Does the Gov’t have a role in the Cost of Oil?

Normally I do not write on such topics, but with all of the news lately about how the cost of a barrel of oil is largely inflated by 1/3 or more, I thought this might be a good time to express my belief and thoughts on this matter.

For the past few days now, I have been taking my bike to work. I only live about 2.5 miles away so it is a good 15 minute ride. It gives me my daily exercise as well since this comes out to 30 minutes of exercise five times a week. So, this keeps my car in the garage and from driving to work and back which wears down on vehicles worse than driving them out on the open road. I have a Honda Civic that gets about 35 – 36 miles per gallon with my driving style, so even if I were to drive to work each day, I may have one fill up a month.

Now, lets get down to the beef of the matter. I was watching a PBS news episode last night and they were interviewing different people from research firms on their show. Many of them all indicated that the cost of oil – as you and I know – jumped up dramatically from around $70 a barrel to $135 per barrel at the current rate in six months. That means the cost of oil has jumped almost 100% in that amount of time.

Saudia Arabia has agreed to increase production, but they failed to indicate by how much they would increase such production because they do not believe it is a production problem – but a problem with the American markets. I tend to agree.

The U.S. met with Chinese leaders last week to try to get the Chinese government to quit subsidizing oil and energy and allow the prices to rise in order to be more in line with what the current market is asking. While they still are not at market value, they did agree to increase the cost of energy by 18%. Will that help the cost of oil over here by reducing demand in China? I think not.

Unfortunately, the facts are that we import more than half of our oil from other nations. We could produce our own by offshore drilling and setting up shop in Alaska, but is this really a solution to a problem that we all know is eventually going to cause great problems in the future? Because oil costs have gone up, this is definitely pushing inflation up in this country – oil prices are double what they used to be, food costs are surging higher, and regular day-to-day purchases are much higher – all because the producers must pay for transportation to our storefronts – which have doubled. Therefore, the costs then are passed along to us.

According to the PBS show that I watched, the individuals they interviewed all blamed the high oil prices on a group of people – speculators. What are speculators? Speculators are people who trade “futures markets” on what they believe commodities (such as corn and oil) will sell for – say six months from what is happening currently. If you look at the news articles about oil prices going up, they always say things such as “sweet crude oil for July delivery”. This is a future market for the month of July. When these speculators trade in these markets, they are actually – in a sense – buying oil by the barrel. They then own the barrel of oil. When the price goes up, they can either sell their oil or buy more – same when the price goes down. The reporters say that these speculators have driven the cost of oil up to $135 and that this is a huge bubble. These reporters estimated that if the speculators were taken out of the picture, oil may be around $75 – $80 per barrel from where it is now. They called it the “.COM bubble for oil” and said that it will indeed burst at some point and come down.

The government is attempting to pass legislation now to get to the bottom of all these problems and begin making laws against speculators for these exact instances – their ability to artificially inflate the cost of commodities that the consumer then must pay an additional price for such items.

OK, so that is what we have been told. While I do not have any kind of proof to back up the theory I will present, it sure does make sense considering the government gave each of us a handout of $600 this past May for the economic stimulus plan – and the continuing wars that are going on and the potential circumstances surrounding Iran right now.

America consumes approximately 22 million barrels of oil per day (http://www.eia.doe.gov/pub/oil_gas/petroleum/analysis_publications/oil_market_basics/dem_image_us_cons_sector.htm). If 1/3 of the cost of oil is inflated, what if the government is actually the group that is skimming the top of the oil cost? All of these speculators are “hedge funds” and are run by companies such as Morgan Stanley, Lehman Brothers, and others. Does the government do any business with these companies? Does the government themselves invest in these hedge funds against oil?

