Brent Crude benchmark is the enemy, not Iran

http://en.wikipedia.org/wiki/Brent_Crude

Although the “Brent Crude” category of oil is losing objective relevence due to depleted stocks, and is priced higher because of those supply problems, it is becoming the “benchmark” for setting oil prices because producers have discovered that consumers and businesses are will pay the higher amount.

That is of course because we don’t have any choice.  That is why government is supposed to take action against price fixing.

One of the reasons why car gas prices have been high all year even though oil’s price per barrel was relatively low for much of the year is this spread.  Another is the parasitic speculation that our governments negligently allow.   What you might call “naked buying” of oil is far more dangerous to the world than “naked short selling”. 

Naked buying means that investors who add no value and never take delivery or deliver any oil at all are receiving some of the proceeds.  That drains money that would be spent on the real economy.  It is a dangerous form of price fixing because the only way to opt out of paying the prices is to not use any oil products such as gasoline at all.  To the extent that gas prices are built into food costs there is no way to opt out at all.  Food will have to be shipped to markets and the additional costs will be passed on to the consumer.

The 2008 economic crash was primed by the surge in the costs of oil and gasoline, which crippled the economy.  The first step in that catastrophe was a surge in oil and gas prices caused by speculation rather than supply and demand.

If we allow the same  crippling action again we are inviting the next crash, having not yet recovered from the previous one.  With the problems in Europe we are teetering on the brink of worldwide economic depression.

Such a depression will not serve the oil producers for a number of reasons (although I am certain that  Goldman Sachs will find a way to make money out of it).  Consider for instance that during the great depression worldwide manufacturing dropped by one third.   If that happens one would expect that supply of oil will vastly exceed demand and oil producers will be lucky to get $20 per barrel for 5-10 years.   If the humanitarian disaster and artificially constructing tensions that could lead to world war 3 aren’t enough of a motivator to get oil producers to cooperate with sensible pricing, maybe the prospect of cheap oil will do the trick.

One commentator noted in 2008 that demand for oil was actually dropping at the time of the price surges back then so supply and demand were not the cause of the problem.

As with health care and other critical economic areas, private citizens, small business and even most big businesses have almost no leverage to control the price and the responsibility for doing so falls to the government.  Unless supply exceeds demand, most consumers of oil and gas have to pay as much as they can barely afford in the short term, if necessary at the expense of cutting in other areas.

One of the more offensive aspects of this price fixing is that, to the extent that oil and gas are domestically produced, our own oil and gas are getting sold back to us at a 100% premium.  That adds insult to the injury of giving away our natural resources almost for free and giving the wealthiest corporations on earth tax breaks in return for them accepting the onerous obligation of robbing us blind.

So if oil costs are rocketing, why is it that the US and other countries are making the terrible decision to impose sanctions against Iran, one of the world’s leading oil producers?

The reason is that the sanctions have nothing to do with Iran’s non-existent nuclear threat.  The conclusion of the ominous UN report that Iran’s nuclear weapons program “may” have continued after 2003, i.e. there is no evidence that it did continue after 2003, is a preposterous basis for severe sanctions in 2011.

What the sanctions will do is reduce the supply of oil which will tend to drive prices higher, and more specifically prevent prices from collapsing to a more realistic level.

In some ways, from the perspective of an evil investor, such an arrangement may even be preferrable to conquering Iran as was done with Iraq and Afghanistan.  A war may disrupt supply, but eventually when the supply is back on line, there is no longer an excuse for keeping it off the market.  Sanctions create the possibility of perpetually keeping supply out of the market without the risk and expense of a war.

The sanctions against Iran will be worth tens or hundreds of billions of dollars to those who are making money off artificially inflated oil and gas prices.

This is at a time that the public, legitimate businesses and governments can ill afford to give greedy rich individuals and corporations such an unearned gift.

We probably won’t see any real action from Obama on this because he, like Bush, is far too close to Goldman Sachs, who spearheaded the creation of the commodities bubble in 2007-8 and probably a similar role with the present bubble.

I note that if anybody who had prior notice of sanctions against Iran could have made an enormous amount of money with investing positions that exploited access to that information.

A government that wished to respond in kind could time announcements for the opposite effect, say by using intelligence agencies to determine a hostile corporation’s long and short exposure and resulting weaknesses. If they, say, are long in options in a commodity, a well timed government announcement could render those options worthless, and if they have no advance knowledge, they could be stuck. If they do protect themselves by making what would be an irrational decision without that knowledge, you nab them on insider trading.

The US – Iran standoff is a lose-lose situation for both nations and their citizens.   The foundation for it is even worse than the foundations for the Iraq war. 

What the west should be doing is looking at how to integrate Iran into global civilization.  That will, in time, have the desired effect of moderating Iran. 

Iran needs to sell its’ oil and we need to buy it.

There is an obvious solution here.

The solution is not diminished in any way by its failure to make Goldman Sachs money and its potential to lose Goldman Sachs money.

The 2009 Pentagon report on economic terrorism hypothesized that there could have been a multi-staged plot to destroy the US economy, with phase one being an artificial escalation of commodity prices.

If a government were to make the implied finding against Goldman Sachs and take appropriate measures to seize their international assets and other steps, I would probably not disagree, although the most perverse aspect of the events of 2007-8 is that it is not clear whether those driving the world to the abyss violated any then existing law.