Gas Crisis Conspiracy
I have always enjoyed conspiracy theories, although I ascribe to few, if any. In quantum theory, you are never really able to pin down a particle's location in four dimensions (our physical world plus time). In fact, some argued that a number of histories can bring about the same reactions in the physical universe - histories that exist in alternate universes, but end with the particle sharing the same space/time continuum where multiple histories intersect. Conspiracy theories are like that. Its almost like seeing another universe where a series of events contrive the same ending as the conclusion of a series of events in our universe. But both series of events are completely different.
So I decided to start a conspiracy theory. A potentially true, alternate history to what we are being told. Something logical with common sensibility. And simple, like a second shooter on a grassy knoll. My target? Not a Kennedy, but gas.
In the last three to four years, gas has risen from $1.25 to more than $4.00 nationally. Thats an insanely high sustained increase for a commodity in such a short time. When people dissect the reasons for the dramatic rise, they inevitably cite such reasons as supply and demand, inability to tap new resources, an aging infrastructure with too little refining capability, growing demand from China and India, and the role of the speculators.
The speculators were first mentioned during the middle of this gas crisis, but I don't think people understand what these sly dog investors really do. Otherwise, I think America would have been a little more interested. See, speculators do exactly that - they speculate on the prices of things in the future. The price of "positions" in the future is what brought the futures market to be created. To boil it down, it means that, in the case of crude oil, a speculator is purchasing oil six months in advance of it's delivery and sale on the open market. The speculator makes a profit if the market value of the commodity at the time of delivery is above the price the speculator bought in at.
So lets take a barrel of oil. Right now, a barrel of oil is trading at around $135 a barrel. You will find that the current cost of gasoline trends along with the price in crude, as one is dependent on the other. A gallon of gas is a little more than $4.00, meaning that a thirty gallon barrel is worth over $120. But wait, isn't that lower than the price of a barrel right now? It is, but remember that those barrels were purchased six months ago, when the price of crude was in the $90's. Thats a $30 per barrel profit - or a 25% return. In six months.
It's easy to see the motivation for commodities traders to keep bidding the price of oil ever higher, citing inventory figures, weather, Ouija boards and tarot predictions to justify the constant increase. When you are making gobs of money at the expense of the masses, you don't want to stop. If a barrel of oil bought now is only worth $90 in six months, you just lost 25%. So why not keep using any excuse to bid it up and make more money?
The frightening part is the speculator's obvious desire to perpetuate the high return percentages, both for their own gain and their statistical win streak. To earn a 25% return in six months again, it means that gasoline must be priced at a minimum $5 a gallon. Is this why the predictions of $5 gas in 6 months came out around the time it hit $4? This pegs gasoline at $6.25 a gallon a year from now.
Eventually, this bubble will burst. But not until market pressure comes to bear and inventory starts piling up. They will finally outbid themselves and the house of cards will collapse as oil investment fails, much like the housing bubble. But the only way for that to happen is for people to stop using so much gas and make hybrid and electric cars affordable. Its the old supply and demand thing, with the bubble rising until demand slows, which might take $5-$6 gallons for the next few years. This way, when the streak ends, it will settle back to $3.50-$4.00 a gallon again, and we will all be grateful.
But who else stands to profit?
Most 9/11 conspiracies mention the WTC insurance and odd stock fluctuations. Kennedy theorists discus military contracts. There is always money involved in a good conspiracy plot...
We know the oil execs get richer than Red River soil, with bonuses in the seven and eight figures. And oil companies are making tremendous, unheard of profit. But I don't really think it's their fault. I really think they are just along for the ride, looking to make and keep all the bucks they can. Although influential, the very nature of the commodity means that the market will eventually stabilize and they will see a reversal of fortunes. Look at the people who traded gold up to $1200 an ounce in the late 70s. Many people lost their shirts when it fell into the $300s, and it stayed there until the last few years.
I think what the oil companies do is obscene. I also think they ought to be held accountable for turning record profits from inflated prices and return a few shekels to the consumer. But I don't think they are the primary culprits.
Its true that many of the logical reasons the oil companies and commodity analysts offer could contribute in part to the current crisis - after all, it is a worldwide commodity both in source and users, so events across the globe can influence prices. But a conspiracy theorist ignores the facts and instead looks to other reasons.
