# How reasonable is this article re: Oil Prices? **URL:** \ **Category:** Factual Questions\ **Created:** [May 28, 2008, 6:52pm UTC](https://boards.straightdope.com/t/how-reasonable-is-this-article-re-oil-prices/450918 "2008-05-28T18:52:36Z")\ **Posts on this page:** 20\ **Page:** 1
**Author:** ![bump](https://avatars.discourse-cdn.com/v4/letter/b/7c8e57/32.png) [@bump](https://boards.straightdope.com/u/bump)\ **Post date:** [May 28, 2008, 6:52pm UTC](https://boards.straightdope.com/t/how-reasonable-is-this-article-re-oil-prices/450918/1 "2008-05-28T18:52:36Z")
[http://www.atimes.com/atimes/Global\_Economy/JE24Dj02.html](http://www.atimes.com/atimes/Global_Economy/JE24Dj02.html) 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. ---
**Author:** ![John\_Mace](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/john_mace/32/185_2.png) [@John\_Mace](https://boards.straightdope.com/u/John_Mace)\ **Post date:** [May 28, 2008, 7:28pm UTC](https://boards.straightdope.com/t/how-reasonable-is-this-article-re-oil-prices/450918/2 "2008-05-28T19:28:29Z")
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? ---
**Author:** ![LonghornDave](https://avatars.discourse-cdn.com/v4/letter/l/a87d85/32.png) [@LonghornDave](https://boards.straightdope.com/u/LonghornDave)\ **Post date:** [May 28, 2008, 8:22pm UTC](https://boards.straightdope.com/t/how-reasonable-is-this-article-re-oil-prices/450918/3 "2008-05-28T20:22:40Z")
> [@](#): > > The US government’s Energy Information Administration (EIA) concluded in its most recent monthly Short Term Energy Outlook report that US oil demand is expected to decline by 190,000 barrels per day (b/d) this year. That is mainly owing to the deepening economic recession. > > Chinese consumption, the EIA says, far from exploding, is expected to increase this year by only 400,000 barrels a day. That is hardly the “surging oil demand” blamed on China in the media. Last year, China imported 3.2 million barrels per day, and its estimated usage was around 7 million b/d total. The US, by contrast, consumes around 20.7 million b/d. > > That means the key oil-consuming nation, the US, is experiencing a significant drop in demand. China, which consumes only a third of the oil the US does, will see a minor rise in import demand compared with the total daily world oil output of some 84 million barrels, less than half of one percent of total demand. 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? ---
**Author:** ![Philster](https://avatars.discourse-cdn.com/v4/letter/p/13edae/32.png) [@Philster](https://boards.straightdope.com/u/Philster)\ **Post date:** [May 28, 2008, 8:54pm UTC](https://boards.straightdope.com/t/how-reasonable-is-this-article-re-oil-prices/450918/4 "2008-05-28T20:54:16Z")
Drop has a bigger impact than increase. Any drop bad, so drop not minor. That’s my cavemanian explanation. ---
**Author:** ![LonghornDave](https://avatars.discourse-cdn.com/v4/letter/l/a87d85/32.png) [@LonghornDave](https://boards.straightdope.com/u/LonghornDave)\ **Post date:** [May 28, 2008, 9:07pm UTC](https://boards.straightdope.com/t/how-reasonable-is-this-article-re-oil-prices/450918/5 "2008-05-28T21:07:19Z")
For informational purposes, here is what Goldman Sachs said about the role of speculators in a 5/5/08 report. > [@](#): > > Commodity speculators play a critical role in balancing oil supply/demand > > We believe there is a fundamental misperception among many in the oil industry, Wall Street, the media, politicians, and the general public that so-called “speculators” are driving up the oil price to supposedly unjustified levels. Unfortunately, we do not think the energy crisis will be solved by finding and punishing the big, bad speculator. In fact to the contrary, we believe commodity investors are helping to solve the energy crisis by speeding up the process of incentivizing higher capital spending on a wide range of energy projects while at the same time encouraging lower levels of demand by energy users. > > Without question increased fund flow into commodities has boosted prices. The issue is whether the resulting oil price is “real” or represents speculative excess; we strongly believe the former. We note that if it is an excessive oil price, where is the excess supply? Inventory levels look normal and just about all of industry—both non-OPEC and OPEC—are badly missing production forecasts. The minimal supply growth despite what is now nine years of favorable energy market conditions is remarkable and in our view the most substantive indication that current oil prices are fundamentally justified. > > The fact that tight oil supply/demand fundamentals are attracting large amounts of capital is a good thing. Higher oil prices signal to oil companies the need for greater investment. Higher oil prices also signal to consumers the need to demand less. This is basically the point of capitalism, which over the past hundred years has proven to be the superior economic and geopolitical philosophy. > > The so-called commodity speculator should be applauded for speeding up the message to both oil companies and consumers that energy markets are tight. Commodity speculators also encourage venture capital and private equity firms to invest in alternative energy and other new forms of supply. During the 1990s, very little investment went into clean energy. Today, alternative energy investment is rising rapidly thanks in large part to the role of commodity investors in bidding up energy prices. > > In our view, supporters of a cleaner environment should be supportive of commodity investors, as the combination of lower demand and new alternative energy investments take hold. In our view, commodity investors are helping to accelerate the speed by which the world will naturally want to burn less crude oil. ---
