BUSH FAILS IN OIL ... AGAIN

Everyone in America knows that George W. Bush was a failure as a businessman in the oil industry. Well, in spite of touting his oil credentials as a potential plus with OPEC members when he ran for the White House, it turns out that he's an abject failure at Oil Diplomacy too.

Here's a quick overview of President Bush's most recent efforts at "jawbone" diplomacy, which he claimed he would bring to the White House.

For the second time in two months, President Bush's efforts to "jawbone" his Saudi friends over the cost of oil fell on deaf ears. On Friday, oil surged to a record $127 after Bush's meeting with King Abdullah failed to secure a production increase beyond the meager 300,000 barrels the Saudis previously committed to on May 10th. In all, it was just the latest dismal failure for the jawbone of the Texas oilman who campaigned on his powers of persuasion when it came to OPEC ...

... For its part, OPEC brushed off Bush's feeble entreaties and rejected calls for an emergency meeting ahead of the cartel's next scheduled gathering in September. On Saturday, the Qatari oil minister put it simply, "The oil market is balanced...There is no threat to or crisis in supply."

There's no secret to what's happening here. OPEC members do not respect, nor trust, the capabilities of George W. Bush. And they're particularly not happy with the Bush administration's dollar policy (there is none). As Fadel Gheit, an oil analyst at Oppenheimer & Company in New York, put it: "It's really not surprising that they have ignored [Bush]" when you consider the collapsing value of the dollar.


Indeed, while Saudi King Abdullah has "shut down grandstanding talk from Venezuela's Hugo Chavez and Iran's Mahmoud Ahmadinejad" (which focused on moving OPEC away from the "worthless piece of paper" this past February) OPEC Secretary-General Abdullah al-Badri is still suggesting that the oil cartel might switch to euro-based pricing.

My guess is that this will become a real issue some time during the next administration. When this happens it will be yet another tattered feather in President Bush's lifelong headban of failure.

- Mark

THE ROOTS OF MARKET & WEALTH

I finally sent the first manuscript for my book, The Roots of Markets & Wealth, to the publisher. I'm expecting at least 6 weeks (if not longer) before I get the first request for revisions. The photo here is Bush the Elder with Prince "Bandar Bush" - the tutor, diplomat extraordinaire, and Saudi family friend that President Bush thanked for for keeping the price of oil low before the 2004 elections. Below is an excerpt from my book on the U.S.-Saudi relationship ...

Saudi Prince Bandar al Sultan, aka "Bandar Bush" and President George H.W. Bush

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... In Sleeping With the Devil: How Washington Sold Our Soul for Saudi Crude, former CIA operative Robert Baer tells the story of returning from Langley, Virginia. Coming from the direction of the Potomoc River was a convoy led by a Chevy Suburban with flashing lights. He suspected it was the President because “he’s the only official in Washington who gets that kind of protection.” When the convoy turned into an estate, he recognized the enormous iron gates.

The next day he learned the convoy was escorting Prince Bandar, the Saudi Ambassador to the United States – who “alone of all ambassadors got official State Department protection.” And why not? Granted the title of “Bandar Bush,” for his long and cozy relationship with the Bush family, Prince Bandar is dean of the Washington diplomatic corps – its brightest star, with a constellation of resources and political contacts that give him both access and power. But perhaps his greatest trump card is how he uses money and oil to move U.S.-Saudi relations.

After the oil price hikes of 1973 the U.S. convinced the Saudis to use their “petrodollars” to help underwrite U.S. budget deficits. Later, a combination of geo-politics and personal greed helped turn a simple funder-borrower relationship into a hydro-headed monster that thrives on national security imbalances and narrow self-interest.

Indeed, Baer writes things have gotten so cozy between Riyadh and former high level Washington officials that granting Prince Bandar the same protection afforded the President is only a small part of a larger story. For those fortunate enough to brush shoulders with Prince Bandar and his circle of friends, Saudi Arabia has become “Washington’s 401(k) Plan.”

Former cabinet secretaries, taking advantage of the Saudi Cash Cow, now work with the “good” bin Ladens, while the U.S. government works to keep Saudi regime safe, and its oil flowing. The financial cooperation the U.S. received from the Saudis after Saddam Hussein invaded Kuwait border is illustrative. Success in the first Gulf War, in Washington’s eyes, guaranteed that a grateful and friendly “House of Sa’ud would remain the world’s banker of oil.”


Perhaps more importantly, by keeping the Saudis in business, the global status quo was maintained, which meant (and perhaps more importantly) the sources that help fund the American Kingdom would continue. Interestingly, there appear to be historical parallels to this relationship.

