Letters to the Editor
-
I fully expect ...
I fully expect fuel prices in the US to "coincidentally" -- and temporarily -- drop before the presidential election.
-
Bingo
As the price of oil rises, oil-producing countries have less incentive to convert their oil reserves underground, which are expected to appreciate in value, into dollar reserves above ground, which are losing their value.
That's why trying to persuade OPEC to pump faster hasn't worked: There's nothing in it for them. The declining value of the dollar only makes things worse.
I also doubt the OPEC cares much about the argument that high prices will encourage the development of alternate energy sources. They know this has to happen eventually anyway, and they also know that changing the infrastructure in the country like the U.S. will take a very long time.
-
the four factors
On the question of how much each factor contributes, the first thing to note is that there is a lot of cross correlation between the four. Peak oil affects the other three, the other three affect each other, and ironically, two and four probably inversely affect peak oil.
[pat myself on the back mode]
I mentioned number two in a comment some time ago.
[/pat myself on the back mode]
It is also interesting to note that two is really just a nice way of saying market manipulation. Three could be called manipulation, but given high domestic demand in those countries, it is not really fair to say that manipulating the market is the prime motive for the internal subsidies. Three is a good example of how globalization knocks the equilibrium out of markets.
[cynic mode]
Four tells us who will get bailed out instead of consumers this time.
[/cynic mode]
I would not want to be a whale these days.
-
Utility Fundamentals
This is one thing people need to understand about any commodity-- its total 'fungibility'-- the fact that a barrel of oil from one place, by and large, looks like a barrel of oil from anyplace (sulfur content, etc. being a small differentiator).
Utilities and commodities sit on a price floor of 'cost to make' + 1 penny as long as there is a surplus. However, the minute there is a shortage (demand exceeding supply) then they rocket upwards to the replacement/substitution cost, or until other market factors drive down the demand.
Let's say you're buying electricity to run your supercomputer, which makes you $1M/minute when it runs . You're happy to pay the surplus cost until someone tells you that they're going to cut off your juice-- then you're willing to pay almost anything up to $1M/minute in order to get your electricity.
If you think it's bad for us, think about the folks in 3rd World countries. This has been going on with global food markets (especially seafood) for a long time. Such are the things that famine is made of.
This fact of utility/commodity pricing is why utilities have historically been regulated in the U.S. We are now finding out the hard way what happens when you have an unregulatable utility (oil) as part of your economic structure. When demand exceeds supply, you can have extreme price volatility.
-
Supply is not production
A side note: A number of readers have argued that world demand for oil hasn't grown fast enough to justify the remarkable growth in prices, so there must be something underhanded going on. But I think that argument doesn't appreciate how all you need is just a little bit more demand than supply to get prices moving up quickly. "
--Part of the problem is that supply is confused with production. Supply, in our case, is the net amount available for import by importing countries. While global production has plateaued,net exports has fallen a few % points from its peak a couple years ago. This phenomena is known as the export-land model and is a result of increasing consumption by exporting countries. This is really at the crux of rising prices IMO.
Matt Felix
-
Once again you cherry pick to make your point
George Soros was on a panel with four other experts. As to be expected, he was the most sanguine regarding the overall global financial situation oil included. His is an expertise on bubbles and he agreed that there was a bubble, just more.
The other panelists were much more specific about the need for regulation by CFTC, and the ending of unreasonable speculation, and the immediate impact this would have on the oil bubble. One panelist was clear--The actual cost of oil should be about $80 per barrel, which makes the current bubble about $40 a barrel. The actual cost of the oil is quite low, but market conditions dictate a doubling of the price. The last third is the speculative bubble which will burst soon, especially if the Congress acts to regulate the financial shenanigans of the Hedge Funds, et al. Soros disagreed only to the extent of the bubble.
Your seeming inability to see that the problem is not a dramatic increase in demand but manipulation of the market, not unlike the Enron manipulation of 2000 in California, suggests another agenda. The industry has lived with the need to increase production annually. They need demand, but they cry that the demand is to great. Crying wolf once again.
True, increasing the cost of oil is a good thing for the eventual reduction of emissions, but allowing that increase to be the product of an unregulated bubble courtesy of Phil Gramm etal defeats the purpose and exacerbates the problems we are currently facing. To regulate or not to regulate? Libertarians of course say let the market right itself. Soros and others say REGULATE to deter the Hedgies etal from creating and then shorting the bubble.
-
counterfactuals seem to be the key
1) Krugman and others have argued against the speculation hypothesis with the point that inventories have not gone up substantially. While I am sympathetic to the speculation story, it would be useful to see someone (Andrew?) offer evidence that you can have speculation without rising inventories or that flat inventories is not the appropriate counter-factual.
2) Regarding the point about the backward bending supply curve, shouldn't we see supply going down? I get the impression this is not true. How can we rationalize this reasonable theory with reasonable data that does not agree with it. Again, a reasonable counter-factual would be helpful.
Finally, Andrew Leonard continues to do great work explaining complex ideas in an intelligible way. Thank you.