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Putting money where one’s mouth is

Surfing the cable television channel briefly on Friday lunchtime, I came across a CNBC programme about oil prices, in which a couple of analysts fielded email questions from the public about why prices are so high. One guy claimed that the price of oil – currently about 70 dollars a barrel – was grossly inflated by those evil speculators and the “real” price of oil was more like 40 dollars.

Okaaay, said one of the analysts. If that is the case, maybe the emailer should quit his or her day job and take up oil speculation if the “real” price of oil was far lower. Armed with this insight, the correspondent would make a killing, said the clearly rather bemused analyst. It is rare on television to see this sort of nonsense smashed out of the park in such a fashion. Certainly not likely on the BBC.

While on the subject of nonsense about the role of speculators and prices, this is worth a read.

6 comments to Putting money where one’s mouth is

  • John East

    Thanks for the link to the article about the great depression, it made fascinating reading.

    Economic illiteracy does not seem to change much across the generations, and so much of the depression analysis has resonances today. Massive ($40 trillion) and soaring US debt, rising inflation (forget the published lies, if you add energy, and housing it is >6%), years of liquidity growth and investment misallocation (Nasdaq and housing bubbles), and growing talk of Tariffs to “combat” China.

    The only thing missing today from the 1930’s scenario is a hike in taxes, and the Democrats have been attacking the Bush tax cuts all along. Thank goodness Kerry wasn’t elected otherwise we would be in a worse mess now.

    I believe that you were lucky to see a CNBC analyst prepared to accept that $70 oil was real, not just a speculators blip. Straying off the goldilocks economy mantra even by this small amount is a rare sight on CNBC. When oil was threatening to go to $40/bbl they were predicting dire consequences should this happen, whilst always reassuring us that it would not reach this level so we had nothing to worry about. We got the same dogma at $50, $60, and $70. I even saw one of their commentators last week, who obviously wants to avoid making the same claim for $80, saying that the economy wouldn’t be severely impacted until we exceed $100.

  • And the doomsayers will say the same thing in reverse as oil comes down to $60, then $50, then $40, then $30…

  • John East

    I think the only chance you have of seeing $30 oil again is either if demand collapses, or if the dollar returns to its highs of 3 years ago. The latter will only happen if the US pays down its debt which isn’t going to happen. That leaves a fall in demand which will probably make the doomsayers very happy as it will signal a deep depression.

  • Johnathan Pearce

    John East, thanks for your comments. Another thing that people tend to overlook is that much of the current sky-high price is down to lack of refinery capacity, some of which is simply a time-lag effect of when oil was below $10 a barrel (not that long ago). Also various environmental and other possibly entirely valid regulations have increased the cost of refining crude oil.

    I would imagine that some of that capacity will increase over the next two to five years. But even if it does, the growth of the Chinese and Indian economies is likely to keep oil fairly high by historical standards. All the more reason, I think, for our car manufacturers to seriously invest in hybrids, hydrogen fuel cell power, etc, etc.

  • John East

    Johnathan, your comment, “much of the current sky-high price is down to lack of refinery capacity” cannot be denied. This has puzzled me lately. Putting the effects of Katrina to one side, a lack of refining capacity has been an issue for at least the last year, and I can’t help wondering why the oil industry, particularly since the growing demand from China is staring them in the face, hasn’t invested in more refining capacity. Perhaps the much predicted, and often denied, “peak” oil point has at last been reached. After all, the guys who would invest in refineries would likely be the first to know.

    Just a thought.

  • John Thacker

    I can’t help wondering why the oil industry, particularly since the growing demand from China is staring them in the face, hasn’t invested in more refining capacity.

    Well, in the USA it’s devilishly hard to get new refineries built. They’re fairly nasty, and environmentalists and NIMBYists oppose them everywhere they’re proposed.

    Oil could also get back to $30 with some sort of spectacular technological advancement.

    Regarding the dollar, do note that much of the recent oil price spike has coincided with a moderately rising dollar over the six month to a year term.