The Shell Game; a la Exxon, BP, QT, Conoco, Mobil …

Posted on February 24, 2011

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So, the stock market has plummeted more than 300 points in three days because of what might happen in Libya, even though the civil and military unrest in the nation’s capital is literally on the opposite side of the country from where the oil fields are, and there is a billion-barrel surplus reserve to ensure absolutely that there is no shortage.

Yet, somehow, oil prices have spiked more than $20 in three days, and gas prices in the U.S. have ballooned by more than 30 cents per gallon in just the past week (and that’s on gas that was already in the ground at your local gas station).

But here’s the kicker, folks:  The United States imports no oil from Libya whatsoever.

Will we never learn?  How many times do we need to see crystal-clear proof that speculators are driving the nation’s economy before we wake up and stop letting fear-mongers control our finances?

It used to be that financial experts foresaw trends and changes in a given industry and their buy/sell actions caused ripple-effect changes in the markets.  Then the speculator profession appeared out of nowhere, and investors started hedging based on what the speculators predicted, and the markets reacted accordingly.

But now, the speculation monster is so far out of its cage, that all someone has to do is vaguely hint that some Rube Goldberg-esque series of events might be possible – regardless of how strongly the facts support or denounce the rumor – and BAM!  The Dow drops 200 points, and American greed kicks into overdrive.

It’s a self-perpetuating prophecy: Speculators guess, prices rise. So speculators guess what the price increase will cause. And prices rise.

We saw it start when the protests in Egypt started. Though Egypt exports no oil itself, the U.S. Energy Department still classifies it as one of the few World Oil Transit Chokepoints. Every day, 3 million barrels of oil and fuel products pass through the canal and the Suez-Mediterranean Pipeline, which also traverses Egypt. That amounts to 2.5 percent of global oil production.  About two-thirds of that energy is traveling north toward Europe. It accounts for 5 to 7 percent of Europe’s oil consumption.  Disrupt these shipments, and European supply — and global prices — would be “affected tremendously,” Dalton Garis, an associate professor at an Abu Dhabi energy-research center, told the Wall Street Journal.

But not one drop of oil in any shipment was disrupted. European supply didn’t change one iota (nor did the United States’ supply).  Not so much as a can of oil was lost. But oil prices rose $11 a barrel that day anyway.

A four-year-old could punch holes in the the math of Garis’ prediction. If the canal only supplies 2.5% of global production, how can it create an increase of *MORE THAN* 2.5%? It’s easy, if your entire industry is based on making exactly that happen.

But it’s not just America getting gouged for what’s proven to be no reason whatsoever.

“Canada imports no oil from Libya, so speculators are fueling an artificial situation that they created, as the per barrel price of oil rises past $110 on the world market,” Liberal Minister of Parliament Dan McTeague said Wednesday. “Gas prices may rise another 2 to 3 cents overnight because of the “overblown” response to the situation in Libya. We are paying extra (for gas) today, because a grumpy dictator made some threats yesterday that he hasn’t acted upon.”

David Detomasi, professor of International Business at Queen’s University, agreed with McTeague’s estimate that the response has been overblown and caused partly by speculation, and partly due to deregulation of the oil industry.

“Although Canada and the United States does not get any oil from Libya, the speculation is affecting the price of gas futures on the world’s stock markets. There is some fear that what is going on in Libya will spill over to the rest of the Middle East,” Detomasi told CTV.ca. “And there are people who are looking to make a profit from that possibility.”

Oil was at under $75 a barrel when Egyptians took to Facebook and, subsequently, the streets of Tahrir Square earlier this month. Then the oppressed citizenry of three other nations followed suit.  Through it all, hundreds were shot, dozens were killed, but not one drop of oil was wasted, destroyed or flow-stopped. But oil is $110 per gallon today.

Why?  If none of the things that would have caused price increases happened, why have prices increased *anyway*?

Three words: Speculator fear-mongering.

The prices you and I see every day are immediately changed by what speculators say *might* happen.  What the hell will the grocery bill and gas pump going to look like if any of the fear-factors ever actually happen? Can you say high-interest soup-mortgage?

It’s painfully simple to prove that the oil and gas industry lies to us on a daily basis.

In 2003, the primary gasoline provider to the Phoenix Valley in Arizona, Kinder-Morgen, announced that they were opening a brand-new second supply line into Phoenix that would immediately increase supply by 40%.  Throughout the fight that Kinder-Morgen put up to get permits to build the pipeline, they argued that decreased supply in contrast to customer demand was what caused Arizona’s gas prices to top $4 a gallon.

If your price is based on the amount of supply, and you increase supply by 40 percent, simple Sesame Street mathematics tells you that price should equitably drop by 40 percent.

Kinder-Morgen got their permits and built that second supply line. And prices decreased by exactly … zero.  Why? The company’s official reason was, “Unforeseen increase in demand.” The Arizona Department of Transportation reports that fueled vehicle population in Arizona has increased by a net of 4.3 percent between 2003 and 2011.

Like I said … painfully simple.

Energy speculators. Agricultural speculators. Technology speculators. Investment speculators. We even have speculators who guess at what other speculators will guess! And while they deal in nothing but potential intangibles, they all have direct, immediate, tangible impact on the active American dollar.

We, as a nation, are putting far too much stock in speculators, while the working class savings account pays the price. And we can’t get a zero-interest federal bailout when we go under, because that would be “Communist redistribution of wealth.”

But, you know me – the eternal optimist!  Look on the bright side: With oil so expensive again, just think of how much the U.S. government is going to save by cutting all those home oil heating subsidies for the elderly next winter.

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Posted in: Errata