Let’s just assume for a moment that the government is the only key player in these hedge funds and making the cost of oil more based on speculation. Heck, they sure do hold a lot of meetings about oil, the lawmakers are always talking about ways to reduce our oil consumption and bring in other forms of energy. President Bush has been quoted in a speech saying very bluntly “America is addicted to oil”. He wants us to look for alternative energy sources. President hopeful McCain also has created an award by which if someone comes up with a battery for hybrid vehicles that will work better, he will pay them $300 million. So, at 22 million barrels of oil per day usage and $60 per barrel that is inflated ($135 at current price minus the $75 per barrel that is estimated the real cost is), the government would be making $1.32 billion a DAY in artificially inflating the cost of oil. Now, I know that even if the government has a role in these speculations and hedge funds, they do not account for 100% of all of it. But – think about it – $1.32 billion a day in nothing but pure profit (import it for $75, resell to oil refineries for $135)!

Is this the government’s way of getting rid of its huge debt that supposedly each of us owe for our government’s overspending? According to a website (http://www.brillig.com/debt_clock/), the per capita debt of the U.S. is $30,816.41 (as of June 25, 2008). Now – I want you to notice something else on the page. The page says “The National Debt has continued to increase an average of $1.36 billion per day since September 28, 2007!” $1.36 billion per day? Wow! Look how close that is to the $1.32 billion in profit made on each day in the oil markets. Interesting eh?

I guess when it comes down to it, the governments ends up spending the bulk of that money overseas anyways – so why not just increase the cost of oil so that us Americans are directly paying for the wars we are fighting in near real-time? We spend more than $2.5 billion a day in Iraq (http://usliberals.about.com/od/homelandsecurit1/a/IraqNumbers.htm). That doesn’t include the cost of our soldiers in Afghanistan either.

So that is my speculative theory for what is going on the U.S. currently. These oil markets are being bubbled up in price by speculators – but who indeed are these speculators? Some average American citizens and corporations are involved in such speculation – but is it possible that our own government is driving the cost of oil up to finance our economic stimulus checks or finance the current wars that we are fighting? I guess maybe it is the government’s way of taxing those who pollute the environment more than others – as those who drive more often and require more gasoline for their daily tasks are required to purchase $4+ per gallon gasoline. Because of the way I drive and the lack of driving for that matter, I am taxed at a very low rate since I do not have to purchase gasoline as often as those that drive an hour to work each day in their 17 mpg vehicles. However, I also am indirectly paying for the public transportation buses in our community that use gasoline although I don’t use this service.

Normally I do not write on such topics, but with all of the news lately about how the cost of a barrel of oil is largely inflated by 1/3 or more, I thought this might be a good time to express my belief and thoughts on this matter.

For the past few days now, I have been taking my bike to work. I only live about 2.5 miles away so it is a good 15 minute ride. It gives me my daily exercise as well since this comes out to 30 minutes of exercise five times a week. So, this keeps my car in the garage and from driving to work and back which wears down on vehicles worse than driving them out on the open road. I have a Honda Civic that gets about 35 – 36 miles per gallon with my driving style, so even if I were to drive to work each day, I may have one fill up a month.

Now, lets get down to the beef of the matter. I was watching a PBS news episode last night and they were interviewing different people from research firms on their show. Many of them all indicated that the cost of oil – as you and I know – jumped up dramatically from around $70 a barrel to $135 per barrel at the current rate in six months. That means the cost of oil has jumped almost 100% in that amount of time.

Saudia Arabia has agreed to increase production, but they failed to indicate by how much they would increase such production because they do not believe it is a production problem – but a problem with the American markets. I tend to agree.

The U.S. met with Chinese leaders last week to try to get the Chinese government to quit subsidizing oil and energy and allow the prices to rise in order to be more in line with what the current market is asking. While they still are not at market value, they did agree to increase the cost of energy by 18%. Will that help the cost of oil over here by reducing demand in China? I think not.

Unfortunately, the facts are that we import more than half of our oil from other nations. We could produce our own by offshore drilling and setting up shop in Alaska, but is this really a solution to a problem that we all know is eventually going to cause great problems in the future? Because oil costs have gone up, this is definitely pushing inflation up in this country – oil prices are double what they used to be, food costs are surging higher, and regular day-to-day purchases are much higher – all because the producers must pay for transportation to our storefronts – which have doubled. Therefore, the costs then are passed along to us.

