I knew, as soon as I heard that the Commodity Futures Trading Commission (chaired by Clinton Administration political hack Gary Gensler) was going to issue a report on alleged speculators in the energy market, that populist conservative cable host Bill O'Reilly was going to gloat insufferably. And, in fact, Bill O'Reilly did not disappoint, as his "I-told-you-so" talking point memo earlier this week derisively spat out earlier explanations of supply and demand.
But, to quote Lucy's Cuban bandleader husband Ricky Ricardo, O'Reilly "got some splainin' to do". He specifically, arbitrarily and contemptuously dismissed last summer's related CFTC investigation which concluded that it was simply a matter of supply and demand. What exactly changed, Mr. O'Reilly? Did new "facts" emerge which contradicted last summer's investigation? Or could the new report simply reflect the Obama Administration's populist rhetoric? Is it simply Bill O'Reilly regards the Obama Administration more "credible" on economic matters than the Bush Administration? (After all, Obama promised passage of the $787B so-called stimulus bill would keep unemployment below 9%, and his Administration has invented unconventional economic statistics in saving jobs, e.g., bailing out states for failing to establish rainy day funds and control spending during economic expansion .) I think that Bill O'Reilly is simply cherry-picking the report which reflects his preexisting opinion.
There are some basic economic facts underlying energy costs which I've raised in past posts and which I summarize here. The United States imports most of its energy, despite (for political reasons, i.e., Democratic Party special interests) having unexploited energy development (incidentally, a key component of a perpetual trade imbalance). The California economy boomed during the 1990's, without an increase in power plant ecapacity (obstructed by environmentalist interests), resulting in brownouts, etc. The environmentalists furthermore shackled nuclear power plant deployment while France over the interim has generated most of its electricity by nuclear power (without Nevada mountain repositories to store nuclear waste). The result? An expansion of carbon-based power plants, utilizing an abundant American source of energy, coal; now, of course, environmentalists are worried about carbon dioxide emissions. And, of course, environmentalists for decades have promoted green energy, which account for less than 5%, is largely government-subsidized, and hardly keeps up with dwindling American domestic oil sources; Obama, with a straight face, promises that green technology will be a key American growth sector and job generator.
In fact, the Arab oil states have not been a promoter of perpetually high oil prices, although they would benefit from that. Why? Because oil prices track the global economy; high oil prices result in recessions (and lower demand/oil prices), not to mention investment in energy alternatives and supplies (e.g., oil sands).
What happens is although the US has slowed the growth of its daily oil consumption (it accounts for about 25% of world consumption, many times its proportion of the world's population), other growing economies (e.g., China and India) are increasing their imports, and some countries that used to export oil (like the US) are now net importers (e.g., China and Indonesia), existing oil exporters find their fields maturing and/or declining, and new global oil finds are difficult to come by (China and Brazil have announced massive new offshore discoveries, while Obama and Democratic Congressional leaders stonewall American exploration off our own shores, ANWR, etc.)
Economists will tell you that spot prices for oil are determined at the margin. (We should also note that currency prices are also in the equation; as the dollar weakens, we would expect the price of oil to increase, and as the dollar strengthens, the price of oil should decrease. In the long term, we would expect, with domestic and trade imbalances, that the dollar would weaken. This would be good for US exports (cheaper for foreign consumers with stronger currencies), but American consumers would face inflation, as the cost of imported commodities and components increase and foreign consumers compete with domestic consumers for American-produced goods and services.) The demand for oil imports depends on a number of factors, including the status of domestic oil inventories, and aggregate competitor net consumption.
Here's one of the facts that O'Reilly conveniently ignores and a recent Wall Street Journal editorial points out: speculator activities were actually in OPPOSITE directions, with speculators at net SHORTS before oil barrel price peaks and they started going LONG, even as oil prices were still dropping. (In other words, they were convinced the price of oil had gotten ahead of itself and domestic oil demand would drop with sky-high prices; at the other end, they reasoned that the long-term tight supply/demand had not gone away with a recession.)
If speculators were responsible for an artificial spike in oil prices, why didn't they do it earlier? Why did they stop? In fact, one could argue without the shorts of speculators (i.e., bets that future oil prices would be lower), the price of oil would have peaked higher than it did. Apparently speculators drive prices up, but prices go down naturally, despite the best efforts of OPEC and the energy corporations with a vested interest in higher prices and profits! It's like ancient men who posited anthropomorphic gods to explain powerful forces of nature. What Bill O'Reilly here needs is Ockham's razor: to quote Gertrude Stein, there is no there there.
