Gaseous Discharges & the Charge for Gas

As usual, Aristotle was way ahead of the curve. He recounts a story about Thales, regarded in legend as the first philosopher. People made fun of Thales because he was poor. Just to prove a point, Thales used his advanced science of nature to predict that there would be a bumper olive crop the next year.

The Greeks loved olives. They mostly loved to press them into olive oil, which was used not only for cooking but for cleaning and oiling the skin. Thales borrowed a bit of money from his friends and patrons (philosophers depend heavily on patrons) and put down a deposit on all the olive presses in the off season. When the bumper crop came in, Thales made a fortune with his monopoly on the presses. So philosophers could make money if they wanted to. They are just interested in other things.

Aristotle guessed rightly that Thales' trick had nothing to do with natural science. He just bought low and sold high. There is a nice and proper term for this: investment. That means spending resources on something that isn't useful right now but will be useful in the future. There is another term for it: speculation. That is what you call it when you have a bunch of olives on your hands and someone figured out before you did that you'd need a press.

Just right now it isn't olive oil but gasoline that is climbing in price. President Obama, with the nation's best economic minds at his disposal, has announced an economically illiterate policy. From CNN:

Prodded by growing public frustration over sharply rising gasoline prices, the Justice Department on Thursday announced the formation of a team -- the "Oil and Gas Price Fraud Working Group -- tasked with the goal of ensuring consumers are not victims of price gouging.

Gas prices exceeding $4 per gallon or higher are "tough" for most Americans, President Barack Obama told an audience in Reno, Nevada. "We are going to make sure that no one is taking advantage of American consumers for their own short-term gain."

One can understand the President's frustration. Gas prices and his poll ratings may be inversely proportional. Unfortunately, the market for energy is not something his Justice Department can fix.

Investors in energy markets try to do what Thales did: buy low and sell high. You buy something if you think that market forces will raise its value in the future. Can you artificially raise the price of something by your own speculation? Yes. But that would mean spending more for it now than it will be worth when you decide to sell it. It doesn't work as an investment policy. Or to be more precise, it works only if you can monopolize and horde something. No one can stash away enough oil or gas to make a difference later.

The President's Oil and Gas Price Fraud Working Group is a fraudulent working group. It has no rational purpose other than to shift the blame for high gas prices away from the President toward some shifty, pointy nosed "speculators". It would be easy to be contemptuous of the President for this, as is Powerline.

In fairness, one has to point out that President's routinely do this. George W. Bush did it. Bill Clinton did it. Barack Obama is just doing what Presidents do when oil prices climb and the electorate gets testy.

Of course, it is worthy of mention that Obama was in favor of raising energy prices only a little while ago. From Politifact:

"Under my plan of a cap-and-trade system, electricity rates would necessarily skyrocket," Obama told the [San Francisco] Chronicle . "Coal-powered plants, you know, natural gas, you name it, whatever the plants were, whatever the industry was, they would have to retrofit their operations. That will cost money. They will pass that money on to consumers."

You name it. The prices of energy will necessarily skyrocket. That is not would will happen if the President's cap and trade plan fails. That was his plan. Only government can artificially drive up energy prices. It is a little disingenuous for him to blame speculators when he himself is in favor of doing precisely that.

Comments

[Stan Gibilisco]

" 'Under my plan of a cap-and-trade system, electricity rates would necessarily skyrocket,' Obama told the [San Francisco] Chronicle."

I saw the video clip. One can hardly accuse Barack Obama of dishonesty on that occasion.

Black Hills Power has raised energy rates by about 20 percent (effective last fall, if my memory serves), and I notice it every month now. Of course, I can't miss the gas price increase either.

However, in all fairness, I can't see how either of these particular rate increases has anything to do with President Obama's policies. The BHP rate increase was done specifically to pay for a coal-fired power plant. I suspect that the gas price hikes have to do with speculation and quantitative easing.

We don't have "cap and trade" yet, and I doubt we'll ever have it unless Barack Obama wins in 2012 and both houses of Congress go back decidedly to the Democrats.

