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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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405 Comments

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  • Oliver - 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.

  • Cyndi - 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.

  • Independent - Friday, August 15, 2008, 7:20PM ET  Report Abuse

    • Overall: 1/5

    The usual myopic thinking. Oil is becoming a scarce commodity just when demand for it is rising inexorably. What we've seen in the past month or so is just fall of demand at the margins. The longer term trend is up.

  • Mike - Thursday, August 14, 2008, 2:32PM ET  Report Abuse

    • Overall: 5/5

    It's pretty revealing to know that oil prices are up only 15% in Euros. Sounds like Fed policy has more impact on US prices than we'd like to admit.

  • Yahoo! Finance User - Wednesday, August 13, 2008, 10:58PM ET  Report Abuse

    • Overall: 1/5

    Why does this fool still have a financial advice column. His track record sucks as bad as Grampa Greenspan. When is someone in the business news going to call out these losers of bad advice? Have either of them read the theory of the Hindenburg Omen which was triggered in June and is now in effect until mid-October? You and Greenspan are about as good and smart at finance as Bush and Rice are about peace. All four of them need to retire. RETIRE BEN! Go teach the theory or creationism you are so big on you nonscientist!

  • Yahoo! Finance User - Wednesday, August 13, 2008, 10:06AM ET  Report Abuse

    • Overall: 2/5

    dumb

  • Karl - Tuesday, August 12, 2008, 9:18AM ET  Report Abuse

    • Overall: 5/5

    Good job Ben. Still people here that only want to trash Ben because of a movie that is now getting fairly old. I still ask, what difference does it make if Ben is a creationist when it comes to discussing Economic issues? Why don't you guys grow up and focus on the topic of the article instead of spewing hate?

  • Yahoo! Finance User - Monday, August 11, 2008, 9:16PM ET  Report Abuse

    • Overall: 5/5

    I had heard about the traders cranking up the price of oil, but not as clearly as this article.

  • __A_YAHOO_USER__ - Monday, August 11, 2008, 8:55PM ET  Report Abuse

    • Overall: 1/5

    Ben, get out of this business, you are clueless. Your crystal ball sucks big time!

  • robert - Monday, August 11, 2008, 7:54PM ET  Report Abuse

    • Overall: 2/5

    change the margin requirments on oil and you will see a big drop.

  • J. - Monday, August 11, 2008, 7:41PM ET  Report Abuse

    • Overall: 3/5

    To Terry, who wrote: "We have proven time after time we can drill and not make a mess. And if we did we have the know how to clean it up. " Apparently, you weren't around to witness the results of the oil spill off the coast of Southern CA in the 1960s. Oil everywhere..on the beach on the birds (dead of course), on the fish (dead of course), on your body if you went to the beach--oil on everything. Sure it cleans up--in 20 years. Forget oil. Think LIGHT RAIL and public transportation--make it fast and cheap. BIKE paths (would help with the obesity epidemic too). WIND and SOLAR. Germany uses more solar than any country in the world and they don't even have sun in the winter. Just think how much more efficient it would be in the USA. Subsidize solar for heating and hot water--we've subsidizing bloated budget nuclear power plants for decades. We have to change our old ways and thinking. Stop polluting our earth with the by-products and pollution from petroleum. Let the Arabs keep their oil. Trouble is, we've had an administration of Texans, whose goal has been to make us use more oil, and not face up to the facts of change. There are lots of non-polluting alternatives.

  • Yahoo! Finance User - Monday, August 11, 2008, 6:10PM ET  Report Abuse

    • Overall: 5/5

    Great article Ben. I almost forgive you for telling us it was a good time to go long equities in the summer of 2007. But, we can't be right all the time.

  • petey tweed straw - Monday, August 11, 2008, 6:08PM ET  Report Abuse

    • Overall: 5/5

    Mr.Stein,, I agree with you 100%. And to take it one more level, most common people dont have a clue how much natural gas and oil are beneath our own feet here in the USA.. Why has a energy co. bought up all the mineral rights in Arlington, Tx. Could it be that a vast amont of oil and natural gas is under the city of Arlingtons dirt. The energy co. wouldnt be buying it up as fast as it can if nothing was there. We have so much oil and gas in this country it will make your head spin. I worked in the Gulf of Mexico for 27 yrs. and during that time spoke with many geologist that will tell anybody the same thing. We have proven time after time we can drill and not make a mess. And if we did we have the know how to clean it up. Dont get mad at the oil companies. If you want to get mad at someone go after the guys on Wall Street. For a oil company to lease a 250 class drilling rig for the Gulf of Mexico, they will pay apox. 60,000.00 to 75,000.00 a day. Yes, A DAY. Thats not being sure that you are going to hit pay dirt. If a oil co. leases a Semi you are talking upwards of 250,000.00/400,000.00 A DAY. We can do it, so let us do it. DRILL,DRILL,DRILL. My old daddy said, Nothing Ventured Nothing Gained. Terry

  • Yahoo! Finance User - Monday, August 11, 2008, 1:22PM ET  Report Abuse

    • Overall: 3/5

    I don't think the numbers are right. The euro is up about 15% over the year, and oil is up about 75%. So it's absurd to say that oil is up only 15% in euro terms. It's more around 45-50%.