So who else would profit the most from oil's rise, I asked myself. And then a thought hit me, and the alternate universe fell into perverse place, where agricultural giants are manipulating the price of oil to turn America into an ethanol nation.
First off, these companies are huge, providing large percentages of worldwide crops and food related products. They have also turned much of America's heartland from homestead to corporate cornrows. And there are more and more cornrows coming.
Since they control much of the world's food supply, they likely own large sectors of certain commodities. And ownership of commodities gives you a way to manipulate worldwide production, which in itself is a tradable commodity - to speculators. Notice how recently there are dramatic shortfalls in crop production, which has caused food shortages in parts of the world, but has also driven up prices for these foods. Ironically, people keep pointing at corn, the most plentiful crop in our country, as the culprit. And they are right.
Secondly, ethanol was a background fuel that went mainstream as an alternative fuel additive, blended with gasoline at a 1:10 ratio as a result of the last oil crisis in the 70s. However, Congress embraced the mass production of ethanol several years ago, signing into place all kinds of nifty incentives and heavy subsidization for large scale ethanol projects, including a federal mandate that 25% percent of the corn harvest must be earmarked for ethanol production (which will rise to 30% next year).
Ethanol can be made from a variety of biomatter in diverse ways. Plants like hemp can be broken down very efficiently into ethanol. Instead, Congress, likely lobbied heavily by these companies, agreed to make corn the plant of choice. Which turns out to be an expensive choice.
The money flowed into farms to expand corn production, and it started a poppin'. More corn was planted at the expense of other crops as it was suddenly much more profitable. Energy companies began building ethanol refineries across the midwest. And combines kept tilling soil for corn. The breadbasket was turning to cornbasket.
But this methanol system is rather expensive. Corn takes quite some time and energy to break down compared with other vegetative matter. In fact, of all the potential ethanol biomasses, corn is one of the hardest to process. In Brazil, often seen as a model for biomass fuel self-sufficiency, the crop of choice is sugar cane. Unlike corn, sugar cane contains far less cellulose and more of the sugars needed for producing ethanol, which translates into an economically viable and renewable source for fuel. Less cellulose means less processing, which means lower production costs and quicker turn-around. more sugar means higher fuel yield per pound. As long as the weather cooperates, Brazil will maintain its leadership in biomass ethanol production.
In the United States, we seem stuck with corn. In spite of having several other biomass options, including hemp, sunflower and soy, the United States government opted to make corn the crop of choice after heavy lobbying on the part of the agriculture-industrial heavyweights. On the surface, based on past farming yields and other agricultural benchmarks, corn seems logical. After all, it is an easily raised legal crop ("hardy") that requires less work than other biomass plants to raise. The United States already produces more corn than almost any other country, with millions of acres sent overseas as international aid every year. At times, the U.S. government has provided subsidies for farmers to NOT produce corn, ensuring stable prices in the markets. Corn grows well in our bread basket (and sugar cane doesn't), and the agricultural giants love to grow it.
But corn does not break down at the cellular level very efficiently. In fact, it is one of the more difficult plants to extract the necessary sugars from, taking more resources and energy to make the ethanol than other sources such as hemp and even algae. Which ultimately means it is more expensive to produce. Even when looking at the weight-to-yield ratios, the sheer quantity of corn needed means additional expenses in transporting the corn to the various refining plants, which randomly dot the landscape thanks to high government subsidies. Subsidies which keep a few costs in production safely hidden.
There is also a twisted irony concerning the use of gasoline in the manufacturing and transportation process. Although this is expected to improve in time, the real cost in overall production is greater than the end product is worth, by as much 1:1.5. This means that every gallon of ethanol produced requires up to 1.5 gallons of gasoline in its manufacturing process. Not only is this counter-intuitive, but an odd way to assume an eventual profit. However, the government and the associated industries have all promised that, as refining technology and transportation avenues improve, so will this ridiculous ratio. On further examination, this means that in the short-term, our use of ethanol will actually use more gasoline than if we just pumped gas into our cars. This is another way ethanol production is affecting the price of gas - by stealthily increasing demand.
