Why Oil Jumped to $130 per Barrel
Why all the wild spikes in oil demand? Surely that is the only answer for the price of a barrel of oil to jump 45% yesterday.
Yesterday oil jumped from $90 per barrel to $130 per barrel, or 45%. That was the largest ever one day rise in a price of a barrel of oil.
This is a result of supply and demand, according to some economist. The price of a barrel of oil is not set by the self-serving speculators, as common sense dictates, but from supply and demand. When oil dropped from a high of $147 barrel this summer to a low of $90 per barrel last week, obviously demand for oil dropped 58% in that time period. This is a natural, and gradually occurring process. What else could explain it. Then yesterday was the largest increase for oil in history. The demand for oil jumped 45% in one day, since the price of a barrel rose 45%, it must be correlated. It is also capriciously coincidental how this demand for oil coincided with the Wall Street bailout talks in Congress. Perhaps there was a lot of driving around in angst over the Wall Street bailout talks in Congress.
Then again, perhaps the core problem with oil not being priced at what the free market would dictate that the price of oil should be–between $70-$80 per barrel, currently, is unregulated speculation. There is that word again, unregulated, which seems have been tossed around a lot in the past in regard to Wall Street. After this Wall Street farrago is straightened out, God willing with this Congress, oil speculation needs to be addressed in a coherent and legitimate fashion.
Some economists and some on the right are ringing their hands and gnashing their teeth at the prospect of regulating oil speculators. “It would be interfering with the free market,” they wail. Nothing could be further from the truth. Regulation of oil speculators is needed to bring the oil industry back to a free market. The trouble with speculators, other than taking oil off the free market, and doubling its value on the market, is that they can do this with as little as a 5% investment. Fifteen million dollars of oil can be controlled with $750,000. The speculator never takes possession of the oil, doesn’t use it, and only trades pieces of paper for 5% of the oil’s value. Seems eerily akin to the headlines in the newspapers today concerning another industry.
So why did oil really rise 45% yesterday? Speculation, and the covering of expiring positions, which is speculation in its most primal form. Investors who were betting on oil prices dropping had to cover their positions with the expiration of future’s contracts or take possession of the oil. There was too much negative activity that could only be explained by a company or companies caught on the wrong side of short trading, and were trading out of desperation. This is what drove the price of oil up. It’s a no win situation with wildly unregulated speculators in the market with no skin in the game. Economically, the price of a barrel of oil is trading at almost double the price the free market equation would dictate. There are others factors to take into account, such as the value of the dollar, but this would only explain a diminutive effect on the 45% increase.
Today, oil prices dropped and settled around $109 per barrel. Perhaps it was a drop in demand overnight while the angst drivers were sleeping.
Supply and demand, indeed.
Comments (1)
It might have something to do with Oil masquerading as a free market when in fact its not. The consumer doesn’t have a viable method of voicing an acceptable price through alternatives or discontinuing use. Its a required part of life put in place by years of real estate trends promoting sprawl that was not just made possible but dependent on the ability to commute rather large distances and our auto industry that has never seen a need to realistically provide alternatives to oil burning cars. So you have cars, real estate and cars. The consumer demands prices on the first two, but the average consumer has almost no effect on the last. Because of that it now hurts to live 80 miles out of town and drive a suburban to work everyday. They got you where they want you.
How is oil different than other utilities as view by the consumer? You have to have it, and nobody is breaking the curve on prices? If we have a Public Utility Commission, then why not a similar body for what is just another energy related matter, which should probably be under the public utility commission.
From the Texas PUC-
“electricity is not a monopoly warranting regulation of rates, operations and services … However, because electric and telephone service are essential to Texas citizens, there are many situations where the normal forces of competition, when left to themselves, would not result in an outcome that would be considered good public policy or to benefit customers. For example, inefficient market rules or insufficient competitors may result in too few competitors to allow competition to set prices. At these times, to the extent that the PUC’s statutory authority allows it, the Commission must assert its regulatory powers to balance the needs of customers with the principles of competitive
markets to attempt to optimize the overall outcome. This is one of the Commission’s most frequently faced and difficult challenges.”