the worst situation of all is that the Fed’s free-money policy has set the economy up for the biggest interest rate shock in history. It’s really not much of a mystery why investors have fled to gold and oil as an alternative to owning paper, which can only offer a negative return after inflation.

 

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Tue, 03/27/2012 - 04:15 | 2293636 MeelionDollerBogus
MeelionDollerBogus's picture

http://flic.kr/p/btrSQu - oil price model from dow USD
dow / 95.6 - 31.342 = oil
oil * 95.6 + 3006.80 = dow

Mon, 03/05/2012 - 20:36 | 2226251 ZeroConfidence
ZeroConfidence's picture

 

 

But but but just last week Nacy Pelosi told us it was evil, profiteering oil speculators that were driving up the price!!!

Does this mean she's full of shit?

 

 

Thu, 03/15/2012 - 22:17 | 2260422 GoldRulesPaperDrools
GoldRulesPaperDrools's picture

Heck no ... shit is actually useful! ;)

Mon, 03/05/2012 - 03:08 | 2223359 Blue Horshoe Lo...
Blue Horshoe Loves Annacott Steel's picture

This guy is much to critical of the USA's leaders.  He must be a terrorist who hates us for our high gas prices!

Sun, 03/04/2012 - 22:08 | 2222972 Thunder_Downunder
Thunder_Downunder's picture

Oil is only rising in countries that have debauched their currency. 

 

Euro area, US, China and Japan, all paying more for energy, all fecking with their currency and believing that the markets won't notice. 

 

For reference, in Australia it has been stable and we actually had CPI DEFLATION last quarter, food costs down, energy flat.

 

Producers of the world are finally feeding back the loss of purchasing power, chickens coming home to roost indeed. But what happens next will hurt everyone.

Sun, 03/04/2012 - 22:05 | 2222968 Ungaro
Ungaro's picture

A week or so ago Bill O'Reily had a segment on why oil prices are high when there is ample supply. He kept harping on the law of supply and demand. I finally had enough and sent him an email. "Yes, there is plenty of oil. The problem is that there are lots more US dollars and oil, for the most part, is priced in USD."

Sun, 03/04/2012 - 22:04 | 2222962 Dollar Bill Hiccup
Dollar Bill Hiccup's picture

I want my, I want my, I want my S U V .

Get your money for nothin

And your chicks for free

 

Sun, 03/04/2012 - 21:49 | 2222937 New American Re...
New American Revolution's picture

Hopium, crack, meth, an 8 ball, 20 Jamaican spliv's, 6 cases of beer, 2 jagermeisters, and a months supply of 5 hour energy consumed in 24 hours. 

That's a powerful dream.

Good luck my friend.

Sun, 03/04/2012 - 21:48 | 2222934 eddiebe
eddiebe's picture

How about implementing FDR style work projects to build out ifrastructure for electric cars and massive electricity based transportation systems like they have in Europe and even in central American countries ( albeit they are diesel powered they at least move anyone anywhere in the Americas) The technology esists to go mostly non carbon based for the energy production. Even pebble reactors could be massbprduced to power individual cities. Energy grids could be incorporated along major highways for individual cars and trucks to draw from while charging onboard batteries.

 That would put people to work start a whole new energy / transportation revolution and transition us to at least the same livingstandard in the future that we have become accustomed to. Failing to do something similar we will be in a world of hurt when peak oil really starts to bite.

 We are wasting valuable time piddling around over wether the price of gas is 3 or 4 dollars. That really is not the issue of import.

Mon, 03/05/2012 - 21:01 | 2226345 thewhitelion
thewhitelion's picture

And to make it even better, Obama can appoint a czar to make it run well, and Goldman Sachs can arrange the financing. 

Sun, 03/04/2012 - 21:47 | 2222932 balz
balz's picture

Peak Oil.

Sun, 03/04/2012 - 21:44 | 2222922 Coldfire
Coldfire's picture

Preach it, brother!

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