Ben Stein How Not to Ruin Your Life

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.