According to the PBS show that I watched, the individuals they interviewed all blamed the high oil prices on a group of people – speculators. What are speculators? Speculators are people who trade “futures markets” on what they believe commodities (such as corn and oil) will sell for – say six months from what is happening currently. If you look at the news articles about oil prices going up, they always say things such as “sweet crude oil for July delivery”. This is a future market for the month of July. When these speculators trade in these markets, they are actually – in a sense – buying oil by the barrel. They then own the barrel of oil. When the price goes up, they can either sell their oil or buy more – same when the price goes down. The reporters say that these speculators have driven the cost of oil up to $135 and that this is a huge bubble. These reporters estimated that if the speculators were taken out of the picture, oil may be around $75 – $80 per barrel from where it is now. They called it the “.COM bubble for oil” and said that it will indeed burst at some point and come down.

The government is attempting to pass legislation now to get to the bottom of all these problems and begin making laws against speculators for these exact instances – their ability to artificially inflate the cost of commodities that the consumer then must pay an additional price for such items.

OK, so that is what we have been told. While I do not have any kind of proof to back up the theory I will present, it sure does make sense considering the government gave each of us a handout of $600 this past May for the economic stimulus plan – and the continuing wars that are going on and the potential circumstances surrounding Iran right now.

America consumes approximately 22 million barrels of oil per day (http://www.eia.doe.gov/pub/oil_gas/petroleum/analysis_publications/oil_market_basics/dem_image_us_cons_sector.htm). If 1/3 of the cost of oil is inflated, what if the government is actually the group that is skimming the top of the oil cost? All of these speculators are “hedge funds” and are run by companies such as Morgan Stanley, Lehman Brothers, and others. Does the government do any business with these companies? Does the government themselves invest in these hedge funds against oil?

Let’s just assume for a moment that the government is the only key player in these hedge funds and making the cost of oil more based on speculation. Heck, they sure do hold a lot of meetings about oil, the lawmakers are always talking about ways to reduce our oil consumption and bring in other forms of energy. President Bush has been quoted in a speech saying very bluntly “America is addicted to oil”. He wants us to look for alternative energy sources. President hopeful McCain also has created an award by which if someone comes up with a battery for hybrid vehicles that will work better, he will pay them $300 million. So, at 22 million barrels of oil per day usage and $60 per barrel that is inflated ($135 at current price minus the $75 per barrel that is estimated the real cost is), the government would be making $1.32 billion a DAY in artificially inflating the cost of oil. Now, I know that even if the government has a role in these speculations and hedge funds, they do not account for 100% of all of it. But – think about it – $1.32 billion a day in nothing but pure profit (import it for $75, resell to oil refineries for $135)!

Is this the government’s way of getting rid of its huge debt that supposedly each of us owe for our government’s overspending? According to a website (http://www.brillig.com/debt_clock/), the per capita debt of the U.S. is $30,816.41 (as of June 25, 2008). Now – I want you to notice something else on the page. The page says “The National Debt has continued to increase an average of $1.36 billion per day since September 28, 2007!” $1.36 billion per day? Wow! Look how close that is to the $1.32 billion in profit made on each day in the oil markets. Interesting eh?

I guess when it comes down to it, the governments ends up spending the bulk of that money overseas anyways – so why not just increase the cost of oil so that us Americans are directly paying for the wars we are fighting in near real-time? We spend more than $2.5 billion a day in Iraq (http://usliberals.about.com/od/homelandsecurit1/a/IraqNumbers.htm). That doesn’t include the cost of our soldiers in Afghanistan either.

So that is my speculative theory for what is going on the U.S. currently. These oil markets are being bubbled up in price by speculators – but who indeed are these speculators? Some average American citizens and corporations are involved in such speculation – but is it possible that our own government is driving the cost of oil up to finance our economic stimulus checks or finance the current wars that we are fighting? I guess maybe it is the government’s way of taxing those who pollute the environment more than others – as those who drive more often and require more gasoline for their daily tasks are required to purchase $4+ per gallon gasoline. Because of the way I drive and the lack of driving for that matter, I am taxed at a very low rate since I do not have to purchase gasoline as often as those that drive an hour to work each day in their 17 mpg vehicles. However, I also am indirectly paying for the public transportation buses in our community that use gasoline although I don’t use this service.

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