My proposals remain:

1. A full FICA suspension:

The suspension of FICA paid by employees restores spending which supports output and employment.
The suspension of FICA paid by business helps keep costs down which in a competitive environment lowers prices for consumers.

2. $150 billion one time distribution by the federal govt to the states on a per capita basis to get them over the hump.

3. An $8/hr federally funded transition job for anyone willing and able to work to assist in the transition from unemployment to private sector employment.

Call me an inflation hawk if you want. But when the fiscal drag is removed with the FICA suspension and funds for the states I see risk of what will be seen as ‘unwelcome inflation’ causing Congress to put on the brakes long before unemployment gets below 5% without the $8/hr transition job in place, even with the help of the FICA suspension in lowering costs for business.

It’s my take that in an expansion the ‘employed labor buffer stock’ created by the $8/hr job offer will prove a superior price anchor to the current practice of using the current unemployment based buffer stock as our price anchor.

The federal government caused this mess for allowing changing credit conditions to cause its resulting over taxation to unemploy a lot more people than the government wanted to employ. So now the corrective policy is to suspend the FICA taxes, give the states the one time assistance they need to get over the hump the federal government policy created, and provide the transition job to help get those people that federal policy is causing to be unemployed back into private sector employment in a more orderly, more ‘non inflationary’ manner.

I’ve noticed the criticism the $8/hr proposal- aka the ‘Job Guarantee’- has been getting in the blogosphere, and it continues to be the case that none of it seems logically consistent to me, as seen from an MMT perspective. It seems the critics haven’t fully grasped the ramifications of the recognition of the currency as a (simple) public monopoly as outlined in Full Employment AND Price Stability and the other mandatory readings.

So yes, we can simply restore aggregate demand with the FICA suspension and funds for the states, but if I were running things I’d include the $8 transition job to improve the odds of both higher levels of real output and lower ‘inflation pressures’.

Also, this is not to say that I don’t support the funding of public infrastructure (broadly defined) for public purpose. In fact, I see that as THE reason for government in the first place, and it should be determined and fully funded as needed. I call that the ‘right size’ government, and, in general, it’s not the place for cyclical adjustments.

4. An energy policy to help keep energy consumption down as we expand GDP, particularly with regard to crude oil products.

Here my presumption is there’s more to life than burning our way to prosperity, with ‘whoever burns the most fuel wins.’

Perhaps more important than what happens if these proposals are followed is what happens if they are not, which is more likely going to be the case.

First, given current credit conditions, world demand, and the 0 rate policy and QE, it looks to me like the current federal deficit isn’t going to be large enough to allow anything better than muddling through we’ve seen over the last few years.

Second, potential volatility is as high as it’s ever been. Europe could muddle through with the ECB doing what it takes at the last minute to prevent a collapse, or doing what it takes proactively, or it could miss a beat and let it all unravel. Oil prices could double near term if Iran cuts production faster than the Saudis can replace it, or prices could collapse in time as production comes online from Iraq, the US, and other places forcing the Saudis to cut to levels where they can’t cut any more, and lose control of prices on the downside.

In other words, the risk of disruption and the range of outcomes remains elevated.

The Saudis are the only producer with excess capacity, which puts them in the position of swing producer.

They post prices and then let their refiners buy as much as they want at their posted prices.

They have no choice but to be price setter, but they also don’t want anyone to know they are simply setting prices, so they talk around it and have obviously done a good pr job in that regard.

So after production spiked due to lost Libyan output, production now seems be falling back to prior levels as Libya comes back online.

There are other things affecting supply and demand as well, also altering Saudi production accordingly.

The Saudis lose control of price on the upside only when they don’t have sufficient productive capacity to meet demand. And they lose control on the downside when they can’t cut sufficiently to address a fall in net demand.

Looks to me like they will remain in that catbird seat for quite a while.

And if they keep prices relatively stable there will not likely be a 70′s style global inflation problem.

This chart of West Texas crude prices vs Brent north sea crude prices was done a few days ago, with the spread subsequently narrowing further to under $10.

As previously discussed a few weeks ago, with the Strategic Petroleum Reserve release initiated by President Obama now winding down, the glut in Cushing that looks to have caused West Texas crude prices to fall to about a $25 discount to Brent crude and world prices in general looks to be coming to an end. Additionally, to help ensure it doesn’t happen again, it was announced the flow in a large pipeline will soon be reversed to allow crude to flow out of Cushing.

