It’s All Speculation?

From BusinessWeek comes the delightfully simplistic and delightfully wrong story entitled “High Oil Prices: It’s All Speculation”.

The article begins with a straw man argument invoking the California Energy Crisis of 2001. Ed Wallace juxtaposes a quote by Vice President Cheney suggesting that the California Energy Crisis had resulted from poorly planned deregulation (which, in large part it did) with one from Energy Secretary Samuel Bodman that suggested oil prices are a result of supply and demand (shocking, I know).

The sleaziness of comparing the current situation to an unrelated, emotional charged event is not unusual for the world of print editorials. Actually, the California Crisis involved energy producers charging a higher wholesale price, whereas Mr. Wallace is suggesting that oil purchasers are inflating prices. That’s what this speculation rhetoric means after all. Allegedly, investors are buying oil at higher than market value and then reselling it to the market and turning a profit. It’s not like hedge fund managers are hoarding oil in their basement, every drop of oil they buy on the futures market gets resold in a short amount of time. “Speculators” have no ability to limit oil supply to boost prices the way electricity producers with monopoly power can. Therein lies another flaw with the comparison, whereas oil is a commodity that is traded worldwide and easily stored or transported, electricity, particularly in California circa 2001, is not. The system needs to have the capacity to meet peak demand all at once. Generating must be fairly local, because even with high-voltage A/C lines, moving electricity over great distance is expensive, particularly as the infrastructure is in bad shape. (For more on this, see The Oil Drum here). OPEC has some monopoly power yes, but the worldwide oil market is a lot more competitive and a lot harder to “game” than California’s power was in 2001.

Mr. Wallace then proceeds to take a number of news excerpts in order to assert that there is no reason for high prices. They don’t relate to his flawed premise and are so out of context that they are at best meaningless and at worse deliberately deceptive. He invokes the minor dips in demand in the United States and other developed nations as a sign that the price has been set at an unfair level, when an economist would say that the market is responding to the higher price caused by the supply crunch. It’s pretty straight-forward: rising prices arise because the quantity demanded is too high for the market. Wallace even bizarrely cites that Iran has a large amounts oil in storage now, even though The Economist already explained that this is not the light, sweet crude that we need so desperately (that was a month earlier in a story already linked on this blog, apparently Mr. Wallace missed that issue).

The truth is that our cup runneth over with these “speculation” witch hunts, but few have been so unapologetically terrible as this one by Ed Wallace. Congratulations are in order.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: