WaPo Article Here
According to some lawmakers and some deep-pocketed investors, speculating on the futures markets is at least contributing to the higher prices. Apparently the regulations restricting futures trading to those who actually have a stake in the market (e.g. airlines, farmers, etc.) were lifted at the behest of companies (including Enron) in 2000. So, let's see, if we account for the policy lag, let's give it about, oh, 7 to 8 years, and here we are. Look's like the neo-cons' economic policies are about as useful as their foreign policies.
Basic law of economics: if it's cheap, demand goes up; demand goes up, price goes up; price goes up, supply goes up, price goes down. Ah, but what happens when the supply doesn't go up, or actually goes down? What happens when some players think they can manipulate the market to their own ends? A bubble, that's what.
If you read the article linked above, you'll see that the main concern of a commodities bubble is the effect it might have on financial institutions. So, what does this mean to the average consumer? Did it hurt your wallet when Bear Stearns collapsed? Is Wachovia's struggling margin really making it hard to put food on the table? No.
The real fear is that there will be a run on the banks like the one that happened during the Great Depression. If people don't have confidence in their banks, those people will take their money out of the banks. However, we have the FDIC that is supposed to insure runs on banks (or at least assure those who make deposits).
No, what is going to happen, and is already happening in the mortgage markets, is that credit will become more and more difficult to obtain. This is because we have become accustomed to living beyond our means and the financial institutions that have supported our habits are running out of suckers who will buy our debt.
Ultimately, when all is said and done, I expect to see a moderate adjustment in the standard of living for the average American, the poor will suffer the most (as they always do), and the concentration of wealth that has been building over the past decade will recede a bit. Then the banks will feel a little more comfortable lending us money, and the cycle will start all over again. Welcome to the bubble-bust economy. Without fundamental changes in the way we see money and credit, it will be a self-perpetuating phenomenon.
Showing posts with label Oil Prices. Show all posts
Showing posts with label Oil Prices. Show all posts
Friday, June 06, 2008
Thursday, May 22, 2008
Economists Don't Understand High Oil Prices
A story in today's Washington Post centers around what seems to be a growing consensus that economists and industry "experts" don't understand exactly why oil prices are rising as rapidly as they are.
The Saudis refused Bush's entreaty to boost production because they didn't want to get caught holding the bag when the prices inevitably drop. They stated that supply and demand are currently balanced and that they didn't want to disrupt the equilibrium.
Some people are blaming speculators, citing some $90 billion of investment money being pumped through the markets in the last two years.
Everybody points the finger (at least partially) at China, which has become the flagship for the rapidly developing world. Certainly China, India, Brazil, and other rapidly developing countries are putting stress on demand, but then, at least according to the Saudis, supply is in balance with demand. Many of those same developing countries are heavily subsidizing oil and China particularly has been cited for hoarding oil in preparation for the Olympics.
Congress seems to think that OPEC is the problem in that they are keeping prices artificially high. The problem with that thesis is that it seems more likely that the weak dollar is to blame for OPEC's high prices. After all, can we really expect the OPEC countries to continue accepting $20 per barrel that is worth about half as much internationally as it was just a couple of years ago?
Further circumstantial evidence that it is actually our own fault that oil prices are rising so rapidly in this country is that, if you'll notice, every time that crude prices hit a new high the Dow drops about 200 points or so (270 yesterday). My theory in the correlation between oil price spikes and stock market tumbles is that all that money being leeched from the stock market is being pumped into the commodities markets which have seen exponential price growth, not just for oil, but also for corn, rice, and natural gas. As the demand for commodities futures rises, so does the price.
Ultimately, I think that high oil prices are a function of a confluence of factors: irresponsible financial policies on our part, both at the macro- and micro-levels (e.g. the credit markets and hyper-consumption); rising demand around the world as former 3rd world countries begin to industrialize and compete; different rules for different players (e.g. China buys its oil through state-negotiated contracts and does not pay market price); and over investing in commodities market as the boom and bust cycle that has plagued Wall Street over the past 20 years creeps into new territory.