As a consequence the WTI price has been rising steadily and looks to me to be reconverging with Brent prices.

And seems to me, watching the news broadcasting, the increase is at best very disconcerting to the US consumer in front of the holiday shopping season.

As discussed last week, the latest euro package just announced is unravelling quickly as markets again realize there is no actual substance, and no operational path with regards to carrying any of it out. So things will deteriorate as described until markets again force further ‘action.’

At the same time, the austerity continues to weaken the euro economies, with Q4 potentially going negative, driving deficits that much higher in the process.

The ‘answer’ remains the ECB writing the check, which they’ve sort of seemed to recognize, but they remain (errantly) concerned that reliance on the ECB is inherently inflationary, and thereby violates the ECB’s mandate for price stability. So it won’t happen until things again get bad enough to force it to happen.

The catastrophic risk remains a failure, when push comes to shove, to allow the ECB to write the check as they have been doing to allow it all to muddle through.

The range of outcomes couldn’t be wider. Write the check and not much happens, don’t write the check and there is unthinkable collapse.

Meanwhile, the 1% running the US looks to be trying to take the lead in the global austerity race to the bottom as the Democrats in the super committee on deficit reduction have led off by proposing a $4 trillion deficit reduction package.

Toss in West Texas crude prices heading to Brent levels of about $110/barrel as the strategic petroleum reserve release winds down over the next three weeks and the looks to me like the US consumer crawls back into his foxhole just in time for the holiday season.

Not to mention Japan now darning the torpedoes and buying dollars to take back a bit of the export market they lost by kowtowing to former tsy sec paulson’s demands to not be a ‘currency manipulator’ in the context of still weakening global demand in general.

The number one threat to world order remains a failure to sustain demand. The good news is sustaining aggregate demand is a simple matter once the monetary system is understood. The bad news is there seems to be no one of authority who doesn’t have it all backwards.

Still seems to me that the idea that WTI appreciates to Brent as the Strategic Petroleum Reserve release winds down over the next few weeks is playing out as previously discussed. The WTI discount depends on a serious glut condition persisting, and the wind down of the approx 3.8 million barrels a week being delivered from the strategic petroleum reserve will work to reduce the glut by that amount.

If so, WTI is marching towards $110/barrel which seems to me could trigger substantial market reactions.

And about the same time the super committee deficit reduction talks will be in full swing, euro financing stresses elevated, exacerbated by confirmation of the 0 gdp growth forecasts hit the headlines, and further slowdown news from China complicating things as well.

The ‘answer’ remains as simple as it is further away from political reality than ever, even though the right policy responses couldn’t be more attractive to both sides:

The US budget deficit is too small.

This is what I’ve proposed the US do with Canada and Mexico- long term contracts for oil and nat gas at ‘fair’ prices would stabilize prices and reduce price disruptions and inflation possibilities of all three economies.

Russia says close to final stage on China gas deal

By Gleb Bryanski

October 11 (Bloomberg) — Russia said on Tuesday it was close to the final stage of a huge gas supply deal with China, in what would be a landmark trade agreement between the long-wary neighbours.

A deal to supply the world’s second biggest economy with up to 68 billion cubic metres of Russian gas a year over 30 years has long been delayed over pricing disagreements.

“We are nearing the final stage of work on gas supplies,” said Russian Prime Minister Vladimir Putin, on his first overseas trip since announcing he was ready to reclaim the Russian presidency.

Putin is hoping his two-day visit will help broaden trade with China, which he expects to grow to $200 billion in 2020 from $59.3 billion last year.

The US sales from the strategic reserve have been about 1 million bpd and are due to end soon. Saudis have upped output by about 1 million per day as well. My concern is how the US output will be ‘replaced’ next month as it looks like Libya won’t be back online as before any time soon. So unless demand falls it will be up to the Saudis. If they don’t have the capacity they could lose control of prices to the upside.

From CNBC:

Libyan oil production was just shy of 1.6 million barrels per day in February, before the uprising swept across the country, leading to six months of civil war. Production in May was down to 60,000 barrels per day, according to the International Energy Agency (IEA).

“The medium-term outlook is that they probably have the potential to produce more than the 1.6 million, so it’s a very bullish scenario for anyone who is ready to invest in Libya,” Johannes Benigni, managing director of JBC Energy, told CNBC Wednesday morning. “The reality factor is, everyone knows that Libya was easier to run in a dictatorship than in a democratic or semi-democratic environment, and those guys first have to prove that they are able to bring back stability.”

The TNC, headed by Mustafa Jalil, appears to be relatively cohesive at the moment, but the rebels are composed of a complex mix of political, tribal and social alliances that analysts worry may not hold once their common enemy is beaten.

Benigni said that he expected that Libya could pump 400,000 barrels per day by the end of the year, but that in the best case scenario it would be 12-18 months before it returned to pre-war levels.

Goldman Sachs had forecast average output of 250,000 barrels per day in 2012, with a potential to increase to 585,000 barrels per day by the end of the year if rebels were to take control of infrastructure in the west of the country. The rebellion, which began in the east of the country, rapidly seized parts of the Libyan oil industry. Goldman’s predictions were based around output from those eastern facilities.

In a report issued on Tuesday, however, the bank said that the seizure of western oil assets increases the likelihood that output could ramp up more swiftly.

Analysts have been struggling to obtain reliable information on the state of much of the Libyan oil infrastructure. A report from Exclusive Analysis, the risk forecasting firm, said that exports would be likely to resume from the east within three months and from the west within six to nine months.

It doesn’t look to me like anything particularly bad has actually yet happened to the US economy.

The federal deficit is chugging along at maybe 9% of US GDP, supporting income and adding to savings by exactly that much, so a collapse in aggregate demand, while not impossible, is highly unlikely.

After recent downward revisions, that sent shock waves through the markets, so far this year GDP has grown by .4% in Q1 and 1.2% in Q2, with Q3 now revised down to maybe 2.0%. Looks to me like it’s been increasing, albeit very slowly. And today’s employment report shows much the same- modest improvement in an economy that’s growing enough to add a few jobs, but not enough to keep up with productivity growth and labor force growth, as labor participation rates fell to a new low for the cycle.

And, as previously discussed, looks to me like H1 demonstrated that corps can make decent returns with very little GDP growth, so even modestly better Q3 GDP can mean modestly better corp profits. Not to mention the high unemployment and decent productivity gains keeping unit labor costs low.

Lower crude oil and gasoline profits will hurt some corps, but should help others more than that, as consumers have more to spend on other things, and the corps with lower profits won’t cut their actual spending and so won’t reduce aggregate demand.

This is the reverse of what happened in the recent run up of gasoline prices.

Japan should be doing better as well as they recover from the shock of the earthquake.

Yes, there are risks, like the looming US govt spending cuts to be debated in November, but that’s too far in advance for today’s markets to discount.

A China hard landing will bring commodity prices down further, hurting some stocks but, again, helping consumers.

A euro zone meltdown would be an extreme negative, but, once again, the ECB has offered to write the check which, operationally, they can do without limit as needed. So markets will likely assume they will write the check and act accordingly.

A strong dollar is more a risk to valuations than to employment and output, and falling import prices are very dollar friendly, as is continuing a fiscal balance that constrains aggregate demand to the extent evidenced by the unemployment and labor force participation rates. And Japan’s dollar buying is a sign of the times. With US demand weakening, foreign nations are swayed by politically influential exporters who do not want to let their currency appreciate and risk losing market share.

The Fed’s reaction function includes unemployment and prices, but not corporate earnings per se. It’s failing on it’s unemployment mandate, and now with commodity prices coming down it’s undoubtedly reconcerned about failing on it’s price stability mandate as well, particularly with a Fed chairman who sees the risks as asymmetrical. That is, he believes they can deal with inflation, but that deflation is more problematic.

So with equity prices a function of earnings and not a function of GDP per se, as well as function of interest rates, current PE’s look a lot more attractive than they did before the sell off, and nothing bad has happened to Q3 earnings forecasts, where real GDP remains forecast higher than Q2.

So from here, seems to me both bonds and stocks could do ok, as a consequence of weak but positive GDP that’s enough to support corporate earnings growth, but not nearly enough to threaten Fed hikes.

Consumer borrowing up in June by most in 4 years

By Martin Crutsinger

May 25 (Bloomberg) — Americans borrowed more money in June than during any other month in nearly four years, relying on credit cards and loans to help get through a difficult economic stretch.

The Federal Reserve said Friday that consumers increased their borrowing by $15.5 billion in June. That’s the largest one-month gain since August 2007. And it is three times the amount that consumers borrowed in May.

