Doubling Down on Stupid: Economic Warnings Already Coming to Pass

And now they’re coming for your kids!

In a bold demonstration of their willingness to play the reeeeally long game, the Biden administration has reached out to TikTok “influencers” — teenagers who command the attention of millions of other teenagers by doing goofy, teenage stuff — to inform their followers that the price of gas, and inflation in general, is Vladimir Putin’s fault…

It’s a generational play. Most adults have enough life experience to understand how inflation actually works. Young people are still figuring it out.

I have a 15 year-old daughter and we have conversations about economic topics all the time. While I admire her ability to think for herself and come to her own conclusions, I sometimes worry that she (like every other kid watching these TikTok videos) isn’t getting the whole story on a lot of issues.

For instance: Wars bring uncertainty, and uncertainty sends markets into frenzies. Putin’s invasion of Ukraine certainly did spike oil prices. But laying the blame solely on him is simply ridiculous.

Gas prices had already soared some 70% to $3.50 a gallon since Biden took office — long before Putin sent in the tanks. Oil was trading in the mid-$90 per barrel range for months too. 

But while they have these TikTokers blaming Putin for every bad thing in the world, others in Washington are sowing other opinions elsewhere…

Talking Out of Both Sides of Their Mouth

Last week I laid out just a few of the realities of drilling, pumping and selling oil. And how the administration’s over-simplification — that oil companies can pump all the oil they want, IF only they wanted — is pretty much just a bunch of mis(or dis)information. 

Our bottom line was that if the Biden administration really wanted to take this oil bull by the horns and eventually get prices back under control, they ought to be a lot nicer — at least in regulatory terms — to the companies who invest the money and take the risk to produce this oil.

Not this:

I guess no one in Congress subscribes to this letter.

Because now, as if on cue, here come the attacks on oil companies.

Senator Elizabeth Warren, whose Twitter feed reads like a socialist manifesto — free everything for all — announced in less than 280 characters last week:

She followed up over the weekend with another assessment:

The Wall Street Journal briefly described their clearly not-at-all-arbitrary plans to hit big oil:

The Senators’ plan would require companies that produce or import at least 300,000 barrels of oil per day (or did so in 2019) to pay a per-barrel tax equal to 50% of the difference between the current and average price between 2015 and 2019 (about $57 a barrel).

So at current prices, this would add somewhere between $20 and $25 per barrel to oil producers’ costs. 

As we’ve tried to point out repeatedly here on the Streetlight site, oil is a commodity. And as such, its price is driven by supply and demand. Arbitrarily adding to manufacturers’ costs never delivers the desired results. (Unless the desired result is to screw up markets.)

If any actual proof of this were necessary, we have the Carter-era crude oil windfall profits tax to look at.  

In 1980, the federal government enacted the windfall profit tax aimed at the U.S. oil industry. Its purpose was to claw back oil company revenues that were effectively the result of our dependence on oil imports. (Dependence on imports — or put another way, the inability to produce your own supply — means paying the market prices that get set by those who are producing the supply).

The results were less than impressive.

According to the Congressional Research Service: “The $80 billion in gross revenues generated by the WPT between 1980 and 1988 was significantly less than the $393 billion projected. Due to the deductibility of the WPT against the income tax, cumulative net WPT revenues were about $38 billion, significantly less than the $175 billion projected.” 

Not only that, they also found the tax reduced domestic oil production somewhere between 3% and 6%, and grew our dependence on imported oil by 8% to 16%.

This “windfall profits” threat comes nearly simultaneously as the poking and cajoling of the industry by US Energy Secretary Jennifer Granholm who, like the rest of Washington, has no clue how the industry works… (my emphasis):

Granholm, who has been quite vocal in her support for renewables replacing oil and gas, told the oil industry that a short-term increase in oil and gas would not go counter to the White House’s energy agenda. “We can walk and chew gum at the same time,” the Energy Secretary said.

Translation: We’d like you to help us out until we get through this crisis… then it’s back to screw you.

The sheer stupidity of this Washington @#$^-show is nothing short of amazing. With that much obvious contempt, I’m surprised the entire US oil industry doesn’t pull a John Galt and disappear. 

Here’s an idea, how about give these oil companies some genuine love, and maybe they’ll spend some of those zillions in profits and start drilling new wells. It’s a long shot, but maybe it won’t matter because… 

The Deck is Getting Reshuffled Too

The week before that, we sent out another warning: about the current reshuffling of geopolitical powers and the impact that could easily have on the US dollar.

This week, again on cue, the Wall Street Journal blazed the headline:

Few investors think about the implications of the dollar/oil link… 

In 1970, faced with too many dollars in circulation and not enough gold reserves to back them all up, President Nixon decoupled the dollar from the gold standard. It was that dollar/gold link that created an artificial demand for our currency (and debt).

Breaking that link did two things: It allowed the dollar to float (and sink) freely versus other global currencies. And it allowed us to devalue our currency by printing more of it pretty much at will. 

This quickly became a serious threat to our economy as well as our standing in the world.

Our politicians weren’t without a plan, however. In order to shore up the dollar, a small team led by Nixon’s Secretary of State, Henry Kissinger, struck a deal with the Saudi royal family. 

According to the agreement, the United States would offer military protection for Saudi Arabia’s oil fields, provide the Saudis with weapons, and perhaps most importantly, guarantee protection from Israel. 

In exchange for all that protection, the Saudis simply agreed to price all of their oil transactions in US dollars. (In other words, they’d refuse all other currencies as payment for their oil.) 

The “petrodollar” was born and by once again linking the US dollar to something of real value, an artificial demand was created for it.

And for decades, it’s been this “backing” by Saudi oil that has supported the US dollar.  

Now, it would appear that support has begun to crack.

It’s Not the End of the World Just Yet

To be clear… There are certain serious downsides to the Saudis making this deal.  

For one, the Saudi currency, the riyal, is pegged to the dollar. Another danger is the fact that China keeps tight control over its own currency, manipulating it at will, which makes for even more uncertainty. 

Still, the fact that they’re saying this out loud should grab investors’ attention. It tells the world they know where our biggest weakness lies. 

Oblivious to the real threats facing our economy and preferring to embrace their “narrative” version of what ails the world, the Biden administration appears to be kicking the global reset into high gear. 

We’ll do our best to keep you ahead of that curve…

Make the trend your friend,

Bob Byrne
Editor, Streetlight Confidential