Wednesday, July 29, 2009

Blaming Oil Speculators = "I Don't Know"

The US government has on occasion during several administrations acted irrationally and in anger trying to manage oil prices with disastrous effect on the US economy. As explained in Oil 101, lines at the gas pump in the US during the 1970s were created by the government. If the government did nothing then oil prices would have been higher, but there would have been no shortages at US pumps.

Today we are facing a seismic fundamental shift in the physical oil market. A similar shift has never occurred in the 150 year history of the modern oil industry. When prices become more volatile and there is a lack of understanding of the fundamentals, a visceral reaction is to look for scapegoats to blame. The current scapegoats are speculators.

Blaming volatility on speculators is a face saving way of admitting that the blamer has no idea what is going on in physical oil markets. Physical oil supply and demand explain EVERY price move in oil. As mentioned previously, blaming speculators is not simply wrong, it is dangerous. It is dangerous because it falsely diagnoses the challenges global oil supply is facing.

There is absolutely no need to change US oil markets. Yet such change now seems likely. Politics is about to raise oil prices in the US and lower them for the rest of the world.

My estimate is that certain proposed restrictions in the US will add between 25 to 50 cents per gallon onto US pump prices in the short term (1-2 years) and much more later. US price increases will subsidize price falls in other countries. This is going to hurt US business and consumers to the advantage of other nations. Each US household will transfer up to an additional US$2,000 overseas each year. A woeful vengeance is being extracted by the uninformed. Preventing such a situation was the reason for writing Oil 101.

I was quoted by The Associated Press yesterday:
"If you start to restrict the market, it's hard to see what that achieves," said Morgan Downey..."People don't like to see the prices, but the market is working fine."
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