I hope you all had a great 4th of July. For many parts of the country the 4th is the biggest produce week of the year. It takes a lot of work to get the produce from the field to consumers. With gas prices up it affects the bottom line from the field to the table. My pool questions this week is “Are speculators driving the price of oil to record highs?”
This week the news articles I chose to share with you focus on crude oil from a different perspective so make sure and read them.
by Alan Reynolds
This article appeared in the New York Post on June 6, 2008.
The price of crude oil has jumped as high as $135 lately, up from $87 in early February. The news encouraged some Wall Street analysts to suggest oil might approach $200 before long. In fact, that's quite impossible: The world economy can't handle current energy prices, much less a big increase. Which in turn means that oil prices will fall.
Market analysts often claim oil prices are almost entirely determined by supply. Demand is said to be insensitive ("inelastic") to price. The standard example is that many Americans have to drive to work and most gas-guzzling SUVs will still be on the road even if the affluent few can trade theirs for a Prius. Whatever the price, we'll pay it.
This idea rests on two fallacies. The first is to exaggerate the United States' importance when it comes to ups and downs in worldwide oil demand. In fact, America is using no more oil than we did in 2004.
The second fallacy is to greatly exaggerate the importance of passenger cars in the United States. It's true that Americans are driving less and buying four-cylinder cars - but that's not where we should be looking for serious "demand destruction."
by Richard W. Rahn
This article appeared in the Washington Times on June 25, 2008
Are you aware that without speculators, most food and physical products would cost a whole lot more? Many members of Congress have been looking for the villain who is causing gasoline prices to soar (they seem to be mirror-less). A large number, mostly, but not exclusively, Democrats, have decided that speculators, or at least "greedy speculators," are the villains.
Many members of Congress make up "solutions" to things they do not understand and cause problems where there are none or make real problems worse, which explains the current run-up in gasoline prices. There are "futures" markets in most basic agricultural, metals and energy products. In a futures market, it is possible to buy or sell things for delivery at some specified date in the future. The reason the futures markets developed formally a couple of hundred years ago, and are so important to the world economy, is that they enable producers and consumers to offset the risk of price changes to those willing to take the risks.
