On Oil Prices: Time to Confront Reality

There has been a lot of talk around the possibility that today’s high oil prices are just the result of speculation and fear, with the obvious implication that if we can get the big bad speculators (and/or increase margin requirements) out of the mix, we can bring energy prices back down to earth. Taking it further, if the prices for oil (and other commodities) are being inflated by speculators, then it means we have a bubble, and if we have bubble it then follows that said bubble will burst and prices will come falling back to earth.

It’s a nice idea because it means that the world will lose a major inflationary pressure and give all of our wallets a break. However I can’t think that this is just wishful thinking for one simple reason: Demand for oil is growing rapidly and the supply is both finite and shrinking.

In other words: If speculators are pushing up prices and we have an energy bubble, all that means is that we’re experiencing tomorrow’s prices today, and the long-term trend of higher energy will continue unchecked until viable/affordable alternative energy sources are introduced into the marketplace. It means little if today’s prices are a little inflated because of speculators, because supply and demand are going to push prices towards those levels in the future regardless. In fact it’s possible that experiencing tomorrow’s prices today might be a good thing, as it is likely to push consumers to change behaviors and businesses to adopt alternative energy sources.

Don’t get me wrong; I most certainly did not enjoy paying $4.09/gallon for gas this past Sunday, however until we address the issues of consumer behavior around consumption, diminishing supply and the need for alternative energy sources the problem of high oil prices won’t go away. Doesn’t it make more sense to focus on those issues than for Congress to waste more taxpayer dollars on another round of farcical hearings, which will accomplish nothing aside from publicly bashing oil industry execs and blaming speculators?

With oil prices at $126 and climbing, we need true solutions to the energy problem; and while it may be momentarily satisfying to watch one group of out of touch millionaires bash another, it’s not going to solve the core problem.

Comments

[EnergyFinancier]

Well said. The "true solutions to the energy problem" include increasing our focus on clean, renewable energy sources like wind, solar, and biofuels.

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[Tom Duong]

Bravo Mr Lee.

The factors contributing to oil prices rising are obvious but because we are so accustomed to such low translated prices at the pumps compared to the rest of the world, we choose to ignore the "truth."

Supply and demand is the heart of the issue; especially from the perspective that access to easy supplies (reserves) is gone and the demand grows non-linearly. While I think speculators contribute to some of the erratic short-term changes in energy prices, long-term prices are reflecting the peak global production, geopolitics, access to reserves, and additional demand scenarios as two billion people in developing nations transition from poverty towards fully developed economies, among others.

Secondly, I would add that climate change is going to play a greater role in energy prices going forward. In some E&P companies, this shadow cost is starting to be an economic factor in oil development projects and will be a factor throughout the energy lifecycle.

[User 42142]

why do the economically illiterate lawyers form the government?

[saffy197]

Seems to me the most obvious change we can do as a county is to once again lower the speed limit on our highways to 55 mph - It worked in the 70's and 80's and I can't imagine it won't again. It is well documented that driving under 60mph conserves fuel, conserving fuel decreases demand. And ,I think I heard truckers say they're driving 10mph slower now to conserve fuel - guess so w/ Diesel slowly inching up to $5.00 per gallon. To me its a no brainer, if little ole' me can come up with this why doesn't "the HILL" what are these guys waiting for? There are no more dinasaurs

[User 87674]

Do not forget that the price of oil is inverse to the value of the US dollar on the world exchange. $60 oil at a dollar worth $1 vs. $120 oil at a dollar worth 50 cents. Therefore, the Federal Reserve is as guilty as anyone.

[Kunst]

If we had a real leader in the Presidency (or even among the troika of remaining candidates for next year), the following steps would bring oil prices down, at least in the short term:
1. Use the bully pulpit to ask Americans to conserve. Sometimes just having a leader say the obvious is enough to get the ball rolling.
2. Strengthen the US dollar by a symbolic 1/4 point interest rate hike (yes, I know the Fed is independent -- tell them to do it anyway).
3. Temporarily stop adding to the strategic petroleum reserve. No need to pull from it -- wrong message -- but even 70,000 barrels a day is significant.
4. Elevate the importance and visibility of moving toward real solutions to the long-term energy crisis. Pull together the big players, including the 3 presidential candidates and Bernanke, to acknowledge the seriousness of the situation and the need for common-sense consensus on real action.
5. Announce and follow through on a real Manhattan Project/Apollo to the moon effort to address all aspects of the problem for the long term.
6. Quit threatening to attack Iran. Get more oil flowing from Iraq. Broker a fair settlement to the legitimate grievances that are fueling the disruptions in Nigeria. Making nice with Russia could help.

Real leadership could break the fever psychology that is driving the current bubble. Yes, long-term it's a supply/demand problem but right this minute speculation that seems to have no downside is providing the rocket fuel.

[paulk8756]

Last week the pro oil and gas exploration forces got 42 votes in the U.S. Senate (they needed 60!) for a proposal to open ANWR and allow states to opt out of the ban on domestic drilling. Currently, 85% of U.S. offshore oil and gas reserves, containing tens of billions of barrels of oil and trillions of feet of natural gas, are out of bounds to exploration and production.

So when the price of a gallon of gas goes from $4 to $6 to $8 (...and higher!), don't blame the oil companies, OPEC, the BRIC nations or speculators for our economic miseries. At the same time the rest of the world is looking under every rock for more oil and gas (...and finding it!), our Democrat politicians and their environmental sponsors and lobbyists have said NO to those of us who think the price of gas is too high.

So if you think gasoline, heating oil and electricity prices are ridiculous, and inflation, unemployment and the value of the dollar are unacceptable, don't blame the oil companies, the Arabs, Wall Street and other imagined boogeymen for your problems.

All you have to do is call your Senators and Representatives. They can give you relief starting tomorrow.