In many ways the U.S. - Saudi relationship follows a pattern similar to the protection racket that existed between prosperous merchants in medieval Europe and their royal protectors. And just like their aristocratic predecessors, when they’re not busy tending to their economic interests, or bestowing politically powerful “titles” on their friends, American elites have become consumed with war.

But there is another, more ominous parallel. Much like the medieval period when Europe’s monarchs tried to keep rogue states and marauding nobles at bay, America’s aristocrats have been slow to recognize that the American Kingdom increasingly depends on the Good Will of others and no longer controls its own fate – a point the well protected “Bandar Bush” seems to understand quite well ...

- Mark

SOLVING THE ENERGY/OIL PROBLEM

Here's Robert Reich on President Bush's weak (and pretty lame) comments regarding the price of gas during yesterday morning's press conference.

The President criticized Democrats in Congress today for barring oil drilling on the Alaskan tundra. If he thinks that will bring down oil prices, he's even farther out of his mind than I feared. Even if such drilling were environmentally safe (and it's not -- remember BP?) it would amount to a miniscule addition to global oil supples.

Reich's also on to the Snake Oil that Hilary and the increasingly out of touch McCain are pitching.

So what else can we do? McCain and HRC are proposing a tax holiday on gas - so this summer you wouldn't pay the 18 cents a gallon that would otherwise go to Uncle Sam. Talk about dumb ideas. This will only encourage Americans to drive more, thereby increasing demand and causing gas prices to rise even higher ... It's a cheap political gimmick that does nothing to stem the rising price of oil.

Reich's solution? It's pretty simple, and very doable.

You want to hold oil prices down? In the short term, strengthen the dollar. Part of the reason oil prices are soaring is because the dollar is tanking [which we discussed on Saturday]. The Treasury and financial ministries of other rich countries should buy back dollars to stop speculators who are bidding the greenback down.

Over the longer term, though, China and India's insatiable demand for oil will continue to drive oil prices up, and turmoil in the Middle East will keep them up. So there's really only one way for us to go: Alternative sources of energy - wind, solar, biomass, water, and if we can make it safe enough, nuclear.

The only drawback is that there's too much commons sense involved. It might even force the Bush administration to answer for its history of saying one thing on alternative energy while doing another - like gutting renewable energy programs.

But that's alright. I'm sure OPEC and/or these two guys will figure it out for us, right? (and, yes, that's Venezuela's Hugo Chavez).



- Mark

REPUBLICANS: KEEPING GAS PRICES HIGH

By way of Crooks & Liars, Democratic Rep. Peter Fazio really takes it to the Republicans and the White House. Here Fazio's pointing out how the Bush administration and Republicans are assisting the Saudis in keeping gas prices high in America through collusion (via the Organization of Petroleum Exporting Countries, OPEC).



Here's one of the pieces of legislation that Fazio is referring to in his speech on the House floor: H.R. 2264. In a few words, H.R. 2264 would amend the Sherman Anti-Trust Act and make it illegal to have market collusion in the oil industry.

- Mark

THE "SAUDI PRIZE" ... A BUSH IN THE WHITE HOUSE

It was 1986, conservation efforts were paying off, competition in the oil industry was returning, and gas prices were plummeting. In The Prize: The Epic Quest for Oil, Money & Power, author Daniel Yergin details the efforts of then Vice President George Bush to assure the Saudis – and U.S. domestic oil producers – that the U.S. should support artificially high prices in energy. On a trip to the Middle East VP Bush made it clear to the Saudis that, as Yergin put it, "market forces had gone too far" and had the potential to cripple America’s energy industry.

Well, I’m sure Papa Bush would be quite content with the following.

At its March 2000 meeting, OPEC set up a price band mechanism, triggered by the OPEC basket price, to respond to changes in world oil market conditions. According to the price band mechanism, OPEC basket prices above $28 per barrel for 20 consecutive trading days or below $22 per barrel for 10 consecutive trading days would result in production adjustments …

And, just like that, competition is mugged by collusion. Think about this the next time you hear some Talking Head drone on about “market” forces in the oil industry.

But I really liked this comment: “At its January 30, 2005 meeting, OPEC decided that market changes had rendered the band unrealistic, and decided to temporarily suspend the price band mechanism” … Translated this says “OPEC’s already making so much stinking money they no longer have to manipulate production levels.”

Papa Bush is no doubt pleased.

- Mark

THE ROOTS OF MARKETS & WEALTH

As I've been doing from time to time, what's posted below is a piece from the book I've been working on, The Roots of Markets and Wealth ... And, yes, it's almost done. To the left is a photo of John D. Rockefeller.