**Author:** ![LonghornDave](https://avatars.discourse-cdn.com/v4/letter/l/a87d85/32.png) [@LonghornDave](https://boards.straightdope.com/u/LonghornDave)\ **Post date:** [May 28, 2008, 9:17pm UTC](https://boards.straightdope.com/t/how-reasonable-is-this-article-re-oil-prices/450918/6 "2008-05-28T21:17:47Z")
> [@From the article](#): > > So it is no surprise to see in a May 6 report from Reuters that Goldman Sachs announces oil could in fact be on the verge of another “super spike”, possibly taking oil as high as $200 a barrel within the next six to 24 months. That headline, “$200 a barrel!” became the major news story on oil for the next two days. How many gullible lemmings followed behind with their money bets? Here is what Goldman Sachs actually stated. > [@Goldman Sachs 5/5/08](#): > > Modestly boosting base-case oil price deck for now, risk skewed to the upside > > We are modestly bumping up our base-case 2008-2011 WTI spot oil price forecasts to $108/$110/$120/$120 per barrel from our previous forecast of $96/$105/$110/$110 per barrel, respectively (see Exhibits 14-15). In our view, risk to our 2008 and 2009 forecasts are distinctly to the upside, as oil markets may have entered the final major up phase of the current “super-spike” era. An alternative price path for 2008-2011 might well be $125/$200/$150/$75, with the point being that prices might move appreciably higher in the earlier years than our base-case price deck only to subsequently fall back to much lower levels in the out years. > > We are also boosting our normalized oil price to $75 per barrel from $60 per barrel before. We continue to use 2012 as our first “normalized” year. Our normalized view continues to be based on a combination of oil prices and costs that yields a “cost of capital” return for industry overall. The specific oil price has always been of secondary importance to us. We continue to assume that in a less bullish price environment, costs will fall. ---
**Author:** ![Doug\_Bowe](https://avatars.discourse-cdn.com/v4/letter/d/df788c/32.png) [@Doug\_Bowe](https://boards.straightdope.com/u/Doug_Bowe)\ **Post date:** [May 28, 2008, 9:24pm UTC](https://boards.straightdope.com/t/how-reasonable-is-this-article-re-oil-prices/450918/7 "2008-05-28T21:24:23Z")
[QUOTE=bump] 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. [/QUOTE] 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. ---
**Author:** ![sweeteviljesus](https://avatars.discourse-cdn.com/v4/letter/s/898d66/32.png) [@sweeteviljesus](https://boards.straightdope.com/u/sweeteviljesus)\ **Post date:** [May 28, 2008, 9:36pm UTC](https://boards.straightdope.com/t/how-reasonable-is-this-article-re-oil-prices/450918/8 "2008-05-28T21:36:38Z")
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. FWIW, Rob ---
**Author:** ![Exapno\_Mapcase](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/exapno_mapcase/32/1051_2.png) [@Exapno\_Mapcase](https://boards.straightdope.com/u/Exapno_Mapcase)\ **Post date:** [May 28, 2008, 9:48pm UTC](https://boards.straightdope.com/t/how-reasonable-is-this-article-re-oil-prices/450918/9 "2008-05-28T21:48:45Z")
[QUOTE=Doug Bowe] 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. [/QUOTE] 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. > [@](#): > > As business and consumers consider the implications for them of crude oil selling at US$130-plus per barrel, they should bear in mind that, at a conservative calculation, at least 60% of that price comes from unregulated futures speculation by hedge funds, banks and financial groups using the London ICE Futures and New York Nymex futures exchanges and uncontrolled inter-bank or over-the-counter trading to avoid scrutiny (see Speculators knock OPEC off oil-price perch, Asia Times Online, May 6, 2008). And what happens if you look at that earlier article? > [@](#): > > As much as 60% of today’s crude oil price is pure speculation driven by large trader banks and hedge funds. It has nothing to do with the convenient myths of Peak Oil. 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. ---
**Author:** ![LonghornDave](https://avatars.discourse-cdn.com/v4/letter/l/a87d85/32.png) [@LonghornDave](https://boards.straightdope.com/u/LonghornDave)\ **Post date:** [May 28, 2008, 9:49pm UTC](https://boards.straightdope.com/t/how-reasonable-is-this-article-re-oil-prices/450918/10 "2008-05-28T21:49:20Z")
[QUOTE=sweeteviljesus] 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. FWIW, Rob [/QUOTE] They aren’t saying that speculation isn’t happening. In fact, they say just the opposite. > [@Goldman](#): > > Without question increased fund flow into commodities has boosted prices. 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. ---
