Oil Prices… swimming in supply

Suddenly, the relationship between Brent (North Sea) Crude and West Texas Intermediate has shifted. For decades, Brent has traded at a discount to WTI and now it trades at a premium. The excuse? Well, Brent is more easily exportable.

And if you’re buying that, I’ve got some stock in AIG and Citi I’d LOVE to sell you.

The facts are these…

1) WTI stocks are at record or near record levels. That’s what’s used by most of the refineries in the US. The east coast refineries use Brent. Look for that to change as older pipelines get reopened.

2) Demand, meet declining production… that’s the case with Brent crude which is seeing increased demand at the same time production is declining.

3) Libya’s production is still offline. That will change.

4) Demand in the US is lackluster as Americans are more comfortable with higher prices and have decided they’ll adapt. By buying cars that get 3-4 times the miles per gallon as their SUVs.

So what is driving the price spike? Speculation. This really isn’t surprising since speculative bubbles tend to occur when you have a very small market (like oil) and a lot of money out there seeking return. Where’s that money coming from? Tax cuts. In short, the wealthy are spending their tax cuts speculating in commodities and a host of other financial markets. For the radical right, this has to be a crushing blow since on balance, the money is being used to speculate not create jobs and real economic growth.

It’s also fun to note that we now have real world data on this, which complete destroys the underlying basis for Paul Ryan’s pathetically stupid little budget plan.

While all that’s fun (and seriously, it’s a blast to once again point out just what a fraud Paul Ryan really is), it doesn’t solve the problem. Now, the President (even if he understood the need for it, which is doubtful) is unlikely to get a tax increase through the radical Republican House. So, there’s no way to pull this money out of the economy with great benefit since it would bring us closer to balancing the budget or gives us the money for infrastructure which we desperately need (not to mention that giving it to government would, ironically, put it to the productive use it was intended for in the first place).

The Fed could raise interest rates, which would effectively raise the return on fixed income and pull money out of speculation and put it into long term investments. Of course, this would damage the economic recovery by driving up costs on consumers and small businesses.

What the President COULD do is ask the CFTC to raise margin requirements on commodities to 1:1. This would shake out some of the smaller time speculators working off credit. It won’t take care of the entire problem, but it’ll definitely help. I doubt it will happen, but who knows.

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