Friday, May 27, 2011

Taibbi Decides to Take Saudi Oil Sheiks at Their Word

In one of the strangest blog posts that I have come across in a long-time, Matt Taibbi, who is known for not taking anybody's word (well he does take words of others, but that's another story), ignores basic economics and decides instead to take the word of, hang on to your seat, Saudi oil sheiks.

He does this so that he can prove that it is evil speculators who have been driving up the price of oil.

He writes:
Well, thanks to Wikileaks, we now know that when the Bush administration reached out to the Saudis in the summer of '08 to ask them to increase oil production to lower prices, the Saudis responded by saying they were having a hard time finding buyers for their oil as it was, and instead asked the Bush administration to rein in Wall Street speculators.

According to the McClatchy report, the Wiki cables show that Saudi ministers repeatedly told Bush administration officials that increasing production might be counterproductive.

The cables show that at the height of the bubble, in May 2008, U.S. officials met in Riyadh with the Saudi assistant petroleum minister, Prince Abdulazziz bin Salman bin Abdulaziz al Saud, who told the U.S. he was "extremely worried" that high prices would destroy the demand for crude.

"Aramco is trying to sell more, but frankly there are no buyers," he reportedly said, referring to the Saudi state oil company. "We are discounting buyers."
Does Taibbi have any frickin clue as to what he is quoting? The Saudi's are saying that the price of oil is too high and they are having trouble selling oil. Duh. In the real world, outside the world where Taibbi sits and madly scribbles notes at the feet of Saudi oil sheiks, if a price is going up that means there is more demand for a product. It means that it is an easier market to sell a product in. For a Saudi sheik to say that a high price is a problem for them because they can't sell any oil at that price, is totally absurd. If they can't sell oil at a given high price, how is oil at that price?

In other words, why the hell is Taibbi buying this absurd economic analysis from a Saudi oil sheik?

The answer is because he wants to blame the climb in oil prices on speculators:
The Wiki documents show that the Saudis had long ago concluded that this increased investor flow was a threat to disrupt the markets. An embassy cable from 2007 recounted a meeting U.S. officials had with Yasser Mufti, an Aramco planner. "The Saudi analysts indicated a link between higher oil prices and the influx of investor funds into the oil markets," it read.

The cables also show that the Saudis urged the Americans to enact reforms to rein in Wall Street, calling for speculative limits and other changes. It also showed that some Saudi officials believed that speculation added as much as $40 to the oil price during the height of the bubble.
Duh, wouldn't you want investor money to flow into a sector where prices are going up, so that more research and development goes on in the sector? But instead of making a basic Econ 101 analysis, Taibbi takes us on a merry road where somehow higher prices are seen as a problem for oil sheiks because there is no demand at the higher prices. Yet somehow, these sheiks can't sell into the higher prices. What the hell kind of logic is that?

Bottom line: Taibbi continues to be an apologist for government intervention (this time to limit commodity traders) and will even go as far as spouting nonsense from Saudi oil sheiks to justify his absurd position. At the same time, he fails to examine the link between Fed monetary policy and price inflation. Is Taibbi clueless or is there an agenda here?



    See how that goes?

  2. The Democrats are trying to engineer an oil crisis.

  3. I can't believe I am defending Taibbi here but the nature of this post loses me. Taibbi correctly states that the price levels for crude oil do not reflect supply and demand indicating massive speculation. I suggest that government intervention (and non-intervention) also has a HUGE effect by restricting the typical buyers of large contracts for crude oil (refineries and resellers) from buying new supplies and creating [barriers of entry] to new buyers.

    High crude prices seem to excuse government from further power grabs in the name of alternative energy and climate change and interestingly enough, to re-position the Middle East in geopolitics (less dependency on foreign oil).

    Middle East crude oil (if not crude generally) is harder to sell (bring to market) and local supplies are more appealing now to tap (at least in the US).

    The Austrian School teaches that prices are always an indicator of demand. Is there a huge demand for crude oil...the price says there is. Is there an easy way to bring supply to the market to create downward pressure on price...NO.

    This is one of the rare times that I am in disagreement with Mr. Wenzel but "barriers to entry" is a topic in ECON 101 (the Saudi's say they can't find buyers...I believe them).

    I would appreciate any further comments on this subject. I am especially interested from hearing an opinion from someone in the refining business.

    Note: I have some knowledge regarding the primary crude oil trade so I feel that I should say something here.

  4. please keep sharing of knowledges with us.Thanks a lot for your great posting.