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Real_Trouble -> RE: Iraqi government (10/27/2008 9:52:17 PM)
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Oil prices are a complex interplay of multiple factors. Speculation is but one small part. If you listen to truly intelligent economists ( I was speaking to someone who won a Nobel prize in economics about oil prices earlier today ), you don't get one part answers from them on the topic.
Key factors:
- Highly inelastic demand, or in plain English, major changes in oil prices don't seem to do a lot to reduce oil consumption compared to if, say, coca-cola suddenly went to $10 bucks a can.
- Somewhat fixed short-term supply, and possibly long-term supply. There's just not a lot more "easy" oil to be extracted around the world. It's not like we can double our supply in a year if we decide we want to use more, or if demand increases.
- Increasing demand due to continued reliance on oil-based technologies and growth in emerging markets. In other words, more people want oil, and we keep building infrastructure that uses it while limiting other options, like coal or nuclear power. That's not to comment on the viability of these options (there are many opinions and I won't touch on that here), but just to say we unequivocally keep making gasoline and oil using products.
- Speculation, but more so, a flow of money into commodities as they were considered an "asset class". When more people want to purchase the same amount of a good, price goes up! So to a point, the speculation in oil futures was more a facet of too many people entering the market. On the upside, now that people are realizing we might be in a recession and demand for oil might not be as strong as they thought, people are exiting the market just as fast. Speculation tends to exacerbate price swings, but it's not responsible for underlying supply and demand, and if you have enough market players, you can't have price-fixing cartels, either. Anyone who was claiming there were secret cabals fixing the price of oil needs to look closely at the losses people have taken over the past few months.
The bottom line is this:
The long term dynamics have not changed. Either oil prices will increase, on average over long periods of time, as demand increases and supply does not keep up, or we need to transition to other forms of energy.
It really does all come back to supply and demand. Not buying oil from one specific country just means that other people will, and that suppliers, knowing we won't buy from that one country, will probably charge us a higher price to buy theirs. Someone will still buy that oil; unless you could convince all countries in the world at the same time to boycott Iraq, it will have no effect. You can't ignore the other players in the game, and there are a lot of them.
So if you want to suggest a way out of the problem, you have to go right back to the root of the problem, which is the demand for oil. How do you plan to reduce that? Re-shuffling the deck doesn't change the cards in it, after all. There has to be a legitimate plan to replace energy from oil with energy from something else, or to dramatically reduce our energy consumption overall (or both).
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