Friday, July 1, 2011
America's Oil Price Inflation Crisis is Yet to Come
NIA is very disturbed by President Obama's decision to sell off oil from the U.S. emergency oil reserve, in an attempt to drive down oil prices. One week ago it was announced that the U.S. and other oil-consuming nations that are a part of the International Energy Agency (IEA) will begin releasing 60 million barrels of oil from their reserves, with 30 million barrels coming from the U.S. government-owned reserve. They hoped that by flooding the market with excess supply, they would cause an artificial forced liquidation of oil futures contract holders who bought using leverage.
The U.S. Strategic Petroleum Reserve is the world's largest government-owned stockpile of emergency crude oil reserves and is maintained by the U.S. Department of Energy (DOE). It holds 727 million barrels of oil reserves at four different sites along the Gulf of Mexico. Considering that the U.S. is releasing 30 million barrels of oil from these reserves, we are reducing the size of our emergency reserve by 4.1%.
After Obama's decision was announced on June 22nd, crude oil prices originally dipped as much as $5.71 per barrel from $95.41 per barrel down to a low of $89.70 per barrel on June 23rd. Oil prices declined slightly more during the next two trading days, reaching a low this past Monday of $89.61 per barrel and closing Monday at $90.61 per barrel. However, oil prices have surged $4.81 during the past three days and are currently $95.42 per barrel. Oil has recovered the entire dip that came after Obama's decision was announced and is now a penny higher than before his announcement. Unlike 2008 when most oil futures contract holders were hedge funds using leverage in an attempt to make short-term profits, today most oil investors are much stronger hands who bought with cash, because the world is now flooded with dollars thanks to Federal Reserve Chairman Ben Bernanke.
It certainly wasn't worth jeopardizing the homeland security of this country by reducing our emergency oil reserve by 4.1%, just to see a $4 reduction in oil prices that lasted for only 3 days. If the White House had any faith whatsoever in Bernanke's assertion that rising oil prices are only transitory, there would be no reason to release 30 million barrels of oil from our emergency reserve. The rising oil prices we have experienced so far is far from an emergency. The emergency will come soon when the world turns its back on the U.S. dollar and we see a rapid decline in its purchasing power. The emergency will be here when the U.S. can no longer import oil from foreigners at any price due to hyperinflation, and we are forced to live with only the oil produced in this country.
At any time that they choose, China has the power to set off in our country the economic equivalent of a nuclear bomb. China can at any time announce that they are no longer going to buy U.S. treasuries, but they are going to take their $2 trillion in U.S. dollar reserves and use them to buy gold. The price of gold would double overnight, with the U.S. dollar immediately losing half of its purchasing power. The yuan would then skyrocket in purchasing power, automatically giving China the world's largest economy with the Chinese GDP soaring past U.S. GDP. There would be a massive rush out of the U.S. dollar with our trading partners unwilling to export any oil to us.
The U.S. currently produces only 5.5 million barrels of oil per day, but consumes about 19.3 million barrels of oil per day, with total input into refineries of 14.7 million barrels of oil per day. This means the U.S. currently needs to import 9.2 million barrels of oil per day. U.S. commercial crude oil stockpiles are currently 359.5 million barrels or enough to last for 24 days without any domestic production. In the event of hyperinflation where the U.S. is cut off from oil imports, if we were forced to live off of our own oil production of 5.5 million barrels of oil per day, our commercial stockpiles would be gone in 39 days.
Without an emergency oil reserve, in the event of a major oil shortage due to hyperinflation, after a period of just 39 days, farmers won't have enough oil to produce food, manufacturing plants won't have enough oil to process and package food, and logistics companies won't have enough oil to get finished food products into our supermarkets. This is why we have an emergency oil reserve, to prevent store shelves from becoming empty in our supermarkets due to a fuel shortage.
It takes 13 days for oil from our emergency reserve to begin entering the market and once it does, the most it can add to the market on a daily basis is 4.4 million barrels of oil. Therefore, in a crisis we must first use only our commercial stockpiles for 13 days, which would cause our commercial reserve to decline down to 239.9 million barrels of oil. Beginning on the 14th day of a crisis, 4.4 million barrels of oil per day can come into the market from our emergency reserve with 4.8 million barrels of oil per day entering the market from our commercial reserve.
After 50 additional days, our commercial reserve will be depleted and all that will be left is 507 million barrels of oil in our emergency reserve. That will give us 115 more days where we can withdraw 4.4 million barrels of oil per day, but the U.S. will be forced to reduce its daily oil consumption by 33% during those 115 days. This is based off of an emergency reserve of 727 million barrels of oil. With Obama this month prematurely releasing 30 million barrels of oil from our emergency reserve, we will actually only have 108 days where the U.S. will be able to consume 2/3 of its normal oil consumption, after 63 days of full oil consumption.
The solution to high oil prices is not more government intervention, but is less government interference in the free market. Instead of trying to manipulate oil prices down using artificial methods that will only last temporarily, the U.S. government should look at the root cause of rising oil prices. Oil is rising due to the U.S. government's deficit spending and the Federal Reserve's willingness to monetize our deficits and debts. If they want to see lower oil prices, the government should start out by eliminating the DOE. The DOE was created in 1977 to make the U.S. less dependent on oil imports. In 1977, we imported 44% of the oil used in U.S. refineries. Today, we import 63% of the oil used in U.S. refineries. Eliminating the DOE would save this country $27 billion annually.