  • jay B - Monday, August 11, 2008, 10:08AM ET  Report Abuse

    • Overall: 2/5

    You mentioned that the price of oil in Euro is up 15% year to date, but failed to mention the percentage increase of euro to USD. An interesting sideline according to Economist magazine, the variance between the top five oil producers and top five oil consumers is 3% from January 2008 to June 2008. Blame it on the oil speculators, just like the fall of British pound not too long back.

  • Yahoo! Finance User - Monday, August 11, 2008, 9:42AM ET  Report Abuse

    • Overall: 3/5

    with the increased demand for fuel efficient vehicles, the awareness of people to conserve energy as well as the investment of some group of people for alternative energy (wind, renewable, solar, etc.) and once it reaches critical mass and caught up to bring the necessary change and development..and there will be companies who will try to spread that positive development and change to the other parts of the world, the demand for energy will increase but it will be supplied in different fronts that demand for oil will not increase exponentially that it will go high over the ceiling (or sky) for that matter. technology will always catch up to straighten the crooked imbalance in this world. people will always be resilient to this kind of problem, now or in the future. peak oil or not, people will always try to make the positive change that we all need.

  • BradleyD - Monday, August 11, 2008, 7:03AM ET  Report Abuse

    • Overall: 5/5

    Pretty good summary.

  • William - Sunday, August 10, 2008, 11:24PM ET  Report Abuse

    • Overall: 1/5

    This guy is a nut. Can you spell "tipping point?"

  • Francisco d - Sunday, August 10, 2008, 10:58PM ET  Report Abuse

    • Overall: 3/5

    we are far from runing short of oil ! ... and the press does not tell us, because it is a good-buy present from the president, to the people that paid his election...

  • robert - Sunday, August 10, 2008, 10:13PM ET  Report Abuse

    • Overall: 4/5

    when ben speaks i listen

  • Bob - Sunday, August 10, 2008, 9:45PM ET  Report Abuse

    • Overall: 1/5

    Ben, I was pretty sure you were one of the honest ones for a long time. It's sad to watch you on Kudlow these days as you trade your integrity to spout the latest Repoublican talking point right out of the RNC play book. This is not a football game pal. This country's financial strength was taken down big time as the dogs you have chosen to lie with looted and pillaged with the consent, if not the urging, of the Republican leadership over the last seven and a half years. You have been in a position to speak out against the deceit and dishonesty and took the low road. What you are promoting has shameful repercussions for your and the progeny of America for the next hundred years. I'm sure you enjoy the benefits of the rape of our country. It's too bad your children and grandchildren and their children will have to pay the price for your unconscionable behavior.

  • Jackson - Sunday, August 10, 2008, 8:56PM ET  Report Abuse

    • Overall: 1/5

    Ben, the problem here is that you are a Republican; as such, you are the problem, not the solution. Soon, because the American people will vote for change, you and all the other NeoCon fascists, Texicans, Democratic Imperialists, rude country bumpkins, and the one and only Crawford Texas Village Idiot, will retire from public service to start work on the GW Bush Presidential Library, never to be seen again (Thank God All Mighty). You will, of course, have to work with GW on the proper spelling of L-I-B-R-A-R-Y, not L-I-B-E-R-R-Y! You and Phil Gramm (Pinky and the Brain) will find out fast that, while both of you consider yourselves experts in every field, in reality it's all in your heads! John George North Carolina

  • Yahoo! Finance User - Sunday, August 10, 2008, 4:54PM ET  Report Abuse

    • Overall: 1/5

    remember your projection of subprime? It is not a big thing. The overall housing picture was good. So? what do you think of housing market now? How long this decline will go? I see no evidence in your article about why commodity will fall further. How do you make such a big projection, AGAIN? I see no data to support your opinion from economist's perspective. So we just got a biased OPINION, AGAIN.

  • A N - Sunday, August 10, 2008, 3:41PM ET  Report Abuse

    • Overall: 5/5

    As always, rational wisdom from one of the best.

  • TrixieDavid - Sunday, August 10, 2008, 3:18PM ET  Report Abuse

    • Overall: 1/5

    Ben, You're a funny guy but pretty much washed up as an economist, if in fact that label even applies. Stick to comedy and game shows. Your Nixon and Milin references illustrate that you stopped thinking quite swome time ago. No offense, really. Like I said, you're a funny guy, but far from an economic expert as Yahoo has you labeled. Thanks for you time. REM

  • David - Sunday, August 10, 2008, 1:12PM ET  Report Abuse

    • Overall: 2/5

    Ben, If I recall correctly you have also stated the problem in the mortgage industry was a "mere 1% of mortgages" and damage would, at worst, cost about 300 billion dollars. Take off your rose colored glasses.

  • Robert W - Sunday, August 10, 2008, 9:02AM ET  Report Abuse

    • Overall: 5/5

    As always a very logical and compelling observation ,the reality is the dollar sank and "the store of value " became commodities. Commodities can be equated with a fear index.It's not what will happen,it's what may happen that drives the price. We have an opportunity now to discover and move from oil to an alternative to power our transporation needs.However we will have to "clean house" first.That means stop voting in the same old folks with new will or vision.

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