Two of my friends argue over whether the recent huge rise in oil prices (2007/2008), and subsequent falling of the prices in 2009 are due to the end of Oil, or due to speculations.
So, listen. You guys are both right.
Of COURSE speculators are what cause price changes in oil. NOBODY ELSE CAN. The only way that “non-speculators” (such OXCART), can buy a futures contract on fuel is if someone else agrees to sell them a contract.
So, if OXCART thinks that paying $4/gallon for diesel in spring 2010 is a steal, because the price will be $5, then the only way that they can get a contract for that is if someone else (a SPECULATOR) thinks that in fact, the price will be <$4/gallon. (NUMBERS ARBITRARY)
You can’t have a futures market with the speculators. If there are no speculators that think it will be <$4, then nobody will sell that contract, and one of two things will happen: 1) OXCART will not purchase any contract, and will pay “retail” (really, that means that they will be buying diesel from a speculator that played at another point)
2) OXCART will look for a contract at $4.50. Lather. Rinse. Repeat.
Imagine that: the non-speculators in the market will have a bidding war with the speculators. Now who wins in that? The speculators. Whose at fault? The guys who need the fuel, and can “pass the costs on”
The best you can say about speculators is that they aren’t dumb, but that they aren’t really that smart either. They listen to all the reports (all the ones we can read, and some of them that we can’t, either because we can’t afford to pay the fees for the report, and the grapevine of what the oil companies know)
So, of COURSE it’s the speculators fault. Doesn’t change the reasons for why they would bet the way they do, which is about fundamental supply and demand.
But, it’s also about chaotic systems: as they move away from equilibrium (and most chaotic systems have a dynamic equilibrium, not a static one), they tend to significantly AMPLIFY all errors, so of course there are massive swings. The swing to lost cost oil is ALSO a result of being far from equilibrium.
More important is that there is a limited capacity in refineries, and there is no reason to ever build any more capacity. It doesn’t matter what the price of oil is, or how much there is still in the ground (we could have 5 years or 500 years worth)
The key is the rate of extraction is not going up, and so there is no point in building $1B+ refineries only to have them operate at 50% capacity.
As I see it, the economic downtown said quite clearly to the speculators: the future demand for energy is soft (particularly from the construction industry), people can’t go into debt anymore to buy expensive fuel — the demand is coming down.
As soon as you step back from running the refineries at 105%, the supply catch up, and prices will go down. Why it took “mere” 3 months for the price go down is simple: most contracts are 90-day.
My secondary argument is that the more expensive oil is, the more economically feasible expensive extraction (and even oil-from-coal) will be. My environmental argument is that none of this will save us from climate change or the other insidious effects of our oil addiction. Like a drug addict, everything will simply get worse*, unless or until there is a) a breakthrough transition technology for transportation (like long distance batteries) and b) concerted global public & political will regulates oil as an evil to be marginalized.
I think you are bang on here.
Perhaps, the oil-sands, etc. efforts will get killed by repeated cycles of very high oil costs, followed by massive drops in price as economies collapse from too much reliance on non-renewable energy. Obama is building a few trains systems, but also lots and lots of roads, and the new GM likely will fail again in 10 years.
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