**Author:** ![Spoke](https://avatars.discourse-cdn.com/v4/letter/s/a88e57/32.png) [@Spoke](https://boards.straightdope.com/u/Spoke)\ **Post date:** [May 28, 2008, 9:55pm UTC](https://boards.straightdope.com/t/how-reasonable-is-this-article-re-oil-prices/450918/11 "2008-05-28T21:55:49Z")
[QUOTE=John Mace] But one has to wonder: why did this not happen until recently? [/QUOTE] 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). Just a guess. ---
**Author:** ![Lemur866](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/lemur866/32/434_2.png) [@Lemur866](https://boards.straightdope.com/u/Lemur866)\ **Post date:** [May 28, 2008, 10:01pm UTC](https://boards.straightdope.com/t/how-reasonable-is-this-article-re-oil-prices/450918/12 "2008-05-28T22:01:00Z")
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? ---
**Author:** ![Uncommon\_Sense](https://avatars.discourse-cdn.com/v4/letter/u/f9ae1b/32.png) [@Uncommon\_Sense](https://boards.straightdope.com/u/Uncommon_Sense)\ **Post date:** [May 29, 2008, 3:20pm UTC](https://boards.straightdope.com/t/how-reasonable-is-this-article-re-oil-prices/450918/13 "2008-05-29T15:20:46Z")
[QUOTE=Lemur866] 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? [/QUOTE] Because sometimes you have to write the article in order for a stock event to occur. And maybe he IS shorting oil futures… ---
**Author:** ![sweeteviljesus](https://avatars.discourse-cdn.com/v4/letter/s/898d66/32.png) [@sweeteviljesus](https://boards.straightdope.com/u/sweeteviljesus)\ **Post date:** [May 29, 2008, 3:35pm UTC](https://boards.straightdope.com/t/how-reasonable-is-this-article-re-oil-prices/450918/14 "2008-05-29T15:35:19Z")
[QUOTE=LonghornDave] 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. [/QUOTE] 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. FWIW, Rob ---
**Author:** ![cmkeller](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/cmkeller/32/118_2.png) [@cmkeller](https://boards.straightdope.com/u/cmkeller)\ **Post date:** [May 29, 2008, 3:51pm UTC](https://boards.straightdope.com/t/how-reasonable-is-this-article-re-oil-prices/450918/15 "2008-05-29T15:51:47Z")
Yep, horray for the speculators, they’re saving the environment! :rolleyes: I swear, I’m so anti-green at this point, I’m ready to vote for the first candidate that promises to pave over Central Park. ---
**Author:** ![cmkeller](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/cmkeller/32/118_2.png) [@cmkeller](https://boards.straightdope.com/u/cmkeller)\ **Post date:** [May 29, 2008, 4:00pm UTC](https://boards.straightdope.com/t/how-reasonable-is-this-article-re-oil-prices/450918/16 "2008-05-29T16:00:43Z")
Didn’t realize my first posting worked ---
**Author:** ![LonghornDave](https://avatars.discourse-cdn.com/v4/letter/l/a87d85/32.png) [@LonghornDave](https://boards.straightdope.com/u/LonghornDave)\ **Post date:** [May 29, 2008, 5:03pm UTC](https://boards.straightdope.com/t/how-reasonable-is-this-article-re-oil-prices/450918/17 "2008-05-29T17:03:09Z")
[QUOTE=cmkeller] Yep, horray for the speculators, they’re saving the environment! :rolleyes: I swear, I’m so anti-green at this point, I’m ready to vote for the first candidate that promises to pave over Central Park. [/QUOTE] 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? ---
**Author:** ![Exapno\_Mapcase](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/exapno_mapcase/32/1051_2.png) [@Exapno\_Mapcase](https://boards.straightdope.com/u/Exapno_Mapcase)\ **Post date:** [May 29, 2008, 5:21pm UTC](https://boards.straightdope.com/t/how-reasonable-is-this-article-re-oil-prices/450918/18 "2008-05-29T17:21:44Z")
[QUOTE=LonghornDave] 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? [/QUOTE] 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. Means are hugely important when it comes to ends. ---
**Author:** ![LonghornDave](https://avatars.discourse-cdn.com/v4/letter/l/a87d85/32.png) [@LonghornDave](https://boards.straightdope.com/u/LonghornDave)\ **Post date:** [May 29, 2008, 6:56pm UTC](https://boards.straightdope.com/t/how-reasonable-is-this-article-re-oil-prices/450918/19 "2008-05-29T18:56:08Z")
[QUOTE=Exapno Mapcase] 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. [/QUOTE] 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? [QUOTE=Exapno Mapcase] 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. [/QUOTE] 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. [QUOTE=Exapno Mapcase] Means are hugely important when it comes to ends. [/QUOTE] 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. ---
**Author:** ![sweeteviljesus](https://avatars.discourse-cdn.com/v4/letter/s/898d66/32.png) [@sweeteviljesus](https://boards.straightdope.com/u/sweeteviljesus)\ **Post date:** [May 29, 2008, 8:17pm UTC](https://boards.straightdope.com/t/how-reasonable-is-this-article-re-oil-prices/450918/20 "2008-05-29T20:17:49Z")
[QUOTE=Exapno Mapcase] 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. Means are hugely important when it comes to ends. [/QUOTE] 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. I’m only sayin’… FWIW, Rob [Next page](https://boards.straightdope.com/t/how-reasonable-is-this-article-re-oil-prices/450918.md?page=2)