Not only is it more difficult and expensive to distill, but there is no centralized infrastructure available to readily transport the finished ethanol. In the current landscape, which is dotted with small refineries all over the vast heartland of the U.S., the highly explosive product is shipped en mass via the rail system in expensive, reinforced tankers, as opposed to pipelines. This means an irregular delivery system which requires fossil fuels to move, instead of high pressure. Since it is unlikely that a pipeline system can be created in this randomly distributed and far-flung venture, the cost of transportation will remain high and passed along to the consumer.
This raises a very important question in the ethanol equation: just how expensive is this corn-based fuel? When adding together the associated costs - market price for a bushel of corn, transporting the corn to the refinery, energy-intensive distillation, rail and truck transportation - the consumer cost of a gallon of ethanol approaches $3.50. (This was in 2007, and I wish I could cite my source on this figure. Last year I read an article in either the New York Times, the New Yorker, or the Washington Post which calculated this estimate). Of course, this figure is dependent on other commodities - namely gasoline, diesel, and electricity.
This is a very important figure. Consider it a baseline number in the conspiracy analysis. Simply speaking, for home-brewed ethanol to become a viable fuel source for the American public, it has to become cheaper at the pump than gasoline. At a production cost of nearly $3.50 a gallon for ethanol (2007 estimate), the consumer cost of gasoline has to be in excess of $4.00 to make this biofuel attractive enough that the public migrates to it, and for the manufacturers to make a profit.
So, in the end, who really stands to make the most off rising crude prices? The agricultural giants.
First off, the oil companies will not suffer in the long run. If the green giants have their way and American consumers trend towards ethanol, demand for gasoline will drop in this country even as demand increases in developing countries. This could raise the price of gas further before it tops off and stabilizes, letting the oil companies maintain their profit margin. Secondly, with 30% of the corn crop dedicated to production, these companies have a guaranteed revenue stream courtesy of the U.S. government. And third, with this large slice of harvest earmarked already, there is little chance of a corn glut paying a low cash yield per acre. In fact, the constricted supply will further raise market prices for corn worldwide, lining agricultural pockets more than ever before.
Basically, these agricultural industries have more revenue to gain in the long-term than the petroleum companies, and they are playing their cards just right. From getting the government to start the ball rolling with subsidies and mandates, and continuing with potential manipulation of the price of crude (courtesy of the commodities speculators), the green giants have positioned this country to free itself from black gold in exchange for yellow gold.
So I decided to start a conspiracy theory. A potentially true, alternate history to what we are being told. Something logical with common sensibility. And simple, like a second shooter on a grassy knoll. My target? Not a Kennedy, but gas.
In the last three to four years, gas has risen from $1.25 to more than $4.00 nationally. Thats an insanely high sustained increase for a commodity in such a short time. When people dissect the reasons for the dramatic rise, they inevitably cite such reasons as supply and demand, inability to tap new resources, an aging infrastructure with too little refining capability, growing demand from China and India, and the role of the speculators.
The speculators were first mentioned during the middle of this gas crisis, but I don't think people understand what these sly dog investors really do. Otherwise, I think America would have been a little more interested. See, speculators do exactly that - they speculate on the prices of things in the future. The price of "positions" in the future is what brought the futures market to be created. To boil it down, it means that, in the case of crude oil, a speculator is purchasing oil six months in advance of it's delivery and sale on the open market. The speculator makes a profit if the market value of the commodity at the time of delivery is above the price the speculator bought in at.
So lets take a barrel of oil. Right now, a barrel of oil is trading at around $135 a barrel. You will find that the current cost of gasoline trends along with the price in crude, as one is dependent on the other. A gallon of gas is a little more than $4.00, meaning that a thirty gallon barrel is worth over $120. But wait, isn't that lower than the price of a barrel right now? It is, but remember that those barrels were purchased six months ago, when the price of crude was in the $90's. Thats a $30 per barrel profit - or a 25% return. In six months.
It's easy to see the motivation for commodities traders to keep bidding the price of oil ever higher, citing inventory figures, weather, Ouija boards and tarot predictions to justify the constant increase. When you are making gobs of money at the expense of the masses, you don't want to stop. If a barrel of oil bought now is only worth $90 in six months, you just lost 25%. So why not keep using any excuse to bid it up and make more money?
