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As the price
of North Sea Brent crude oil touched $125 /barrel last week, the topic of
sharply higher gasoline prices suddenly caught the attention of the Main
Stream Media (MSM). Spin artists for the re-election campaign of President
Barack Obama were quick to deny any responsibility for soaring oil prices,
and instead blamed the upward spiral on geo-political tension with Iran.
However, since the days of the Yom Kippur War in October 1973, - when the
OPEC cartel placed an embargo on crude oil sales and hiked oil prices by 70%,
the price of gasoline has been a key variable effecting the outcome of
US-presidential elections.
In nine of
the last ten US-presidential elections, if the price of gasoline was higher
at the end of the incumbent's term in office, than when it began, the
incumbent lost the election. The only exception to this trend was in 2004,
when the average price on Election Day was $2.03 per gallon compared to $1.54
four-years earlier. George W. Bush won reelection, but just barely, 51% to
49-percent. Since Obama took office, the average price per gallon had doubled
to $3.70 and is 43-cents higher than a year ago. It's up 23-cents just in the
month of February. Most analysts say gasoline prices could climb to $4 a
gallon, as US-refiners switch to a more expensive blend of petrol for summer
driving.
But
regardless of the cause, the president of the United States gets an
inordinate share of the blame anytime there is a spike in gasoline prices,
dating back to the Carter administration. While the president is punished in
the court of public opinion whenever gasoline becomes too expensive, he
receives no reward when gasoline prices are relatively low. If a spike in
gasoline prices is sustained for an extended period of time, it usually has a
ripple effect of fueling broad based inflation, and begins to chip away at
the president's popularity.
Given the
fragility of the Euro-zone's economy, - the world's largest trading bloc, the
latest upward spiral in the price of North Sea Brent to an all-time high of
€93.35 /barrel, is threatening to tip a mild recession into a deeper
downturn. And because Europe buys about 20% of US-exports, and US
Multi-Nationals earns about a quarter of their revenue from affiliates
located in Europe, a deeper economic downturn on the eastern side of the
Atlantic Ocean could derail the fledging US-economic recovery.
Right now,
the balance between global supply and demand is razor thin. Global oil
production was 90.2-million barrels/day (bpd) in January, or about
700,000-bpd more than global demand. Saudi Arabia holds about 2.5-million bpd
of idle production capacity to meet any sudden shortages, - the world's only
significant unused capacity. As US gasoline prices have become a top
political issue in the run-up to the 2012 presidential elections, Senator
Charles Schumer, asked secretary of state Hillary Clinton to urge Riyadh to
increase its oil production to full capacity of 12.5-million bpd - an
increase of 2.5-million barrels, in order to calm the oil markets.
"These skyrocketing fuel prices are directly linked to the global energy
market, particularly Iran's recent efforts to manipulate oil prices and the
worry of impacts on supply from an escalation of regional hostilities,"
Schumer said in a letter.
However,
Emerging giants India and China are increasing their purchases of crude oil.
China imported 23.4-million tons of crude oil last month,the third highest amount on record, and up +7.4%
from a year earlier. India ramped up its purchases of crude oil to 17-million
tons, up +18.6% from a year earlier. China wants to build its strategic
reserve of crude oil, which presently stands at 102-million barrels - 21-days
of imports. It's scheduled to add another 168-million barrels of storage
facilities by early 2013. If filled at a steady pace China would need to
secure an additional 220,000 barrels per day, - not including any incremental
increases in demand for economic growth or from falling domestic production.
Indentifying the precise threshold of pain at which a Global
"Oil Shock" wrecks havoc upon the fragile
Euro-zone economy is tricky, but crude oil prices are quickly approaching the
danger zone. Treading above the 2008 highs is certainly as warning sign of
trouble looming on the horizon, especially if prices continue to march
upwards. From a strictly technical point of view, the outlook for North Sea
Brent is Bullish - climbing higher along an upward sloping trend-line.
In the olden
days, - before the collapse of Lehman Brothers and the financial crisis of
2008, central banks would've moved to tighten their monetary policies, and
hike interest rates, in a concerted effort, in order to combat the
inflationary impact of sharply higher oil prices. But in today's world of
"Quantitative Easing" (QE), a tighter money policy is no longer an
option, especially with a US-presidential election, scheduled for Nov 6th.
