Wednesday, July 30, 2008

Speculators led oil prices up and now – just as quickly – they’re leading prices down

Even at my favorite neighborhood bar in Maryland, where you can order chicken wings “old bay” style, I couldn’t get away from chatter about Iran and high gas prices.Two guys were going at it right next to me. Then one of the guys suddenly stood up and walked out. He departed in such an agitated state that he left his credit card behind. The aggressor in the discussion looked at me and said, “Hi, I’m Joe and I’m a Republican.” “Hi,” I replied. “I’m Wolex and I’m a Red Sox fan.” In the heart of Orioles territory, I knew those were fighting words – much worse than declaring fealty to Obama. But instead of backing away in disgust and disdain, he asked, “You local?” And that was it. My plans to chill that evening were shot.We talked for the next two hours and we didn’t agree on much. His biggest belly-laugh came when I talked about the auto companies. How they had to start making small gas-sipping cars right now ... how the huge number of Americans buying big cars and trucks was a thing of the past ... how “affordability” went from killing the housing sector to killing the retail sector to killing the auto sector.“’Less is more...’ something right out of the hippie sixties is making a comeback,” I said. And the guy just laughed. “You just wait,” he said. “Once gas prices go lower, we’ll be back buying our muscle cars and pickup trucks again.”He has history on his side. Small cars (all of them from Japan) grew popular in the 1970’s as expensive gas changed our point of view – just like what’s happening now. But as gas prices crept lower ... and lower ... and lower still, our love affair with spacious and powerful cars slowly but surely returned. Could it happen again? If prices head lower like last time, why not? But that’s a big “if.”First of all, it’s jumping the gun to assume we’re at the beginning of a “demand destruction” phase. We’re not. Oil and gas may be more expensive than it was during the last spike in prices – which topped out in 1980. But as a percentage of wage income, we’re at about six percent. In 1980 it was 7-8%. And back then – coming at the end of a decade of stagflation – people were hurting more than they are now.We’re driving about three percent less than we were last summer. So there’s no doubt that high prices are driving gas consumption down. But we’re still driving much more than we did five years ago when gas prices were much cheaper. I think prices still have at least one more leg up before demand gets curtailed in a serious way.Then we’ll see prices fall again. As rational consumers, that should put us right back in the driver’s seat in droves. What’s going to stop us?“An Inconvenient Truth” isn’t that the environment is in trouble. It’s that we respond to prices. Could it be that GM and Chrysler will be rewarded for hanging on to their big gas-guzzling cars?If the oil and gas market were only domestic, I’d say yes. But the energy market is global.Do you think coal prices are so high because demand in the U.S. has spiked? No, the spike is mostly coming from China, not the U.S.Do you think jet-fuel costs so much because carriers in the U.S. have upped their usage? No, Just the opposite has happened. U.S. airlines have cut back on their number of flights.Let’s attack the issue of price from a different angle. Do you think the price of oil costs less now because demand in the U.S. has gone down by a few hundred thousand barrels a day?No. It’s part of the story and not even the most important part.Crude simply went up too fast and was due for a correction. Oil’s chart looked a lot like China’s stock chart before it suffered a 50 percent decline. And, yes, the speculators have something to do with the oil market’s frothiness. They led oil prices up and now – just as quickly – they’re leading prices down.

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