Comments (30)

• Dray

• The fact that oil prices are high is mailnly due to central bank policy. With very low interest rate and fear of a recession the central banker "fuel" money into the economy which encourage to speculate on hihg price. Supply and demand for oil are what they are but with actual price this is only due to more "fiat money" into the economy. And this lead to inflation and destruction of whealth.

  The solution is free banking and a pure free-market economy and not a statist economy as we are facing today.

  I know I'm like a man speaking in the desert but the only way to get rid of such phenomena is to get rid of government.

  A free-market oriented man.

  Pascal DRAY

• Published: June 28, 2008 6:42 AM

• Elias

• The role of politicians and speculators are both overstated. Demand for oil is growing faster than supply, and the old mega oil fields are past their peak growth rate. What is the likelyhood of discovering similar enormous new oil fields that can be drilled for next to no cost? Answer is zero...

  Remember that the cheapest oil fields to drill are the ones that are now just past their peak. The new known oil fields not yet ready for production are more expensive to operate that any oil fields producing today. Replacing old cheap drilling with new expensive drilling is the only way forward for oil.

  If, by chance, new enourmous oil reserves are discovered in the future, they will most certainly be orders of magnitude more expensive and difficult to drill than the current well developed fields. Oil will flow slower, even if the reserves are infinitly large, because of technical difficulties and the cost of drilling far from civilization.

  The only way to reduce oil price for the future is to reduce the growth of demand for oil. The production capacity continues to grow, but at a slower pace than demand. In the long term there are several ways around oil, most of them involving nuclear power, using new or old technology. In the short term, a collapse in demand can come from too high price, but that 'solution' is like arguing the that the patient is no longer sick because of death.

  The solution to the rising oil price is to reduce reliance on oil. It's difficult, it's painful, and those who are not able to adapt awaits the fate of dinosaurs.

  Peak Oil took me by suprise this year, but at least I'm able to admit it and face reality. Only 6 months ago, I thought Peak Oil was something I would maybe have to face before I retire, at least 25 years into the future.

  It was almost impossible to predict when the balance would finally tip towards scarcity of oil, although everybody agrees that it had to happen sooner or later. Now, in hindsight, it is easy to recognize that the balance has indeed tipped. Those who still claims this is a temporary problem have personal gains (imagined or real) from doing so. Politicians can try to react to the problem, but Peak Oil is something that was created from the tremendous growth of the global economy in the last years.

  Usually the free market players claims that politicians hampers growth. Are we about to hear a complaint that politicians allowed too much growth?

• Published: June 28, 2008 6:55 AM

• Biffoni Patrizio

• Economists and opinion makers could be divided into 2 categories: those who blame speculators for rising oil prices, and those who blame governements. They have both valid reasons theoretically, but in practice their opinion is motivated by ideological reasons. What we need is a reliable econometric study establishing the real causes of the current rising oil prices. I hope this survey come soon, otherwise we will continue this endless ideological and boring talking.
  Italy. Lucca.
  

• Published: June 28, 2008 8:45 AM

• hayesy

• The solution to the rising oil price is to reduce reliance on oil.

  The "solution" is that there is no "solution"; no magical piece of policy some pork-barreling politico is going to pull out of his posterior. The best thing to do is to get out of the market's way. Even disregarding crackpot theories like "Peak Oil", new and more efficient energy technology will always supplant the less efficient. This natural free-market evolution is obfuscated and sabotaged by government measures. Environmental policies limit potential economical supply sources, reduce geopolitical diversification of this supply and further concentrate the cartel power of OPEC. Alternative energy subsidies divert scarce resources down unproductive avenues, while anti-nuclear populism denies the market a genuinely viable source of alternative energy. Reserve banking diminishes the measuring stick by which the commodity is denominated on a daily basis, distorts price signals and adds unnecessary volatility to exchange prices.