The category that measures credit card use increased by $5.2 billion — the most for a single month since March 2008 and only the third gain since the financial crisis. A category that includes auto loans rose by $10.3 billion, the most since February.

Total consumer borrowing rose to a seasonally adjusted annual level of $2.45 trillion. That was 2.1 percent higher than the nearly four-year low of $2.39 trillion hit in September.

Setting price and letting quantity adjust:

Daily Oil Note: OSPs a Critical Piece in the Supply Puzzle

A key source of market uncertainty is how much oil Saudi Arabia will produce and export over the next few months. We see reports that Saudi Aramco recently offered additional cargoes to term buyers, but reportedly many declined because pricing was unattractive versus alternatives. Tanker bookings also do not point to a substantial ramp up in Middle East liftings in coming weeks. In fact, they are running well behind the pace in June.

Looks like some OPEC infighting.

The only way OPEC could block Saudi attempts to lower price would be production cuts beyond the Saudi’s ability to increase supply.

In the past, OPEC has never actually been able to do that, as apart from the Saudis the rest pretty much always pump flat out even after they agree to cut.

I suspect the Saudis and Obama also know Lybia will be back online soon with another 1 million barrels a day make it that much more problematic for the rest of OPEC to cut sufficiently to get the price up.

And the US and the Saudis probably also know world demand is falling short of forecasts, or they probably wouldn’t have undertaken the price cutting actions.

*DJ OPEC Secretary General: Sees No Good Reason For IEA Oil Release
*DJ OPEC Secy Genl: Wants Immediate Cessation Of Stocks Release
*DJ OPEC President Ready To Call Emergency Meeting If Needed
*DJ OPEC President: Hopes Oil Market Won’t Warrant Emergency Meeting

Looks like the Saudis left the OPEC meeting saying they wanted crude 80-90 and didn’t need OPEC to do it.

The Saudis realize that to stay in power they need Obama’s support.

This latest move is an understanding with Obama to give him all the credit and keep the fact that the Saudis are price setters out of the headlines.

And there is probably an understanding that the Saudis will keep the price low enough so the US can later refill the reserve at the lower prices.

The Saudis don’t sell in the spot markets, they only post prices to refiners and then take orders at those prices.

That is, they post price and let quantity vary.

So the only way they could definitively get to 10 million bpd would be to change policy and sell in the spot market, which would let loose a downward price spiral until some other producer decided to cut production to stop the fall.

As always, it’s their political decision, and no telling what they might actually do.

Saudi Shows Who’s Boss, to Pump 10 Million Barrels Per Day

June 10 (Reuters) — Saudi Arabia will raise output to 10 million barrels day in July, Saudi newspaper al-Hayat reported on Friday, as Riyadh goes it alone in unilaterally pumping more outside OPEC policy.

Citing OPEC and industry officials, the newspaper said output would rise from 8.8 million bpd in May. There was no immediate independent verification of the story.

The report suggests Riyadh is asserting its authority over fellow members of the Organization of the Petroleum Exporting Countries after it failed to convince the 12-member cartel to lift output at an acrimonious meeting in Vienna on Wednesday.

“The Saudi intention is to show that they cannot be pushed around,” said Middle East energy analyst Sam Ciszuk at IHS. “Either OPEC follows the Saudi lead or they will have problems.”

A proposal by Saudi and its Gulf Arab allies the UAE and Kuwait to lift OPEC production was blocked by seven producers including Iran, Venezuela and Algeria.

The two sides blamed each other for the breakdown in talks. Saudi Oil Minister Ali ali-Naimi called those opposed to the deal obstinate. Iran’s OPEC governor Mohammad Ali Khatibi responded by saying Riyadh had been overly-influenced by U.S.-led consumer country demands for cheaper fuel.

“The hawks in OPEC called their bluff and now it is up to Riyadh to show that they were not bluffing — that they will go ahead unilaterally if pushed,” said Cizsuk.

Saudi Arabia has not pumped 10 million bpd for at least a decade, according to Reuters data, production having peaked at 9.7 million bpd in July 2008 after prices hit a record $147 a barrel. It is the only oil producer inside or outside OPEC with any significant spare capacity.

Asked in Vienna on Thursday whether Saudi would reach 10 million bpd Naimi said: “Just send the customers, don’t worry about the volumes.”

Gulf delegates said Riyadh was planning to pump an average 9.5-9.7 million bpd in June.

Saudi is already offering more crude to refiners in Asia, which, led by China, is driving a global rise in oil consumption.

