Jul

3

Blame game on the price of oil

Filed Under Sunrise on KGMB9 

Three factors are driving the price of oil up, but people connected with each want to downplay their factor and blame the other two.

To refresh your memory, these are the three factors:
1. Demand for oil.
2. Demand for oil futures contracts.
3. The falling value of the dollar.

The sheiks say the current run-up has more to do with institutional investors buying oil futures than with demand for actual oil.

The institutional investors say their role is manini and point fingers at demand and the fact that oil is a dollar-denominated commodity.

The treasury secretary says the decline of the dollar is not a major factor and blames lack of new oil production.

All of this is misleading. All three factors are in play.

We like to demonize Arab oil states so it may be hard to swallow, but the sheiks come closest to the truth when they say that they are pumping as much oil as their customers require.

As I mentioned in a recent post, the price of oil has risen many more times than the actual increase in oil consumption. This is all the proof we need that there are other factors in play.

Oil states are pointing to the other factors for public relations reasons — they don’t wish to be any more unpopular than they are already.

Institutional investors prefer not to believe they are having that much effect because what they’re doing is spun as evil — the word “speculation” has a whiff of criminality about it, or at the very least, recklessness — and one recently emailed me to point out that prices are rising just as much for oil that is not traded on commodity markets. He’s right, but it doesn’t exculpate “speculators.” That’s like saying you’re not responsible for filling the ice tray because you only poured water into one cube. It is absolutely true that demand for futures contracts has led to higher oil prices.

Treasury Secretary Paulsen now weighs in, denying the role of the weak dollar. The dollar has depreciated 25% since 2002, he says, while oil has risen more than 500%.

Okay, suppose the dollar has fallen 25%. (Against what? Let’s assume he means, against the average of other key currencies, or something else sensible. For purposes of simplifying the math, let’s just assume the dollar has fallen 25% against a mythical currency X that we will consider a benchmark.)

If the dollar has depreciated 25%, then it takes one third more money, in dollars, to buy now what you could buy in 2002 for the same price. Something that cost $100 in 2002 would cost $233 now. This is an argument in FAVOR of the assertion that currency exchanges are a factor, not an argument against.

The reason Paulsen is trying to focus attention away from factors other than supply is that the current administration is friendly to oil companies and sees the current situation as an opportunity for a fresh attempt to ease restrictions on drilling for oil in prohibited areas.

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