WHEN GASOLINE HITS $25 A GALLON

September 10, 2010 WHEN GASOLINE HITS $25 A GALLON

It's going to. It's only a matter of when. And how. Why do I think it's going to $25 a gallon? Because itused to be 35 cents, and the same government policies thattook it to $2.50 are still in force, plus a lot more thatare worse, or will be soon enough. The oil in the ground is still owned by governments. The great pools of oil are not in the private sector. Letus never forget this. Governments profit from the sale ofoil. Other governments want to profit from the sale ofoil. So, demand for oil by consumers increases, but thesupply of oil is in the hands of politicians by way ofbureaucrats. Conclusion: gasoline is headed to $25. Then there is OPEC. It is a cartel of governments. All cartels break down at some point. That is the goodnews. But the more concentrated the military power topolice the cartel, the less likely it will break down. There is a reason why 50,000 American "non-combatant"troops remain in Iraq, plus 100,000 mercenaries ("privatecontractors") paid for by American taxpayers.
http://huff.to/IraqContractors
There also is a reason why the United States keepscarriers in the Persian Gulf. It is the same reason forpermanent American forces in Iraq. They are not there toincrease oil production. They are there to police whoincreases oil production, and at what price. There are three reasons why gasoline can go to $25: 1. The Federal Reserve will inflate. 2. There will be a major war in the Persian Gulf. 3. Increased demand for oil will not be met by a countervailing increase in supply. There are three reasons why gasoline can go back to 35cents. 1. The Federal Reserve will deflate. 2. OPEC will fall apart peacefully. 3. Increased supplies of oil will not be matched by increased demand above 35 cents. Which set of options do you think is more likely? SUPPLY AND DEMAND According to the U.S. Department of Energy, every daythe world consumes 85.53 million barrels of oil. Everyday, oil producers produce 85.47 million barrels.
http://bit.ly/OilGoes
So, every 12 days, the world consumes a billion barrels ofoil, or 30.4 billion barrels a year. That is a lot of oil. China and India are not yet consumers of oil on alevel with the United States. In terms of per capitaconsumption of oil, the United States is #1. The next 17are island nations or oil-producing nations. The #19nation should be obvious. It is the nation most like theUnited States: Canada. China is #144. India is #165. http://bit.ly/OilPerCapita If current rates of economic growth continue, thenChina and India will move up rapidly. Their productivitywill create demand for cars. This will make themsuccessful bidders for oil. There is no way to reversethis process for long. India and China are implementingfree market principles, so per capita output is increasing. The culture of the West is dependent on energy, and theenergy of choice (at today's price) is oil. People inIndia and China want a piece of the action, and they areable to pay to buy in. We think of manufacturing as energy-intensive. Wethink of services as less energy intensive. Yet the UnitedStates has the highest per capita consumption of oil,despite the fact that the number of Americans involved inmanufacturing constitute about 12% of the workforce. Itappears that a service-based economy consumes more energyto maintain its lifestyle, and is capable of buying it, atleast for as long as Asian central banks keep buying U.S.Treasury debt at historically low interest rates. As large nations get richer, they consume more oil. India and China are the largest nations. They are gettingricher. We know what is going to happen. The auction foroil will attract more bidders. Will the arrival of thesearmies of bidders be matched by an increased supply of oil? This is the great debate today. The oil geologists who arewilling to offer an opinion disagree, so the non-geologistshave to pick sides. I don't think that a world economy (1) dominated bycentral bankers, when combined with (2) a handful of largegovernment-owned oil fields (3) whose output isadministered by the OPEC cartel, which is (4) policed bythe United States military (5) on behalf of the world'smajor oil companies is likely to match this increaseddemand at $70 a barrel. Call me a pessimist. I can takeit. Putting it differently, I think that pricing is likelyto be in terms of a giant auction. This auction will beattended by two groups: sellers of oil and buyers of oil. As in all auctions, sellers compete against sellers, whilebuyers compete against buyers. I do not see lots of newsellers competing head-to-head with the Good Oil Boys whohave controlled oil production since about 1920. On theother hand, I do see lots of new buyers. These new buyers will be welcomed by establishedbuyers with the same enthusiasm that long-establishedcollectors at an art auction welcome newly rich rock stars. "Welcome to the club" is less likely than "who let thisriff-raff in?" But anyone can buy his way in. That's thething about auctions. All it takes is money to get in. Asians and Indians will have ever-larger quantities ofmoney. In the oil market, this means dollars. Where will they get these dollars? They will buythem. From whom? From people willing to sell dollars. Who has dollars to sell? Rich Americans do. Foreigncentral banks do. The Federal Reserve System can createmore dollars at any time. What happens if Indians and Chinese buy dollars andthen buy oil? The price of oil goes up in relation toother goods and services. What happens if Indians and Chinese buy dollars, butthe Federal Reserve creates new dollars? The price of oilgoes up, along with lots of other goods and services. There seems to be a pattern here. If Israel attacks Iran by way of landing fields inSaudi Arabia (http://bit.ly/StrangeBedfellows), and if Iransinks two or three Saudi supertankers in the Hormuz Straitsin retaliation, this pattern could arrive within a fewdays. What can reverse this pattern? 1. The Federal Reserve deflates. 2. OPEC falls apart peacefully. 