Nowadays, the Fed can only display its hawkish credentials, by fending off
demands of the ruling politicians for a third round of QE. That still leaves
the Fed looking timid and weak in the eyes of speculators.
Throughout
the first three years of the Obama administration, the Fed has pursued the
easiest money policy in the nation's history. The Fed has locked the federal
funds rate at 0.25%, and has vowed to maintain its Zero Interest Rate Policy
(ZIRP) through the end of 2014. With its $400-billion "Operation
Twist" scheme, the Fed has pushed the Treasury's 10-year yield below 2%,
a historic low. President Obama has exerted enormous pressure on the Fed to
inflate the value of the US-stock market by Election Day, by printing vast
quantities of money, in order to create the perception among the unsuspecting
public that an economic recovery is underway. Obama and his spin artists are
pointing to the rising stock market in campaign speeches and before audiences
tuned into the MSM around the country, as a sign of optimism about the
future, and a reason to vote for Obama in November.
The problem
of course, is that QE is only widening the gap between the rich and the poor
in the United States. In fact, the top-10% of the wealthiest Americans own
80% of the stocks that are listed on the NYSE and Nasdaq.
So in essence, most of the financial gains of the past three years have gone
to the upper echelon of society. This policy known as "trickle
down" economics, - is enriching the top-10% of the wealthiest Americans,
and hopefully, they'll spend more of their new found wealth. That in turn,
would generate more demand for goods and services in the economy. This trickle
down policy has damaging side effects though, which is why 60% of Americans
think the US-economy is still in recession, according to a recent Rasmussen
poll. For most Americans, the cost of living is rising faster than their
wages.
One major
problem that's now cropping up for the Obama re-election campaign,
is that the price of North Sea Brent crude oil, - the benchmark for 2/3's of
the world's oil markets, - appears to be tightly pegged to the direction of
the Dow Jones Industrials. As the Fed inflates the value of the stock market,
with its ultra-easy QE money policy, - one of a dangerous side effects is
sharply higher oil prices. If the Fed is aiming to inflate the value of the
Dow to the 14,000-level in advance of the upcoming presidential election, as
is widely expected by equity traders, it also runs the risk of jettisoning
oil prices to $150 /barrel.
Several
members of the Bernanke Fed are addicted money printers, and are itching to
unleash QE-3, - flooding the markets with an extra $500-billion to
$1-trillion of freshly printed greenbacks. "It's vital that we keep the
monetary policy throttle wide open," said San Francisco Fed chief John
Williams on Feb 14th. "That will help lower unemployment a little bit
quicker, and raise inflation back toward levels consistent with our mandates.
And importantly, we want to do so quickly to minimize total economic
damage," he added. The Fed routinely drops hints to the financial media,
that it would quickly unleash QE-3, if the US-economy shows any signs of
faltering, to keep the stock markets propped-up.
On February
2nd, Republican Congressman Paul Ryan, from Wisconsin blamed the Fed's
radical monetary experiments for eroding the purchasing power of US-citizens'
savings, creating a false sense of security in the stock markets, and
manipulating the long end of the yield curve."The
Fed is putting a cap on price discovery and creating a false sense of
security by keeping rates low. I think this policy runs the great risk of
fueling asset bubbles, destabilizing prices and eventually eroding the value
of the dollar. The prospect of all three is adding to uncertainty and holding
our economy back," Ryan argued. However, Ryan's arguments fell on deaf
ears, since Bernanke's tenure at the Fed is tied to the fate of his boss -
President Obama, and there's no chance of reversing nuclear QE this year.
However,
Bubbles are now starting to show-up in the crude oil market. Investment
demand by speculators and hedge funds, utilizing "black gold" as a
hedge against the ultra-easy money polices of the central banks, is on the
rise. On the New York Mercantile Exchange, traders have raised their bets on
rising oil prices by 25,273 contracts to 259,162, the CFTC said. Net longs in
New York are up by more than 53,000 in the past two weeks and have risen by
more than 110,000 since October.Interestingly
enough, the Chicago Mercantile Exchange cut initial margins on Nymex crude oil by -9% to $6,885 a contract from $7,560.
The exchange operator also trimmed initial margins to trade Brent to $7,425
per contract, from $8,100. (Look for the Obama team to crack down on the CME,
and demand that the exchange reverse its decision, and ask speculators to pay
higher margins to hold oil positions).