Future energy price hikes will likely go along with general inflation.

As an aside, I have a Certificate of Deposit that currently pays 1.3 percent. It is about to renew at 0.8 percent. With real inflation estimated by some pundits at around 10 percent right now, something's radically out of whack here. At least in the Carter years (yeah, that dates me), interest rates more or less kept pace with inflation, didn't they?

Oh well, it's a great time to invest in Singapore real estate if you've got the dough. One can only guess when emigration from the United States will actually begin on a significant scale.

[larry kurtz]

Aaww, Ken; you poor old sot. Your life must be miserable. If South Dakotans would just spring for collective liposuction the state could power their rigs from the fat so they could drive down to Loaf 'n Jug for more Cheetos.

[Michael (Constant Conservative)]

I am am reminded of the difference between speculation and gambling. Speculation occurs when somebody buys a piece of future risk. Gambling occurs when someone's participation creates the risk (where previously there was none). Oil futures are speculation. Blackjack is gambling.

Speculation serves a useful function within an economic system. Those who speculate are providing a type of high-risk insurance. To blame those who buy part of a pool of risk for the creation of the pool is misguided, at best. Yes, speculators sometimes make substantial gains from buying and selling risk. As such, they receive so-called windfall profits--making them members of the greedy rich. Speculators also take massive losses when they read the risk wrong. Very few people are mentally prepared to be speculators.

Unfortunately, it seems to be the President who is misreading the risk of the current situation with regard to the cost and price of petrochemicals. This working group will do nothing to address the underlying economic realities.

[George Mason]

Obama must have been talking to Daschle. Investigating "high gasoline prices" was a perennial you could count on with Daschle, especially in election years. It was just as fraudulent. As with the other perennial, congress calling executives from the oil companies to testify, wrong doing is never discovered. But of course that is not the purpose. This is to befog the real issues and cover up their incompetence and total inability to understand.
KB you have now been accused of shallowness by Donald and of being a sot by Larry. We are all worried about you.

[Anne]

Given the history with Enron and the mass criminality that created the Great Recession, I am sure that the suggestion that there is hanky panky among speculators comes only from ignorance in how the markets have actually worked.

[duggersd]

If you would like to burn speculators, the best way would be to open more areas to drilling. More permits to the drillers would have speculators selling their "futures". I seem to recall this happened a few years ago. Or you can investigate people trying to make a profit.

[larry kurtz]

Whichever one of you bozos not making four times what you were making when gas was a buck is a poor excuse for a capitalist. Get out there, produce, and stfu. It ain't over; states should raises fuel taxes now.

[Ken Blanchard]

Stan: I am not accusing the President of dishonesty at all. He was breathtakingly honest. I am pointing out a massive inconsistency.

Anne: yes, if you understand the difference between a ponzi scheme and an investment bubble. Do you?

[Michael (Constant Conservative)]

Don't forget the dollar. A weakening dollar is definitely contributing to the price of crude. Of course, we could do something about that, but it would run afoul of current policies. http://clarionadvisory.com/?p=13487

[Anne]

I know the difference between a Ponzi scheme and ten other forms of securities fraud involved in what you describe as investment bubbles. Enron was not a Ponzi scheme. It involved most of the other types of fraud practiced by speculators to manipulate margins. In our current rise in energy prices, a key symptom of manipulation is that the profit margins do not stay proportionate to market fluctuations, but rise exponentially far beyond the drive of market demand.

[Jimi]

Gallon of Gasoline Breakdown Revisited:

March 2011:
Retail ======= $3.56/gallon
Refining====== 13.1% = $0.47
Distribution = 7.2% == $0.26
Taxes ======== 11.3% = $0.41
Crude Oil ==== 68.3% = $2.42

2000-2011 Average (10yr average)
Retail ======= $2.19/gallon
Refining ===== 13.9%
Distribution = 11.3%
Taxes========= 21.2%
Crude Oil===== 53.52%

If you eliminate the year 2008, those numbers drop extremely with the exception of Taxes and Refinement