Friday, May 6, 2011

Oil Speculators & Gas Prices: Is Feature, Not Bug?

I’ve already written plenty about the dishonesty of “Drill Here, Drill Now, Pay Less” (for a rundown, check here.) That’s a nice little bumper-sticker slogan that caters to the low-information crowd who still believe in simplistic supply and demand models -- something we all know does not apply so easily to oil and gasoline. Frankly, I don’t see that message getting much traction outside Fox News; American consumers are a little more sophisticated than that.

One thing I haven’t talked about too much though is the influence of Wall Street speculators on our gas prices. In that regard I found a recent interview with Ed Wallace on NPR’s “Here & Now” quite interesting. The interview built on his column of April 19, but then went into what interviewer Robin Young dubbed “provocative” territory. If you get a chance, give it a listen, it’s only around 15 minutes long.

I found his theory fascinating. He says that banks and investment houses need to make up for the money they lost in the mortgage meltdown, so they're gambling it on oil futures instead of loaning it to small businesses and consumers. This is sending the price of oil soaring.

In the radio piece (around the 11:00 mark) he specifically blamed the Federal Reserve’s policy of loaning money to the nation’s banks at virtually zero interest. The idea was, banks would send that cheap money back out into the economy in the form of small business loans, consumer loans, and the like. But as anyone knows, banks are not giving loans these days. They’re being downright stingy in that department, actually. Wallace says it’s because they’re trying to get a bigger return on their investment by speculating in commodity futures like oil. The banks are making tons of money but they aren’t sharing the wealth with the rest of us; in fact, they’re costing us, because this speculative activity has sent gas and food prices soaring.

And while President Obama is calling for an investigation into such practices, Wallace thinks it’s all so much Kabuki theater. Indeed, the "provocative" thing is, he thinks this situation is a feature, not a bug. I’ve transcribed part of the interview Robin Young conducted here:
RY: But why can’t it be exposed?

EW: Because I think they have to keep it this way. And this ... now let me speculate on my own story. The housing crisis is not over yet. They say that somewhere between 13% and 15% of all homes in America are now sitting vacant. Not all of them have been sold. The Wall Street Journal -- what was it, last September? -- did a story, said at our current sales rate for used homes in America, it’s going to take 9 years to clear off the backlog of these homes off the bank’s books and actually get them sold. That means they haven’t taken the losses, Robin. So how do you get the banks into a position where they make so much money they can slowly work out of this mess?

RY: You give them oil!

EW: You give them so much money at virtually no interest they can make money in commodities, food, oil, whatever. And these huge profits you’re piling up are actually gonna go to probably handle the losses that are still coming our way and will come our way for years to come.

RY: So it sounds like you’re saying that the government needs to keep this inflated oil market there because that’s how banks, investment houses, whoever these speculators are, can sort of offset their losses in homes.

EW: I think that’s as logical a theory, and I’m not saying that’s absolute, but why else would the government let it happen when the government’s the one that knows exactly why it’s happening, they’ve studied it. And yet they do nothing?

Why indeed!

It’s certainly a complicated issue, and while a few of Wallace’s ideas seem shaky -- who is to say the sales rate of homes will stay at its current rate, for example? -- I do think he’s onto something here.

Unfortunately, Americans can be intellectually lazy. Rather than exercise the gray matter on such intricacies as the global commodities markets and real estate inventory, they’ll jump on board the more simplistic “demand is up so gas prices are up” tale Grand Old Petroleum is selling. And any attempt to pressure the Fed to change its policy and prevent such gambling by banks in the Wall Street casino will be viewed as unpatriotic, Socialism, Fascism, tinkering with the free hand of the market, class warfare, punishing the rich, etc. etc. etc. I mean, we've seen this movie before, haven't we? Instead we'll get more oil leases off the coast of Viriginia and in the Gulf of Mexico, which won't do a damn thing because the oil companies are already sitting on more untapped, unused leases than they know what to do with. And gas prices will go up, and on and on. Lather, rinse, repeat.

C'est la guerre!

[UPDATE]: I just realized I contradicted myself when I said the "drill here drill now" slogan wasn't getting much traction outside of Fox News audiences, and then concluded that Americans are intellectually lazy. I guess what I meant is that while I believe most Americans understand the price of gas and the price of oil are complicated issues affected by more than just how many oil platforms are in the Gulf of Mexico, they aren't necessarily researching this stuff on their own to find out all the many ways prices are manipulated. It's too easy to grab onto whatever message the media is peddling today and buying into certain assumptions, such as "demand is high!" Um, well, no, actually, it's not. The media also likes to conveniently blame China and forget about the role of refineries which have cut capacity, something Wallace goes into in his April 19 column.

So, as always ... 'tis complicated.


That was fast. Gosh I hate it when I’m right. I said we'd get more oil leases off the coast of Viriginia and in the Gulf of Mexico and that's exactly what our clueless House of Representatives has authorized.

I'm not worried about this. As I've said before, the oil companies have more leases than they know what to do with. The problem is not oil leases. They already know where all the oil is, the problem is pulling it out of the ground (or, in this case, the seabed.) There will be windfarms off the coast of Virginia long before there are oil platforms.

But if Congress wants to do something to lower gas prices, they're barking up the wrong tree. And perhaps, as Wallace suggests, that's all part of the Kabuki theater. They want to give the appearance of taking action, all the while knowing that what they're doing won't affect anything at all. Because they want this oil speculation to continue.

I dunno, it's a theory ... but a damn good one.