  Demand for oil IS growing faster than supply, that much is true, particularly given the economic growth of China over the last decade, artificially exacerbated by being suddenly released from almost 50 years of stifling Socialist governance. If a soaring inelastic demand schedule relative to supply was the only issue, this wouldn't be a big deal. The subsequent price rises cause formerly uneconomical oil sources and energy alternatives to enter the supply chain. As it stands, this equilibrating production shift is being severely handicapped by regulators and politicians seeking some cheap, short-sighted points by appealing to people's ignorance, confusion and envy. So, by appealing to a Peak Oil theory, you're indirectly referring back to the political problem which you initially decried as being overstated.

• Published: June 28, 2008 9:45 AM

• hayesy

• What we need is a reliable econometric study establishing the real causes of the current rising oil prices.

  Was that an ironic comment?

• Published: June 28, 2008 9:47 AM

• Inquisitor

• "They have both valid reasons theoretically, but in practice their opinion is motivated by ideological reasons. What we need is a reliable econometric study establishing the real causes of the current rising oil prices. "

  What "we" need is for economists to abandon poor theories. That is what. No two theories are equally valid in this case.

• Published: June 28, 2008 9:54 AM

• fundamentalist

• Elias: "The only way to reduce oil price for the future is to reduce the growth of demand for oil."

  That's about to happen, at least in the US. The next recession will curb the appetite for oil in the same way it did in 1981-82.

  Elias: "Are we about to hear a complaint that politicians allowed too much growth?"

  That has been the position of the Mises Institute for a long time. A great deal of the demand for oil today was caused by loose monetary policies of the recent past, not just in the US but worldwide. In addition, states like China, Mexico, Iran and other subsidize gasoline and increase the demand even more. Those states can't keep that up forever; they'll go bankrupt. Eventually prices will rise in those states and cause the demand to fall.

  Biffoni Patrizio: "What we need is a reliable econometric study establishing the real causes of the current rising oil prices."

  I share you frustration with economists, but I don't think econometric studies will help much. When people do econometric studies, other econometricians come out of the wood work to challenge the assumptions and methodology. They end up bickering endlessly about whose work is correct. As Mises has said, the only way to solve such bickering is with correct theory. If you approach historical data with sound theory, then you can make some sense of it. If you approach it with no theory, hoping for the data to speak for itself, you end up with endless bickering and confusion.

  I have studied mainstream economics (those who blame speculators) and Austrian economics (those who blame governments) and am convinced that Austrian econ holds the keys to understanding how economies really work. If you'll put in the effort, I think you'll find the same thing to be true.

• Published: June 28, 2008 9:59 AM

• Inquisitor

• "Usually the free market players claims that politicians hampers growth. Are we about to hear a complaint that politicians allowed too much growth?"

  Had "we" opened "our" ears up, "we" would have already heard such a complaint - though it has little to do with real growth, as opposed to malinvestment stimulated by bad monetary policy. Free market "players"... pfft, how I hate that stupid word when applied out of the context of games.

• Published: June 28, 2008 11:13 AM

• ktibuk

• Oil prices are rising because demand is rising. But demand is a tricky concept.

  Demand is desire backed by purchasing power. Normally purchasing power comes from prodction. As in Says law, only supply can create demand.

  But since it is hard to produce and barter men created money to reflect the purchasing power of production.

  But this opened a door to creating fake demand by counterfeiting money. People, mainly governments, discovered that instead of producing to be able to demand other goods it was easier to counterfeit money and create demand out of thin air.

  So in todays economy based on conterfeit money, demand comes from both production and counterfeiting and it is very hard to differentiate how much comes from what.

  But it is clear that regarding oils dollar prices' most of the demand is because of counterfeiting.

  In this case the counterfeiter doesnt directly demand oil by it own counterfeit money, but demand other goods mainly from China, and China demands oil with the dollars it gets from the US.

  Those counterfeit dollars flowing from the US to China might have been used to demand more of other goods than oil and other commodities (like automobiles and such), but since China is a developing country it is understandable that the money the first and foremost goes to raw materials mainly commodities.

