CNNMoney.com reports that gasoline hit a new record of $3.718 a gallon today. That's up 21% from a year ago when it sold for $3.06 (although I remember paying $2.20 a gallon in February 2007 for midgrade). The U.S. government could help out us poor gasoline consumers, but it refuses to do so. Meanwhile, in 2008, global oil supply is expected to grow more than global oil demand. So arguments that speculation has nothing to do with record oil prices fall flat.
Yet, this morning, the New York Times' Paul Krugman offered such an opinion. He concluded that oil is not a bubble. He doesn't really define what he means by a bubble, nor does he offer any numbers to back up his case that the price of oil is rising due to demand growth exceeding that of supply. He also throws in a comment about how if oil were a bubble, people would hoard it and they're not.
But numbers from the Energy Department suggest that global oil production will grow more than demand. Specifically, it expects global production to exceed global consumption by 0.8 million barrels a day (mmbbl/d). How so? The Energy Department forecasts global consumption in 2008 to rise 1.2 mmbbl/d from 85.4 mmbbl/d to 86.6 mmbbl/d. Meanwhile, it expects global oil production to grow 2.0 mmbbl/d from 84.6 mmbbl/d in 2007 to 86.6 mmbbl/d in 2008.
If it were all about supply and demand, the price of oil would be crashing. So what gives? The beauty is that as the Fed has cut rates from 5.25% last August to 2% where they are now, the dollar has lost value relative to the euro. And since oil is traded in dollars, it takes more greenbacks to buy a barrel of the black gold.
Traders have been selling the dollar short, buying euros and oil as a way to profit from this nearly perfect correlation. Unfortunately, I don't know what proportion of the money flowing into the oil market every day comes from such speculators, but I'd expect a Princeton University economist such as Krugman to use numbers in making his arguments.
Regrettably, these speculators are not obligated to disclose that information. However, Online Journal estimates that 60% of oil trading volume is due to their trades. The lack of disclosure would be fine except that we are paying for it every time we use our cars or buy anything that involves oil -- which is just about all consumer products.
When 100% of the public is governed for the benefit of the top 0.1%, you can run into those little problems.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.
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Reader Comments (Page 1 of 1)
5-12-2008 @ 3:26PM
william lindblad said...
How true, goes back to the time that the "robber barons" had more assets than the U.S. Government.
However in this case the speculators may eventually find themselves taking major loses, the very same that happened in sub-prime. Price tends to push change in the same manner as major conflicts and this could come quickly. Over the last ten years battery technology has increased and the electric vehicle could become widespread reality. All that is required is one major breakthrough. The first company that can build one that can go 300 miles a day, fits a household plug and is of reasonable cost will have a goldmine.
5-12-2008 @ 3:27PM
The Baron said...
. At a time when this nation needs its greatest minds to lead it, we have been mortally wounded by a two-party political system that rules by the power of the numbers and has nothing to do with real ability and competence. The price of ignorance can sometimes exceed the ability to pay,and the price at the pump is almost there. The price of heating oil is already there. We are now witnessing the same phenomenon that took place in the 1970s when the "Hunts" tried to corner the market in Silver and drove the price over $40/oz. They got caught and the result is now history.
5-12-2008 @ 3:30PM
The Baron said...
The price of crude is not the result of short supplies. And it has not been determined by any supply and demand function. The price at the pump is the result of a lack of refining capacity in the U.S. and a Commodities Exchange which has responded to the public's misperception that we can not get enough crude from OPEC or the other crude producers. Now,who sold them that idea? Each day another rumor of political unrest or violence in a crude producing nation and greed and emotion drive prices higher and higher.The rich get richer, and the rest of us are literally being robbed of our ability to economically survive and wondering what our elected officials can do to help us, another very naive notion. Unfortunately,they also take advantage of our energy crisis to push there own political agendas which also lack truth and knowledge,the blind leading the blind.
5-12-2008 @ 3:39PM
The Baron said...
A Commodities Exchange is not the pricing mechanism for something that is a basic need to all of us. The procurement of crude oil should be done by a central authority that is monitored by the U.S. Energy Dept., and is staffed by competent manages and non-politico advisors. If that were the case ,today, the price of crude would never have gone over $40/barrel. We have now been hearing from some Media "energy -experts" who are predicting $200/ barrel crude oil which will translate into 6.50/Gal heating oil. And notice that not one political character is this country has mentioned the only short term solution to what is now a pending economic disaster about to happen,rationing.And all it would take is a 20?% plan designed to reduce excess and waste. It would work and the price of crude would fall to $50/ barrel upon announcement,and the value of the dollar would increase and inflation dramatically decrease. So why haven't are politicians offered this as a solution? They all lack the knowledge,courage, and integrity to do what they feel maybe politically unpopular.And ,as Bill Bennett entitled his book on Clinton,you have to wonder,'Where's the Outrage?"
5-12-2008 @ 3:42PM
Dan Barnett said...
Mr. Lindblad,
Amen, though can I ask that it be priced below the 80 Grand that the current all-electric cars are priced?
America is simply too spread out for an electric that can only go 35 mph & has a range of 50 miles when you don't use any extras (like lights or heater or radio)
5-22-2008 @ 3:50PM
Matt R said...
I'm not convinced by your numbers. Your numbers indicate that demand and supply will be equal (at 86.6 mmbbl/d. So what? By definition demand and supply are equal at the market clearing price. What does that have to do with whether that price is driven more by speculators than by fundamentals? I've yet to see a convincing argument that is speculation.