OIL: Speculators – or Supply and Demand?

If supply is solid and demand is solid, how can it be that oil prices are skyrocketing?

President Obama offered his thought recently, explaining that “we [speculators] think that maybe there's a 20 percent chance that something might happen in the Middle East that might disrupt oil supply, so we're going to bet that oil is going to go up real high. And that spikes up prices significantly."  He even announced a special “commission” to investigate and root out oil speculators.
Is Obama right about speculators being the cause of high gas prices, and that supply and demand are balanced (as he also stated)? Let’s take a closer look:
supplydemand

The above  two charts from the International Energy Agency’s latest report show quite clearly that world oil demand is currently outstripping world oil supply. And it will get worse over the near term.
If countries cannot get oil at good prices, their economies begin to suffer. Prices of everything go up. With Fed Chairman Ben Bernanke’s loose money Quantitative Easing policy, printing endless dollars, and the dollar declining rapidly against a basket of global currencies, this hits us right in the pocketbook. The official currency of OPEC is the US Dollar. Since we currently import 70% of our oil (not long ago we only imported 39%) , we must pay for the bulk of it with dollars that have been artificially debased, further increasing the cost.
Speculators have “some” effect on oil prices, but it is mainly to exacerbate price swings in either direction. Without a fundamental supply-demand dynamic, speculators have nothing to do. The fact should not be lost, either, that speculators are NOT buying physical oil - only commodity futures for later delivery.

So as you drive your gas-guzzling SUV to the pump this summer to fill up with $6.00 / gal gasoline, remember to thank President Obama, who has put a virtual hold on domestic drilling, and Mr. Bernanke, whose Keynesian money policies have debased our currency to the point where we cannot even affford to import the oil we no longer produce at home.

Comments

  1. Or it could be that Oil hasn't gone up at all relative to gold and essentially every other commodity and that what is actually happening is that Ben Bernake's idiotic QE is finally hitting and the US dollar is collapsing.

    Yes, there may be a 10-20% hedge built in right now, but that put's it well over $90 a barrel with little reason for it to be that high.

    More likely is that supply and demand is having it's affect on the value of MONEY itself. The Austrians were right (again).

    ReplyDelete
  2. Note that shortly after explaining that there is plenty of oil supply and that speculators are who are causing oil prices to go up, Mr. Obama proceeeded to start jawboning OPEC members to increase production. Meanwhile dozens of rigs have left the Gulf to go drill where there aren't ridiculous restrictions on getting oil. They won't be back, either.

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  3. For some reason you are assuming that US has endless reserves of oil and it can find enough oil for any demand level.

    It is obviously false, oil is a limited and finite resource.

    Sources of cheap oil are all already found end fully exploited.

    Still sources for more expensive oil exist , like offshore drilling, oil sands and oil shells.

    Relying on more expensive sources of oil will obviously will rise prices at the gas station.

    So solution for expensive oil is obviously not using more oil but to use less of it.

    ReplyDelete
  4. @Mikhail,
    Nobody has "endless reserves". But the US has ample reserves of both cheap and more expensive oil, more than any other country.

    One of the biggest reasons for high oil prices is OPEC which throttles output according to it's whim.

    I agree that we need to look at alternative energy sources for the future, but in the meantime unless we are happy with chaotic economic disruptions we need to produce more of our own oil.

    ReplyDelete
  5. As you pointed out american proven reserves are decreasing from the 70's while demand for oil is increasing all the time. If it was rely economical viable to extract more oil at reasonable cost one of the republican oil friendly presidents that ruled during these 40 years would make it happen.

    So today gas prices are not caused by today actions of Obama.

    It did not happened so reality proves you wrong. Maybe at today prices and with today technology some of these potential oil fields become economical but at best case scenario it will take 5-10 years to create necessary infrastructure to make this oil available.

    It will not be an immediate solution to gas price as you try to portrait it. More it will not be a long term solution not even mid term solution.

    On the other hand in the same 5-10 years and using the same resources you could completely change american transportation and solving the gas price permanently.

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  6. @mikhail,
    Your solution while hopeful is simplistic at best. We all wish it were so easy!

    ReplyDelete
  7. Anonymous9:39 AM

    correct. regardless of whether we "should" or "should not" produce more domestically, the prices are based on the market. no man in the history of the world has been able to contain the market, as billions of voters elect what to do with their money every moment. shameless tilting at windmills on the part of the teleprompter's advisors....

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  8. Anonymous9:32 AM

    The Telegraph has an article directly on this subject:

    Speculators not causing oil price surge...

    ReplyDelete
  9. @Anonymous,
    At least the Telegraph "gets it.".

    ReplyDelete
  10. Anonymous5:33 PM

    if all this is the case then how is that Oil companies record record breaking profits when the price goes up? If they are having to spend more money to find and get the oil shouldn't their profits be down? I also find it amusing that the price of oil goes up when republicans have enough control to stop any legislation that would do something about it

    ReplyDelete

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