Yay! $100 checks all around!

The congressional proposal to mitigate American citizens' high cost of gas by passing out $100 checks to all taxpayers is the clearest, most explicit example of Bernanke's "helicopter money" policy yet. How much cash is this anyway? On the web I see that in 2003, there were almost 140 million US federal tax returns filed. Lets round that up to 150 million for 2005. If every taxpayer gets $100, that is $15 billion. So, this is not a huge factor compared to the entire US economy. It could have a significant effect on the K-mart set. But it would have no effect at all on the high income end of the economy. Maybe the best thing you can say about this policy is that it reduces income disparity instead of exacerbating it.

So why not issue $100 checks monthly? How about $1000 checks? What difference would it make anyway? The Fed can issue as many bucks as it pleases, at virtually no cost. Unfortunately, the more checks they issue, beyond the token $100, the faster prices will inflate. Capital flight, from dollars to gold, will accelerate. The Fed generally prefers to distribute dollars in the form of debt, rather than passing out party favors. Debt is a the rationalization for money creation.

No one seems to notice that there is more to energy-cost inflation than oil company profits and geopolitical issues. There is also the issue of US government's, and governments' worldwide, monetary inflation. If the US inflates the US dollar supply by 8% in one year (they did this in 2005), that alone will drive up the price of oil by 8%. Oil is priced in US dollars! As the dolllar goes down, oil goes up. On top of that we have a geopolitical oil shortage.

Since a month ago, when the Fed stopped publishing the M3 money supply numbers we don't know how much the Fed is inflating. The $15 billion they propose to pass out to mitigate gas prices won't, by itself, inflate oil much. Rather, oil price inflation (property inflation, insurance premium inflation, gold price inflation, you-name-it inflation) is caused by governments around the globe frantically pumping cash into the banking system in a desperate effort to keep the international trade system flowing. This money spreads everywhere, via the easy-credit pipeline. All those credit card offers we get in the mail? The money they are offering to lend us comes from the Fed. They badly want us to go out and spend.

Its easy to inflate the money supply. Much harder to inflate the oil supply.

Shiny new oil refinery in Yuma? Nope.

Thanks to Cyberedoubt for this link on an american oil refinery that won't be built for the lack of a guaranteed supply of crude oil. After Katrina I was blogging that the Gulf of Mexico refining complex would not be rebuilt. And this is why. Of course the residents of Yuma, AZ, might be glad that the refinery that supplies American gasoline will probably be in Mexico instead of their own back yard.
But if this business issue becomes a trend, it represents another huge loss for America. Refining is an essential industrial manufacturing process. If we cede that industry to other countries we are dependent on them to supply our gasoline. They get the refining margins, not us. They get the fat manufacturing paychecks. And why shouldn't they? They have the oil. They should get the value added profit of selling consumer products, instead of crude oil.
And for America? Since we can no longer make cars profiably, nor gasoline, maybe we should consider the idea that our way of life, which consists of driving the SUV to the mall, isn't working out so well.

I have been told that I express an illogical glee in my notes on peak oil. No doubt this sounds very disturbing.

I can't help it! The globe has reached the stage of tragi-comedy. Religious buffoons are threatening each other with nuclear bombs. They brazenly censor science. They print money and believe themselves rich. We are returning to the dark ages, the inquisition, and the crusades. I conclude that the human race learns nothing in the end. Mighty civilizations are fated to repeat the same sad follies that have brought them to ruin, again and again, since the age of Sumer.

A Short Rant This Evening

There will be no shortage of blame at least. We will hear lots of “there'd be plenty of oil if it weren't for those damn enviro-freaks preventing us from drilling” or “we'd have all the oil we need if the hateful Iranians would just let us come in and run things”.

Meanwhile, the real problem, inexorably falling EROEI, is so subtle and gradual that people don't notice it. A constant series of political crises captures our attention. These crises will make it very hard to make sensible long term choices.

Iran is a case in point. Iran and the USA are intent on facing off in confrontation. They seem to have lost site of the fact that war would destroy lots of critical energy infrastructure. It might be very hard to bring Iranian oil production back after the massive bombing campaign they are talking about. They can't even get Iraq to produce oil. The Iraqi oil facilities were the only thing they cared about protecting all along, but it didn't even work! And now they want to do Iran also???? WTF??!!

Daniel Gross Fearlessly Faces Down The Gold Bugs

I have to admire Daniel Gross, Slate's retrograde, believes-the-CPI-is-accurate, all-is-prosperous, economist. He has come out with a column describing how demand for gold will fall this year, and the price for gold will tumble from its current high of $600 per ounce. It takes chutzpah to be so contrarian. The big fund money is now moving strongly into commodities, gold included. Investment advisors Keith Rabin and Scott McDonald describe the current mood in an editorial for 321 Energy:

The major financial institutions have finally begun to shift their orientation from one that disparaged the resource market as one inhabited by quirky “gold bugs”, survivalists, old-timers and those not wise enough to recognize the unchallenged appeal of technology and other sectors investors came to know and love in the 1990s. Today, these institutions appear to be slowly realizing the rise of commodities, metals and energy is not likely to be a short-term phenomenon, but rather one that will endure so long as global growth and demographic trends continue at anywhere close to present levels. We have seen this change reflected in numerous conversations with fund managers, bankers and other financial professionals in recent months.