The frightening part is the speculator's obvious desire to perpetuate the high return percentages, both for their own gain and their statistical win streak. To earn a 25% return in six months again, it means that gasoline must be priced at a minimum $5 a gallon. Is this why the predictions of $5 gas in 6 months came out around the time it hit $4? This pegs gasoline at $6.25 a gallon a year from now.
Eventually, this bubble will burst. But not until market pressure comes to bear and inventory starts piling up. They will finally outbid themselves and the house of cards will collapse as oil investment fails, much like the housing bubble. But the only way for that to happen is for people to stop using so much gas and make hybrid and electric cars affordable. Its the old supply and demand thing, with the bubble rising until demand slows, which might take $5-$6 gallons for the next few years. This way, when the streak ends, it will settle back to $3.50-$4.00 a gallon again, and we will all be grateful.
But who else stands to profit?
Most 9/11 conspiracies mention the WTC insurance and odd stock fluctuations. Kennedy theorists discus military contracts. There is always money involved in a good conspiracy plot...
We know the oil execs get richer than Red River soil, with bonuses in the seven and eight figures. And oil companies are making tremendous, unheard of profit. But I don't really think it's their fault. I really think they are just along for the ride, looking to make and keep all the bucks they can. Although influential, the very nature of the commodity means that the market will eventually stabilize and they will see a reversal of fortunes. Look at the people who traded gold up to $1200 an ounce in the late 70s. Many people lost their shirts when it fell into the $300s, and it stayed there until the last few years.
I think what the oil companies do is obscene. I also think they ought to be held accountable for turning record profits from inflated prices and return a few shekels to the consumer. But I don't think they are the primary culprits.
Its true that many of the logical reasons the oil companies and commodity analysts offer could contribute in part to the current crisis - after all, it is a worldwide commodity both in source and users, so events across the globe can influence prices. But a conspiracy theorist ignores the facts and instead looks to other reasons.
So who else would profit the most from oil's rise, I asked myself. And then a thought hit me, and the alternate universe fell into perverse place, where agricultural giants are manipulating the price of oil to turn America into an ethanol nation.
First off, these companies are huge, providing large percentages of worldwide crops and food related products. They have also turned much of America's heartland from homestead to corporate cornrows. And there are more and more cornrows coming.
Since they control much of the world's food supply, they likely own large sectors of certain commodities. And ownership of commodities gives you a way to manipulate worldwide production, which in itself is a tradable commodity - to speculators. Notice how recently there are dramatic shortfalls in crop production, which has caused food shortages in parts of the world, but has also driven up prices for these foods. Ironically, people keep pointing at corn, the most plentiful crop in our country, as the culprit. And they are right.
Secondly, ethanol was a background fuel that went mainstream as an alternative fuel additive, blended with gasoline at a 1:10 ratio as a result of the last oil crisis in the 70s. However, Congress embraced the mass production of ethanol several years ago, signing into place all kinds of nifty incentives and heavy subsidization for large scale ethanol projects, including a federal mandate that 25% percent of the corn harvest must be earmarked for ethanol production (which will rise to 30% next year).
Ethanol can be made from a variety of biomatter in diverse ways. Plants like hemp can be broken down very efficiently into ethanol. Instead, Congress, likely lobbied heavily by these companies, agreed to make corn the plant of choice. Which turns out to be an expensive choice.
The money flowed into farms to expand corn production, and it started a poppin'. More corn was planted at the expense of other crops as it was suddenly much more profitable. Energy companies began building ethanol refineries across the midwest. And combines kept tilling soil for corn. The breadbasket was turning to cornbasket.
But this methanol system is rather expensive. Corn takes quite some time and energy to break down compared with other vegetative matter. In fact, of all the potential ethanol biomasses, corn is one of the hardest to process. In Brazil, often seen as a model for biomass fuel self-sufficiency, the crop of choice is sugar cane. Unlike corn, sugar cane contains far less cellulose and more of the sugars needed for producing ethanol, which translates into an economically viable and renewable source for fuel. Less cellulose means less processing, which means lower production costs and quicker turn-around. more sugar means higher fuel yield per pound. As long as the weather cooperates, Brazil will maintain its leadership in biomass ethanol production.
