Posted in Big Thought, Business by Harsha on March 13, 2008

Update: has a good article on the subject. Note the comments about traders making money only when the prices change. So keeping in mind the comments below, if I were a trader, it only helps me if I bet higher because that is the natural trend in oil prices given the world situation today. Only an uneducated person will bet on it going lower. The only reason I can think of oil futures trading lower in the distant future is if it’s demand is stabilized due to other competing sources of energy.

The Times of India has an article about oil prices and the consternation over the inability to accurately predict the future and to manage the rising price of oil.

The article says “Goldman now sees average selling prices of $95 a barrel for 2008, $105 a barrel for 2009 and $110 a barrel for 2010 and that was before this weeks spike according to Dow Jones wire service”

So the star analysts and brainiacs over at Goldman get it wrong because this is something that is larger than all of us. We may like to think that we can neatly chop world events into number arrays and review them, but that is very far from the truth.

To sum it up, more cars = more expensive crude. Unless you change the left side of the equation (not factoring in oil-based or oil-dependent products), you are not going to see the price of crude drop. From the 70s crisis till now, America was able to keep the price down but at some point price has to catch up with the rest of the world. We may see another drop in prices for political reasons (not for the election this time around) but reality is something else altogether. Mind you, crude has not become more expensive to produce but the futures on a barrel of oil determining what prices a buyer will be expected to pay next year and the years after that, is what is driving up this number. The irrational traders believe that demand will eventually outstrip supply (and even bring it down to 0) and want to make the most of it before that happens. Pure and simple economics.

Any economically sound individual with a long term view will realize that oil-based products are going to get phenomenally expensive, until it’s price drops to zero when there is nothing left to consume. It is going to be inflated so to counter it, you’re going to have to earn more by being productive. At some point, oil will become nationalized – owned and run by governments, who will ration it like chocolate during the world wars of past. That will create a universe of its own problems, but much smaller in magnitude.

Oil is a “key industry” as socialist India would say. We know what business leaders are capable of when such key industries are made private (Enron). In India power generation is still with the government, which has it’s follies. But never will the price of a unit of power exceed what the peoples of that nation can afford to pay. That is when you get politics to finally work for the masses. Similarly, oil is meant to be owned and controlled by the government, which will always have the power to keep prices low.

I believe the privatization of an economy is the best way to let a nation prosper; look at India since 2003. However, there needs to be a meeting point between economic growth and economic stability. That is exactly where the government needs to fit in. While it is staffed with ‘human beings’ who permit inefficiencies to thrive, I’m willing to bet that the price-to-be-paid for those infarctions will be far less than the irrationalities of today’s oil merchants. If we can all mutely agree to let our present rest on the shoulders of nervous futures traders, then why can we not let it lie with government bodies that will be SO slow to move that the price of oil may artificially remain lower than it’s true cost?

Wouldn’t that be refreshing!

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