Priced in terms of real money (gold), oil prices haven't been rising at all. The Federal Reserve's QE2, in which it printed $600 billion out of thin air, has created artificial demand for oil. If it wasn't for the Federal Reserve working tirelessly trying to prevent a much needed recession, Americans would be cutting back on oil consumption and oil prices would be declining. If the free market was allowed to operate, falling oil prices would make it easier for Americans to live with the real unemployment rate currently at 22.3%.
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Fed's Massive Stimulus Had Little Impact: Greenspan
The Federal Reserve's massive stimulus program had little impact on the U.S. economy besides weakening the dollar and helping U.S. exports, Federal Reserve Governor Alan Greenspan told CNBC Thursday.
In a blunt critique of his successor, Fed Chairman Ben Bernanke, Greenspan said the $2 trillion in quantative easing over the past two years had done little to loosen credit and boost the economy.
"There is no evidence that huge inflow of money into the system basically worked," Greenspan said in a live interview.
"It obviously had some effect on the exchange rate and the exchange rate was a critical issue in export expansion," he said. "Aside from that, I am ill-aware of anything that really worked. Not only QE2 but QE1."
Greenspan’s comments came as the Fed ended the second installment of its bond-buying program, known as QE2, after spending $600 billion. There were no hints of any more monetary easing—or QE3—to come.
Greenspan said he "would be surprised if there was a QE3" because it would "continue erosion of the dollar."
The former Fed chairman himself has been widely criticized for the low-interest rate policy in the early and mid 2000s that many believe led to the 2008 credit crisis.
Bernanke, who took over for Greenspan in 2006, began implementing the quantitative easing program in 2009 in an attempt to unfreeze credit and prevent a collapse of the US financial system.
CNBC
More:http://www.cnbc.com//id/43598606
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Moody's warns may downgrade U.S. muni debt ratings
Reuters) - Moody's on Wednesday warned it may downgrade some Aaa-rated U.S. states and municipalities if the country loses its top-notch rating or if federal funding falls significantly as part of a plan to reduce the nation's deficit.
Most states and some municipalities rely on federal funding for operational purposes. The most susceptible to federal budget cuts would be those with greater economic volatility and that rely more heavily on capital markets to refinance their debt, Moody's senior analyst Anne Van Praagh told Reuters in an interview.
"To the extent that Treasuries markets are volatile (in the case of a U.S. default and downgrade), then that could pass through in the form of additional interest costs for states or local governments," she said.
Moody's said earlier this month it may cut U.S. ratings in August if the government misses debt payments because of a failure by Congress to raise the nation's debt ceiling.
Negotiations between Republicans and Democrats to raise the debt limit fell apart earlier this week over disagreements on taxes and the size of budget cuts.
Van Praagh said Moody's will analyze the impact of a federal deficit reduction plan on state and local governments to decide about possible downgrades.
"We have 15 Aaa-rated states and we think that, generally, many of them will be resilient. We're looking closely at those which are vulnerable and we'll put out some more specific research in the next few weeks with details," she said.
In its report issued on Wednesday, Moody's also said ratings directly linked to the U.S. government, including those of Fannie Mae, Freddie Mac, the Federal Home Loan Banks and Federal Farm Credit Banks, would move in lock-step with any sovereign rating action.
The ratings on municipal supported transactions, pre-refunded municipal bonds, and structured securities that hold government-linked debt as their primary collateral would also move in lock-step with the sovereign rating, it added.
However, the credit-worthiness of U.S. corporates and financial institutions with Aaa stand-alone credit ratings that lack any direct credit linkage to the sovereign would generally be resilient to a one- or a two-notch downgrade of the U.S. government, Moody's said.
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Unemployment rises in more than half of U.S. metro areas
WASHINGTON — Unemployment rates rose last month in more than half of the nation's largest metro areas, driven higher by weak private-sector hiring and natural disasters.
The unemployment rate increased in 210 metro areas in May, the Labor Department said Wednesday. It fell in 131 cities and remained unchanged in 37. That's a sharp reversal from April, when unemployment rates dropped in more than 90% of metro areas.
Nationwide, the unemployment rate ticked up in May to 9.1% and employers added just 54,000 net jobs. Employers added an average of 220,000 jobs a month the previous three months.
Tornadoes and flooding shut some companies in the South in late April and May. And a parts shortage stemming from the March 11 earthquake in Japan affected U.S. auto production. The metro employment data isn't seasonally adjusted, and as a result can be volatile from month to month.
One of the biggest increases was in Tuscaloosa, Ala., which was struck a deadly tornado that killed 41 people in late April. The unemployment rate there rose from 8.1% in April to 9.3% in May.
Toyota, Ford Nissan and Chrysler were all forced to shut some or all of their North American factories because of the parts shortage. At least 13 metro areas in South Carolina and Louisiana, where many factories are located, saw significant gains in unemployment. Detroit, Ann Arbor and Battle Creek, Mich., also saw big increases.
The sharpest increase in unemployment was in Yuma Ariz. The unemployment rate there rose from 25.3% in April to 27.9% in May. Competition from farmers in neighboring Mexico has left some cotton, wheat and lettuce growers out of work. Agriculture drives about 40% of Yuma's economy.
Many of the areas with the steepest declines are tourist destinations. Hotels and tourist attractions add workers for the summer. Ocean City, N.J., reported the sharpest decline. Unemployment there fell from 13.3% in April to 11.6% in May.
Other steep drops were in three California metro areas: Madera-Chowchilla, Santa Cruz-Watsonville and Salinas. All three are big farming communities that demand more seasonal workers at this time of year.
AP
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