Thursday, October 22, 2009

Oil Over $80

That's up from the $30's earlier this year. In a system in which accountability mattered, Bernanke would be forced to explain himself in front of Congress after every $10 move in oil -- $80, $90, $100 -- or after any substantial decline in the dollar. Like gold, oil represents consequences. I wonder how many people at the gas pump think about the link between bailouts/too big to fail and the flickering digits in front of them. It's been almost two years since I stood in upper Manhattan on a raw night and took the poll at the end of this article. Have things changed?

Unlike previous years, right now there is no credible way to attribute oil's rise to "demand." Check out this wire report from earlier in the week, and note how it explicitly links oil to the dollar. This sort of reporting was rare in early and mid-2008, when you were more likely to read about refinery problems, unrest in Nigeria, storms in the North Sea, fog at U.S. ports, or pirates. But because monetary policy has been in the spotlight for the past year, the old excuses won't fly anymore. Still, I guess we should start watching for the return of the peak oil pushers. They should be well-rested.


Anonymous Anonymous said...

News reports like that should turn up the heat on the FR especially if oil goes even higher. Good.

10/22/2009 5:50 PM  
Anonymous Bill in SoCal said...

Don't forget the "Drill baby drill" crowd.

10/22/2009 6:13 PM  
Anonymous Thomas Daulton said...

Of course, like any financial subject, the price of oil is complex, so when you point the finger at any one cause, other people can point fingers elsewhere. Any comment on Matt Taibbi's assertion that Goldman Sachs and other brokerages caused a 5-year bubble in oil by excessive speculation?

And what caused the huge spike in oil prices? ... Obviously Goldman had help — there were other players in the physical-commodities market — but the root cause had almost everything to do with the behavior of a few powerful actors determined to turn the once-solid market into a speculative casino. Goldman did it by persuading pension funds and other large institutional investors to invest in oil futures — agreeing to buy oil at a certain price on a fixed date. The push transformed oil from a physical commodity, rigidly subject to supply and demand, into something to bet on, like a stock. Between 2003 and 2008, the amount of speculative money in commodities grew from $13 billion to $317 billion, an increase of 2,300 percent. By 2008, a barrel of oil was traded 27 times, on average, before it was actually delivered and consumed.

Taibbi points only towards speculation during a specific period and makes no mention of monetary policy theory; while TCR is always presenting solid historical geopolitical linkages between oil and the dollar. I personally think both causes can coexist! Along with other price disruptions.

The problem is that oil is pretty much life-critical to our whole economy, so any disruption or wobble has a huge ripple effect, while TCRs overarching policy concerns simply tilt the entire market broadly in the wrong direction (towards volatility). Everything gets magnified. Poor monetary policy is a big disruption, certainly. But we noted during the California Power 'crisis' of 2001, as the amount of overcapacity in the system drops towards zero, any tiny disruption can cause the price of a life-critical commodity to skyrocket many hundreds of percent. This is Economics 101, this is the situation when futures shares are supposed to jack up the price, as a warning to market players that the commodity is becoming scarcer.

Hence I don't understand TCRs hostility to the Peak Oil idea. In a world where demand keeps increasing almost exponentially, but capacity has been stalled nearly level for a decade and shows little promise to jump upwards very much -- then the "consequences" of poor monetary policy are greatly magnified. There's no reason to pooh-pooh the idea of scarcity -- if it weren't for the scarcity, we wouldn't be at the point where we have to worry about "consequences" at all. That's how America skated by for the first half of the 20th Century.

10/23/2009 11:11 AM  
Anonymous Cecelia said...

saw a remark by a Saudi Oil official - he thought that governments should find a way to curb speculation - he noted the current price should be much lower given the surpluses - and blamed the price now on specualtors

10/28/2009 7:42 PM  

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