How Markets Work, and a Truth Bomb

Look, I'm getting sick and tired of hearing the White House spewing forth bovine excrement about how reversing the decision to halt the Keystone XL pipeline - a decision that Joe Biden made unilaterally on his first day in office, with a boastful flourish - wouldn't affect gas prices at the pump for years, because it would take a long time for Keystone XL to become operational and start delivering oil. Such bovine excrement ignores how markets work. So let me explain how they work, and in so doing, illustrate why Joe Biden and Jen Psaki are idiots.

Wait a minute - let's not over-complicate things. Actually, Joe Biden and Jen Psaki are idiots because their mommas each raised an idiot. Alright, that's not fair. Joe Biden is an idiot, but Jen Psaki is actually probably very bright. She just either doesn't have an earthly clue how markets work, or she's a pathological liar. Probably both.

There, now we've got that out of the way. Let's turn to how markets work. If you lean left, you'll want to pay close attention, because you've probably been spreading this bovine excrement, and you need to stop it, because you're wrong, and it makes you look like an idiot, too. And if you don't lean left, please share this with your friends who do, because friends don't let friends look like idiots.

Markets trade on future expectations. Take stocks for example. Stocks don't trade on the underlying companies' past performance. Consider Kumquat, a hypothetical tech company that makes widgets, ubiquitous products that everyone uses. There are even people who love Kumquat's products so much, they're called "Kumquat fanboys" (which is probably a sexist term). They have Kumquat stores where everyone goes to buy those widgets. People line up at the Kumquat store to buy the latest Kumquat widget when it comes out: everybody has to upgrade their Kumquat 10 to a Kumquat 11, etc.

Now, Kumquat's stock doesn't trade on how many widgets Kumquat sold last quarter. No, it trades on how many widgets Kumquat expects to sell next quarter, or next year. Kumquat's CEO will have a call with a bunch of Wall Street analysts, and he'll say the company is going to open X new Kumquat stores, and they're going to release the new Kumquat 12, which will do twice as many cool things as the Kumquat 11 did, and they expect to sell Y units of the Kumquat 12 at ZZZ dollars a unit, while still selling a bunch of units of the Kumquat 11 at a now-discounted price, blah, blah, blah.

It's all based on the future outlook. And based on that outlook, if it's rosier than last quarter's actual performance, Kumquat's stock price will go up. Even though - and this is important - even though Kumquat hasn't opened one of the promised new stores yet, or produced one new unit of the Kumquat 12.

Now, when the actual results come in, if Kumquat's projected earnings are below what they forecast for the quarter - known as an "earnings miss" - the stock might go down. Or, if the earnings are higher than forecast - an "earnings beat" - the price may go up. So it does respond to actual performance. But it's driven by future expectations, first and foremost, and adjusted after the fact based on results versus those expectations. In other words, the results are judged relative to the expectations. It's like beating the point spread vs. winning or losing the game.

Oil isn't a stock, but it trades the same way. If oil traders think something's going to happen that could lead to the future price of oil increasing, they'll bid up oil futures - derivatives contracts for forward delivery of "spot," or physical barrels of, oil. If they think the outlook for oil prices is negative, they'll bid oil futures prices down. Projected supply and demand are the primary factors oil futures traders look at. And spot oil prices, as well as gasoline prices, are influenced by oil futures prices.

Okay. So let's look at what happened to oil prices when Joe Biden was elected President in November 2020. Now, if you lean left, you're crying, "Foul! Joe Biden may have been elected in November 2020, but he didn't take office until January 2021, so he couldn't have influenced oil prices yet, because he wasn't yet in a position to make any decisions!"

To which I say, "Aha!" Because remember? Markets trade on expectations. Now that the election was over and we knew that Joe Biden was going to be President, the outlook for oil became negative. Joe Biden campaigned against domestic fossil fuel production. He said he wanted to put oil producers out of business. He was for the Green New Deal. He promised to kill the Keystone XL pipeline on his first day in office (and he did). So the oil traders said, "Ruh-roh. Domestic supply is going down. Keystone XL - even though it isn't even complete yet - isn't going to deliver the increased supply we expected it to when Donald Trump gave it the green light. Oil prices are going up, because OPEC is going to start gouging us." And they started bidding up the price of oil.