Forecasts from OPEC headquarters show demand will increase about 1.7 million bpd in the second half of the year from recent cartel output of about 29 million bpd.

Brent crude rose to a 5-week high of $120 a barrel after the OPEC talks broke down. Prices eased after Friday’s Saudi news, last dipping 63 cents to trade near $118.94 a barrel.

So imagine the corn crop report comes out and it surprises on the upside at up 30%
What happens? The price of corn probably starts to fall. Commercial buyers back off, farmers rush to hedge, and, overall, players of all ilks try to reduce positions, get short, etc.

A few weeks later it’s further confirmed that the farmers are producing a massive bumper crop.

What happens? The same adjustments continue.

But what if that crop report was wrong? What if, in actual fact, there had been a crop failure? And market participants never do get that information?

What happens? Prices go down for a while as described above, but at some point they reverse, as sellers dry up, and as consumption overtakes actual supply price work their way higher, and then accelerate higher, even if no one ever actually figures out there was a crop failure.

QE is, in fact, a ‘crop failure’ for the dollar. The Fed’s shifting of securities out of the economy and replacing them with clearing balances removes interest income. And the lower rates from Fed policy also reduces interest paid to the economy by the US Treasury, which is a net payer of interest.

But the global markets mistakenly believed QE was producing a bumper crop for the dollar. They all believed, and some to the of panic, that the Fed was ‘printing money’ and flooding the world with dollars.

So what happened? The tripped overthemselves to rid them selves of dollars in every possible manner. Buying gold, silver, and the other commodities, buying stocks, selling dollars for most every other currency, selling tsy securities, etc. etc. etc. in what was, in most ways, all the same trade.

This went on for months, continually reinforced by the pervasive rhetoric that QE was ‘money printing’, and that the Fed was playing with fire and risking hyperinflation, with the US on the verge of suddenly/instantly becoming the next Greece and getting its funding cut off.

Not to mention Congress with it’s deficit reduction phobia.

So what’s happening now? While everyone still believes QE is a bumper crop phenomena, QE (and 0 rate policy in general) is none the less an ongoing crop failure, continuously removing $US net financial assets from the economy.

And so now that the speculators and portfolio shifters have run up prices of all they tripped over each other to buy, the anticipated growth in spending power-underlying aggregate demand growth needed to support those prices- isn’t there. And, to throw more water on the fire, the higher prices triggered supply side repsonse that have increased net supply along with a bit of ‘demand destruction’ as well.

Last week I suggested that higher crude prices were the last thing holding down the dollar, and that as crude started to fall I suggested its was all starting to reverse.

It’s now looking like it’s underway in earnest.

The Saudis operate by posting prices for their refiners and then filling all orders at their posted prices.

It looks like the spike in demand for Saudi crude due to Libya has pretty much passed, and Libya is not back to full production.

So look for Saudi production to fall further when Libya comes back on line.

Prices, however, will remain at whatever level the Saudis decide to post, much like Donald Trump has been proclaiming. And with Trump having the President’s ear, there’s at least an outside chance the President figures it out and lets the Saudis know he’s on to them and works out a price cut?

I thought he did a AAA job within his paradigm.

The answers on the dollar were spot on- ultimately the dollar is worth what it can buy, so ‘low inflation’ is a strong dollar policy in the long term. It’s pretty much the purchasing power parity argument. Additionally, he said a strong economy helps the dollar, citing the capital inflow channel, probably a reference to China and other emerging market nations. And I might have added the fiscal tightening channel, as strong economies tend to cause federal deficits to fall via automatic fiscal stabilizers.

Interestingly, he did not mention specifically how higher oil prices, set by a foreign monopolist, continue to work against the dollar.

Nor how highly deflationary policies in other currencies tend to strengthen those currencies relative to the dollar.

And there was no mention of how portfolio shifting alters the dollar, which may be the largest driver currently.

Let me suggest, however, it would have been more nearly correct for him to have said the policy of low inflation and strong growth also happens to support the dollar, rather than imply a strong dollar was the policy variable.

He remains out of paradigm on the QE issue, still not realizing it’s entirely about price and not quantity, but that was to be expected.

