Oil Prices — What President Obama Doesn’t Understand

Supply and demand is the rule of the market

     

gas pump spewing gas 630 flickr 300x300 Oil Prices    What President Obama Doesn't UnderstandIf you think gasoline prices are volatile now, stay tuned. President Obama’s plan to clamp down on oil speculators is going to make things worse.

I’m sure you’ve seen the news by now.

The president wants to clamp down on so-called “oil price manipulation” and has proposed a $52 billion plan to increase federal supervision of oil markets.

What the president doesn’t understand is that the oil markets already have this function built in.

Speaking from the Rose Garden last Tuesday, President Obama noted specifically that we can’t afford to have “speculators artificially manipulating markets buy buying up oil, creating the perception of a shortage and driving prices higher – only to flip the oil for a quick profit.”

Evidently, the president hasn’t passed Econ 101.

If he had he would know that prices on everything from eggs to houses are by their very definition self regulating.

Speculation, as opposed to manipulation, is a vital part of the markets – they are not the same thing despite the fact that the president is interchanging the terms.

If prices are too high, people stop buying. If prices are too low, they stop selling. By authorizing $52 billion in oversight, he’s chasing a ghost that he’ll never catch.

The Real Problem with Oil Prices

The real problem is that the United States consumes 20% of the world’s crude but only produces 2%. It comes a time when oil demand is expected to rise more than 25% (to 105 million barrels a day) by 2015, according to a new report titled Oil and Gas: A Global Outlook by Global Industry Analysts, Inc.

If you want the biggest piece of the pie from the deli, you have to pay a premium.

There is no hocus pocus and there’s no additional oversight necessary. Rather, we need to enforce the laws we already have on the books.

Sure the $10 million fines he’s jawboning about (up from $1 million) sound great but they’re really a non-starter. In fact, given that Exxon (NYSE: XOM) alone generated an average of $1.33 billion a day in 2011, they’re little more than an acceptable cost of doing business. Nice try.

Take gasoline, for example.

Prices have jumped 78.2% since the president took office and that doesn’t sit well with the party faithful who are convinced that evil oil price speculators are responsible.

They are distraught that traders put hundreds of billions of dollars into energy every month because that may cause prices to rise.

This is not complicated. Any time there are more buyers than sellers, prices go up. Any time there is more demand than supply, prices go up.

Contrast what’s going on in the oil markets with what’s happening in natural gas.

Prices for natural gas are at ten- year lows. Demand has risen but supply has risen faster. There are more suppliers than buyers. So natural gas prices drop.

Natural gas, by the way, is traded by many of the same traders who trade oil.

 
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