Monday, January 12, 2009

The Price of Oil

If you missed 60 Minutes last night, you missed this report on how the price of oil hit $147 last summer, then finished the year worse than the Buffalo Bills.

Watch CBS Videos Online

The most ridiculous thing I heard last year was the claim that speculation had nothing to do with the price. The number of contracts written on oil had multiplied many time, there were hedge funds set up to trade oil, and ETF's to make it easy to speculate. None of those buyers was going to refine the stuff into gas! And all that money moved into commodities has got to bid up the price.

What I am also guessing, and this report doesn't explore, is that the speculators were borrowing money to do this, and when the doody hit the financial fan, there was no more money to borrow, which hastened the oil drop during October and November.

Having been a day-trader during the end of the tech bubble, I could see the same behavior in the oil market last year. Analysts were making wild claims about future prices that moved the market by themselves. And all news was bullish news. When Iran or the Bushies made threatening statements, the price would jump $4 on expectation of attack.....but when the attack never came, the jump stayed in the price.

Let's not be too hard on these guys though, as some good has come from this. $4 gas made Americans see the folly of driving cars far bigger than they need, and hopefully the threat that we could see $4 again will keep us thinking that way. We suffered some short term pain for, hopefully, long term gain, as burning less oil is better for this country in so many ways.

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