Oil Price Declines Unrelated to Supply and Demand

All spring and into June we have been told by the media that the rise in oil prices was related to the “supply and demand for oil.”  Journalists and economists told us that the doubling of the price of oil, from $72 per barrel in September of 2007 to $147 at the beginning of July was the market responding to (and you can take your pick) China and India buying more oil, guerrilla bands attacking oil rigs in Nigeria, oil companies being unable to find new oil supplies, or tensions between the U.S. and Iran.  Then, once again, reality showed that most economists and journalists are merely putting a positive spin on anything that puts money into the pockets of big corporations.

In the two weeks between Friday, July 11 and Friday, July 25 the price of oil fell 16.3%, from $147 per barrel to $123.26 per barrel.  Did China or India stop buying oil, were tensions eased betweent the U.S. and Iran, did Exxon-Mobil find a new oil field, is there peace and justice in Nigeria?  No – yet the price fell 16.3% in 14 days.  What better evidence that most of the price rise was speculation; speculation based on the falling U.S. dollar, speculation based on low U.S. interest rates, speculation based on U.S. trade and budget deficits.  The price fell in July because the speculators went too far, the U.S. dollar is not collapsing, it is gradually sinking, so they overshot their mark.  This is cold comfort as we spend $50 to $100 dollars filling our tanks.

Let’s be clear, this is not the kind of illegal, market manipulation speculation that the Democrats in Congress say they can wipe out with legislation.  This is financial managers at multi-national corporations, traders at hedge funds, investment banks in Switzerland and London and New York, doing what they do every day, year after year, move money around the globe to find the best pay-off for their cash.  Countries that have suffered runs on their currency at one time or another since 1990 include Mexico, Russia, South Korea, Indonesia, Malaysia, and Argentina.  Now it is the U.S.’ turn – our budget deficits, trade deficits, and low interest rates are a classic set-up for a run on our currency – and the traders are doing the run in oil futures because oil is paid for in dollars.  Check out my post from June 27 for a more detailed explanation of why the oil price rise is a run on the dollar.

There is a solution to this problem, but it can’t be done overnight.  It will take rare leadership ability for the U.S. to change the way it operates in the world.  If the oil price speculative frenzy is at heart a run on the dollar, then the cure is:

1) Reduce the U.S. trade deficit by greatly reducing imports of oil (take out the cost of imported oil and our trade is roughly in balance) and do it by conserving energy and ultilizing alternative energy, not by making ridiculous claims about the amount of oil that can be drilled off-shore.

2) Raise U.S. interest rates above their artificially low levels so that people can get decent interest rates when they save money and then resolve the mortgage/financial crisis by targeting aid to people who are either in foreclosure or verging on foreclosure.  It sounds expensive, but direct subsidies to homeowners in trouble would be way cheaper than what doubling the price of gasoline has cost us.  Plus, every dollar spent would stay in the United States, while our oil dollars line the pockets of companies in other countries.

3) Reduce the U.S. federal deficit by ending the Bush tax cuts for the rich and reducing military spending by ending the War in Iraq.  Most of the federal deficit run up during the Bush years is a creation of the tax cuts for the wealthy in 2001 and 2002 and by the $150 billion per year we are spending to occupy our new colony in Iraq.


One response to “Oil Price Declines Unrelated to Supply and Demand

  1. I’ve been reading along for a while now. I just wanted to drop you a comment to say keep up the good work.

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