The US doesn’t need to protect Mideast oil

A few weeks ago the President tweeted a threat to Saudi Arabia about its oil production:

The OPEC Monopoly must remember that gas prices are up & they are doing little to help. If anything, they are driving prices higher as the United States defends many of their members for very little $’s. This must be a two way street. REDUCE PRICING NOW!

OPEC is not a monopoly. It’s a cartel, but that is nitpicking. The idea is to anger Americans and the word monopoly does that more efficiently than does cartel. The President is worried about the US economy, but in addition he knows that higher oil prices will increase revenues to Iran’s wealthy politicians, whom Trump’s sanctions don’t affect. Economic sanctions only hurt Iran’s poorest people who have no influence over their government.

The US spends almost 4% of its GDP on the military. That includes billions the US spends to protect the sea lanes around the world to make a clear path for oil transportation. But we get only about 13% of our total oil from Persian Gulf states. Is that a good tradeoff, or as economists say, a good cost/benefit analysis?

Oil can sink lower than we think

Everyone is wondering how low the price of oil can go. It’s well below the profitable level in the US, but the pumps keep pumping. In this earlier post I showed that oil companies will continue to pump at a loss as long as the revenue covers variable costs because the costs of shutting down an oil well can be very high.

But how long will they continue to operate with prices around variable costs? One analyst says they will do so until the cash runs out:

Housing bubble reincarnated as oil

We took my six-month old grandson to the park this weekend and put him into a baby swing for the first time. He couldn't decide if it was fun or not and took turns crying for a while then laughing for a while. I think of that when I read about the oil bubble.

The Fed has reincarnated the real estate bubble of the early 2000s in the current tsunami of oil. To see how, we need summon the help of the Austrian Business-Cycle Theory (ABCT). The ABCT says that Fed induced interest rates below  the rate that the market would naturally set causes excess borrowing and investment in capital goods industries, not a general over investment, but bad investments in particular industries. The market reveals those excess investments through falling prices that cut into profits, reduce employment and spark a recession in the economy.

Crude shutdown price - lower than you think

When the Saudis allowed the price of their crude oil to fall, it was reported that the Saudis expected the price to fall no lower than $60 per barrel. The Saudis assumed that the average cost of production in the US shale oil fields was somewhere around $70 and that producers there would not operate for long at a loss. Insiders have said that the Saudis want to reduce competition from high cost US producers and retain their share of the US market, which came to 13% of imports in 2013, the latest figures from the US Energy Information Agency.

Crude Economics

Central bankers in countries that have fallen into recession or are on the precipice have suffered seizures over the fall in oil prices. Most are mainstream economists or groupies who think that falling oil prices will deepen the plunge in prices, which they consider the ultimate evil, even while most consumers are cheering them.

Of course, mainstream economists will fall back on the old apologetic that says what is good for individuals can be bad for the nation as a whole. They claim it is a paradox and those types who love Eastern mystic nonsense like “the sound of one hand clapping” or “global warming will cause another ice age” love such inscrutable sayings.

The truth is that it’s not a paradox; it’s a contradiction. Mainstream macro contradicts a large part of the principles of microeconomics. And since micro has the firmer foundation that means a lot of macro is pure nonsense. Now mainstream macroeconomists aren’t dummies, so why do they love inflation when the rest of the sane world hates it? It’s because they know what inflation does: it transfers wealth from savers to borrowers (and they hate savers) and from workers to employers.