Lunacy – D.C. Style

High grade crude for gulf delivery hit the highest price since the spring of 2008 this morning. This is the raw material for gasoline, so look for another big spike at the pump over the next few months. I think that premium gas will be at $5 by July first in many parts of the country. If the trend towards ever higher crude does not turn around soon we are going to hit a wall before the summer is over.

 

Don’t worry about a thing. Congress is working on a new solution. New legislation is being drafted as we speak that will fix the problem overnight. So what is the magical solution? The USA is going to sue OPEC! (Reuters link)

WASHINGTON, April 5 (Reuters) - A U.S. Senate panel will vote on legislation this week that would allow the Justice Department to sue OPEC members for price fixing as surging gasoline prices once again threaten the economy.

A sponsor of the bipartisan Senate legislation, Herb Kohl of Wisconsin, said the so-called "NOPEC" measure would prevent future gasoline price increases.

So the US is going to sue OPEC using the anti-trust statutes. This will never work. The most likely consequence would be that some OPEC states will just arrange to sell their production to the Chinese.

Does Senator Kohl really believe that this is viable? Does he think that our pal Hug Chavez down in Venezuela is going to give a damn about this? How about our new friends, the rebels in Libya? They don’t care either. Or our best buds in Iran? They are laughing at this. How about our really good friends the Saudis or Iraq? Does anyone believe that a threat of a lawsuit by the DOJ is going faze them one bit?

The USA is still using about 25% of global crude production so what we do actually does make a difference in the global market for oil. But a lawsuit is not going to change the outcome by even a cent.

If Senator Kohl were really serious about getting the price of crude and gas down about 20% all he would have to do is lean on Mr. Bernanke. If the Fed were to end QE and nudge up the federal funds rate to 2% oil would drop by $30. But that is not going to happen. Ben will not let up on the gas and crude is headed to new highs.

I don’t really think that Senator Kohl believes that his lawsuit legislation will accomplish anything. This is just an effort to show the folks back home that he is really-really trying to fix the problem. It’s just a bluff by Mr. Kohn. OPEC knows it already. The US people will find out by the end of the summer.



Old Note:
Way way back around 1970 I connived/snuck my way into a presentation by the then head of OPEC, Sheik Yamani. He spoke to an audience of bankers and other financial types. This was just a few years after the first major oil shock in the country. Things had calmed down a bit and stability had resumed in the oil markets.

Yamani was a very bright guy who spoke very clearly. He first told the audience what it wanted to hear. That OPEC understood that it had the power to crush the Western economies. But that it would be foolhardy for OPEC to do that as it ultimately leads to less petroleum demand and that ends up hurting the exporting countries.

But he was also clear on what this “peace” would cost over time. When he said these words you could have heard a pin drop. I’ve never forgotten them. This was forty years ago. Every word has come true.

OPEC and the industrial world can achieve a lasting stability that creates prosperity in all nations. But there is a price that must be paid and understood by all. From this point on and for the next hundred years, the wealth of the West must flow to the East.