3. Increased supplies of oil are offered for sale. 4. Iran is left alone. This is the meaning of economic liberty: the legalright to make a bid. This is why the oil market is arigged market. The people who set the rules are supplyingthe product. They make the rules to keep high bidders --more oil per dollar -- from making bids. This is themeaning of every cartel. It's nice work if you can get it,but you can only get it with weapons. If you own a lot ofoil, you can buy weapons or hire those who own them. Here is political reality: a modern empire requiresweapons and oil. You can buy oil with weapons. You mustbuy or lease weapons to control the price of oil. Anyonewho talks of any of these three components without theother two is living mentally in the nineteenth century. CARTELS OR FREE TRADE People say they don't like cartels, but there is onlyone alternative to cartels: free trade. People say theylike free trade -- anyway, some do -- but they reallydon't. They prefer cartels. What is free trade? It is simple to understand: nogovernment interference on people's decisions to trade. Free trade is trade across invisible lines called borders. Let's begin with invisible lines separating cities fromcounties. 1. No sales taxes on imported goods 2. No quotas on imported goods 3. No export subsidies 4. No price controls 5. No currency tampering to control trade Everyone accepts this with respect to his own nation. There is only one visible exception in the United States:the closed highway border of California. You are asked tostop and declare any fruits or vegetables. They do thisbecause, in the 1930s, the state restricted poor Americansfrom driving in. The Supreme Court declared thisunconstitutional. But the state had hired all those borderguards, so it kept them on the payroll. It had to have areason. It invented one. As soon as we get to free trade across nationalborders, all five rules are jettisoned. 1. Sales taxes (tariffs) on imported goods 2. Quotas on imported goods 3. Export subsidies 4. Price controls 5. Tampering with the currency to control trade What is the logic of this? Why is one invisible linedifferent from another? The reason is clear: cartels. Certain voting blocs want favored trade. They pressureCongress to provide this. "Fair trade" is a code phrase for "protection." "Protection" is a code word for "cartels." This system really is simple to understand. Successful cartels hide behind words. So few people canfollow the logic of economics that this tactic issuccessful. There is no question in my mind what the mostsuccessful cartel in America is. It's the Federal ReserveSystem. Read any college-level textbook in economics. There is a chapter on cartels. The FED is not listed. Then read the chapter on the FED. It conforms to thedefinition of cartel in the chapter on cartels. But theword "cartel" does not appear in the chapter. How would a nation adopt free trade? Simple. 1. Reduce all tariffs to zero. 2. Eliminate all import quotas. 3. Eliminate all export subsidies. 4. Abolish all price controls. 5. Adopt a 100% private gold coin standard. That's all? That's all. Goods and services wouldflow across borders. "But what about. . . ?" Cartel. "But wouldn't this. . . ?" Cartels. "But couldn't managed trade. . . ?" Lots and lots of cartels. This brings us to the World Trade Organization: theWTO CHINA, EMPIRE, AND THE WTO The WTO is an unelected bureaucracy created byinternational agreements. It establishes the rules forgoverning free trade, by defining free trade as not beingsteps 1-5 (above). China entered the WTO in December 2001. China understands the acronym WTO differently fromwhat the Clinton-Bush administrations did. They see it asa three-step process. 1. We Take Orders. 2. We Take Oil. 3. We Take Over. What are they after? The reabsorption of Taiwan. TheUnited States stands in their way. The Chinese governmentis determined to remove this barrier. People in the West see China as just another empire. This is a major mistake. The central government of Chinais the oldest empire. This was why the national ruler wascalled the emperor a century ago. There was a reason whyit survived intact for so long. It was not an expansiveempire. It was a defensive empire. It still is. It wantshegemony over its territory. It wants to set the terms oftrade. Chinese merchants were trading with the West longbefore that upstart Julius Caesar came along. They have alot of experience in these matters. Americans tell themselves that we are the solesuperpower. The Chinese leaders take this seriously. Theyare determined to eliminate all superpowers. They followan ancient Chinese tradition that extends back amillennium. That was why they built the great wall. So, they have a plan. The plan is WTO. Their goal is to bring down the American empire. Theyknow how to do it. Be the highest bidder in the auctionfor energy. They are building dozens of nuclear power plants. They are making deals with oil-producing nations. They arepreparing for the day in which the dollar is no longer thecurrency that OPEC accepts for oil. The People's Bank of China buys dollars. The Chinesegovernment can use these dollars to buy oil. All it has todo is sell T-bills for dollars and buy oil. That woulddrive up American interest rates. This would hurt theChinese WTO: We Take Orders. The exporters would sell lessto a depression-suffering United States. But the goal ofthe Chinese government is to weaken the United States tosuch a degree that Taiwan is abandoned. At some point, the Chinese government will sellTreasury debt for dollars, and buy oil with the dollars. Gasoline is going to $25 a gallon. ------------------------------------------------------- CONCLUSION The auction for oil will intensify unless recession or depression lower demand. Otherwise, the price of oil will rise. As it rises, residents of the United States will findt hat they must readjust their spending. They must decide how to pay for their share of the oil. The Chinese rulers are planning to use this readjustment to their advantage. They expect that voters who are readjusting their budgets will be willing to seethe reduction of spending on the military. With gasoline at $25, defending Taiwan will look like a luxury that no longer is worth the expense. When the price of oil rises, the cost of empire rises. When it's a question of funding the empire or driving to work, voters will cut off the empire. The Chinese leaders are not all that inscrutable. WTO.So, after this inspiring thought why don't we all buy an extra large container to store gasoline?