May 12, 2008

The Bombers Heading Towards Vorkuta

JUST AS THINGS SEEM to have been going well for the financial markets, and world-destroying disaster averted, Ambrose Evans-Pritchard has made the most impolite suggestion that we may be in for that most awful of Dr. Strangelove-type situations -- the bear rally. Mr Evans-Pritchard is a natural bear, so gloom does not exactly come as a shock, but when even he says the data frightens him, I take notice. It would appear that despite our recent harrowing of the credit crunch, there are still a few financial bombers heading towards Vorkuta.

One of these, of course, is the price of oil. I must admit surprise, with crude prices at $126 per barrel, that the Government has not taken concrete steps to address this, either overt or in secret. After all, we have 702.7 million barrels -- 280.5 million of which are "sweet" -- of crude oil in our Strategic Petroleum Reserve, worth some $88 billion. We continue to add a couple million barrels to the SPR each month. Why the Government has not used this stockpile as a billy club amazes me.

I do realize we need the SPR just in case we wake up one morning and discover the People's Liberation Army has landed on Oahu. Still, if we released oil from the SPR during the supply shock from Hurricane Katrina, you would think we could do the same now and fry the speculators who have driven up the price of oil, ostensibly on supply concerns.

Of course, we know from past history that flooding the market with scarce goods doesn't work, if the injection of additional supply is limited and temporary. It could be the Government has already considered this, and accordingly held back from taking action. But although oil supplies may have been seen as tight, they are still perfectly adequate at this point. Thus, although it might not work and oil prices could remain high as ever, I'm not exactly seeing the downside of giving it a try.

The only objective here would be to convince the speculators the run in oil is over. If you could do that, and the speculators quailed as visions of the profits were replaced with nightmares of their losses, you would see a trickle, then a stream, then a flood out of oil.

It wouldn't even need to be a big deal. In fact, not making it a big deal -- at least to start -- might be the way to go. After all, if everyone knows about it, then the collective market could conceivably write it off. So it would be better for the Government to go after the speculators at their own game. You'd want to bury the news as best you could; conveniently leak advance news of it to certain players but refuse to confirm it; start the rumor mill going the opposite way for once. Then, once there was sufficient turmoil, bang! Blow open the flood gates!

But wait, you say. Wouldn't this go against those notions of fair play and caveat vendor that presently rule American capitalism? Yes, it would -- but sometimes you have to fight fire with fire, and the blaze we're fighting is not only out of control but heading towards population. Besides, the Government's so-called Plunge Protection Team reportedly has vast powers to intervene in the financial markets, an image the PPT has itself undoubtedly quietly encouraged. So I'm not exactly seeing a moral conundrum here, particularly since the very nature of financial speculation is cut-throat and ruthless. With each passing day, though, I am seeing the virtue of giving it the old college try.

Posted by Benjamin Kepple at May 12, 2008 11:50 AM | TrackBack
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