The more dovish tone from the FOMC indicates some fundamental insecurity about the economy. Yes, they remain moderately optimistic, but probably continue to worry disproportionately about the downside risks. They see downside risks to demand everywhere from the euro zone and the UK, to Japan and China, and, though recognizing nothing of consequence has happened yet, they hear the fiscal sabre rattling from both the left and the right. And they see it’s unlikely for the housing channel to provide much support in the near future as it’s done in previous cycle.

Also, second chance to buy my 100oz gold bar at the current spot price of gold!
When I offered it for sale when gold was $1,200, no one wanted it so I still have it.

:)

Karim writes:

1) Extended period means a ‘couple of meetings’.
2) Q1 GDP weakness transitory (i.e., they didn’t alter the outlook for rest of f/cast period) due to
   a. timing of defense outlays
   b. timing of export shipments
   c. weather
3) No fiscal measures that have been announced so far have altered their near-term outlook
4) Impact of Japan supply disruptions ‘moderate and temporary’
5) Strong and stable dollar in U.S. best interest

Stupid headline and stupid response.

Unemployment is a macro problem, and cutting spending does’t create jobs.

It’s the continuing saga of the blind leading the blind.

Looking for $31 billion in federal spending cuts this week.
And that’s just a down payment.

Obama: Shift From Foreign Oil Will Help Create More Jobs

April 2 (AP) — President Barack Obama says shifting the U.S. away from imported oil and toward cleaner forms of energy will add momentum to a trend that has led to 1.8 million new jobs in the past 13 months.

Obama used his weekly radio and Internet address Saturday to promote his ideas for bringing down gasoline prices by decreasing U.S. dependence on foreign oil. A blueprint he outlined in a recent speech calls for increasing domestic oil exploration and production, making cars and trucks more energy efficient and building vehicles that run on alternative fuels or electricity.

Noting that the U.S. doesn’t have enough oil reserves to meet its needs, he set a goal of reducing imports by one-third by 2025.

“By doing so, we’re going to make our economy less vulnerable to wild swings in oil prices,” Obama said. “We’re going to use cleaner sources of energy that don’t imperil our climate. And we’re going to spark new products and businesses all over the country by tapping America’s greatest renewable resource: our ingenuity.”

The address was Obama’s third in recent days on the issue. On Wednesday, he travels to the Philadelphia area to visit an arm of the Spanish company Gamesa, maker of giant turbines that generate electricity from wind.

Oil prices have climbed because of increasing demand in China and instability in some oil-producing countries in the Middle East. That, in turn, has pushed U.S. gasoline prices to new highs. The national average for a gallon of gas hit $3.619 on Friday, the highest price ever for this time of year, according to AAA and other sources. Prices have climbed 23.2 cents in the past month and more than 81 cents in the past year.

Senate Republican leader Mitch McConnell agreed with Obama on encouraging more domestic energy production. But he accused the administration of stifling that industry’s growth by canceling drilling leases, halting drilling off the Gulf Coast after last summer’s oil spill and increasing permit fees.

“As a result, thousands of U.S. workers have lost their jobs, as companies have been forced to move their operations overseas. That must end,” the Kentucky Republican said. “We must do more to find energy here at home, and the jobs that go with it.”

Obama said that sparking new products and businesses during a transition away from imported oil will help create jobs. The government reported Friday that 230,000 private sector jobs were created in March, bringing the total number created in the past 13 months to 1.8 million. The national unemployment rate also dipped to a two-year low of 8.8 percent last month.

“That’s a good sign,” Obama said. He recorded the address at a UPS shipping facility in suburban Maryland, where he examined all-electric and hybrid vehicles used by AT&T, Verizon, PepsiCo and other companies.

“But we have to keep up the momentum, and transitioning to a clean energy economy will help us do that,” Obama said.

House Speaker John Boehner, R-Ohio, focused his party’s weekly message on steps he said the government must take to encourage small businesses to create jobs. Among those steps are continuing to cut spending, blocking tax increases, reducing the bureaucracy and eliminating regulations. Boehner once owned a small plastics and packaging business in Ohio.

Boehner said Congress also needs to pass a bill funding the government through Sept. 30, when the budget year ends, and avoid a shutdown. The government’s authority to spend money expires next Friday.

“Washington’s inability to get spending under control is creating uncertainty for our job creators,” Boehner said. “It’s discouraging investment in small businesses and eroding confidence in our economy. To put it simply, the spending binge in Washington is holding our country back and keeping our economy from creating jobs.”

DJ Algeria Oil Min:Increasingly Hard To Understand Market Dynamics

Agreed!

