Sunday, October 08, 2006

Supply and demand are not the cause of the oil and gasoline price roller coaster

An editorial in the NY Times entitled "Roller Coaster at the Pump" wrongly asserts that "As long as the demand for oil and gasoline grows faster than the ability to produce and refine them, the slightest shocks to supply will keep sending prices rocketing higher." Other than the oil embargo of 1973, we haven't experienced a "shock to supply" which was the cause of sharply higher energy prices. The Times does correctly refer to the role of speculators and hedge funds ("But to speculators, volatility means the potential for big profits, so hedge funds and investment banks pile in to make bets, bidding oil futures up to unnatural highs and making the market even more unstable") but almost in a mocking tone of voice as if to give such speculators a "free pass" to manipulate prices.

The editors of the NY Times should learn how to read the weekly petroleum inventory reports put out by the Department of Energy where for many months the overall assessment has been that "Total commercial petroleum inventories ... remain well above the upper end of the average range for this time of year."

Further, the editors at the NY Times need to educate themselves and their readers about something called the Strategic Petroleum Reserve (SPR) which has over 680 million barrels of oil in storage just in case we do actually see a supply disruption, such as Hurricane Katrina.

The "roller coaster" simply has not been due to either an increase in real demand nor a reduction in real supply. Why the Times suggests otherwise is incomprehensible and flat out unjustified.

Shame on the NY Times for once again allowing the speculators (and the Wall Street firms that enable, encourage and aid and abet them) off the hook.

Underlying energy prices may indeed trend up gradually in coming decades as demand gradually rises and supply gradually falls, but the roller coaster that is with us now has had nothing to do with either supply or demand or the long term outlook for supply and demand. Supply and demand for energy futures and other speculative instruments, yes, but real demand by real users of energy products, no.

Maybe the editors at the NY Times did have good intentions to promote alternative energy sources and more efficient transportation and heating and cooling systems, but for the editors to hitch that argument to the speculative "roller coaster" was a very bad idea and shows a careless insensitivity to the needs and budgets of real consumers.

I only wish that the editors would assign more reporters to ferreting out the truth and extent of speculation in commodities and the extent to which everyday consumers are seriously harmed so that a bunch of deep-pocket Wall Street firms can line their own pockets.

-- Jack Krupansky

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