  There is no bubble in commodities the prices are here to stay. Their rate of increase may slow down if the FED bites the bullet and decides to slow down the counterfeiting, but that doesnt seem to be the case for now.

• Published: June 28, 2008 3:27 PM

• eugene chase new york city

• universities deserve no tax breaks-they are very selfishand contribute virtually nothing for the the nations ordinary population--where are the reports to the public on the following topics: the real reasons we are in the middle east,the causes of the great oil spikes,the reasons why we have a diabetes epidemic,the real cost in tax dollars of the banking bailout mess,the elimination of the real middle class, the cause of the third world invasion of america---and so on--colleges are no better than the money whores on the street- --congress--take away their tax giveawaye and pronto

• Published: June 28, 2008 5:05 PM

• eugene chase new york city

• universities deserve no tax breaks-they are very selfishand contribute virtually nothing for the the nations ordinary population--where are the reports to the public on the following topics: the real reasons we are in the middle east,the causes of the great oil spikes,the reasons why we have a diabetes epidemic,the real cost in tax dollars of the banking bailout mess,the elimination of the real middle class, the cause of the third world invasion of america---and so on--colleges are no better than the money whores on the street- --congress--take away their tax giveawaye and pronto

• Published: June 28, 2008 5:05 PM

• eugene chase new york city

• universities deserve no tax breaks-they are very selfishand contribute virtually nothing for the the nations ordinary population--where are the reports to the public on the following topics: the real reasons we are in the middle east,the causes of the great oil spikes,the reasons why we have a diabetes epidemic,the real cost in tax dollars of the banking bailout mess,the elimination of the real middle class, the cause of the third world invasion of america---and so on--colleges are no better than the money whores on the street- --congress--take away their tax giveawaye and pronto

• Published: June 28, 2008 5:05 PM

• eugene chase new york city

• universities deserve no tax breaks-they are very selfishand contribute virtually nothing for the the nations ordinary population--where are the reports to the public on the following topics: the real reasons we are in the middle east,the causes of the great oil spikes,the reasons why we have a diabetes epidemic,the real cost in tax dollars of the banking bailout mess,the elimination of the real middle class, the cause of the third world invasion of america---and so on--colleges are no better than the money whores on the street- --congress--take away their tax giveawaye and pronto

• Published: June 28, 2008 5:06 PM

• eugene chase new york city

• universities deserve no tax breaks-they are very selfishand contribute virtually nothing for the the nations ordinary population--where are the reports to the public on the following topics: the real reasons we are in the middle east,the causes of the great oil spikes,the reasons why we have a diabetes epidemic,the real cost in tax dollars of the banking bailout mess,the elimination of the real middle class, the cause of the third world invasion of america---and so on--colleges are no better than the money whores on the street- --congress--take away their tax giveawaye and pronto

• Published: June 28, 2008 5:06 PM

• eugene chase new york city

• universities deserve no tax breaks-they are very selfishand contribute virtually nothing for the the nations ordinary population--where are the reports to the public on the following topics: the real reasons we are in the middle east,the causes of the great oil spikes,the reasons why we have a diabetes epidemic,the real cost in tax dollars of the banking bailout mess,the elimination of the real middle class, the cause of the third world invasion of america---and so on--colleges are no better than the money whores on the street- --congress--take away their tax giveawaye and pronto

• Published: June 28, 2008 5:06 PM

• eugene chase new york city

• universities deserve no tax breaks-they are very selfishand contribute virtually nothing for the the nations ordinary population--where are the reports to the public on the following topics: the real reasons we are in the middle east,the causes of the great oil spikes,the reasons why we have a diabetes epidemic,the real cost in tax dollars of the banking bailout mess,the elimination of the real middle class, the cause of the third world invasion of america---and so on--colleges are no better than the money whores on the street- --congress--take away their tax giveawaye and pronto