So why does Gross think gold will fall? He says that the largest demand for gold comes from Asian jewelry buying. Chinese and Indians are heavy buyers of 22 carat gold jewelry, not just as adornment, but also as a store of wealth. Gross asserts that Asians, being "poorer", can't afford to buy gold at today's inflated prices. They will slack off on buying the stuff. Gross also maintains that they will sell the gold they own, which will enter the "recycled" gold market on the supply side. This increased supply, and reduced demand, will start gold on a downward path.

A gold bug myself, I find this logic baffling. Asians like to save large portions of their income. They see gold as a store of wealth and an investment. Won't a rising gold price encourage them to keep buying it? A rising housing market encourages more people to buy houses. A rising stock market gets more people buying stocks. I think the Asian retail gold market will increase volume, not shrink. And if there is a worldwide recession? After some initial liquidation, I think gold buying will resume. The Japanese have only increased their astonishing saving rate (approx. 25%) right through their deflationary recession.

Another thing that bothers me about Gross' column is the quick association of "Asian" and "poor". I'm not being politically correct here, I just think it is wildly off base. There are a lot of Asians who are getting fabulously rich these days. The Asian standard of living is going up, as Americans' is trending down. Per capita, we may still have more money than they do, but we have huge debts. They have savings — in gold. If anyone will be forced to liquidate assets this year, it will likely be Americans who can't pay their mortgages, not Asians who can't afford $600 gold.

Saudis suddenly see the benefits of peak oil

My friend Mary sent me this link: Demand May Outpace Saudi Oil Capacity. Mary writes:

"this is one of the more chilling things I've read in a while. Why? Because the Saudis have always been publically in bold denial about peak oil, and now all of a sudden they're crying uncle. It really brought it home to me in a stark way. I have been reading about peak oil for a long time but it has always seemed kind of abstract to me, almost theoretical. Now it seems real. The quotes that some of these Saudis make are astonishing. A real eye opener."

Then I saw this, a true conspiracy theory by Huffington contributor Raymond Learsey: Oil Prices Being Pushed Ever Higher By Manipulating Oil Futures Trading. Learsey's thesis is that Saudi Arabian speculation is behind the recent rise in oil, not any fundemental supply and demand issue. It does fit rather nicely with the shift in official Saudi statements. However conspiratorial it sounds, I think it is neither unlikely nor incompatible with peak oil (although Learsey presents no evidence for his theory). Peak oil, or just the perception of peak oil, creates the market conditions in which manipulation is possible.

All commodity producers hope and dream of controlling the price of their commodity, preferably in a smooth uptrend. But they can only do that in sellers' markets. Powerful commodity consumers hope to control the price downward. Sometimes the opposing forces balance out, but if they don't, then one side can be said to control (manipulate) the market. Industrial nations, led by the USA, successfully drove the prices for practically all commodities down for decades in the 1980s and 1990s. It was in their interest to do so and they did. Central banks wanted gold to go down. They were able to do that. I see this as normal.

But now it is a sellers' market for oil and most other commodities. I would assume that the Saudis are manipulating oil! And so are the Norwegians, the Venezuelans, the Texans, and anyone else who wants to pile on for a quick buck.

It is important to recognize that pushing oil up is also a backhanded way to push the dollar down. Is oil worth more? Or is the dollar worth less? Same difference!

Disastrous Fall In Energy Prices?

In the current race to break up the globalized economy, between peak oil and peak capital, the money sure looks like it will run out first. There is more to this interaction that we hear about.

The housing bubble is leading this process and seems to be popping right now. I think the consequences, for this year, will be far more severe than anything peak oil is likely to deal out. I don't see how we can have a soft landing. America is already in a recession, but for the faked GDP numbers, and we are running only on freshly printed cash from the Fed. So, after the inevitable market crash, sparked by a bankruptcies in GM, Ford, Fannie Mae, and many others, our economy will come to a near complete halt. This will surely create market crashes and recessions in China and many other countries. It is a huge world of dominoes out there, all set to knock each other down. The massive and impenetrable business of derivatives, originally created to share and minimize risk, has been perverted for the sole purpose of maximizing profits. If any of the huge derivative based hedge funds fall down that will make the financial depression far worse.

The real estate and inflated currency boom is not only in the USA. Australia, Britain, and much of Europe and Asia are enjoying similar monetary free-for-alls.

The short term effect will be falling energy prices! Oil back down to $40 or $50. The reason is that we are at peak and therefore by definition pumping more oil than ever. There is a huge vested infrastructure in oil, gas etc. They have to try to keep pumping to pay their rising capital costs.

Demand may not fall so much in the USA because it is built in structurally. But in Asia they have not been heavy consumers of energy very long. They can conserve by getting the bicycles out, far easier than we can. Given the Asian propensity to save money in a crisis, Asian energy demand will plummet.

The real problem with this scenario is that it will make the capital-intensive process of developing an alternative energy infrastructure impossible to finance due to unprofitability. As almost everything will be impossible to finance anyway.

Then, as the dollar and other currencies continue to bounce down the road to utter worthlessness, commodities (such as oil) will rise in price. But only because the fiat currency is worth so much less, and because it will be so hard to raise the capital to produce the commodities, not because there is any more demand for them. I am just saying I think we'll run out of money before we run out of oil.