In the United States, we seem stuck with corn. In spite of having several other biomass options, including hemp, sunflower and soy, the United States government opted to make corn the crop of choice after heavy lobbying on the part of the agriculture-industrial heavyweights. On the surface, based on past farming yields and other agricultural benchmarks, corn seems logical. After all, it is an easily raised legal crop ("hardy") that requires less work than other biomass plants to raise. The United States already produces more corn than almost any other country, with millions of acres sent overseas as international aid every year. At times, the U.S. government has provided subsidies for farmers to NOT produce corn, ensuring stable prices in the markets. Corn grows well in our bread basket (and sugar cane doesn't), and the agricultural giants love to grow it.
But corn does not break down at the cellular level very efficiently. In fact, it is one of the more difficult plants to extract the necessary sugars from, taking more resources and energy to make the ethanol than other sources such as hemp and even algae. Which ultimately means it is more expensive to produce. Even when looking at the weight-to-yield ratios, the sheer quantity of corn needed means additional expenses in transporting the corn to the various refining plants, which randomly dot the landscape thanks to high government subsidies. Subsidies which keep a few costs in production safely hidden.
There is also a twisted irony concerning the use of gasoline in the manufacturing and transportation process. Although this is expected to improve in time, the real cost in overall production is greater than the end product is worth, by as much 1:1.5. This means that every gallon of ethanol produced requires up to 1.5 gallons of gasoline in its manufacturing process. Not only is this counter-intuitive, but an odd way to assume an eventual profit. However, the government and the associated industries have all promised that, as refining technology and transportation avenues improve, so will this ridiculous ratio. On further examination, this means that in the short-term, our use of ethanol will actually use more gasoline than if we just pumped gas into our cars. This is another way ethanol production is affecting the price of gas - by stealthily increasing demand.
Not only is it more difficult and expensive to distill, but there is no centralized infrastructure available to readily transport the finished ethanol. In the current landscape, which is dotted with small refineries all over the vast heartland of the U.S., the highly explosive product is shipped en mass via the rail system in expensive, reinforced tankers, as opposed to pipelines. This means an irregular delivery system which requires fossil fuels to move, instead of high pressure. Since it is unlikely that a pipeline system can be created in this randomly distributed and far-flung venture, the cost of transportation will remain high and passed along to the consumer.
This raises a very important question in the ethanol equation: just how expensive is this corn-based fuel? When adding together the associated costs - market price for a bushel of corn, transporting the corn to the refinery, energy-intensive distillation, rail and truck transportation - the consumer cost of a gallon of ethanol approaches $3.50. (This was in 2007, and I wish I could cite my source on this figure. Last year I read an article in either the New York Times, the New Yorker, or the Washington Post which calculated this estimate). Of course, this figure is dependent on other commodities - namely gasoline, diesel, and electricity.
This is a very important figure. Consider it a baseline number in the conspiracy analysis. Simply speaking, for home-brewed ethanol to become a viable fuel source for the American public, it has to become cheaper at the pump than gasoline. At a production cost of nearly $3.50 a gallon for ethanol (2007 estimate), the consumer cost of gasoline has to be in excess of $4.00 to make this biofuel attractive enough that the public migrates to it, and for the manufacturers to make a profit.
So, in the end, who really stands to make the most off rising crude prices? The agricultural giants.
First off, the oil companies will not suffer in the long run. If the green giants have their way and American consumers trend towards ethanol, demand for gasoline will drop in this country even as demand increases in developing countries. This could raise the price of gas further before it tops off and stabilizes, letting the oil companies maintain their profit margin. Secondly, with 30% of the corn crop dedicated to production, these companies have a guaranteed revenue stream courtesy of the U.S. government. And third, with this large slice of harvest earmarked already, there is little chance of a corn glut paying a low cash yield per acre. In fact, the constricted supply will further raise market prices for corn worldwide, lining agricultural pockets more than ever before.
Basically, these agricultural industries have more revenue to gain in the long-term than the petroleum companies, and they are playing their cards just right. From getting the government to start the ball rolling with subsidies and mandates, and continuing with potential manipulation of the price of crude (courtesy of the commodities speculators), the green giants have positioned this country to free itself from black gold in exchange for yellow gold.