Presidential candidate frontrunner Barack Obama has proposed tightening the regulation regarding oil speculation. Is speculation really the reason for high oil prices?
The rapid increase in the price of oil has led some such as Barack Obama to believe that speculation is the cause of this. This is an interesting but not so obvious theory.
The demand for oil still remains strong in the US but is weaking with higher prices. Americans actually drove less miles this year than they did last year. According to the Federal Highway Administration Americans travel fell .4 percent in 2007.
Since then prices have increased further and travel is expected to fall even further. Americans have been cutting back on SUV purchsase and the driving of large vehicles.This means oil consumption in the US will most likely remain flat or actually decrease slightly.
If US consumption is going down, then why are oil prices going up? The oil industry states that it is due to supply and demand that is causing the price to increase.
Regarding demand, many have been blaming China and the US. Americans didn't just start buying large trucks and SUV's the past year. This has been an ongoing trend that recently has stopped.
China has been using oil in factories and for automobiles. However neither the US nor China have had anything drastic happen recently regarding consumption. China relies on the US as a major trading partner. The economies of both countries are tied to each other. Consumer confidence and spending have been weakening even as the price of oil has been increasing.
There is no mad rush to buy Chinese goods right now just as there is no mad rush for the Chinese to drive autmobiles. The consumption of oil of both countries will most likely remain flat or even fall.
If China and the US are not using more oil, then the problem must be on the supply side. We really have very little information regarding how much oil is in the ground. The inventory numbers that are released are often distorted. As a result, most look at oil stored above ground in tanks as the inventory.
No particular law changes come to mind with regard to oil speculation. When the price of California's electric went up during 2000-2001 it came shortly after the government gave Enron the sole responsibility of creating a market for energy trading. The problem was almost immediately apparent; Enron was controling the supply for electric by routinely shutting down power plants to cause spikes in prices then selling it to Californians at inflated prices. They were manipulating the market.
During this time, end users were blamed for the cause of the high electric rates in California. Large, flat screen TV's and computers were said to have been the problem. Yet, before Enron everything was fine. Now we are seeing the same sort of blaming going on with the US and China as the top consumers and SUV's / pickups as the problem.
With oil recently this isn't so obvious. No one company has been given the opportunity to control oil trading. Many hedge funds, and institutional investors are said to have been trading in oil futures as opposed to actually holding oil.This is done because buying contracts is cheaper than owning oil outright which is usually done with borrowed money. SInce the credit markets are weak now so contracts are popular now.
These so called speculators are said to have been increasing the price of oil because of all the contracts being bought for oil is driving up the price. Generally there will also be sellers so the price can go down just as it has gone up. This hardly seems like market manipulation when there are so many participants.
George Soros made approximately one billion dollars when he shorted the British pound. After this there was outcry among some who saw Soros as a man that stole money from the pockets of innocent Brittons. However, without the public market black markets would develop.
Should we be blaming those for making money on oil? Others are free to participate as well. The buying and selling of commodities is essential in a capitalist system. If oil speculation gets out of hand, then the prices will fall and the end user will see the benefit. Maybe the oil industry is right and oil supplies really are low right now.
The dollar has been falling vs the euro but not as drastically as oil prices have been rising.
|
