Demand for OIL is NOT driving up oil prices: there is enough oil being recovered to satisfy all our REAL oil needs.
REPEAT: There is NO SCARCITY of oil.
So why are oil futures going UP UP UP!?!?!?
Because, er... um, there is a scarcity of OIL FUTURES.
More speculators want oil futures than there are oil futures. That's why oil futures are SKY HIGH even though there's plenty of oil around for actual users of oil.
Despite being an economic libertarian and laissez faire at heart, I have come to feel that the futures markets might be in need of a more orderly and transparent set of rules.
For free markets to function good rules are necessary. We do not allow body parts to be traded. Perhaps trading in oil futures is in need of more constraint.
This is NOT the only change in policy I think we need.
I also think we need to open up ANWR, and the waters off our coats, and build 100 more nuke plants and/or more clean-coal plants/wind plants and solar plants.
Besides eventually reducing our dependence on energy imports, this will IMMEDIATELY send a message to the futures markets.
And prices will comes down.
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6 comments:
I am normally in sync with almost everything you post, but I must respectfully disagree here.
There is no question that a feeding frenzy is in play. And the Iran attack talk is obviously not helping; however I think Congress and their posturing is adding to the tension/speculation in a very negative way. Please allow me to attempt to explain:
The problem with trying to control the market price of oil by governmental interference is virtually the same as trying to control any other "price" in a market economy.
First, the US Congress can only attempt to "regulate" its own sovereign oil futures markets (i.e. the exchanges on US soil); the restrictions on our own markets will only serve to drive all of the investment capital that would otherwise be coming into our markets--overseas instead.
One BIG problem is that there are more than one commodities markets: in fact because of the declining value of the dollar, many traders are already taking their investment capital money out of New York and Chicago, and choosing instead to invest overseas, e.g. in the brand spanking new Abu Dhabi oil futures marketplace. Open to all comers with a laptop, and those guys are more than happy to take any and all trades there. So problem one is that the regulation accelerates the drain of capital from the US, which puts even more pressure on our economy.
An alternative that has been mentioned by the Dems is to tax the profits of traders at a higher rate. Unfortunately, this will most likely have the same effect: only US investors will be penalized, and every other investor on the planet will take their money elsewhere.
Thus, the law of unintended consequences strikes again--as it does whenever some bureaucrat tries to interfere with the free marketplace.
Also: remember that ALL these speculators are placing a big BET on the price continuing to rise; if they are right, they have secured oil for their customers at a lower price (if they trade today) than the future price (if they wait to trade tomorrow if the price has risen further by then). That is the essence of capitalism: you are always trying to get the best deal. On the other hand, if the speculators are proven WRONG (which is likely to happen eventually--prices cannot rise forever, eventually someone will increase supply)--then the speculators will LOSE BIG. It's like betting on horses: as the price gets higher and the odds of a big return get smaller, your risk/reward ratio declines(ask anyone who bet on Big Brown at the Belmont...). A lot of analysts are already predicting the oil bubble to burst soon: in fact I have already bailed out from what little coin I had in Deutsche Bank Oil Index EFT fund that I was in... too risky for my blood.
The best way out our situation in my view is consistent with the best way out for any free market: let the market decide. Our partisan neo-Marxist Congress' clumsy attempt to interfere not only will ultimately serve to drive the speculation capital offshore; I believe it would also create an even greater "scarcity"--i.e. "artificial" shortages of the oil futures themselves--by making them more difficult or painful to obtain in the US. Thus the prices are quite likely to rise even higher than they otherwise would.
Ask Jimmy Carter: price controls ALWAYS cause shortages. I would not doubt that many professional traders are jacking up the price higher as we speak, partially BECAUSE they fear the Congress might interfere, and the consequences that would ential...
In summary: I believe any attempt to control this outcome will only make the situation worse. INCREASING SUPPLY OR DECREASING DEMAND IS THE ONLY WAY OUT. And I do not think the Indians or Chinese are planning to mothball their vehicles or industry anytime soon. Unlike our own Congress, they understand that oil and energy are the very lifeblood of a vibrant economy.
As an aside (my cynical side speaking): I think that driving prices even higher is exactly what the Democrats WANT to do in the short term. In their utopian dream world, prohibitively high prices will ultimately drive people away from oil and (in their twisted view) towards alternatives and greater conservation--and then all will be well, the earth will cool and we will all hold hands and sing "Imagine".
Of course it won't work; not this quickly--we are 10-20 years away from being ready for alternatives to make a significant impact, even if we started building nuclear plants and refineries today and started drilling everywhere we could. Meanwhile the Marxists' effort to even attempt to change the outcome of the marketplace will have the same outcome it always does; and it could well become a critical factor in further crippling our already fragile economy; but then again, when has the Left's interference with a market economy ever truly "worked"?