As a result,
there are early signs that the upward spiral in gasoline prices is already
beginning to chip away at Obama's approval rating, as measured by the Gallup
polling organization. Obama's approval rating has tumbled by 4% in recent
weeks, to only 44% today, according to Gallup. Until Feb 9th, Obama's
approval ratings were tracking the direction of the stock market, albeit with
a lag. However, the latest 23-cent spike in gasoline prices might be taking
its toll on the president. In the latest Rasmussen Reports daily tracking
survey released Feb 27th, Obama has begun to shed his recently rebounding job
approval, 26% of the nation's voters Strongly Approve of the way Obama is
performing, compared to 42% that Strongly Disapprove, giving Obama a
Presidential Approval Index rating of -16-percent. That's the president's
lowest rating in over a month.
Rasmussen
notes that for the first time since December, 2011, Romney leads Obama 45% to
43-percent. Romney is leading the president among "unaffiliated
voters" by 9-points. Gallup shows Romney leading Obama by 50% to 46%.
These two pollsters, - Gallup and Rasmussen, are considered to be unbiased in
their reporting, in sharp contrast to news organizations from the far-left of
the political spectrum, that support the Obama re-election campaign, and show
Obama leading the Republican field by a wide margin. Ominously, no American
president has won re-election in modern times, when his approval rating was
less than 47-percent.
Sensing
political flak from the Republicans, Obama tried firing back with some
political rhetoric of his own. "Anybody who tells you that we can drill
our way out of this problem doesn't know what they're talking about or just
isn't telling you the truth. The United States consumes more than a fifth of
the world's oil, more than 20% of the world's oil, just us. We only have 2%
of the world's oil reserves. We consume 20%. That means we can't just rely on
fossil fuels. The American people aren't stupid. They know that's not a plan
- especially since we're already drilling. That's a bumper sticker. It's not
a strategy to solve our energy challenge. That's a strategy to get
politicians through an election. You know there are no quick fixes to this
problem. You know we can't just drill our way to lower gas prices,"
Obama said.
Luckily for
Obama, the Republican candidates haven't yet recognized the biggest culprit
behind the upward surge in crude oil prices - is the Fed's ultra-easy money
policy, - which weakens the US-dollar and encourages risk taking in
commodities, precious metals, and equities. The Fed has gotten a free pass.
Even the Fed's biggest critic, Texas Congressman Ron Paul has been silent
about the link high gasoline prices and the Fed's massive expansion of the
high octane MZM money supply. Instead, the blame for higher oil prices is
shifted to fears that Iran's leaders might try to shut down the Strait of
Hormuz, if the European nations and the US continue to tighten economic
sanctions on Iran's commercial dealings.
Although the
Fed is the primary culprit behind the rise in crude oil, other central banks
are also responsible for the pain that motorists are feeling at the pump. The
Bank of Japan (BoJ) for instance, has increased the
supply of yen in the Tokyo money markets, by 30-trillion yen, ($385-billion)
over the past three years. In turn, Japanese banks lend yen to speculators at
borrowing costs of just 0.10-percent. That encourages "Yen Carry"
traders to borrow funds in Japanese yen, and to utilize the cheap money to
initiate positions in crude oil and Tokyo gold futures. On Feb 14th, the BoJsurprised the currency markets, by bending to heavy
government pressure, and agreed to further inflate its monetary base by an
additional ¥20-trillionby year's end. Once the BoJ's
QE-4 scheme begins to fully blossom, it could single handedly lift crude oil
to $135 /barrel.
Tokyo argues
however, that its QE-4 scheme is a legitimate response to its ever worsening
trade balance, and the debilitating impact that a super-strong yen is having
on its economy. Japan's trade deficit grew to ¥1.48-trillion
($18.9-billion) in January, the highest since records began in 1979, andmore than triple last year's shortfall of
¥479-billion. Imports surged +9.8% to nearly ¥6-trillion, with
natural gas purchases shooting up +74% and coal rising +26-percent. Japan
posted its first trade deficit in 31-years in 2011, as the nuclear disaster
raised the country's dependence on imported fuel.
Japan's
Finance chief Jun Azumi said the BoJ has agreed to +1% inflation target, meaning the
central bank would likely unleash QE-4 at full throttle, - injecting
¥20-trillion by year's end, until the Tokyo's top financial objectives
are met. The top priorities are weakening the Japanese yen's value compared
to the Euro and US-dollar (ie fueling the yen carry
trade), and inflating the market value of the Nikkei-225 index. During the
month of February, Tokyo was extraordinarily successful in lifting the
US-dollar by 5-yen to as high as 81.60-yen, and thereby helping to ignite a
+14% rally for the Nikkei-225 index.
