Driving around and looking at gas prices, it is just stunning to see $1.60 and less, especially after paying $4+ just this summer. I had a sense of deja vu: the Clinton era. In fact, when I think back to the Clinton era, somehow it is the low gas prices that standout foremost in my mind (I know I should be thinking of all his evils etc. but they all seem petty by comparison to what followed). Then one recalls Bush’s stated agenda–Oval offices meetings–to raise the price of gas. Then one recalls Bush’s own personal connections to the industry. One can see how conspiracy theories of presidents and their impact get started.
If you knew nothing about economics, nothing about how prices work, and abstracting for all other business-cycle considerations, and only looked at an indicator like gas prices, and tried to do a rough correlation based on presidents and parties, and noting the astonishing price fall that happened just as it became clear that Obama would be president, you might easily conclude that, despite all the rhetoric: Democrats = cheap gas; Republicans = expensive gas.
It so happens that some do believe something along these lines.
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The recent drop in oil has been a real head scratcher for me.
Was this whole pricefall not a consequence of those Saudis starting to produce more?
You really think the Saudis are producing enough to drop the price in gas nearly 300%?
The drop in OIL price has been an odd thing to observers. Considering the supply and demand for – what appears to be a nearly infinite demand and very limited supply.
I think that the price of OIL represents nothing more than nonsense and price fixing / price controls. How long they can keep the plates in the air is anyones guess but would wager not much longer.
This Spring William Engdahl tried to explain the idea that oil price was not linked to supply and demand anymore but “controlled by an elaborate financial system”. You can find more here: http://www.engdahl.oilgeopolitics.net/Financial_Tsunami/Oil_Speculation/oil_speculation.HTM . His website also as other very interesting articles and interviews about oil geopolitics and economics.
In the end he was wrong: crude price was even more inflated than everybody imagined and the bloated bladder is still deflating. On Friday the Brent barrell went under 40 US $ for the first time in years. It was around 150 US $ just four months ago and everybody expected it to reach 200 US $ by the end of the year because oil prices always exhibited an upward trend during winter months.
I don’t think oil-producing countries will cut their production by a significant amount in the immediate: plainly put they need all the cash they can get. Venezuela and Russia are particular cases because they planned future spendings according to high oil prices: Russians in particular had 70 US $ as a minimum price to keep up the present level of spending. Russian oil is now selling at around 30 US $.
I bet there are many slepless bureaucrats and kleptocrats in Moscow and Caracas right now.
According to Austrian theory commodity prices will be bid up disproportionately during the boom phase of monetary expansion. Why is it so surprising that they would collapse so quickly?
We are experiencing what is essentially a system wide bank run. This is how a bank run “feels” under a fiat currency with a FED and FDIC insurance, Fanny and Freddie, and all the other non-market alterations to the system.
That bank run is causing a fractional reserve originated monetary deflation. So of course those goods that were bid up the most during the flood of cash are going to crash the most.
I had been predicting that oil prices were going to go at least around $80 a barrel back in 1999. They went far higher.
Those high prices brought a lot of capacity on line and now that glut of producers are competing. Heck I was reading articles about some Joe Blow reopening oil wells in his Pennsylvanian backyard at the high prices. You also have all the oil tar producers in Canada.
All these new producers have now invested in capacity, and the investments, the new pump for the guy in pennsylvania, the new plants in Canada, etc. all are sunk costs.
So prices are, of course, now going to nosedive below what they would have been otherwise had the Fed not induced the massive monetary expansion.
The Fed has caused a coordination of several factors that are going to crash commodities prices:
1) Induced asset bubble that caused over investment in commodities.
2) Caused malinvestments that means that even if there wasn’t that overcapcity there should be less demand for commodities.
3) Caused a fractional reserve monetary bubble based on over-leverage, not only in desposit accounts, but in other areas. The deflation of that bubble means money is dearer and that alone would cause deflation in commodities prices below what would have happened on the free market.
Fractional reserve systems are highly unstable. The reason being is that the very assets that are used as collateral for expanding the money supply are the ones that rise in value during the boom. This is self feeding and it runs away from equilibrium.
That’s true even without governmental intervention, and can only happen if the government does not crack down on the fraud of fractional reserve banking. This is a matter of law not intervention. It should be a matter of law, not political whim, that it is fraudulent to borrow from one person short term to lend to someone else long term.
All the other governmental interventions on top of this initial problem, the central bank, the attempt to control interest rates, the attempt to force banks to lend to poor people, etc., all these tend to exacerbate the instability of the system. Fractional reserve banking is more, not less, likely to be a run away process with a central bank than without.
I predict bailouts for the oil industry if this continues.
Oh wait, maybe that was the plan all along?
The price doesn’t seem that perplexing. Prices got really high and people adjusted accordingly to reduce their consumption, and now its falling. The rise I think was probably just a result of increased international demand from huge growing economies like China and India. Speculators may play a part in exaggerating the highs and lows. I tend to think that speculators may have a distorting effect on the prices when there is considerable uncertainty, since they’re making decisions in the dark (we tend to be more irrational when faced with situations of which we have little experience). Uncertainty seems to describe well the situation of war in the Middle East, vacillating global warming policy, Washington scrambling blindly to stave off a recession, and then the election of a new and inexperienced president who might have some sort of New Deal up his sleeve.
Fleecing of working Americans, high gas price. Low gas price gets working Americans out more for more long distance trips. Hopefully, while they are out, they will spend (malls, restaurants, more gas, unnecessary trinkets along pit stops, bars: beer & wine to ease their troubled minds from the Federal Reserve man-made financial collapse.) In times of change of power, the state takes care of its cronies financially and handsomely, manipulating the markets to help friends out.
There was an oil boom. Lots of investors owned oil contracts at crazily inflated prices. The forced deleveraging has caused them to sell oil at fire sale prices. We are the beneficiaries, for now.
@Kakugo,
while there’s a lot of valuable information int the piece you mention, I’m not sure what’s its aim since Speculation and manipulation (=fraud) is made equal it seems here.
There’s another similar view on speculation being sometimes self-reinforcing as George Soros keeps repeating… but apart from making it necessary indeed to better keep track of the potential manipulation (with State blessing), the public could just start to realize that any stock exchange has the dangerous leverage principle in it through credit expansion and FRB for a start.
Oil prices have partly developed because oil infrastructure development acts as a sort of (lousy) reinforcing speculation in itself as Engdahl states, but evidently the exaggeration must be worse here than for any other industry of scarce resources like gold or even steel since oil normally gets burned!
In the case of gold particularly, the speculation for increased demand is at the most directed towards the currency use… and monetary inflation
If there’s really an oil & gas conspiracy, why would prices ever come down at all? This is like that silly monopolistic theory that companies lower prices to “hook” consumers and then will somehow reel them in afterwards–it’s the latter part of the theory that blows the conspiracy idea away. Or else our conspirators and monopolists are just really bad businessmen!
Brian has it right. It wasn’t just oil. All commodities peaked in July and promptly fell sharply afterward. Copper, silver, corn, even dirt were affected due to an over-inflated money supply. Gold was also affected but to a lesser extent because of its use as a hedge against fiat money.
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