• Published: June 28, 2008 5:06 PM

• eugene chase new york city

• universities deserve no tax breaks-they are very selfishand contribute virtually nothing for the the nations ordinary population--where are the reports to the public on the following topics: the real reasons we are in the middle east,the causes of the great oil spikes,the reasons why we have a diabetes epidemic,the real cost in tax dollars of the banking bailout mess,the elimination of the real middle class, the cause of the third world invasion of america---and so on--colleges are no better than the money whores on the street- --congress--take away their tax giveawaye and pronto

• Published: June 28, 2008 5:06 PM

• eugene chase new york city

• universities deserve no tax breaks-they are very selfishand contribute virtually nothing for the the nations ordinary population--where are the reports to the public on the following topics: the real reasons we are in the middle east,the causes of the great oil spikes,the reasons why we have a diabetes epidemic,the real cost in tax dollars of the banking bailout mess,the elimination of the real middle class, the cause of the third world invasion of america---and so on--colleges are no better than the money whores on the street- --congress--take away their tax giveawaye and pronto

• Published: June 28, 2008 5:06 PM

• eugene chase new york city

• universities deserve no tax breaks-they are very selfishand contribute virtually nothing for the the nations ordinary population--where are the reports to the public on the following topics: the real reasons we are in the middle east,the causes of the great oil spikes,the reasons why we have a diabetes epidemic,the real cost in tax dollars of the banking bailout mess,the elimination of the real middle class, the cause of the third world invasion of america---and so on--colleges are no better than the money whores on the street- --congress--take away their tax giveawaye and pronto

• Published: June 28, 2008 5:06 PM

• Walt D.

• Great article Stefan.
  
  What is interesting is that since the Carter Windfall Profit Tax in 1980, proven reserves in the US have declined year by year. In the BP review, the US is virtually the only country in the world where proven reserves have not gone up. It is unfortunate that the rapid rise in oil prices has again occurred in an election year. There is intense political pressure to pass more crackpot legislation. This would be a disaster.

• Published: June 28, 2008 7:13 PM

• Biffoni Patrizio

• Fundamentalist, I appreciate your comment. You're right in saying that data will never speak for itself.This applies very much to econometrics where if you don't approach the subject with a sound theory and good judgement you reach poor results.

  Hayesy "Was that an ironic comment?"
  I don't understant your answer to my comment. Did you find it non-sense, stupid? I was only saying that before talking good data are needed. Currently there are economist, like Samuelson, that blame speculators and others who find the cause of the rising prices in the increase in demand. I want only to know the importance of the different factor. An econometric study ( with its limits) is an instrument for such purpose.

• Published: June 29, 2008 5:10 AM

• hayesy

• Apologies Patrizio, I wasn't aware how familiar you were with the Mises Institutes' general opinion of econometrics and the general positivistic epistemological basis of much modern economics. Needless to say, your appeal for more data was probably not greeted with much sympathy.

• Published: June 29, 2008 7:07 AM

• Patrizio Biffoni

• Thank you haysey for your response. I've understood the misunderstanding. The fact is that I'm studiyng economics and management (undergraduate degree at Pisa) and I am not familiar with austrian economics yet. However, I share the skepticism towards economic schools of thougth that treats economic as Phisics. Too many models and poor theory make economics become a boring and blind science. Ciao! (bye in italian). I leave the space to others to talk. I've talked much.

  Patrizio Biffoni.

• Published: June 29, 2008 8:10 AM

• DS

• What is truly sad is that this whole episode has a historical example with which everybody involved should have been able to learn, and yet very few central bankers and politicians seem to even know that the precedent exists.

  In that repeating historical movie re-playing today we are in about 1970 in the plot-line.

  After a decade when the politicians and the bureaucrats claimed that the business cycle was "solved", that the economy was now "different" and the American people believed it, the government used these false-hoods as cover to inflate the currency, spend record amounts of money on social programs and an unpopular war, and create a false prosperity that would eventually result in run-away inflation and a horrible crash.