The graph below shows the price of West Texas Intermediate (WTI) crude oil, the benchmark for domestic oil prices, from the day before Biden was elected through March 7, 2022. Note that immediately after the election, oil prices started to rise. The Friday before the election, WTI was $36.97/barrel (bbl). By March 5, 2021 - about six weeks after Joe Biden was inaugurated, and signed the Executive Order killing Keystone XL - WTI was $66.08/bbl, an increase of 79%. By mid-July, crude had more than doubled from the pre-election day level (some of that had to do with normal summer demand). By late October, it was over $85/bbl. This was all before Putin even began amassing troops on the Ukrainian border.

Now, you could note that there was something else going on during this time: recovery from the COVID pandemic. And you'd be right, to some degree. The shutdowns were finally over, including the renewed California and New York shutdowns of December 2020. The vaccines were being rolled out. People were going on vacations again. So there's certainly a demand component involved.

However, the economy re-opened in May 2020 after the initial COVID shutdowns in March of that year. I took driving vacations in the summers of 2020 and 2021, and I went from Kansas City to Taos, New Mexico both years, so that's a pretty good frame of reference: same trip, same route. There was certainly more traffic in 2021 than in 2020. But there was lots of large truck traffic in 2020, and plenty of local traffic. Certainly demand was higher in 2021 than in 2020, but the price increase shown in the graph above could not have resulted from increased demand alone.

Let's look at oil prices in 2020, from the time the economy re-opened until the election, as seen in the graph below. The increase from the re-opening, around the beginning of June, to the peak of summer in late August, was less than $8/bbl - about 22%, but from a starting point of only $35/bbl or so. By the election, the price was back down below $37/bbl, and that was before California and New York shut down again. So even though demand went from virtually nil to a pretty healthy increase, we saw only a modest increase in oil prices. Why? Because the policies of the Administration in office at the time were decidedly friendly toward domestic oil production. From that, we can infer that increased demand due to COVID recovery (and summer travel) might account for a 20-25% increase in prices - admittedly, a crude guesstimate (pun intended). That leaves about a 50%-plus increase in 2021 that's attributable to Joe Biden's anti-fossil fuel policies.

Bottom line? Joe Biden owns the run-up in oil prices from the day he was elected until the day Vladimir Putin began amassing troops on the Ukrainian border. And he owns a piece of it since, because he has stubbornly refused to relent in his assault on domestic oil production. Let's face it: he was proud of those policies. He was bragging about the actions he took, at least until inflation started soaring, and he started getting pummeled in the polls. So why hide behind it now? Why point the finger at Putin now? Look, if this is "Putin's price hike," why are Biden's poll numbers falling further?

Markets trade on expectations. And since Biden was elected, oil prices have risen. They didn't rise under Trump, because oil traders expected oil-friendly policy, and thus that the future trajectory of oil prices would be lower, or at least stable. From Election Day 2020 forward, the expected trajectory has been up, up, up, because the effect of Biden's policies on supply was expected to be down, down, down. Putin's actions have exacerbated that. So has Biden's response (or lack thereof) to it. Going hat-in-hand to Iran, Venezuela, or Saudi Arabia will only drive prices even higher.

So that's why, if Biden announced a reversal of his Keystone XL decision, oil prices - and gas prices, which are based on oil prices - would drop immediately, even though the pipeline wouldn't deliver a drop of oil for about a year. (And no, Jen, you couldn't replace all the gas-powered cars with EVs before then.) Because markets trade on expectations.

A final word. Today, Jen said, in response to a reporter's question, that since Putin began amassing troops on the Ukrainian border in January, the price of a gallon of gas is up $0.75.

Well, what she didn't say is this: from the time Joe Biden was elected until the time Putin began amassing troops on the Ukrainian border, the price of a gallon of gas went up $1.18.

So whose price hike is worse?