Tuesday, August 12, 2008

Re: Pelosi For Drilling -- Who can stand against it?

The family that has purchased a variable life insurance policy for the purpose of protecting the family has put money into the account during good times and bad. It was a sacrifice to make the payment but the protection was valued. The value of the policy might have soared but the needs of the family also increased. Taking the money out to spend on the assumption that it could be put back later would not be the right decision.

The purpose of the SPR is protection against a shut off of oil. Iran is training people to kill us if they can. Iran is sending money and equipment to terrorist organizations that are blowing people up day after day. Iran has the stated desire to blow Israel off the map. Iran is actively enriching uranium and Iran is actively acquiring missiles with the range to send a nuclear bomb to Israel. The UN Security Council, by unanimous vote, has declared that the threat from Iran is real. The UN Security Council, by unanimous vote and one abstention by a non permanent member, has authorized sanctions on Iran. Getting China, Russia, France, UK and USA to agree on anything is a rare event. Are you suggesting that the treat of Iran is not real?

Today, a massive armada containing the most sophisticated equipment in the history of the world is underway in preparation of enforcing the sanctions. The possibility of a cut off of oil supplies is real.

Besides, selling off the reserve would not lower oil prices. Whenever a market does not have adequate backup supplies, the market place is ruthless. Market prices include risk premiums. Stocks offer higher returns than bonds because there is a risk premium. The risk premium in oil is reduced by the presence of reserves. The risk of producing oil would increase if the oil companies are put into competition with the government.

If government were smart enough to consistently sale at high prices and buy back at low prices, the government would earn huge profits for the citizens but the profit would come at the expense of the market place, which would adjust margins such that the cost of oil would incorporate the cost of dealing with the all knowing government trader. If the government is going to trade oil, I think it should trade gold, corn, copper, lumber and soybeans as well. It should buy deeply discounted houses in foreclosure and resell them later at substantial profits. It should buy the shares of dozens of banks that hold deeply discounted mortgages.

The reality is that the government cannot and should not become an oil trader. Trading oil is simply an improper role for government. Theoretically, we live under a free market system. On balance, the less government the better.

Our experience has been very consistent. When the government gets too involved in a market, we all eventually pay a price. The recent housing crisis is a case in point. It was the government that changed the rules in an attempt to force lenders to make loans to one and all. We can point to bad practices by banks and even to crooks who lied on loan documents, both customers and loan companies, to place blame but none of these activities would have happened if the government had not pushed banks to lend in marginal situations.

Please answer some questions for me. If you were put in charge of SPR sales, today's price is $113 per barrel. How much oil would you sell tomorrow and at what price would you plan to buy it back? Why not wait until the price is $10 cheaper before buying it back? What would you do if after you sold 50 million barrels, Iran, seeing the ships in route, scuttled 20 oil tankers in the Straight of Hormuz, blocking the flow of 17 million barrels per day for the next three months?

Why not sell the right to drill in a number of plots off the Gulf Coast rather than sell our insurance policy?

On 8/12/08, Lamar wrote:
In my opinion the strategic reserve was established to bridge a disruption in oil supplies due to some natural or political event. Furthermore the SPR should not be the American people's collective commodity account speculating on short term prices of oil. Who knows they may try gambling with our social security funds..LOL.

My thoughts.

On Tue, Aug 12, 2008 at 3:57 PM, Al wrote:

SELL OIL now from the SPR. Didn't we continue to buy oil for the SPR as the price rose? The SPR has a certain amount of high priced oil that should be sold now and replaced with lower cost oil in the future and by publicly announcing the sale it guarantees lower future oil prices. Its good economics and good political policy, it shouldn't be looked at as a flip flop. Remember, in DC today's political climate requires some compromise so neither party looks like it has lost face.