Wednesday, August 20, 2008

I'm No Economist

However, if common sense has anything to do with oil prices then there is something wrong with this argument, courtesy Madeline's Dad:

If you say you are going to drill, and then don't, prices go back up. The lower prices we are seeing now are reflective of what the Market hears and sees. If we don't do what we said we are going to do, things revert back to how they were.
He and I have been going back and forth about this for a while. He believes that the price of oil is chiefly controlled by futures speculators, and therefore the prices were high until Bush rescinded the executive order against offshore drilling, at which point they started falling precipitously.

I believe the price of oil rose until people started using less gas and more public transportation.
Less demand, lower prices.

Here's what's troubling about MD's argument. No speculator thinks that increased supply is going to kick in immediately. An offshore drilling rig takes at least ten years to produce, and they haven't even started building them. Yet we're supposed to believe that speculators, who are looking at prices six months from now, are willing to sell their interest at a loss today.  It's true some speculators may see the value in selling off, but MOST of them? Seems suspicious to me. 

Also, I recall the price of oil started dropping not on the day that Bush signed the order, but the day after when he made a speech about signing the order. Speculators weren't paying attention to the actual lawmaking but once he made the speech, THEN they knew he was serious?

And why would there be movement now, when congress isn't in session, and the prospect of drilling is anything but settled? Popular sentiment, MD would say, but if I had a piece of that market, I wouldn't trade yet.

Then again, I don't really know that much about economics. So convince me. 


Anonymous said...

Let me offer you a scenario that might make this all clear.

Say the cost of produce begins to go upward at a very fast rate due to the floods in the Midwest this Spring/Summer. Costs for tomatoes, lettuce, carrots quadruples very quickly.

You like your veggies, and you have a small spot of dirt that you can grow your own in. The Governor of your State tells the citizens that a packet of seeds only costs $.25. He encourages you to partner up with your neighbors-one of you grows lettuce, one grows tomatoes, etc. Your neighbors do the same. In the short term, while you are waiting for your "crops" to grow, you reduce your consumption at the grocery store. It will take a while for the crops to grow and begin producing, but the community bands together.

The grocery store knows it's prices are high, it hears what the Governor is proposing, and it's seen it's sales slump. It knows that is has a finite customer base.

What does the grocery store do?

Danielk said...

The absence of vegetable speculators in this scenario suggests you agree with me.