The truth of the matter is that the government wants to have more control and more regulations and this is just one reason why they are blaming the speculators for run-up in prices. Another reason why politicians are blaming speculators is because they don’t have the courage to put the blame where it belongs: On average Americans.
Ask anyone that is an expert on the oil markets this one fundamental question: If there were excess deliverable capacity of 10 million barrels or more per day of oil could prices have run-up so much and be sustained for long? If they know anything about commodities, they’ll tell you no way! The reason is simple, when speculators run out of money to buy oil, oil will flood the markets and push prices way down, which would then force the speculators to sell, which then pushes prices further down. So, with flush deliverable capacity, there is no way that speculators could have pushed prices to such heights. The Bass brothers will tell you what happens when you ignore this fundamental: Ask them how they like silver now!
What then is responsible for escalating prices? Mostly increasing demand for oil from developing countries such as China and India, and the high rate of consumption of oil in the US. The US consumes roughly 22% of the world’s oil supply while accounting for only 5% of the world’s population and about 22% of the world’s GDP. Contrast this to Germany that accounts for about 2.9% of the global consumption of oil versus about 1.2% of the population and about 5.2% of the world’s GDP. The ratio of oil consumption to GDP as a percentage to the world for the US is about 1.00, while for Germany it’s about 0.57. Compare this again to Japan. Japan accounts for some 5.3% of the world’s oil consumption while accounting for only 1.8% of the world’s population and 8.5% of the world’s GDP. Japan’s ratio of percentage of oil consumption to percentage of GDP is only 0.62. For France the numbers are 2.2% of the oil consumption, 0.9% of the world’s population and 4.0% of the world’s GDP. And the oil consumption percentage to GDP percentage ratio is 0.55. This data shows how piggy, we Americans are. We can’t live without our hulking SUVs.
In terms of growth in oil consumption, according to the EIA, in 2011, the world consumed about 87 MMBBLS/Day. Individually, China consumed some 9.8 MMBBLS/day, India consumed 3.4 MMBBLS/day, Brazil consumed 2.7 MMBBLS/Day, Saudi Arabia consumed 2.6 MMBBLS/Day, and South Korea consumed 2.2 MMBBLS/Day. This compares to about 64 MMBBLS/Day of total oil consumption in 1990. Broken down by the same five countries above, in 1990, China consumed about 2.3 MMBBLS/Day, India consumed about 1.2 MMBBLS/Day, Brazil consumed about 1.5 MMBBLS/Day, Saudi Arabia consumed about 1.1 MMBBLS/Day, and South Korea consumed about 1.0 MMBBLS/Day. This means that the total of the five countries consumption went up by 13.6 MMBBLS/Day an increase of some 21%, and individually, China’s went up by about 7.5 MMBBLS/Day or some 326%, India’s went up by about 2.2 MMBBLS/Day or some 183%, Brazil’s went up by about 1.2 MMBBLS/Day or some 80%, Saudi Arabia’s went up by about 1.5 MMBBLS/Day or some 136% and South Korea’s went up by about 1.2 MMBBLS/Day or some 120%. In comparison, excess capacity in 1990 was about 10 MMBBLS/Day or about 16%, while in 2007-2008 excess capacity was thought to be less than 1 MMBBLS/Day and, at present, it is thought to be about 2.5-3.0 MMBBLS/Day or roughly 3%. However, excess capacity is expected to go down to about 1.0 MMBBLS/Day in 2013-2014.
Also, the fact is that oil supply doesn’t change rapidly because it takes years, sometimes decades for an oil field to go from discovery to production. Contrast this to oil consumption, which changes relatively very rapidly, even a fairly modest increase in oil consumption will quickly drain excess production capacity. This means that given very tight excess capacity any disruption in supply or spike in demand will quickly choke off the excess capacity, which means that oil prices will sky rocket, very, very quickly to destroy demand so that excess capacity can be restored.
Now, what is the role of speculators? Speculators don’t create high prices, because, by definition, they are like gamblers: They make bets and hope that they are right. The difference between speculators and gamblers is that speculators are making educated bets in a fair market, while gamblers are making bets in a skewed market with no knowledge that can shed light on the future. And, it was a no-brainer to bet that oil prices would rise in 2007-2008 with excess capacity only at 1.0 MMBBLS/Day and potential for disruption in supply due to Iran rattling its saber and speculation that Saudi Arabia is running out of oil. However, when the global economy took a dive oil prices tanked and speculators went running into the hills because excess capacity was thought to be increasing rapidly.
This means that it is clear that speculators couldn’t take prices to higher levels without excess capacity being tight, and excess capacity couldn’t be tight unless demand growth outstrips supply growth as we’ve seen over the last 20-25 years or so. All speculators are guilty of doing is taking advantage of a tight supply-demand fundamental that was created by others. This is no different than betting on the expected announcement that Apple will introduce a revolutionary next generation phone, tablet and TV or betting that the Bank of Japan will lower interest rates, which would weaken the Yen versus the USD. However, the difference between betting on Apple and Yen/USD versus oil prices is that oil prices have a direct impact on consumers, who then cry a river of sorrows, which then makes politicians pretend to care and make a big fuss about the evil of speculation.
Therefore, if people want to blame someone for spiking oil prices, first they should look in the mirror then they should look towards growing economies. However, there is little that we can do about China, India, Brazil, Saudi Arabia and South Korea. And, those countries’ have growing economies that are based on manufacturing that are more energy intense and need to be versus our lack of public transportation use. It isn’t difficult to see that we have a lot to do with our own suffering. So, stop blaming speculators, stop crying a river and start saving energy! You can start by getting rid of your SUV or old gas guzzler and using public transportation. Those in the northeast can convert your oil-fired furnace into gas too.
For more, please read my books, “… Under the Constitution with Liberty and Justice for ALL,” available at http://www.CreateSpace.com/3978962 and also available on Kindle, and “The New Constitution for Modern America,” available at http://www.CreateSpace.com/4281897 and also available on Kindle. Please don’t forget to rate this post. Any comments or questions are welcome and can be left for me on this blog, @Ahmedinejahd on Twitter, on Facebook or via email at AlexAhmedinejahd@Yahoo.com. Thank you in advance for buying my books, and rating this post. And, thanks for visiting my blog; I hope you get an opportunity to read my other posts. Have a great day!