Q. What's worse than finding a worm in your apple?
A. Half of a worm.
This is kind of where we are with oil prices. We have a worm, but that's better than half of a worm. Some are calling to put an end to the speculative side of the oil trade. There's some merit in this, except for this basic problem.
Oil prices are currently running up to a "what the market will bear" regimen. A price any lower than that point necessitates a subsidy (or extortion) from someone. That someone has traditionally been (drum roll please) OPEC itself. We used to rail against OPEC fixing oil prices. Well, they used to (click here for some of OPEC's faq), and they don't anymore. And prices have done the following:
So OPEC used to be the bogeyman, and it can't be blamed anymore. Most of the member states have been pumping flat-out for some time now. Here are some listings of articles from the last couple of years:
(2008) article from XE.com
(2008) article from TradeArabia.com
(2004) EnergyBulletin.net posting
The OPEC member states say they are trying to bring down prices by increasing supply, but one cannot help but think that they must be at least a little happy at the extra cash. Anyone seen pictures of Dubai recently? Here's a nice little post on a little construction there, but I can't help but sneak at least one picture of Dubai right here:
...and here's a 71-minute Google Video on Dubai's plans for itself:
So we know: 1) OPEC says it's pumping flat-out, and 2) it serves OPEC's states' interest to pump flat out (to buy all those awesome towers).
So why would oil prices be where they are?
This is asking exactly the wrong question. The question is: why haven't they been higher for longer? Here's my answer:
The prices have been held down for much of this time. Prices have not reflected "what the market will bear" for a while now. If oil prices had stayed this high for this long during the 1980s, oil despots would be facing international pressure, then sanctions, then maybe some covert meddling, and maybe even outright war. It would have been easy in the 1980s to dig up one reason or another to legitimize war, whether it would have been a Cold War proxy war or to "help" the citizens of that country overcome a tyrannical leader. I'm not suggesting that I oppose helping citizens overcome tyrannical leaders; but I am suggesting that too many nations "deserve" that meddling and other factors ultimately must be used to decide which countries will be so lucky. Oil is a fine reason.
Simultaneously, we decided to create new ways to trade "oil". I say "oil" in quotes because we have been trading oil for a long time. The new trading was in derivatives for oil futures contracts. Here's someone who's pretty upset about this recent advent, but this person still has it wrong. The bottom line is that, with gas higher than $4 per gallon, we are still buying gas. Less of it? Sure, in our country. But worldwide, demand continues to grow. So just think about this: the price of oil went up, and the quantity that we want (as a world) goes.... up. What other outcome could possibly come about except that prices go higher!
So while some people are fuming at the "oil speculators", I say they are just people who are profiting on what many of us refuse to accept: that the market will bear much higher oil prices. I agree that they are speeding our arrival at a higher price, but I simply posit that oil prices were not suppose to be lower in the first place. Our government could intimidate oil exporters, but it cannot intimidate the electronic herd of financial traders. This is market economics, like it or not.
Do I think that rising oil prices is good? No. But I think we'll pull through it, and frankly I think we'll be better at the end of it. In the meantime, there's a lot of hurt through this change, and unfortunately it will catch exactly the people who are not in a position to deal with the increased prices in its cross hairs. But with all of that said, I think it's high time that we take a deep breath, accept that oil prices are high, and change some of our habits accordingly.
So now I can rewrite that apple-and-the-worm joke:
Q. What's worse than rising oil prices?
A. Always having had high oil prices.
So OPEC used to be the bogeyman, and it can't be blamed anymore. Most of the member states have been pumping flat-out for some time now. Here are some listings of articles from the last couple of years:(2008) article from XE.com
(2008) article from TradeArabia.com
(2004) EnergyBulletin.net posting
The OPEC member states say they are trying to bring down prices by increasing supply, but one cannot help but think that they must be at least a little happy at the extra cash. Anyone seen pictures of Dubai recently? Here's a nice little post on a little construction there, but I can't help but sneak at least one picture of Dubai right here:
...and here's a 71-minute Google Video on Dubai's plans for itself:So we know: 1) OPEC says it's pumping flat-out, and 2) it serves OPEC's states' interest to pump flat out (to buy all those awesome towers).
So why would oil prices be where they are?
This is asking exactly the wrong question. The question is: why haven't they been higher for longer? Here's my answer:
The prices have been held down for much of this time. Prices have not reflected "what the market will bear" for a while now. If oil prices had stayed this high for this long during the 1980s, oil despots would be facing international pressure, then sanctions, then maybe some covert meddling, and maybe even outright war. It would have been easy in the 1980s to dig up one reason or another to legitimize war, whether it would have been a Cold War proxy war or to "help" the citizens of that country overcome a tyrannical leader. I'm not suggesting that I oppose helping citizens overcome tyrannical leaders; but I am suggesting that too many nations "deserve" that meddling and other factors ultimately must be used to decide which countries will be so lucky. Oil is a fine reason.
Simultaneously, we decided to create new ways to trade "oil". I say "oil" in quotes because we have been trading oil for a long time. The new trading was in derivatives for oil futures contracts. Here's someone who's pretty upset about this recent advent, but this person still has it wrong. The bottom line is that, with gas higher than $4 per gallon, we are still buying gas. Less of it? Sure, in our country. But worldwide, demand continues to grow. So just think about this: the price of oil went up, and the quantity that we want (as a world) goes.... up. What other outcome could possibly come about except that prices go higher!
So while some people are fuming at the "oil speculators", I say they are just people who are profiting on what many of us refuse to accept: that the market will bear much higher oil prices. I agree that they are speeding our arrival at a higher price, but I simply posit that oil prices were not suppose to be lower in the first place. Our government could intimidate oil exporters, but it cannot intimidate the electronic herd of financial traders. This is market economics, like it or not.
Do I think that rising oil prices is good? No. But I think we'll pull through it, and frankly I think we'll be better at the end of it. In the meantime, there's a lot of hurt through this change, and unfortunately it will catch exactly the people who are not in a position to deal with the increased prices in its cross hairs. But with all of that said, I think it's high time that we take a deep breath, accept that oil prices are high, and change some of our habits accordingly.
So now I can rewrite that apple-and-the-worm joke:
Q. What's worse than rising oil prices?
A. Always having had high oil prices.
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