Tuesday, April 29, 2008

Mighty George Keeps Striking Out

Mighty George W. Bush keeps striking out on energy. For someone who was once the owner of a Major League Baseball Team and an oilman and has an MBA, he keeps striking out on the cross between energy, the economy, and fiscal policy.

First, he seems wholly committed to plunging the world -- including the United States -- into a foolish and preventable world food crisis:

"And the truth of the matter is, it's in our national interest that our farmers grow energy, as opposed to us purchasing energy from parts of the world that are unstable or may not like us," Bush said.

We have a finite amount of land that can support corn production. That amount of land is made smaller if we don't realize that corn is an exhaustive crop: it removes nitrogen from the soil at exponential rates, requiring the use of artifical fertilizers and manure to "reinvigorate" the soil for the next season. We learned this long ago with another exhaustive crop: cotton. This ultimately raises the cost of corn production AND does in fact damage the environment.

Because we have a finite amount of land, and because corn is such an important part of our economy, we have to make a choice. Use corn for fuel, or food. Trying to support both only paralyzes our economy.

But Bush's ignorance on this matter isn't limited to farm economics. He doesn't seem to realize that a large part of the increase in the cost of light sweet crude is from his own actions. By not working agressively to bring back King Dollar, Bush is driving the cost per barrel up because oil is traded in dollars. The hastening decline of the dollar is what has driven the cost of a barrel of light sweet crude - the best crude for gas and diesel refining -- from $100 to $120 in under six months. Don't take my word for it... listen to Larry Kudlow, one of the smartest economists on the planet.

The second action is his insistence on not tapping the Strategic Petroleum Reserve. The SPR exists to alleviate supply problems. But, in fact, we do not have a supply problem for crude oil. We have a cost issue. That is because, since last fall, the government has been issuing fill orders for the SPR, and has been filling it with light sweet crude. Right about the same time new regulations went into effect mandating lower sulfur diesel and home heating oil. (Note: #2 fuel oil, used in homes, power plants, and commercial applications, is the same as diesel, but for color additives to distinguish whether the "road tax" has been paid). The value of light sweet crude therefore is higher than sour crude (read: higher sulfure content). Saudi and Iraqi crude is considered sour. North Sea, Russian, and US crude is mostly sweet. West Texas Intermediate -- the old fashioned Permian Basin stuff that made J.R. Ewing famous and made Bush a lot of money -- is in between. Venezuelan crude is typically called "heavy", having more sulfur than even Saudi crude.

If the government were to start pushing SPR stocks into the market -- and then refilling the SPR with sour or heavy crude -- you would see some temporary downward adjustments in the price while the President works with the G7 to stabilize and raise the dollar.

Combine those actions with a suspension of the ethanol mandates, a supsension of the tariff on imported ethanol, and the tariffs on imported sugar, and you will see a decline in food prices across the board, and decline in fuel prices as stresses on the fuel and food supply chain are relieved.

This isn't rocket science, and does not require an MBA or a PhD in economics. All it requires is some frakking common sense.

Crossposted on Gunpowder Chronicle

1 comment:

Anonymous said...

Bush never was an oilman, he was a dry hole man.

Why do you think he needed all those Saudi petro dollars to buy him off...who I mean rescue his personal bank account.

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