

"Keep gasonline prices high, forever" - iamelgringo
http://www.nytimes.com/2008/05/28/opinion/28friedman.html

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justindz
I heard a great interview on C-SPAN yesterday morning (I can't find a
reference, sadly) with an economist preparing to testify to Congress that the
chief problem with prices is that they are not currently based on supply and
demand.

His argument is that pricing is being driven by largely unregulated
speculation via the "Enron loophole" providing unsupervised markets in which
to buy and sell between speculators for the primary purpose of artificially
increasing the value of the asset.

If this is true, then Friedman would be repeating the supply problem as the
chief factor in increases when that might only be part of it and _might not_
be the biggest part. The economist also claims that increasing supply will
have a disproportionately small impact on the cost because the cost is not
being principally set by supply vs. demand and therefore it would just
provider larger hordes of strategic assets for the companies engaged in this
practice who are hedging their positions against the dollar decline.

Is anyone smarter (and sexier!) than me able to bolster or refute that claim?

~~~
nostrademons
I've heard varying opinions on the claim that speculation is driving up prices
instead of supply & demand. Economists seem split down the middle, with some
saying that it's all traders stockpiling oil in anticipation of future price
increases and some saying it's rising demand from India and China. Personally,
I believe it's speculation, but that's only because every other time we've
seen a 50% rise in price over 6 months (housing, dot-com) it's been a bubble
rather than a sustained increase.

This is one of those things that it's impossible to know for sure either way,
since secret market manipulations are by definition secret, and anyone who
knows has a vested interest in not telling you.

Regardless, Friedman's point holds either way. If it's a supply problem, then
a gas price floor encourages the development of efficient vehicles and
alternative energy technologies, providing us with alternative supply sources.
If it's a demand problem, a gas price floor reduces our consumption demand,
and then India and China can go deal with the troublesome states in the Middle
East (let them handle Iraq!) If it's a speculation problem, a price floor
encourages development of alternative energy, which cuts demand for petroleum
and ends up causing a price collapse, with speculators left holding the bag.

~~~
ericb
My father was in charge of purchasing the natural gas (which is intertwined
with oil at the extraction and pricing levels) for most of Rhode Island for
years. When I ask him about this, he says capacity comes on only slowly
because of the massive investments involved and time to build out, so supply
lags demand, which is why prices go from a buck a gallon to four in a few
years. Yes, it's more profitable to increase capacity, but if you decide to
invest now, you don't see the benefit for years and in the meantime, prices
are high. If everyone decides to increase capacity, and it comes online all at
once, prices fall apart. It's an interesting game theory problem in that
regard.

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steveplace
There's more than one thing going on when you talk about oil prices.

You've got two sides: supply and demand. Currently it's a supply problem. We
can only get so much oil per week into this country. There's only so much
pipeline and so many tankers that we can send into our country. We are facing
demand destruction. People decreased driving by 11 billion miles this March as
compared to last March. Decreases in driving YoY have occured three other
times and that was during severe oil crises.

[http://calculatedrisk.blogspot.com/2008/05/us-vehicle-
miles-...](http://calculatedrisk.blogspot.com/2008/05/us-vehicle-miles-vs-
real-gasoline-price.html)

See this interview if you'd like to learn more about the fundamentals going on
currently.

[http://bigpicture.typepad.com/comments/2008/05/t-boone-
picke...](http://bigpicture.typepad.com/comments/2008/05/t-boone-pickens.html)

But there is speculation, that is a fact. The total barrel capacity for
Cushing, OK (where light sweet crude is delivered) is around 65 Million bbd.
The current open interest for this contract on the NYMEX is about 300 Million
bbd. These contracts aren't exercised, they are rolled and such.

Not only are their speculators, there are hedgers (transports, airlines, UPS,
etc) so that accounts for some.

I am not anti-speculation. Speculators give liquidity to a market and
encourage price discovery. Upping the margin requirements to trade /CL is a
dumb idea. It would lead to further price manipulation.

We do need to get rid of OTC (over the counter) markets because they don't
show us the price. The same can be said with credit default swaps (CDS), but
that's another story. Provide an open market, and that will help.

If you want to scare out the speculators, tap into the Special Reserve for a
week. That should cause a pop in the bubble. Clinton did it. Bush II has been
pumping oil into the SPR and wanted to keep adding in and double the capacity.
The numbers were something like 5x as much than what we had before he came in.
Legislation just recently stopped him from adding more.

In terms of policy changes, you can put a price floor on crude contracts, say
70 bucks a barrel. Anytime the price goes under that, the government collects
the difference and puts that money to work in a green hedge fund/pension
hybrid.

Another policy would be to create economic incentives for people that buy
cars. I've already explained this over on my blog (yes, shameless plug):
[http://www.graduatedtaste.com/2008/05/27/a-solution-to-
the-e...](http://www.graduatedtaste.com/2008/05/27/a-solution-to-the-energy-
crisis-part-1/)

~~~
maw
If the stories about used car lots full of SUVs are true, there are already
economic incentives at play.

------
TrevorJ
The free market will do the job. in 5 years we will be laughing about a 'price
floor' at 4 bucks --gas won't be that cheap again until demand falls. Price
floor or not.

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stcredzero
Whatever happened to "The power to tax is the power to destroy?"

Folks like the author want us to tax the automotive petroleum fuel industry to
destruction. But most of us suspect that this won't be politically viable. So
just how much "power to tax" is there?

The real hurt is the power to subsidize. (Which includes the power to
selectively tax less.)

------
tx
Funny thing how oil automatically translates to cars and SUVs in ears of most
consumers, while in reality transportatino sector consumes only about 18% of
oil, at least in US. And that includes (!) aviation.

There was an edutorial on the subject by one of C/D editors, that's where I
got my number from.

I want gazoline prices to be around $8 to completely eliminate vehicles
heavier than 2,200lb, and force lemmings to live closer to the city, but I
want oil prices to come down, because it really increases costs of nearly
everything. Tax on gazoline looks like a candidate for a solution, although I
am never going to support more taxes.

~~~
nostrademons
Huh? I just read _Blood and Oil_ by Michael Klare. The number given there was
67% for transportation, with 40% of that for individual automobiles (much of
the rest is for trucking - aviation is a relatively small component). That
also seems to square with various online sources:

[http://www.ucsusa.org/clean_energy/fossil_fuels/offmen-
how-o...](http://www.ucsusa.org/clean_energy/fossil_fuels/offmen-how-oil-
works.html)
[http://cadlab6.mit.edu/2.009.wiki/anchor/index.php?title=Per...](http://cadlab6.mit.edu/2.009.wiki/anchor/index.php?title=Percent_of_world_oil_consumption_used_for_transportation)
[http://www.oildepletionprotocol.org/getinformed/oilandtransp...](http://www.oildepletionprotocol.org/getinformed/oilandtransportation)

