Saturday, July 11, 2009

Regarding oil prices

There's been a lot of prattle, lately, about volatility in the price of oil. For some reason, lots of analysts insist on relating oil prices to expectations of economic recovery. Personally, I think that's nonsense.

Let's start by noting that there are tankers brimming with crude sitting at anchor in ports all over the world. There is no shortage of oil, despite feeble attempts by OPEC to create one. There is a glut. Let's continue by recalling that oil is denominated in dollars, so that buying oil futures is a straightforward hedge against a weakening dollar.

Fed and Treasury actions to alleviate the recession have created vast quantities of dollars since the beginning of the year. It seems to have been "common sense" for investors to buy oil futures as a hedge against inflation. As it happens, though, that sense was much too common, so demand pushed up prices.

When the Commodity Futures Trading Commission suggested it would put limits on the purchase of oil futures by buyers who are not end users -- that is, those buying the futures purely as investment vehicles -- it seemed likely that demand, and therefore price, would decline. Hence, demand, and therefore price, declined.

As usual, none of this has very much to do with the overall economy, much less the price of gasoline at the pump. Gasoline prices, distinct from oil prices, continue to be controlled by the same old oligopoly -- so gasoline will continue to cost whatever the buying public is willing to pay.

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