Letters from the President
March 3, 2012
Did you know that in actuality the demand for oil is at a 37 year low? In fact, that is true, as our cars and factories are vastly more efficient than they were 30 years ago. Therefore, we must ask the question – why are the laws of supply and demand being turned upside down? That is, if demand drops, prices should fall, not rise. So why aren’t they? In fact, there are three main reasons why the price is rising. First off, the blame must go to the Federal Reserve and Ben Bernancke, who have been printing money prodigiously. I actually think Bernancke prints money as his part of the bargain with Obama. Bernancke was in the past supposedly a relative conservative, but he sold his soul to Obama to be re-appointed a few years ago, and has been printing money ever since to pay him back by making the economy (at least short-term) look better than it actually is. Oil is sold on the world market denominated in dollars, and the more of them floating around, the more dollars there are to bid for any commodity. This is the basic definition of inflation.
Second up is the war premium. Oil is bought on a long-term basis and in the “spot” market, and what guides its price is the future expectation of supply. Oil is a fungible commodity, that is, it is the same no matter where it is pumped (there are of course some differences before it is refined), so in fact, apart from domestic oil, in the U.S. we get most of our foreign oil from the Western hemisphere and not the Middle East, but we are affected by that nonetheless because as oil is fungible, it can be diverted, so a cutoff in Middle East supplies will still affect our non-domestic supply. The actual estimate of this on oil prices is roughly $15 a barrel, though that will skyrocket if Iran shuts the Straits of Hormuz, from whence most Middle Eastern oil, including Saudi Arabia’s, flows.
Third, of course, is the supply of our domestic oil. In actuality, our domestic oil production has risen in the past year, though this is almost exclusively due to production on private lands, brought about by the revolutionary technique called “fracking”.