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Ben Stein How Not to Ruin Your Life

Ben Stein, How Not to Ruin Your Life

Why Oil Will Keep Falling

by Ben Stein

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Posted on Monday, August 4, 2008, 12:00AM
I'm not much of a believer in conspiracy theories. I've seen up close and personal how wrong they were in the case of my old boss, Richard M. Nixon. He was not a criminal mastermind. He was not paying attention to a bunch of juvenile delinquent aides and they did him dirt. It was a case of an absent minded father, not a KGB plot.

But every so often something happens in the world of finance that is at least a bit like a conspiracy. The Drexel-Milken junk bond fraud was a conspiracy, at least as I saw it (though I could be wrong). A number of instances of looting Texas S&L's in the eighties were conspiracies. There were whole good-sized companies basically run as conspiracies in the S&L days.

Now, I see something that looks a bit like a conspiracy happening in energy commodities. I'm not at all sure it's an illegal conspiracy so maybe that makes it not a conspiracy at all. But in any event, here's what I see.

The price of oil in dollars was recently up by roughly 50% since the beginning of the year. In dollars, it was up roughly 100% recently compared to a year ago. Now, to be sure, much of that has been caused by the fall of the dollar in international markets. Oil is "only" up very roughly 15% in euros, which might make for a cleaner comparison with the past.

But why is oil up even 15% in euros in one year? What has happened to move it that much? Every self respecting free market observer says it's just supply and demand. Demand, so they say, is rising in the Far East and in the Middle East, and supply is stagnant. Hence, the rise in price.

And to some extent, this is true. There has been greatly increased demand from India and China and the Mid Eastern petro states. And supply from Iran, Venezuela, Mexico, and Nigeria has not been coming to market at the rates hoped for. This is because of poor oil field maintenance and political problems.

So, you might expect some effect on price from these factors and we've gotten some. But there's been another immense factor: US demand has been falling.

The US of A, by a million miles the world's largest consumer of energy products, especially oil and natural gas, has actually been a source of declining demand in the last few months. This is an immense factor in world oil arithmetic.

Now, it would take far better analytical powers than any human or machine has to produce an equation that tells you what the 'right' price of oil is under these circumstances. But history is a guide. In the past, when US oil demand has fallen, world oil prices have literally collapsed.

Or look at it another way: As of a year ago, everyone knew there were problems pumping in Iran, Nigeria, Venezuela, and Mexico. Everyone knew Russia was not getting as much oil to market as had been expected long ago. Everyone knew that Chinese demand was rising a year ago. The price then was about (very roughly) $70 a barrel. There is not one single brand new factor in the market to explain why that price has gone up so much except the fall of the dollar and as we have seen, that only explains most of it, not all of it.

Wait. I take that back. There has been one huge new factor. A staggering rise in purchases by speculators of contracts for future delivery of oil. This has been a new and gigantic effect in the market. This same effect gave us a bubble in high tech. It gave us a bubble in gold and silver about thirty years ago.

Some people say that buying oil futures cannot affect prices because someone else is always selling. But then if that were true, no price would ever change. Concentrated buying has to affect the market price for oil.

Or, to put it another way, if it's the only new factor in the market, we have a clue about what's causing the price changes.

Now, I don't say it's been done by agreement and secret monopoly buying. I don't say it's illegal. But it tells us something big, in fact two big things: one, the price will fall further. Commodity bubbles always end. Second, it's not being done by the oil companies, and they deserve no blame.

It also tells us that when we are buying a car, we might not expect to see high gasoline prices forever. We might also be wary of putting a lot of our money into commodities. Bubbles can take a long, long time to correct, but they always do.

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395 Comments

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  • hockeytape - Thursday, August 28, 2008, 6:12PM ET  Report Abuse

    • Overall: 1/5

    Ben Stein is not an economist, although he sometimes plays one on tv. I was watching two years ago when he ridiculed Peter Schiff for recommending that everyone get out of financial stocks, and when Mr. Stein called Merrill Lynch his "top pick" because it was "undervalued". If you had listened to Mr. Stein's advice over the past 3 years, you would have lost over 60% of your capital. People like Bill Miller, Steve Forbes and Ben Stein are a product of the 1980 to 2000 US equities bull market, and that is all they know. Perhaps one day the World will again revert to that environment of high growth, low inflation. However, that may be many, many years from now, and you may not have much capital left if you blindly follow their advice. Everything goes in cycles, and inflationary commodities bull cycles have tended to average 15 years in length over the past 200 years. That means we're only around half way through this one. You will know the end of the commodities bull market has arrived when "experts" like Mr. Stein go on tv to recommend commodities and oil stocks with abandon. Of course, they will claim that they were right all along, and you will never see them admit that they were saying just the opposite a few years earlier when prices were lower.

  • Yahoo! Finance User - Sunday, August 24, 2008, 6:46PM ET  Report Abuse

    • Overall: 3/5

    Isn't it ironic how the "naked short selling" rule was put in to protect financials following the July 15th capitulation of financial stocks...and since then the commodities have come down, just look at the OIH chart as an example. Purely coincidence? I don't believe so. The Fed bows to the big financial companies' pleas for protection and as a by-product, inflation (by way of commodities prices) is tamed. The Fed isn't dumb. Market manipulation? You bet. A lot of investments and investors holding commodities, including pensions, got screwed. Just remember, the Fed's job is to bail out the companies which are in a deep load of crap due to their own greed...at taxpayers' expense.

  • Yahoo! Finance User - Wednesday, August 20, 2008, 9:59AM ET  Report Abuse

    • Overall: 1/5

    Ben, you're rong again. Oil is at 116 and climbing. Stop making stupid prediction about things that you're clueless about. Stick with comedy and unfortunately you suck in that department too.

  • passiveguy - Sunday, August 17, 2008, 2:29PM ET  Report Abuse

    • Overall: 5/5

    Conspiracy or not; you are right on. The point is too many institutions are holding energy related instruments and the dollar rise is not going to stop. There was a report on oil on one day that seemingly caused a spike. If you take out that spike, the drop so far has been only 7%. But the number of people holding the oil related investments are too many (including large pension funds). They all have to unwind before someone else can fill their shoes. And you are right on the mark that those shoes have left the market. Demand from USA is the key to energy prices and that genie has been extinguished. China and India are just stories to support theories. They dont play enough role to push up prices. Oil just only started falling. More to come. Same to do with commodity prices. So many people have drawn a nice picture to explain all this nonsense. Dollar started its upwardly move and nothing in the horizon I can see that can stop it. If you catch my drift, the oil bubble is about to burst and so is the commodity bubble. Then where will the new money hide? I would like to know.

  • cynthiamazzulla - Saturday, August 16, 2008, 2:25PM ET  Report Abuse

    • Overall: 5/5

    Ben, you got it rite,it's a conspiricy and the OIL CO'S are part of it.

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