The US solution is probably not going to lie in a business as usual approach, but rather we will need to innovate. We will need to move past the oil economy and into a new age. The problem is that no one really knows what resource will fuel the next era. Interestingly, this seems to be the first time (at least that I can think of) that humans have needed to transition from the fundamental mover of the economy (e.g. stone, bronze, copper, iron, etc.) due to pressures on the resource pool instead of simply using the technological gains of one age to bring about another.
The clock is ticking on the oil age. Global warming threatens the relative environmental stasis we have enjoyed throughout most of human history. Oil supplies are dwindling as new sources become more and more scarce. The question is whether or not we can transition from the oil age before it happens on its own.
The Saudis refused Bush's entreaty to boost production because they didn't want to get caught holding the bag when the prices inevitably drop. They stated that supply and demand are currently balanced and that they didn't want to disrupt the equilibrium.
Some people are blaming speculators, citing some $90 billion of investment money being pumped through the markets in the last two years.
Everybody points the finger (at least partially) at China, which has become the flagship for the rapidly developing world. Certainly China, India, Brazil, and other rapidly developing countries are putting stress on demand, but then, at least according to the Saudis, supply is in balance with demand. Many of those same developing countries are heavily subsidizing oil and China particularly has been cited for hoarding oil in preparation for the Olympics.
Congress seems to think that OPEC is the problem in that they are keeping prices artificially high. The problem with that thesis is that it seems more likely that the weak dollar is to blame for OPEC's high prices. After all, can we really expect the OPEC countries to continue accepting $20 per barrel that is worth about half as much internationally as it was just a couple of years ago?
Further circumstantial evidence that it is actually our own fault that oil prices are rising so rapidly in this country is that, if you'll notice, every time that crude prices hit a new high the Dow drops about 200 points or so (270 yesterday). My theory in the correlation between oil price spikes and stock market tumbles is that all that money being leeched from the stock market is being pumped into the commodities markets which have seen exponential price growth, not just for oil, but also for corn, rice, and natural gas. As the demand for commodities futures rises, so does the price.
Ultimately, I think that high oil prices are a function of a confluence of factors: irresponsible financial policies on our part, both at the macro- and micro-levels (e.g. the credit markets and hyper-consumption); rising demand around the world as former 3rd world countries begin to industrialize and compete; different rules for different players (e.g. China buys its oil through state-negotiated contracts and does not pay market price); and over investing in commodities market as the boom and bust cycle that has plagued Wall Street over the past 20 years creeps into new territory.
The US solution is probably not going to lie in a business as usual approach, but rather we will need to innovate. We will need to move past the oil economy and into a new age. The problem is that no one really knows what resource will fuel the next era. Interestingly, this seems to be the first time (at least that I can think of) that humans have needed to transition from the fundamental mover of the economy (e.g. stone, bronze, copper, iron, etc.) due to pressures on the resource pool instead of simply using the technological gains of one age to bring about another.
The clock is ticking on the oil age. Global warming threatens the relative environmental stasis we have enjoyed throughout most of human history. Oil supplies are dwindling as new sources become more and more scarce. The question is whether or not we can transition from the oil age before it happens on its own.
Sunday, May 18, 2008
I Know Its Almost Summer And All...
But let's take a look at futures for natural gas and heating oil.
Crude oil prices are also hitting record highs almost every day. Bush just got back from Saudi Arabia where he asked the sheiks to boost production of crude oil. Know what they told him?
And, if you look at the above graphs, it seems the prices of heating oil and natural gas are also going up without the conventional pressures on demand (e.g. cold weather). My prediction: demand for blankets will spike around January 2009 when people begin to find that heating their homes is becoming prohibitively expensive.
Special thanks to my friend for bringing these graphs to my attention.
Crude oil prices are also hitting record highs almost every day. Bush just got back from Saudi Arabia where he asked the sheiks to boost production of crude oil. Know what they told him?
Demand does not justify increasing production at this time.
And, if you look at the above graphs, it seems the prices of heating oil and natural gas are also going up without the conventional pressures on demand (e.g. cold weather). My prediction: demand for blankets will spike around January 2009 when people begin to find that heating their homes is becoming prohibitively expensive.
Special thanks to my friend for bringing these graphs to my attention.
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