DJ Algeria Oil Min:Oil Markets Increasingly Respond To Financial Speculation

Agreed! The funds involved in commodity speculation dwarf the funds involved in the physical markets

DJ Algeria Oil Min:Market Volatility Makes Energy Investment Difficult

Agreed! The risk of a price collapse is a major factor for long term investment decisions.

DJ Algeria Oil Min: Seeking To Exploit Shale Fields In Algeria
DJ Algeria Oil Min: Will Seek Partnerships To Exploit Unconventional Oil, Gas
DJ Algeria Oil Min:Sonatrach, Partners To Invest $2.5B/Year On Unconventional Hydrocarbons
DJ Algeria Oil Min: Europe Will Need Long-Term Gas Contracts

Yes, long term contract work best for both producers and users to ensure the viability of investments and the stability of supply and price

DJ Algeria Oil Min: No Shortage Of Physical Oil

Agreed! Reinforces the fact that the Saudis are the swing producer/ultimate price setter as previously discussed

DJ Algeria Oil Min: OPEC Will Respond If There’s A Shortage Of Crude

Confirming excess Saudi capacity estimates

DJ Algeria Oil Min: No Requests For Extra Crude From Algeria

Confirming no supply shortages and Saudi price setting

Here’s my take.

As before, all the world actually cares about is the price of oil.

And the internal struggle will wind down with someone controlling the oil.

And whoever gets control of the oil wants the oil for only one reason- to sell it.

In a land of haves and have nots (at all levels), and no understanding of fiscal balance, it’s all about having the oil to sell.

So that means prices go back to where the Saudis want them to be.

My guess, and all anyone can do is guess, is Brent at maybe 100 which puts WTI maybe just under 90 until the glut issues are sorted out.

If this happens, seems-

The long oil long trades reverse.
Food prices back off some.
The view of the economy goes from half empty to half full.
The dollar gets a lot stronger.
Energy related stocks lose, others win.
But a stronger dollar may dampen prospects for US stocks.
Bonds move with stocks.
Attention shifts back to China, Europe, UK, and US fiscal policies, which are all in tightening mode.

And happy birthday to my brother Seth who turns 60 today! He just posted some old family pictures on facebook.

Right, as swing producer/monopolist that’s what they necessarily do- set price and let quantity adjust.

But if quantity demanded exceeds their ability to pump they lose control of price on the upside.

>   
>   (email exchange)
>   
>   On Thu, Feb 24, 2011 at 9:43 AM, Greg wrote:
>   
>   Just like you say about the Saudi’s…..
>   

Saudi Arabia in talks to boost oil output

By David Blair, Jack Farchy and Javier Blas

February 24 (FT) — Saudi Arabia is in “active talks” with European oil companies to meet the production shortfall left by Libya, the clearest indication to date that the leader of the Opec oil cartel is about to boost supplies to stop further rises in the oil price, which surged to near $120 a barrel on Thursday.

Riyadh is asking “what quantity and what quality of oil they [the European refiners] want,” a senior Saudi oil official said on condition of anonymity.

Oil traders said the talks signalled that Saudi Arabia realised that the political crisis in Libya was now an oil supply crisis and that the kingdom needed to act quickly and decisively to stop oil prices hurting the global economic recovery.

“You can only expect the price to go up. It is fear of the unknown. The risks are all to the upside,” one senior oil trader said. “Saudi Arabia needs to respond.”

The kingdom is considering two options for increasing supplies. The first would be to boost Saudi production and send more crude through the kingdom’s East-West pipeline, which links the Gulf region with the Red Sea port of Yanbu, for shipment to Europe.

Another possibility, which is currently only being “studied”, would be a swap arrangement, whereby West African oil intended for Asian buyers is redirected to Europe, with Saudi Arabia stepping in to supply the Asian customers.

West African oil, such as Nigerian crude, is very similar to the gasoline-rich Libyan oil, traders said, noting that West Africa is geographically closer to Europe than Saudi Arabia.

“Right now, there are active talks in order to implement what is needed,” the Saudi oil official added. He stressed that the kingdom retained spare capacity of some 4m barrels a day – more than than double Libya’s entire output which totalled 1.58m b/d in January, according to the International Energy Agency.

Saudi Arabia has not yet decided whether to increase its output in response to Libya’s crisis, the official added, saying it would depend on the requirements of European oil companies.

If it proved necessary for Saudi Arabia to produce more, “then that will happen, there’s no problem at all”, he added.

