Friday, March 23, 2012

30% OFF SALE...

The bedrock principle for free market capitalists is the law of supply and demand. If you have a huge demand for a limited product, the price increases until the demand is met. If you have a lot of product, and little demand, the price drops until demand increases. My wife recently told me she paid $4.24 for a gallon of gas in the City. Gas prices are up 18% in just the last few months. Why? Currently, the world has an unused capacity of over 2 million barrels of oil a day. On top of that, gasoline stocks are also high. Demand for gasoline in the United States has been trending down since the depression hit in 2008. Even if you factor in higher demand in China, India and developing nations, there is more supply than there is demand. So why have prices skyrocketed? The answer is simple...speculation. If you eliminated the ability to speculate on the future cost of a barrel of oil, you could drop the price of gasoline by about 30%. You would be paying about $2.98 a gallon right now.

In one day, the price of a barrel of oil dropped over $2.00. Why? It turns out Saudi Arabia announced it would make up for any oil disruption which might be caused by Iran either cutting off oil to Europe or attempting to close the straights of Hormuz. The price dropped because "speculators" believe the supply will continue to outstrip demand. The possibility of the United States and Britain tapping into the strategic oil reserve drove the price down as well. It didn't result in more oil; rather it represented the possibility of more oil in the "future". In other words, when it came to oil, the basic laws of capitalism don't seem to apply. Instead, traders are allowed to stampede the price based on what they think will happen tomorrow.

Everyone could live with gas at $2.98 a gallon. It would benefit consumers, but also benefit industry where energy costs are driving up prices and reducing profits. It would guarantee Obama's re-election and have his opponents grasping for an issue on which to run. Food prices would drop. Transportation costs would decline. UPS and Fed-Ex would be ecstatic. A shaky economy would be back in full throat. So, why do we allow a group of gamblers to wreak such havoc on our lives and livelihoods? How it, when talking about energy policy, neither regressives nor progressives suggest changing the system and eliminate commodity futures trading in oil?

There is no right to speculate. Adam Smith did not cite it as a key to a capitalist economy. There is no inherent value in turning the oil market into a lottery. Congress could decide to treat oil like a utility. It could prohibit the trading in oil futures. To do so, violates no tenet of capitalism nor could it be construed as some kind of socialist plot. Let a barrel of oil be priced based on simple supply and demand. If there is overcapacity at the moment of 2-3 million barrels a day, the price should drop until it encourages demand to rise. Oil producers could also cut back on production to increase prices. To eliminate speculation would not hurt the oil companies. They are making enormous profits as is and even if these were lessened slightly, they would still be healthy. The argument could be made, futures trading allows someone to lock in a profit on oil in the future, but the benefit is more than offset by the volatility futures trading causes in the market and the increase in prices based on nothing more than a crystal ball.

I have to be honest and say except for the traders themselves, and the oil companies who see profits rise on a commodity they have too much of at the moment, I don't see whose ox would be gored by prohibiting futures trading in oil, natural gas, biofuels etc. Where would the opposition to this idea come from? Regressives would cheer, as eliminating futures trading would be a classic free market position. (It would however render mute their drill baby drill energy policy.) Progressives would be thrilled because the economy would benefit, poor people would have more money in their pockets, jobs would increase and a booming economy would lift all boats. One argument you might here from progressives is how low gas prices would encourage people to drive more and make the nation more dependent on foreign oil. Increased driving would also add to greenhouse gases and be bad for the environment. This is not an argument for speculation. It's an argument for increased taxes to raise the price of a gallon of gas and that is an argument for another time. Despite not being able to articulate where the opposition would emerge or who would object, neither President Obama nor any of his rivals have offered this as a possible solution to sky-high gas prices. Why not?

Treating oil like a public utility, instead of a crap game, makes sense. Prohibiting the speculation on the future price of a barrel of oil is good for the global economy and our national economy. It is an idea which seems simple, and yet no one proposes it and I don't have a reason to explain the reluctance. So, if you want to see lower, more stable oil and gas prices...if you would like gas for under $3.00 a gallon...if you want to eliminate the ability of Iran or OPEC, or any oil nation, from extorting us and holding our economy is incumbent on you to raise this question with your member of Congress. It should be asked of presidential candidates. It would be fascinating to watch their reaction and hear them justify using a barrel of oil as a chip in the biggest casino gambling in the world. Wouldn't it? What do you think?


  1. PLEASE, please, stop and think and show some compassion.

    Mass transportation is not a viable option for most people in the BA. They must drive to work.

    Yet we have these imbeciles demonizing people for driving to work and even demanding higher gas taxes.


    I see many hard-working low-income people who want to drive to work, but can't and it is just heartbreaking.

  2. Until the sheep rise up and call for real reform in the commodity markets from Congress and President Obama, this fleecing at the pumps will go on. It is not only oil futures, but also agriculture futures that need go back to the market regulations before Sen. Phil Gramm slipped in the deregulation language into a bill signed by President Clinton. The guys behind the curtain in this deal were the Koch Brothers and Enron who lobbied long and hard for a way to create a pricing scheme not based on the sluggish old supply and demand. Congressional Democrats realized this was artifically increasing the price of crude and tried to reinstate control in 2008, but because of GOP opposition, the bill fell way short.

    To determine if the oil price is being driven by supply and demand or speculators, check online for crude oil storage at Cushing, Oklahoma. Back in the days when oil refining was centered in the Central U.S., Cushing was the storage distribution point. As the center of refining activity moved to the Gulf, Cushing's oil tanks eventually became storage for the crude futures market trading. If Cushing is awash in oil, you can bet there is an oversupply and the speculators are running wild.

    I've been told a bottleneck in this arrangement has been getting the oil from Cushing to the big refineries. Could this have been the reason for the Administration's green lighting of a pipeline from Cushing to the refineries on the Gulf?

  3. I on first thought am with you bernie, the price of oil is too high. But then I think about high oil prices vis a vis europe and realize we don't pay near enough. We don't pay at the pump for the massive subsidy the government is giving to the oil companies so that they can bring their product safely to market. Furthermore, we will never transition to the low carbon economy we need with prices this low. Detroit refuses to build hybrids because oil is not expensive enough. Obama's poll numbers went down substantially last week because americans have to pay what amounts to about two extra bucks a week. $2 a week!

    Long live capitalism and the speculators! I think it was Marx who said capitalists will sell the rope to hang themselves with?