Crush Liberalism

“Big Oil” not seeing the same profits as before

As all of you have noticed, the price of gas at the pump has spiked way up.  Normally, this time of year sees a decrease in gas prices.  However, this trend is unusual in a big way: it’s not being driven by the normal supply-and-demand mechanism that usually drives gas prices.

Here’s an article that shows where the oil companies aren’t the beneficiaries of the current $100-a-barrel oil prices we see today.  In fact, things are about to head south for the oil companies (much to the delight of the class warfare types).  No, we can’t blame today’s gas prices on “Big Oil” at all.  The blame instead lies on big money investors (i.e. speculators), many of whom lost their #sses in real estate and are now trying to make up their losses at our expense.

Here’s the low-down:

Crude oil futures prices per barrel have been zooming to all-time highs on the New York Mercantile Exchange, continuing a steep upward trend. Billionaire Texas energy investor Boone Pickens was right in his prediction that prices would top $100 per barrel.
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But it’s increasingly obvious that oil prices are being pushed into the stratosphere by speculators in a lightly regulated global trading market that has grown by leaps and bounds. Traditional supply-and-demand factors can’t explain the price jump. There’s no shortage of oil or gasoline, nor major supply disruptions. World oil demand has stabilized at about 85 million barrels a day.

A weak dollar has made purchases of oil on the futures market look increasingly attractive to foreign investors. But that can’t account for $90 oil.

A favorite whipping boy — “Middle Eastern tensions” — again is being trotted out to explain the soaring prices. But even if a hot spot explodes, the odds are still against a major, sustained curtailment of global oil supplies.

Fadel Gheit, a respected energy analyst for Oppenheimer & Co. in New York, predominantly blames speculators. “There is absolutely no shortage of oil,” he says. “I’m absolutely convinced that oil prices shouldn’t be a dime above $55 a barrel.”

Oil speculators include “the largest financial institutions in the world,” he said. “I call it the world’s largest gambling hall. … It’s open 24/7. … Unfortunately, it’s totally unregulated. …This is like a highway with no cops and no speed limit, and everybody’s going 120 mph.”

Speculators can trade from anywhere via their BlackBerrys and buy oil on the margins by putting up only a small fraction of the price of a barrel, Gheit said. Oil prices are escalated by a “fear premium,” he acknowledges — trepidation that events such as a new Mideastern conflict will escalate prices.

Gheit said he is “making a bet that the U.S. will have airstrikes in Iran in the next two to four months,” but he notes that global oil supplies haven’t been seriously curtailed even by the prolonged war in Iraq.
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Oil prices eventually will fall considerably, as supply-and-demand fundamentals prevail over market speculation. Some traders undoubtedly will take a financial bath. In the near term, however, gas-guzzling U.S. motorists will be taking it in the shorts. 

Those of you who know me know that I am a big defender of capitalism and free markets.  However, I do not see how these speculators add any value whatsoever to the market.  All they’re doing is disrupting the normal supply-and-demand mechanisms that have worked since the beginning of time by artificially inflating the cost of gas in order to get rich.  Hey, I don’t begrudge them for getting rich, and I can respect that they’re doing it in a way that’s perfectly legal.  As Gordon Gecko said, “Greed is good.”  By and large, I agree.

But eventually, their greed is going to kill them in the same manner that it killed those who got too greedy in the real estate market (and those whose common sense went on hiatus during the tech stock boom of the late 1990′s).  I won’t be weeping for them.

November 6, 2007 - Posted by crushliberalism | economic ignorance, oil