Traders believe Saudi Arabia has the capacity to boost production by at least 1m b/d with just 24 hours notice, meaning that if a decision was adopted now, the oil tankers could be arriving in Europe within 10 days.

The move by the world’s largest oil producer comes as Eni of Italy, the most active foreign oil company in Libya, said on Thursday that oil production from the North African country has plunged to just a quarter of normal levels.

Increasingly panicked buying drove the price of Brent crude futures, the global pricing benchmark, up 6.7 per cent to a peak of $119.79, the highest since August 2008. Traders and investors feared that the near-total shutdown of Libya’s oil industry would leave the global oil market with little supply cushion should the political crisis spread to another major Middle Eastern oil producer.

Paolo Scaroni, Eni chief executive, on Wednesday made the most pessimistic public assessment to date of the impact of the Libyan crisis on the country’s oil output, saying the country was producing only 400,000 b/d, compared with 1.6m b/d before the violence erupted.

“The real phenomenon is there are 1.2m barrels less on the market,” Mr Scaroni told reporters in Rome, adding that the loss of Libyan production was “not a huge thing, but it is something and there is also a sense of general uncertainty in the region which can be the trigger for speculation”.

The shortfall means the world market is enduring its biggest oil crisis since hurricane Katrina in 2005 knocked out most US oil production in Gulf of Mexico.

Traders believe that Saudi Arabia has the capacity to increase production and also the oil of the right quality to meet the shortfall. The kingdom produces so-called Arab Extra Light and Arab Super Light, which through blending could be made to resemble the high-quality, light, sweet oil produced by Libya.

The Saudi move comes as oil prices reached levels that many economists believe will dramatically slow the global economy and potentially trigger a double-dip recession. Oil prices hit an all-time high of nearly $150 a barrel in mid-2008.

Might need to delay ‘peak oil’ a bit.

More interesting, I’d estimate it would take about a 5 million barrel a day ‘shift’ in net demand to dislodge the Saudis as swing producer, as they can only cut production by less than that much to sustain price should that happen.

In other words, a combination of increased non opec supply and reduced world demand of 5 million bpd would force a cut in production of that much for the Saudis to be able to continue to set price, from their current production level of about 8.5 million bpd.

And along with these ‘new drilling methods’ Iraq is looking to add over 5 million bpd in capacity over the next several years.

The question is what will happen with demand, and looks to me the US and Europe are starting to go the other way and reduce gasoline demand via conservation (higher mpg’s in vehicles) and shifting to alternative fuels, directly and indirectly.

So what’s the Saudi’s best move here?
Keep prices high a long as possible and get all the wealth they can before prices collapse?
Or cut price in an attempt to discourage the forces at work that are threatening their pricing power?

New Drilling Method Opens Vast Oil Fields in US

February 9 (AP) — A new drilling technique is opening up vast fields of previously out-of-reach oil in the western United States, helping reverse a two-decade decline in domestic production of crude.

Companies are investing billions of dollars to get at oil deposits scattered across North Dakota, Colorado, Texas and California. By 2015, oil executives and analysts say, the new fields could yield as much as 2 million barrels of oil a day—more than the entire Gulf of Mexico produces now.

This new drilling is expected to raise U.S. production by at least 20 percent over the next five years. And within 10 years, it could help reduce oil imports by more than half, advancing a goal that has long eluded policymakers.

“That’s a significant contribution to energy security,” says Ed Morse, head of commodities research at Credit Suisse .

Oil engineers are applying what critics say is an environmentally questionable method developed in recent years to tap natural gas trapped in underground shale. They drill down and horizontally into the rock, then pump water, sand and chemicals into the hole to crack the shale and allow gas to flow up.

Because oil molecules are sticky and larger than gas molecules, engineers thought the process wouldn’t work to squeeze oil out fast enough to make it economical. But drillers learned how to increase the number of cracks in the rock and use different chemicals to free up oil at low cost.

“We’ve completely transformed the natural gas industry, and I wouldn’t be surprised if we transform the oil business in the next few years too,” says Aubrey McClendon, chief executive of Chesapeake Energy, which is using the technique.

Petroleum engineers first used the method in 2007 to unlock oil from a 25,000-square-mile formation under North Dakota and Montana known as the Bakken. Production there rose 50 percent in just the past year, to 458,000 barrels a day, according to Bentek Energy, an energy analysis firm.