Obama's
efforts to address American motorists' latest pocketbook heist, spoke volumes
about the danger signs in recent polling, plus his campaign's determination
to rebut Republican criticisms in real time, even though the general election
is still months away. Obama and his re-election team believe any new drain on
voters' wallets into the spring and summer could prove costly at the polls
come November. Gas prices nationally are the highest ever for this point in
the calendar -- still well before the summer driving season when prices
typically rise. The added costs for businesses and consumers could stall the
economic recovery, just when the country is more optimistic that recovery has
been taking hold.
However, a
major part of Obama's dilemma is the European Central Bank's recent decision
to massively increase the supply of Euros in the banking system. ECB chief
Mario Draghi is urging banks to lend the money they
borrow from the ECB at 1% interest rates to Euro zone households and
businesses. On Dec 21st, the ECB lent €489-billion ($658-billion) for
three-years to 523-banks. A second tranche will be made on Feb 29th, and the
ECB chief said he hopes the banks would lend the funds to customers and
expand credit in the real economy. However, the banking Oligarchs can either
decide to hoard the cash, buy Euro-zone sovereign bonds, precious metals, or
speculate in commodities, such as crude oil.
So far, the
rally in North Sea Brent has been largely fueled by monetary easing in the
West and Japan. The rising tide of liquidity is pushing up stock markets and
commodities across the globe. While the leading commodity gauge, the Thomson
Reuters CRB Jefferies index, has climbed 6% so far this year, crude prices have
jumped faster, rising 16% in the same period. Similar forces lifted oil
prices to $127 /barrel last year, after Libya's 1.6-million bpd of oil output
was crippled during the uprising against the 41-year rule of Moammar Gadhafi. Fears of global demand destruction owing
to plunging stock markets in the summer, had subsequently cooled oil prices,
but the North Sea Brent never fell below $100 /barrel.
President
Obama has exerted enormous pressure on the Fed to inflate the value of the
stock market ahead of the upcoming election. The US-dollar's resulting
weakness against the yen forced Tokyo to begin unleashing QE-4, to counter
the lingering effects of the Fed's QE-2, and the ECB's upcoming QE-2 money printing
spree. Despite softer Chinese economic growth, its demand for oil continues
to be resilient. China is due to overtake the United States as the world's
biggest oil importer within 18-months. So far, global stock markets haven't
shown much fear or trepidation to oil prices trading at $125 /barrel.
That's
because markets are heavily sedated with massive dosages of liquidity.
Furthermore, not a single central bank in the world is contemplating a
tighter monetary policy. Instead, central banks in the developed and emerging
nations are expected to inject additional rounds of liquidity to energize
their economies. These QE schemes could start to boomerang, if the
"crude oil vigilantes" are able to punish central bankers for
creating too much money, and smack politicians for creating too much debt, -
by jacking-up oil prices to $150 /barrel.
If Europe and
the US continue to tighten economic sanctions on Iran, to a point of
significantly wrecking havoc upon the Iranian
economy, oil traders could seize any verbal threat by Tehran regarding the
Strait of Hormuz, as a chance to jack-up oil prices. Some 40% of all seaborne
oil passes through this narrow passageway, amounting to 17-million barrels
per day.However, under international maritime law,
Iran along with Oman has sovereign territorial rights over these waters. Iran
has under United Nations law agreed to grant ‘innocent passage' to
ships through its waters provided there is no infringement of its security.
Although Tehran customarily follows the "Law of the Sea," it's not
legally bound by them.
The Iranian
Regular Force Navy and the Iranian Revolutionary Guard Navy monitor and
police the Strait of Hormuz, and could effectively shut down traffic for
weeks until the US Navy could establish safe passage. Whatever the case,
crude oil vigilantes can use the tension with Iran as a convenient excuse to
bid-up the price of oil, and sustain the spike in gasoline prices. If
correct, soaring gasoline prices could sink Obama's popularity and his
re-election bid. "Oh what a tangled web we weave when first we practice
to deceive,"-- Sir Walter Scott.
Gary Dorsch
Editor, Global Money Trends
www.sirchartsalot.com
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