Sticker Shock at the Pump: Supply & Demand or Market Speculation?

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One of the more contentious, and least soluble, questions in the great energy debate is whether constantly escalating prices and the result of a genuine supply-and-demand crunch; futures market speculators running up the price, or a natural and long overdue correction.

This question has become so important that it is now the subject of a full-blown investigation by the U.S. Congress.

Most observers believe that Congress will find little by way of a smoking gun that will point clearly in one direction or another. There has, in fact, been a sharp increase in demand in recent years. For those who pay attention, we are aware that the growth of a automobile culture in third world countries, particularly China and India, have put a strain on world reserves ready for market. At the same time there has been little reaction on the supply side to take account of this increase in areas of the world that we never used to think of when the question of energy availability came up.

Such a convergence of unusual and unforeseen economic headwinds would naturally lead investors to get into oil futures. But is there a concerted effort on the part of some cabal to drive up prices artificially in order to reap profits that would not accrue in the natural order of things? It would seem not.

A number of economic considerations appear to be driving investors. One is the recent realization that the world price of oil has been greatly undervalued for years. The $4.00 per gallon price we are paying for gasoline today is equivalent to $1.30 in 1980 if measured in constant dollars. This is a situation that is bound to attract investors to put their money in oil.

The weakness of the U.S. dollar on world money markets has at least as much to do with rapids price escalation as investor speculation. Throughout the world, oil can be bought and sold only with American dollars. When the dollar falls against other currencies, there is nowhere for the price of oil to go but up. No alternate avenue is available - anywhere.

Add to this lack of choices is a world economy that is trying to find its level in a number of areas. Oil isn't the only area where confusion reigns. Food, housing, travel, and a host of other areas are all in disarray leaving investors wondering where the safe place is to put their money. In such an atmosphere on a global scale, oil has taken its place along side of gold as a safe hedge against economic chaos. This is not speculation or conspiracy; this is ship of fear seeking a safe harbor.

Complicating the market picture are some questions that don't usually arise in terms of assessing the market. Does OPEC really have the kind of control over supply we all tend to think they do? The answer is not clear. President Bush has asked Saudi Arabia to increase production and they have agreed, but can they really increase output enough to substantially affect the world price. Experts by no means agree about the Saudi's ability to dramatically increase production. Many believe that are at, or very near, capacity now.

The awful truth is that world supplies are well above the 5-year average right now. At the same time there is a dearth of refining capacity due to a 25-year policy of regulation in obstruction that has stopped our ability to refine crude oil into the market products we all need to maintain our lifestyle and whose price we are so sensitive to.

In the long run, of course, high prices are the cure for high prices. Eventually the oil bubble will burst, prices will come down and lifestyles will adjust. But when?

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It’s really easy but Americans are just too weak, self-absorbed and materialistic to do what is required. Start to work 4 days a week and close the shopping centers on Sunday. Fince people that keep the air conditiong too low. MANDATE commuting where it works. It would also help if American corporations stopped sending all of our jobs to china and India. This is the stuff they (politicians CEO’s, and the rich - even rich democrats) don’t want us plebians to figure out. Ban Large SUVS from the road during peak hours. And take Iraq’s oil - they owe it to us. Alos start to blame the responsilbe - these wacko libs that would’nt let us drill, build power plasnts or refineris to save some freaking birds for twenty years

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