In a nutshell, the author of the article claims that a large percentage of today’s high prices are due to unfettered speculation, not variations in supply and/or demand.
Is this reasonable? My gut leans toward yes, but I’m curious to see what others think.
I have heard industry “experts” make similar claims, although not as high as 60%. But one has to wonder: why did this not happen until recently? The article mentions the margin rules for buying futures, but is this something new?
Am I reading this section incorrectly? It appears like they are saying that a 190,000 b/d drop for a 20.7 million b/d consumer is significant in size while a 400,000 b/d increase for a 7 million b/d consumer is minor. How is a .9% drop significant while a 5.7% increase is minor?
Today’s Wall Street Journal contains a story that says that speculation in coca futures is driving up the prices of your candy bars. The major futures traders used to be firms like Hershey, Mars, Nestle…the usual suspects. But the article explains that speculators are driving the price of chocolate, and your candy bars, up.
It appears the same rule that applies to chocolate would apply to oil.
While I think that those who want to lay the blame for our current fuel prices at the feet of greedy speculators have an anti-capitalist ax to grind, the Goldman-Sachs article seems to be saying that it isn’t happening, but if it were, rampant speculation is good for you. I don’t totally disagree with that, but it sounds a little funny.
Not necessarily. It would only apply if the supply and demand curve in cocoa were the same as the supply and demand curve in oil. Somehow I doubt that’s the case.
In any case, reading the first paragraph of the OP’s linked article makes me call bullshit.
And what happens if you look at that earlier article?
I always read “as much as” with the sense of, it’s likely to be half that amount. But when you blithely upgrade “as much as” to “at least” you’re shitting me, knowingly. And he can’t even use the excuse that he misread the earlier article. He wrote it.
I also found the Chinese/U.S. comparison troubling. I thought the rise in prices was due to marginal effects of demand inching ahead of supply. Whenever that happens, pricing will rise as people seek to lock in future supply at a minimum price. If demand is going up overall, then the marginal effect worsens and one expects the future price to go up.
I certainly don’t doubt that speculators are working the market. They may be accounting for a portion of these record prices. Engdahl is hardly alone is predicting that prices may have hit a temporary peak. The question he doesn’t answer, doesn’t even address, is how low prices will fall once this supposed speculative bubble pops. All he says is that above $60 other sources become attractive. That’s not exactly news. Is he predicting that oil will fall to $60? If so, over how long a time?
Engdahl, BTW, is not a reporter, but a writer who is apparently doing the equivalent of an op-ed piece. He’s pushing a opinion, not objectively reporting. His opinion may be right in the end, but I’d like a deeper argument than the one he makes.
They aren’t saying that speculation isn’t happening. In fact, they say just the opposite.
What they are saying, though, is that the increased prices caused by this increased funds flow are supported by the fundamentals as opposed to being unjustified.
Something to do with the real estate crash, perhaps? Maybe fund managers soured on real estate and have latched onto oil (and we wind up going from one investment bubble to another).
If the author really believed oil was going to crash to 40% of it’s current price, why is he writing an article about it instead of shorting oil futures?
Sometimes I amaze myself at how stupid I am. I meant to say that they are saying that the bulk of the price increase is not due to speculation, but even if it were, it’s good for you.
Well, who is better, the effective party that you don’t like their motives or the ineffective party that you do like their motives? If the end result is that less hydrocarbons are used, why do you care if it was speculators that got us there as opposed to the environmentalists?
If the government were to raise gas prices by a dollar a gallon tax instead of speculators raising the per barrel price, that money could go to desperately needed infrastructure improvement. Speculators’ speculations don’t get used for the public good, and that’s assuming that they don’t wind up losing all that money in the next bust.
And how effective do you think a politician would be running on a platform of raising gasoline prices by a dollar a gallon in this environment?
Sure it gets used for the common good. Taxes get paid on the profits made by the investors and the e&p companies that have benefitted. Jobs are also being created by e&p companies due to the rising prices. Also, isn’t the flight to commodities a reasonable and expected reaction to the declining dollar? Commodities give certain people comfort in this (or any) environment.
I don’t mean to say that the ends justify any means. I am a huge proponent of doing things in a legal and ethical manner. In this case, I wasn’t talking about the means so much as the motivations. I am completely ambivalent when it comes to someone’s motivations for doing something if their methods are legal and ethical and the end result is good.
Who says that revenue raised by a gas tax increase will go to some worthy cause? Who says that some speculator who gets rich off the misery of the American consumer won’t go on to found Carnegie-Mellon or something?
On the other hand, while high oil prices are spurring research into biofuels, conservation efforts and other good things, I expect that they are also spurring a lot of new exploration, exploitation of previously uneconomic sources, etc. which lead to more burning of fossil fuels which leads to more CO2 and which may lead to another oil glut which will kill a lot of interest in the above.