Saturday, March 6, 2010

America's Commodity Crisis: The Oil Scam

This article is courtesy of Phil Davis, the options guru who runs a daily chat system trading only options.

Please note that we track live all oil ETFs here.

America’s Commodity Crisis - 2010 Edition

Commodities are a TAX. They are the worst kind of tax because they flatly (not progressively) charge every man woman and child in this country more money for the same food, fuel, shelter and clothing that they had to have last week in order to live. It doesn’t matter if those people are trying to save or trying to tighten their belts or trying to get out of debt - high commodity prices are a shake-down that rips money out of the pockets of the middle class and funnels it to the very, very small class of commodity producers, commodity speculators and the people who finance them and collect the fees.

Over 99% of the people in this country do not own mines or oil wells (and I’m not counting small farmers because they are literally raped by speculators and bankers, often leaving them worse-off than the consumers) or huge plantations and they do not buy futures contracts on margin with cash they borrow at prime plus 0.5% nor do they own tankers filled with 2M barrels of crude that they arbitrage along the crack spread, looking for an opportune moment to deliver their goods (hopefully during a crisis) at a maximum profit.

So 99% of the people in this country don’t even own a commodity ETF - they have no way to profit from high commodity prices and they need to eat, and they need to buy clothing and have shelter and they need fuel to heat or cool their homes and go from place to place. There is a word for people like that, at the bottom end of a transaction they have no control over - VICTIMS!

The American people are the victims of a $2.5Tn commodity scam - 50 times bigger than the Madoff scandal, pretty much one Madoff PER WEEK yet they sit there and take it because those same commodity pushers are major advertisers in the media - so there are no stories about it and the commodity pushers are massive campaign contributors with armies of lobbyists so our Government does nothing about it other than show up to parties and go on junkets. In fact, do you know who the single largest hoarder of oil was in the last decade? It was the US Government as George the Second purchased 240 MILLION barrels of oil AT ANY PRICE, creating a spike in demand that averaged 2.5M barrels per month for all 8 years of his term (over 10% of US consumption) that enriched OPEC and the Saudis on a level not seen since Reagan/Bush/Bush/Quail (1978-1990).

Those are inflation-adjusted prices, of course. Filling and releasing oil from the SPR isn’t the only reason oil goes up and down in price but, WOW - I’d say there’s a pretty strong correlation, wouldn’t you? Both Clinton and Bush I effectively used the SPR to crush speculators and depress oil prices, putting more money back into the pockets of the American people than any tax refund possibly could. We also have our little global incidents that drive up the price of oil from time to time and here’s a chart illustrating that effect since WWII.

When the US consumes 18Mb of oil per day and the President of the US orders and EXTRA 2.5Mb per day to stick in the ground (and pays for it with YOUR money), what would we think would happen to the price of fuel? What if that same President declares a war and sends 200,000 troops and 200,000 support people overseas with tanks and planes and helicopters and jeeps and aircraft carriers and destroyers that use, as a group, over 1Mb of additional oil per day (also at your expense)? What if that same President declared a war on one of the World’s top producers of oil and knocks over 1Mbd off their production numbers? You can see where these little things can add up.

The math is easy. The average driver drives 15,000 miles a year and gets 20 miles per gallon so they use 750 gallons of gas a year. The average family has 2 cars so 1,500 gallons of gas per American family per year. At $30 a barrel, we have $1 gas. At $70 a barrel, we have $3 gas (refining and speculative markups multiply the effect). So we’re looking at the difference between a family spending $1,500 a year or $4,500 a year on gasoline alone - depending on how we manage our oil prices.

But it doesn’t stop there, oil is the basis of a supply chain that flows through most of our industrial society so that 200% increase in your family’s spending on gasoline also increases everything from the price of grains and cattle to the toys that are delivered for Christmas and the plastic they are made out of to the electricity that lights the tree and the gas that heats the home. Oil is the basis for a massive inflationary surge that attacks the consumer over and over and over - hitting them in both their discretionary and non-discretionary spending - there is no escape, only endless suffering as prices climb higher.

Why then, is controlling the price of oil through use of the SPR, development of alternate energy sources and conservation not THE MOST IMPORTANT ISSUE that we have in this country? Giving America’s 200M drivers a $1 per gallon break on gas prices amounts to $150Bn a year in direct savings and another $150Bn a year in other commodity savings. That’s $300Bn a year or 6M $50,000 jobs! That is cash money that is taken out of US consumers pockets every single day with a large portion of it funneled overseas with Billions of those dollars ending up in the very hands of the people who are funding the other side of the wars we are fighting. They are killing us with our own money! How is this allowed to happen?

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