A Christian Liberal is NOT an oxymoron.

Posted by XT on May 20th, 2008 in US News

The all-too familiar news is that oil is expensive. And, of course, oil prices continue to climb. The price for light, sweet crude stopped just short of $130 a barrel. In the “DUH!!!” news of the day:

Meanwhile, the Labor Department’s producer price report indicated higher energy and food prices might be seeping into other parts of the economy — compounding investors’ concerns raised by higher oil. The department said wholesale inflation edged up by 0.2 percent in April following a 1.1 percent jump in March, but outside of food and energy, prices rose by a faster 0.4 percent — double what analysts expected.

Yes, if you raise the price of oil, the price of everything else will surely follow.

Those of you’ve read anything I’ve written on the subject (both of you) will not be surprised to see the price of oil jumping after this news hit the stands:

The dollar has declined since Sept. 18, when the Federal Reserve began cutting rates to ease financial-market strains and stave off a recession. The U.S. central bank cut rates seven times while the ECB left rates unchanged. The dollar fell 1 percent to $1.5664 per euro at 3:37 p.m. in New York.

The price of oil is going up as the value of the dollar goes down.

Here’s a chart of the value of a dollar versus the euro for this year:

But don’t worry - it’s just “speculation” (from the first linked news article):

“The oil price rise is being done by speculators and does not reflect market fundamentals,” he said. “But, it still has an effect on the consumer — and investor confidence is equal to consumer confidence, which has been having swings as of late.”

That’s the opinion of Peter Cardillo, chief market economist of Avalon Partners. I’m not sure I trust him.

Back in December, he was saying:

Oil prices shot up $1.49 to $89.81 in electronic trading on the news. Prices had fallen from a record high near $100 a barrel to under $90 in the last week on hopes of a production increase from the oil cartel.

Peter Cardillo, chief market economist with Avalon Partners, said that even though higher oil prices are not good for the market, the OPEC decision did provide one lift for the markets, signaling that oil producers expect global consumption and economic activity to stay strong.

“Psychologically the fact that OPEC did not open its spigots shows that there’s enough demand out there,” he said.

If you accept what he’s saying, then you would think that if there weren’t enough demand that OPEC would “open its spigots”. That’s stupid. They wouldn’t pump oil into a glutted market. I think what the continued OPEC intransigence means is that they are probably close to the limits of their pumping capacity. If they dumped another 30,000 barrels of oil on the market, it still wouldn’t push the price below $100 a barrell - they’d still make a windfall. Why not do it? Answer: They can’t.

But the explanation of the day is that “speculation” is pushing the market beyond where it would be otherwise. Of course, what they don’t explain is that this is always true. The oil market trades six months in advance, so anyone who trades oil is speculating that the price of oil will be higher in six months than it is right now. Or, if they buy short, they are speculating that the price of oil will be lower than it is right now. Either way, it’s speculation.

Futhermore, there is a real disconnect between the idea that speculators are pushing the price of oil higher than it should be and that they are, in fact, profiting from it. If you buy oil at $120 a barrel and sell it at $125 a barrel, then you make five dollars a barrel - exactly as if you bought it at $40 a barrel and sold it at $45 a barrel. Speculation doesn’t help speculators at all. It’s just a fact of the market.

Who does it help? The producers. The guys that physically pump oil out of the ground. You see, the cost of doing that hasn’t really increased much at all since oil was $36 a barrel. So they are getting close to a hundred bucks a barrel profit - but is it speculation? How could they possibly drive it? They would somehow need control of the market, and even the Seven Sisters don’t have that power.

And neither does OPEC. So this idea about sueing them for jacking up prices is stupid - and also completely lacks any enforcement mechanism. It also betrays a basic lack of understanding of customer-producer relationships. If I sue OPEC and win, where will they get the money to pay whatever fine is imposed? OH, from jacking up the price of oil. Duh.

Speculators - which just means “investors in oil” may be pushing oil higher than it should be. But the reason is that because oil is a good investment for the next six months. We are pretty much guaranteed that the Bush Administration is not going to change it’s borrow-and-blow fiscal policies and it isn’t going to shore up the falling dollar. It’s going to pass on a horrible economy to the Democrats - who will have to cut spending and raise taxes to fix the damn mess. Then Republicans will run on “Democrats raise taxes”.

Here’s something else to keep an eye on - the prices of precious metals have been on the rise, too. Just today, gold is up $14, silver is up $0.65, and copper is up $0.01. In January of 2000, the price of gold opened at $282, now it is $914. Are speculators also causing gold prices to rise precipitously? Of course, they are, but the point is that no one is screaming about gold because we don’t burn it. As long as gold prices are rising along with oil, it’s a pretty good indication that we aren’t developing an oil bubble.

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