Can we blame it on index speculators?
The yo-yoing of gas prices is dizzying, and one theory points to index speculators as one reason for the price volatility. Economics correspondent Chris Farrell talks to Scott Jagow about whether index and speculators belong together.
Economics editor Chris Farrell (American Public Media)
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From Dallas, TX, 06/11/2008
I have an odd question...If global markets are paying over $130 per barrel of crude from OPEC producing nations (I know, there are more countries than just the OPEC nations producing oil, just bear with me for a moment), and this has pushed up domestic prices for crude as well, my question is why? I am confident that it doesn't cost $130+ to pump a barrel of oil out of U.S. soil or offshore, so why do domestic companies insist on selling for market prices? (Yes, I did ace economics in college so again; bear with me for another moment)
On the heels of another conversation on the Hill, big U.S. oil was saved from being hit with a tax on their exceeding high profits. I understand that this is economics, and money talks, but the fastest way to deflate speculation in the oil commodities market; U.S. suppliers of crude could sell for a cost-plus (that plus being a "reasonable" profit margin on crude) domestically and begin a tumble of the market. Bring us back to the "true" cost of crude, wherever that may lie. How fast do you think the speculating would end and this well would dry up for speculators?
Personally, I give it the rest of my life because it will never happen, but it’s nice to dream once in a while.
Bill McCoy
From Belmont, MA, 05/31/2008
Scott Jagow seems a bit sanguine about exchange index funds for my taste. If money surges into a commodities market seeking to stir up action, does not that bid up prices irrespective of underlying demand for the goods themselves? Seems to me that we just saw rice prices spike following a surge of activity on the normally sleepy Chicago rice exchange. The oil market is a lot bigger, of course, but there is an awful lot of capital out there looking for a home. Some of it may even come from oil-producing nations, whose institutions have good reason to push their massive profits to even greater heights by "stimulating demand."
Doesn't anyone have some numbers that can confirm or deny this hypothesis?
From Nashville, TN, 05/29/2008
I hear and understand the supply and demand arguments but it can be difficult for some people to believe the curve is really that sharp. One concept I don't hear anyone speak of "demand flexibility". Just how much CAN we realisticly reduce aggregate demand and how quickly?
After Katrina, I came to the realization that the retail gasoline market here (Nashville, TN) could charge whatever they wanted. Many areas simply don't have the infrastructure to offer a convenient alternative to commuting by car.
Carpool? In my neighborhood, I don't know of anyone that goes to the same area that I do, which is in a different county.
Bus? Being a different county, there is no public transportation option. What public transportation is available here is a hub and spoke configuration limited to one county. This is ok for those who a) work in the relatively small downtown area where ALL bus routes terminate or b) don't mind a 1+ hour commute as they travel downtown to wait for another bus to take them to the part of town their employer is located. If you're lucky, your employer will actually be located on the bus route's main road. Otherwise, you'll walk the rest of the way which usually means walking on the road as there are few sidewalks here.
05/29/2008
"What's driving prices, is good old Mr. Supply and Demand." I don't buy it. The price of oil has increased by over 50% since January. I don't believe that Demand has increased, or Supply has decreased (or a combination of both) that drastically in just a few short months - or even that simple supply and demand is responsible for 1/2 of the 50% increase. So what it really causing the increase in prices if it isn't the speculators and it isn't supply and demand?
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