Crude's Rise Is All About Supply and Demand

The public, the media, and especially our legislators love to have someone to blame for everything that doesn't suit them. Right now, oil and gasoline prices have everyone up in arms and, of course, someone must be to blame - sort of like Salem, Massachusetts in 1692. In similar form we are currently inundated with articles on how those evil speculators are driving up the price of oil. There's an article today on the Los Angeles Times site and Business Week is blaming it on the pension funds. As you might expect our legislators are ready to fix the problem once and for all by imposing higher margin requirements. Of course those folks, suffering from a false sense of importance, think they can legislate away any problem. I'm amazed that they haven't yet cured cancer, world hunger, and obesity with legislation.

But speculation does not drive up the price of a commodity like oil. Supply and demand do. And you can't legislate supply and demand.

Before you hang me for cavorting with evil spirits (I am making money investing in oil) listen to my argument. Oil speculators bet on the price of oil in the futures markets, which could theoretically raise the price of those futures contracts. However, those contracts ultimately settle at the spot price and the only people buying at the spot price are real users of oil. Hence, the price is ultimately determined by real demand - unless someone is buying it to store for future sale. If speculators were piling it up in barrels in their parking lots then I might believe that they could be driving up the price but I'm not aware of this happening. It's not easy storing oil. A significant dollar amount of oil, even at these prices, is quite bulky, gooey, and smelly. Gold, on the other hand, is much easier to store so it could be more prone to speculative manipulation.

If the oil producing nations were cutting back on production and "inventorying" the oil in the ground then I would also believe that speculators were driving up the price but I'm not hearing this story either. What I've heard is that oil production has been fairly steady. In fact, with these higher prices I would expect production to eventually increase but that effect has a long lead time.

So what is driving up the price of oil? Two very simple factors. First, the Federal Reserve's attempt to stave off a credit crisis by lowering interest rates has trashed the dollar. It now takes more dollars to buy a barrel of anything than it did a couple of years ago.

However, the second factor is far more interesting because it's a glimpse into our future. The rest of the world is starting to take their fair share of the world's resources. I've heard that the US consumes 30% of the world's oil. But we only have 5% of the world's population. A similar relationship exists for just about every natural resource the world has. How long did you think that was going to last? It's simply not sustainable. We've been able to get away with this as long as the rest of the world didn't have much money. But that's starting to change as work inevitably shifts to cheaper places and these emerging countries start to emerge. And this is just the beginning because the world still has 1 billion people that live on less than $1 per day and it's not just oil they want to consume more of.

So, how far do you think oil prices have to rise in order for supply to increase enough and OUR demand drop enough so that we eventually consume only 5% of the world's oil? Good luck to congress in trying to legislate this problem away.

Disclosure: Long

Comments

[MR_Z:]

Not only is it convenient to blame the speculators but necessary for the survival of politicians.
If it were basically accepted that the price of oil is a supply demand issue then the proverbial finger points back to the politicians who for years have constrained exploration, constrained refining capacity by not allowing new refineries to be build, prevented building of nuclear power plants, underinvested in infrastructure, alternative energy and reduced the purchasing power of the dollar.

So with that glaring state of affairs that they created, they now need a scapegoat.
Speculators ..... going once. going twice, speculators it is.
If you the public don't buy the speculator story then lets blame the oil producers who are making massive profits. Yep its their fault. Never mind that our policies drove the price of oil through the roof effectively forcing enormous profits, its those nasty oil people that are "reaping" profits from this.

The next chapter to unfold in all of this is how these incompetents are going to try to quick fix this situation that cannot be quickly fixed. Such as making life more difficult for the oil producers thereby pushing prices up even higher. Or constraining free markets to value oil in this world economy which will produce shortages and yes even higher prices.

If we are serious about energy in this country, start by getting rid of the red tape on nuclear energy, refining capacity and let the oil producers explore in places where there is a good likely hood of finding oil. Then provide serious incentives for use of solar, wind and other promising alternative energy sources.

"And stop with the finger pointing already".

Mr Zzzz.

2008 May 22 09:40 AM

[ArtfulDodger:]

Mr. Lucido:

I don't blame speculators; they're simply taking advantage of a situation that can make them some money. However, I do blame those manipulating the supply figures. Here is where Congress should do its work and stop this thievery.

I don't care who gets the blame, and there are plenty of guilty parties out there, but there is no supply problem.

A very important article reporting the scam going on regarding oil supply and demand was written by Philip Davis, who is a scam exposer extraordinaire.

His is a great and badly needed article! It is a must read for those of you who're able to objectively go over the massive pro-high oil price propaganda put out by the big houses and their touts.

Perma-oil bulls need not apply, for just as nothing would convince Saddam Hussein haters that he was a Toy Tiger, and there was not way to convince the public that the wrong date on a computer had nothing to do with running power grids, and there was no way to convince people that the hundreds of dotcom companies the big houses were touting had no real income, no cash on hand, and no business plan and were really dotbombs waiting to explode, there's no way to convince today's suckers who're convinced the planet is heating up to a boiling point and that the earth is quickly running out of natural resources such as oil that both are huge shams created respectively by eco-maniacs and greedy shysters who have a huge amount of control over the business news and investing touts.

See here: seekingalpha.com/artic...

Rebeldog

2008 May 23 11:14 AM

[User 108618:]

The legislators like to legislate. It is their job., to make it look like that they are doing their jobs. Right? Wrong. Only one purpose is to keep their jobs as politicians and not as problem solvers. Hardly. What is good for the people of this country is bad for the wallets of these elected politicos.
When the lobbyists and special interest groups continue to stroke their backs and fill their wallets, then consider that our country is run by these people who contribute smartly to people on both sides of the isles. And why not. They have to stay safe and keep their interest on tract.
What we need is a new government that are sensitive to the needs of the population at large and a new leader that knows how to solve problems and be a leader of government and not allow these old corrupt elected politicians to rule the people like those old kings of the past. We , the people has to do something like change the constitution and put the senators and congressmen on trial by the people who elected them in the first place. They cannot continue what they are doing to us. They have to be accountable for their actions . The gravity of this nations will aggravate , the longer we wait to make a serious efforts in getting this crooks out of office as soon as possible.

2008 May 23 09:11 PM