It is looking like 2008 all over again. Not so much in the weather trend but in the price of gas. Since I blog about AGW, Peak Oil, and alternative energy so often, it is something I am fairly familiar with. What happened in 2008? The same thing that happened in 2005 after hurricane Katrina. The price of gas rose up to $4.00 per gallon. This seems to be the price point where a lot of people start complaining and calling for heads to roll – as if cheap gas were a natural or constitutional right – as if everyone has the right to make money EXCEPT oil and gas companies. With much peril, I am going to go against the (popular media) grain once again. Feel free to disagree in the comment section.
I am affected just as much by high gas prices as everyone else, but I don’t complain. The weather is turning nice enough to ride my bike to work. I am just waiting for it to get out of the shop (Spring tune-up). If my commute was too pricey, I would just move closer to work. If I couldn’t afford to heat my home, I would get a smaller house, move in with family, or get roommates. If my vehicle was a gas-guzzler (it’s not) I would get something smaller. I really know how to stick it to those “evil” oil companies. More people should do the same. It would help keep the environment a lot cleaner.
Last week the Department of Justice also said it was going to (attempt to) stick it to the oil companies and speculators. I am all for prosecuting those who break current law regarding monopolies and price fixing. However, this is a lot different than the language coming from the media. What we hear is that oil and gas companies are engaged in some ill-defined “price gouging”, that the oil companies are making “obscene profits”, and futures speculators are running wild, as if there was a law against speculation. It seems to me these are terms and phrases used to drum up hatred against certain industries and people and not useful in “correcting” the situation. I have covered the price gouging and profits angle before so I won’t go into depth here. Suffice it to say that the price and corporate profits are important signals in the marketplace that we should not ignore or try to control much. Meddling creates nasty side effects like gas shortages and wars. Also, I am not sure why shareholders and workers at oil and gas companies should suffer when the price of gas goes up (as compared to commuters traveling 50 miles one way to work in a Hummer).
On the speculation angle, it is fairly easy to understand. We all speculate. If it becomes clear to me that the price of gas is going to hit $5 or $6 later this Summer, I will probably go out and buy 50 gallons while the price is still $3.93. If I do this, should I go to jail? I don’t think so. The “speculators” that you hear about on the news are doing the same thing, just on a larger scale. They are going to buy oil now (low) and sell it later (high). If the price goes up, it is a good investment. If the price goes down, they lose money. Some people buy the commodity (oil) and have it delivered (the physical stuff) for use or sale. Others buy and trade futures contracts like stocks or bonds in the hopes of making some money off of the transaction. This has been going on throughout human history. Sure it is digitized and sped up in the modern day, but the mechanics are the same – people are making decisions about the future price and availability of the things they need or want. Pursuing speculators as criminals will lead to distortions in the market that could be much worse than anything we are experiencing right now.
That being said, there is a problem in the futures market right now, and it has nearly nothing to do with the oil and gas companies. The resource companies are busy providing very essential things to the human population around the planet and actually earn their money (you might think they earn too much, but at least they are providing something). Alternatively, there is some new money in the commodity market right now that was not earned. Some big speculators (big banks & hedge funds) are using money that was essentially given to them by the Federal Reserve Bank of the U.S. The various federal programs and central bank operations that were meant to “save” the banking system in late 2008, ending up putting a lot of new money and zero interest money into the world monetary system. What would you do if you were given or loaned “free money” and wanted to make a profit with it? Speculating in gold and oil lately has been a very profitable trade. I don’t mind people speculating with their own money because then they are taking on personal risk and are less likely to drive wild price swings. When speculators use free money, they tend to take bigger risks and drive the price up more than the market would otherwise. This should be looked into, but don’t hold your breath.
Another aspect of the “free money” coming into the system that most people are unaware of is inflation. The Federal Reserve has pumped (some estimates) up to 2 trillion new dollars into the monetary system. Money, just like gold, oil, or beanie babies becomesless valuable when there is more of it. Oil sales around the world are priced and conducted in U.S. dollars. If dollars are becoming less valuable then people who are selling oil will want a higher price. It is easy to understand. Say you live in XYZland and have an oil well in your back yard. You sell oil to the U.S. Last year you sold 1 barrel for $100. You like to buy things with your oil revenue. Let us say you really like mac-n-cheese and each box costs $1. Last year you could buy 100 boxes of mac-n-cheese with your $100 in oil revenue. Now this year (because of the increased money supply and inflation), the dollar is only worth 75 cents. Now when you sell your barrell of oil for $100, you are really only getting $75 of purchasing power. Sadly, you can only buy 75 boxes of mac-n-cheese and your family has to go hungry for a few days during the year. What would you do? You would charge more for your oil in order to get the same purchasing power you had the previous year – perhaps $125. This is exactly what is happening in the real world with the inflating supply of U.S. dollars. Countries that produce oil are charging more because the dollars they get from us are becoming increasingly worthless (down to 0.74 today). If they conducted their transactions in gold or other currencies, they might not have this problem, but the dollar is the world’s reserve currency and most resource transactions are conducted in dollars. Bad for us in this situation.
Feel free to disagree in the comment section. I know I have staked out an alternative and unpopular stance, but I feel it is more fruitful to get to the core of the problem. Bashing oil and gas companies, taxing profits, hanging speculators, and implementing price controls might feel and sound good, but we are unlikely to get good results. I hope that by identifying some other potential problems causing the high price of gas, that this time around, in contrast to 2005 and 2008, we can come to better solutions a bit quicker, with less hatred.
The most basic solution is to drill for more oil and gas – especially in areas of the world that are not as prone to revolution as the Middle East. Barring that, conserving more is more personally rewarding and better for the environment. Getting to the core of the current problem means stopping inflation and ending the stream of “free” money to the big speculators.
Have a nice Monday! Meteorologist Justin Loew.
Posted under Alternative Energy, Peak Oil
This post was written by jloew on April 25, 2011