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Why yes, speculators are driving up the price of gas

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shargash's picture
Submitted by shargash on

Look, crude oil production is essentially where it was in 2005, despite global oil demand having risen significantly over those years. Moreover, the newer sources of oil are poorer quality and more energy intensive to extract, so the net energy of oil production now is probably well below what it was in 2005. The excess capacity in the system is gone. We are living on the edge of production, where small changes in supply and demand will cause large fluctuations in price.

One of the purpose of speculators is price discovery. When oil supply growth is lagging demand growth, they are supposed to be driving up prices. That's their job. And that's why it happens in the futures markets. If you wait for supply to undershoot at the spot market, it is too late. The idea is that rising prices will encourage new supply to come online. And producers are doing what they can to bring new supply online, but it is a billion barrels discovered here, and a billion discovered there. The world consumes a billion barrels every 13 days or so. The new (poor quality, hard to extract) supply is pathetic compared to the increase in demand plus depletion of older reserves.

The problem is not speculator or producers; they are just a side show, a distraction. The problem is that we're entering an era in which cheap oil will no longer be available in the quantities to which the world has become accustomed. Every time the global economy sputters to life, oil prices will spike. Every time it rolls over, oil prices will plummet. But the tendency will be for higher highs and higher lows as the world spins through its cycles of recession followed by anemic recover followed by renewed recession.

Releasing oil from the SPR is a foolish idea, motivated solely by political calculation. The affect on prices will be minor and temporary. Israel is about to attack Iran, which may drive actual shortages of oil. There's also this global warming thing, to which "drill baby, drill" and "pump baby, pump" are probably not the best response.

Of course, Obama will probably release oil from the SPR anyway. He thinks it will help his re-election chances, and I don't think any other priority will compete with that for the rest of the year. And Americans do love their gasoline.

CMike's picture
Submitted by CMike on

However, given that both the Krugman and Kunstler arguments have made so little progress around here against the Yves Smith, Matt Taibbi Blame Goldman one, I assume you know you're playing an away game.