I never like to disagree with a friend, but I hope I have at least made a coherent case for my view on this.
Cheers!
Funny: as soon as I left this post, I saw this linked at Matthew Sheffield's facebook page: The NYT-Why High Oil Prices is really for "the best"...
Gag...
dt:
good critique.
BUT...
you write:
1 - "The problem with trying to control the market price of oil by governmental interference is virtually the same as trying to control any other "price" in a market economy."
NOWHERE DO I SUGGEST THAT GOVT SHOULD CONTROL PRICES. Just market rules. Govt already does that. so this is NOT a new encroachment. i just think the rules need tinkering.
NYCOMEX already made some changes - recently: increasing the cost of margins. (i posted on it weeks ago.)
they did this to reduce speculation - which is fine. maybe it should be tweaked up a bit more.
2 - "One BIG problem is that there are more than one commodities markets: in fact because of the declining value of the dollar, many traders are already taking their investment capital money out of New York and Chicago, and choosing instead to invest overseas, e.g. in the brand spanking new Abu Dhabi oil futures marketplace."
Actually, a declining dollar make investment INSIDE the USA MORE attractive. Foreigners should be snapping up real estate and stocks.
the markets are low and so is the dollar; that = a DOUBLE DISCOUNT.
3 - soros and his marxist comrades (and even their islamist pals) may be playing with oil futures as he did with the pound.
they want to weaken the USA and the West.
WE should support policies which strengthen us.
That means FIRST AND FOREMOST - as I think my post says - MORE SUPPLY.
but if tinkering with the rules can tamp down a bubble - that's good.
Bubbles are human but and unnecessarily harsh way the market corrects itself.
part of the whole great thing about the vollker/greespan era is how they smoothed things out.
it's good if we can do things at the margin which make the recessions shallower and the bubbles smaller.
this is NOT price controls - which i abhor categorically.
please don't conflate the two.
i didn't in my post.
and when you criticize me for it you are arguing against a straw man,.
ALL THE BEST!
You are correct that you did not say "control prices"; however in effect any interference with what would naturally occur in the marketplace IS an attempt to influence the price. It is expressly what they (say) they are trying to do. Which (as I said) I agree they are trying to do--only I think it is happening in reverse of what they are telling anyone.
Adam Smith called it: two parties would never agree on a transaction unless it benefits both--So I just don't buy it that interfering with trading is ever a good thing. Money is like river, it will always find the most efficient way to flow.
Greenspan? Well that is another argument. I will say that recent Fed activity especially has been a bit questionable in my view. Greenspan was in charge during some good years, no question--but I do not necessarily attribute a cause and effect there. Milton Friedman probably would have thought that I am being to kind to Andrea Mitchell's hubby; he might have argued that the economy did well despite Greenspan's rate and money supply tinkering. But like I said, another day.
One of the best books I have EVER read is Thomas Sowell's Basic Economics (I know, I'm a nerd...). But it really is that good. HIGHLY recommended. Even downloaded it recently and listened to it again on my iPod.
What can I say, I'm a purist. It is a possibility that I may have read too much Friedman and Sowell--but I doubt it.
Cheers,
I AM NOT A PURIST.
WE HAVE SOME REGULATION OF THE FUTURES MARKET.
WE NEED DIFF/BETTER REGULATION OF THIS SPECIFIC COMMODITY.
ONE WHICH WOULD DEFLATE THIS BUBBLE AND DISCOURAGE ANOTHER.
HAS GREENSPAN ACTED EARLIER TO END THE SPECULATIVE BUBBLES IN THE NASDAQ/"NEW ECONOMY" WE WOULD ALL BE BETTER OFF.
"IRRATIONAL EXUBERANCE" AND BUBBLES ARE MANIAS AND NEED TENDING TO.
MARKETS PRODUCE THEM BUT DON'T NEED THEM.
BUBBLES ARE HUMAN - AS ARE MANIAS --- LIKE TULIPOMANIA.
BUT WE DON;T NEED THEM.
WE ALREADY HAVE DAILY CAPS IN[LACE ON THE STOCK MARKETS.
ENACTED AFTER 1987.
THEY WORK.
THEY GIVE MARKETS TIME TO TAKE A BREATHER FROM HYSTERIA.
AND MANIPULATION.
WE NEED LIKE MEASURES IN OIL FUTURES TRADING.
NOT OIL TRADING BUT FUTURES.
IMHO.
THIS IS NOT A CATEGORICAL EXPANSION OF CONTROL, BUT INCREMENTAL AD TARGETED.
IMHO.
ALL THE BEST!
PS: SOWELL RULES!
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