  Sound familiar?

  Unfortunately this movie is being replayed in an environment where the US is no longer the world's largest creditor but its largest debtor, and it's average citizen has little or no savings (and has been told that it is both bad for the economy and the country to save instead of spend money) and the memory of a monetary system linked to gold is now a distant instead of recent memory. Also, today's environment is one where every central bank world-wide is creating fiat currency at the same incredible rate as the Fed - as opposed to the early 70's when most central banks were trying desperately NOT to do that - precipitating the US government basically declaring bankruptcy and closing the gold window.

  In both cases global inflation so distorted the fundamentals of supply and demand that the price of all commodities could only go up.

  As then, the movie will probably end in the central banks of the world doing just enough to reduce global inflation just enough to make everybody think the crisis is over. Then the politicians and (most) economists will mis-diagnose what just happened - like thinking that inflation is caused by an increase in oil prices or wages instead of the other way around, and the game of inflation will begin again, most likely with the central banks of the world emerging with MORE power and MORE credibility.

  An alternate ending would be one where the people of the world figure out that central banking is a scheme to enrich the banks of the world by keeping everybody, govenments and citizens, in perpetual, intrest-paying debt. A ending where the citizens recognize politicians and bureaucrats for what they are: parasites that feed off of the productivity of free citizens.

  Not likely, I admit.

• Published: June 29, 2008 8:32 AM

• Bruce Koerber

• Stefan,

  I appreciated your description of the inner world of commodity speculators: spots and futures, shorts and longs.

  Why would anyone imagine that government intervention would do anything but distort the economy and disrupt the flow of knowledge and resources?

  With warm regards,
  Bruce

• Published: June 29, 2008 8:57 AM

• hayesy

• You have a wonderful intellectual journey ahead of you, Patrizio. Good luck with it.

• Published: June 29, 2008 9:12 AM

• Inquisitor

• Patrizio, you should read Mises' works on epistemology and later Hoppe's. If you're disinclined to treat economics as a science akin to physics, it will provide you much in the way of a grounding on the topic.

• Published: June 29, 2008 10:12 AM

• Speculator

• The speculators are not the issue. There is no way they could be. Speculators play a zero sum game where they win and the supplier loses or vice versa. There is no other way. Even if all the speculators colluded they could not cause a sustained change in price. There is simply no mechanism under which some or even all of the speculators can drive the prices of something up.

• Published: June 29, 2008 2:24 PM

• banker

• What about the last 50 years of the US federal government dumping untold billions of dollars into road infrastructure? That must have starved railroads and other forms of mass transit of capital. Not only that, with the great migration of Northerners to the Sun Belt, mmeaning most communities in the South are under 50 years old, how many communities have been built on the assumption of $20 a barrell oil? A lot of communities were built around expressway onramps. I am sure this is a large reason why the US is facing such difficulty today. And the capital needed to change the infrastructure away from the cheap oil mindset has been looted to pay for Washington's largess.

• Published: June 29, 2008 8:19 PM

• OilDrummer

• I thought all economists thought we could just go up to the counter and order more (I don't mean to insult anyone, it is just what I thought). If you study the supply side of oil thoroughly you will find that we are on an undulating plateau of peak supply, with ever increasing demand. Global peak is a beast to predict due to all the above ground and below ground complications. The peak oilists have predicted what is happening today with surprising accuracy (The Oil Drum) (ASPO-USA). The integrity- compromised so-called experts have gotten everything surprisingly wrong (EIA, CERA) A year ago I read a news release here on Mises also debunking Peak oil theory. The scary thing is when the decline starts, in about two years I suspect. Decline rates of 4%-7% will have such drastic effects on economics it will be impossible find alternatives fast enough to keep up with the decline (it's really too late folks)
  start here:
  http://en.wikipedia.org/wiki/Hirsch_report

• Published: July 2, 2008 10:37 PM