Posted on 07/18/2008 2:02:40 PM PDT by Leroy S. Mort
Demand, Supply, and Prices
It's clear enough that even if the US economy comes to a halt -- and the Democrats seem determined to make that happen -- the demand for oil by China, India, and other growing nations will go up exponentially; and that greater demand without increased supply will keep the price of oil high and even drive it higher.
Speculators already believe that and are bidding up the price of oil futures. I have seen estimates that the supply/demand price of oil is under $100/ bbl but that speculators have driven it to the present levels. I don't know; it's very hard to estimate the "true" value of anything. What I do know is that the instant there's a real chance of increased supply, the speculator-driven price will fall. That's the way supply and demand works, and is in fact the whole purpose of speculators: to even out the swings in the market.
If the US made it clear that we are going to build new refineries and do off-shore drilling -- we can even simply make that a state option -- then speculators will read that into what they are willing to pay for oil futures. Similarly, new sources of energy, including T. Boone Pickens' wind farms, various means of using natural gas, improved solar, and most of all, nuclear power will be factored into what speculators are willing to bid for oil futures.
Now surely Obama, who says that allowing development of US oil resources won't affect oil and gas prices, must know this? Can he possibly be so stupid that he doesn't know it? Perhaps stupid is not the correct word; but surely he can never have given the subject five minutes' intelligent thought? Yet he makes speech after speech about the subject.
Supply and Demand always works. If demand goes up, prices rise until supply matches demand again. When the Congress decreed that more people ought to own houses even if under older banking standards they couldn't pay for the houses they bought, it created a way to loosen credit and inject more money into the housing market. That sent up demand, sharply, because more people who previously couldn't get a mortgage were able to do so; and the lenders were guaranteed that even if the new owners couldn't afford it, the mortgages would be repaid. That created pressure to get out more mortgages. What Congress intended, for marginal borrowers to be helped into mortgages they could handle, drive up supply of money; and those who made commissions by making mortgage loans were pressured to pay less and less attention to qualifications. The housing bubble was on, and so long as the bubble continued, there wasn't a problem. The property kept going up in theoretical value, the size of mortgages went steadily higher, the loan companies sold their packages of go0d and bad mortgages to get more money which they could loan out, and the bubble grew and grew.
That grew the demand for construction workers. That drove up prices for that labor; which resulted in construction practices that didn't need so much skill (many of them darned good ideas, too, like the various steel brackets and braces that hold things together far better than the old "toe-nail" techniques of master carpenters). Now there was a demand for unskilled labor, and the porous southern border promised an infinite supply of that.
But the new immigrants created demand for hospital emergency services, police services, and school services; none of which was likely to be paid by the new immigrants, and in general not by their employers either. So there was a counter-bubble, as hospitals closed their emergency rooms. They did so because they were forbidden to see if emergency room patrons had the ability to pay. All hospitals, public or private, have to admit anyone who shows up at the emergency room. For about 20 such in Los Angeles County that was too much: the emergency rooms cost so much and made so little that the hospitals simply closed the emergency rooms lest the entire hospital be driven into bankruptcy.
With the collapse of the housing bubble the demand for unskilled labor has fallen; but meanwhile the energy crisis has driven the cost of peasant food higher and higher, both in the US and south of the border, so the pressure to come to the US where things are done a bit more efficiently is high.
This is a very elementary first cut at the complex ecology generated in large part by good intentions: that no one be turned away from a hospital emergency room, and that everyone be able to get a mortgage and own a home. Unfortunately the oil escalation impacted on all that. Of course that was predictable. I believe it was in 1974 that I wrote a series of articles, some for American Legion Magazine, called "America's Looming Energy Crisis". I also wrote several stories about some ways to get past an energy crunch.
The Energy Crisis was predictable and predicted. After Jimmy Carter it was even obvious. But neither major party took any of this seriously (and after Newt Gingrich departed as Speaker neither party seem to think a month ahead); and now we have the crisis.
The only way out of the energy crisis is to increase energy supply. No single source of energy will bail us out; we need to try all that have a chance of success. Correction: a massive investment in nuclear power won't save us by itself, but given sufficient kilowatts from nuclear we can get out of this. If the government wants to set up loan guarantee companies, I suggest that it (1) simplify the nuclear construction regulations -- see how they do it in Japan and France -- and (2) set up something like Freddie Mac to help raise capital for nuclear power plants. Let the states invest in nuclear power. Let the Federal government invest in nuclear power plants. Build the darned things: given energy we'll get out of any other crisis.
Doctor Jerry presents sound, reasoned opinion. Which of course means he’ll be held up to the flames next LASFS meeting he comes to, and some liberal, somewhere, is considering pulling Dr. Jerry’s Guest of Honor invitation because he supports that horrid nuclear power and called Obama (heavenly sigh) a moron.
Good article by Jerry Pournelle (never heard of him before now). Thanks for posting.
As one newsletter writer said today: “Cheaper oil — yes. Cheap oil — no.”
Is he the sci-fi writer (often writes w/larry Niven)?
What the MSM call the energy crises is caused by the government not by the energy situation. We have more than enough oil, natural gas and coal and sufficient technology to provide all of America’s energy needs. The problem is the politicians have disrupted the energy supply and prevented additional energy production in the US. If the Democrats would just go away America would have no energy problems.
The bubble occured primarily because people could use money they didn't have, i.e. credit, to bid up house prices severely over a relatively short period of time.
If all of the speculators in the oil market are using real money to purchase oil futures then what we are most likely seeing right now is the real price of oil.
If, however, speculators are highly leveraged and using loads of credit to speculate in oil, then the current price may very well be a bubble.
The question to ask is not whether a particular persons economic actions with regard to oil are investments, speculation, or even manipulation, but whether the actions are executed with real money or on credit.
My understanding is that there is no one place that anybody can go to find out how much money is being traded on oil futures, and what percentage of this money is real and what is credit.
As far as the short term goes, if you know the answer to that question then you know whether to go short or go long.
As far as the long term goes, if the market believes that global warming is happening and that governments will ultimately deal with it, then the market will not expect oil shale and oil sands to become competitors to traditional oil. If solar, wind, and nuclear are viewed as pipe dreams, then the price of oil will continue to go up.
Thanks. Good article and thread.
Since the aging of the baby boomers in the US, and the 50-odd million abortions since 1973, many companies wanted new, growing markets.
And the problem with creating the new markets is that they produced mostly for export to the US. And with all the investment money rolling in, it created the classic "too many dollars (or rupees or whatever) chasing too few goods", hence inflation.
Add changes in the US to allow speculating on credit, and the prevalence of hedge funds, to chase higher returns than the slow-growth US economy, and you have a commodity bubble.
Pop the bubble be insourcing to the United States, thereby reducing world demand. :-)
Full Disclosure: See articles I wrote on this here and here.
Cheers!
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