Wednesday, May 28, 2008

Oil Conspiracy?

I ask for a little leeway with this one, as I am still working off two please forgive if this isn't my usual, somewhat reasoned approach.

As someone who is gullible and has a very vivid imagination, I am big on conspiracy theories. So when oil jumps from under $100 a barrel to over $130 in just 5 wheels start to turn as I look for answers.

Even the scholars, seem to think there is limited evidence of a bubble, because there has been no signs that oil is being hoarded or stored. Instead they all cite demand from China and India.

This is where they lose me.....if U.S. demand is scaling back in response to high prices, wouldn't the less affluent countries of China and India feel the pinch even more?

My theory: the run-up in price is due to the hedge funds and all the "positions" that these big investors have taken. It seems this global pool of money (see the great NPR story) is looking for a new place to park itself now that RE has gone sour. I think they have become sophisticated enough to move and possibly even make markets (as they did with RE to some degree). When you get to the top, I imagine its a small group of folks who control billions in investment dollars. If they all make the same bet.....they could get even richer somehow.

In my mind, there is no way that demand could have risen 25% over the last 5 months (assuming supply has been steady). Recent evidence shows that Americans are cutting back.....I have to think that people in other countries are as well. None of this makes any sense unless you throw in a conspiracy theory. =)


Buying Time said...

Paul kindly reminded me, the other big factor leading to oil's recent climb.....the sinking value of the dollar.

I do think there is merit to that argument as well. But not sure how much.....In theory the same folks pushing on the oil market could be betting against the dollar....thus buttressing their oil position.

Jacob said...

Oil is being hoarded, in the ground. The oil companies the pump the oil are not increasing the supply, maybe even autificially keeping it low.

Deflationary Jane said...

You can influence price just through purchasing futures which is what I think is happening.

Oh, and Oswald wasn't alone. Please pass me the tinfoil >; )

Sippn said...

Lot of talk about this on Fox Bus the past few days (are you writing for them? :) and some mention in the blogs....

There's a lot of investment money out there looking for a home... all the time...

Buying Time said...

Nope....I've been on vacation. And you should know by now, that I don't get my news from Fox!

"You can influence price just through purchasing futures."

Bingo! The way I understand it, (Paul can correct me, as he knows a heck of a lot about this) these are futures contracts....not the folks who actually process/use it several month's down the road.

alba said...

When you have an organization like OPEC determining the supply of barrels of oil per day, its well documented collusion. W was just in Saudi Arabia last week pleading for his buddies to pump more oil per day.

At the same time, China is putting new cars on the road by the 1000s per day, with 80% of the purchases being first-time owners.

While we skip a few trips to the store, the BRIC countries are zooming down the road like never before. Demand is skyrocketing, despite what Americans do, and the supply is "controlled."

We are screwed! We have little leverage, and we are fighting against the OPEC countries by pounding the dollar down (devaluing their US investments). You think your house price is falling, try owning a few NYC skyscrapers, and watch the value plummet, just in the dollar exchange.

The internal combustion engine is over 100 years old. Its the number one inhibitor to progress in our society.

Sacto EJ said...

"In my mind, there is no way that demand could have risen 25% over the last 5 months (assuming supply has been steady)."

Your reasoning is flawed here (but you have good company!)

Price increases do not have to match demand, and they never do in the real world. Assuming that there is no excess supply to draw upon (let's talk steady state), then oil supply and demand and the impact on cost is the exact same as it is in the housing market.

Assume you have 100 units of supply (barrels of oil or homes) and demand is 105 units at price X. The price will rise until buyers demand 5 less units. Once those buyers drop out, demand and supply is back in balance. In a real world, as price rises, buyers drop out and suppliers look to sell more (if they can find supply).

This same thing can be seen on ebay all day long (think premiums for Wii consoles).

The price can rise 30%, 50%, 150% - the key is it must rise until all the excess buyers (greater than supply) decide they are not buying at that price.

Sacto EJ said...

ps: The opposite works too. Prices will decline (think houses right now) until some buyers step up and make purchases. Until new buyers appear, prices will decline.

(However, the market for homes is unique in many ways, so supply and demand is a very simplistic way of thinking about it. Homes are not fungible - each is somewhat unique and each buyer is unique.)

Deflationary Jane said...

Well you can also loose your @ss on futures contracts too.

Gold was the hedge of choice for a while but it wasn't a strict necessity and therefore too volatile. Hedgies needed to find some we are required to consume to hedge with. So oil and food were it. If they could have found a way to effectively hedge on oxyegen, they would have done so gleefully. They may still find a way to sucessfully hedge H2O.

The effects of those hedges wouldn't have been so bad if the USD was retaining value. Now it's a double whammy with everyone saying "it's not my fault" and pointing at each other.

Patient Renter said...

You're not alone.

This global pool of money theory as an explanation for high oil prices has been ALL OVER the news/blogs this past week. Mish did a good writeup on it...


If "Big Oil" is responsible for higher oil/gas prices, why did they wait over 100 years to get prices to these levels? They could have had $4 gas in the 70s. Or during the Persian Gulf War. Why wait until 2008? If they are greedy, I guess they were lazy and procrastinating too.