... Whatever the roots of his “scathing disdain for the ‘waste’ of unbridled competition” John D. Rockefeller’s pursuit of monopoly power in the late 1800s helped bring organization and, perhaps more importantly, steady profits to the oil industry. However, by the early 1930s oil profits were again threatened by too many competitors. Indeed, by August 1931 producers in Oklahoma and Texas were so plentiful and productive that the price of crude dropped to thirteen cents a barrel and, by the spring of 1933, saw some ‘hot oil’ runners get little more than two cents a barrel. And this occurred after Texas Governor Ross Sterling had, in effect, “declared war” on East Texas by sending the National Guard and Texas Rangers to cut off rogue producers, and then “rammed” a bill through the legislature which allowed market prorationing.

To stabilize prices, the oil industry turned to the federal government. After initially going after black market producers Interior Secretary Harold Ickes sought to reduce production by sending production quotas to the governors of each oil state. And why not? Acording to Ickes, after the Depression many business leaders were shell-shocked and “crawling to Washington on their hands and knees…to beg the Government to run their businesses for them.”

Unfortunately for Ickes, and FDR, the Supreme Court declared much of the National Industrial Recovery Act – which gave the federal government its authority in oil – unconstitutional. Still, with memories of ten cents a barrel still fresh, the states decided to follow federal government determined quotas on a voluntary basis.

To insure cooperation, the Interstate Oil Compact was passed in 1935 and provided a “forum for states to exchange information and plans, to standardize legislation, and to coordinate prorationing and conservation in production.” To check the flow of foreign oil, which might undermine the “informal” quota system, Congress imposed tariffs on foreign crude, fuel oil, and gasoline. This cut U.S. oil imports in half, stabilized sales, and put the U.S. oil industry firmly under a government escorted quota and tariff system.

As was the case during Rockefeller’s time, the post-Depression oil industry was able to establish regular profits at “market prices” only after competition had been brought under control. Perhaps more importantly, the organizational mold that would inspire the creation of the Organization of Petroleum Exporting Countries (OPEC) had been cast ...


- Mark

GREENSPAN, II: FROM MR. HYDE TO DR. JEKYLL?

After posting “Bubbles Greenspan” I started thinking about the larger impact that Alan Greenspan’s monetary policies will have on our nation. This is what I’ve come up with so far.

MR. HYDE … In my post I suggested that Greenspan’s policies largely went by the book and complimented deregulation by making money readily available in measured amounts. This helped satisfy America’s financial needs during the Reagan-Bush I years. With the arrival of Bill Clinton and his deficit reduction policies (i.e. tax hikes and budget cuts) Greenspan promised and delivered Fed policies that helped produce economic growth and healthy surpluses. In the process he helped show that the Fed is not so apolitical, and that entrepreneurs don’t wait around for the marginal tax rate to fall in order to work hard and/or have a good idea. So far so good.

DR. JEKYLL … But then George Bush entered the White House in 2001. Greenspan proceeded to undermine what good his policies may have done by foolishly supporting a massive transfer of wealth (budget surpluses) to America’s financial elites through Bush’s ill-targeted tax cuts. What good had been produced by careful economic policies and monetary prudence was wiped out by Greenspan’s imprudent trust in the reckless policies of Born Again supply-side economics. In the process, he helped insure that the national debt would not be paid down, nor would investments in infrastructures be made (Louisiana and Minnesota show what happens when infrastructures are ignored). In the process Greenspan showed himself to be a political hack of the first order.

DR. JEKYLL ON STEROIDS … It seems to me, the real threat lies in what lurks around the corner. After taking a look at economist J. Bradford De Long’s article on America’s inflationary 1970s something else became clear about Greenspan's tenure. De Long argues convincingly that while OPEC's oil price hikes in the 1970s may have energized inflationary pressures, they only exacerbated what was already a bad situation. Simply put dollar policies and U.S. spending from the 1950s and 1960s had already planted the seeds of inflation. Inflation was going to happen one way or the other in the U.S. after the 1960s. This is what makes the past 28 years so important, and Greenspan’s political hackery so much worse than one might think.

Since 1981 we have added $8.1 trillion to our national debt. We borrow recklessly and run record budget deficits year after year, as if tomorrow will never come. Still, the only time Greenspan saw fit to do his job and guard the integrity of the dollar – which is the only real goal of any central banker – was when Bill Clinton came to office. It was then that he made deficits his primary concern. And if Greenspan’s own account of events are true, he not only got religion suddenly, but he played a pretty good game of political extortion with Bill Clinton.

So why the change of heart when President Bush came to office? While we can debate the answer to this question, there's little doubt that Greenspan’s tenure will be marred by the fact that he allowed one Republican administration after another to wander aimlessly in his monetary forest. Today, as was the case in the early 1970s, the American economy has become primed for inflation.

With the jobs protecting "Shadow of the Depression" gone (which Brad De Long explains), and with deregulated Globalization on the march, there is little to inhibit policymakers from going after workers and wages when the scourge of inflation rears its ugly head. Nice.

- Mark