Bush And The Gas Bubble

Why is the price of gas so high? Why is crude oil trading at all-time highs? It seems like everyday we set a new record price for crude oil. Has there been an outbreak of another war in the Middle-East that I have missed? What I have learned is that the price of gas and the record crude oil prices have nothing to do with reality. The truth is that all those rich speculators and hedge fund managers that caused the mortgage crisis have now when that bubble has burst moved their money from the stock markets to commodities. That’s right with the market taking a beating from the credit mess the “smart money” has moved to oil speculation.

According to the statement from OPEC, the global market is "well-supplied, with current commercial oil stocks standing above their five-year average." Today's prices don't reflect market fundamentals, OPEC said, but the weakness of the dollar, rising inflation and the "significant flow of funds into the commodities market."[1]

So if there is not a shortage of oil why am I paying through the nose for gas? The problem is two fold. First there is greater consumption in the world, so what was enough five years ago is not enough today. With the addition of China and India wanting to fuel their industrial revolutions the reserves are not going as far as they use to. Of course you also have the US marketing and buying SUV’s and “crossovers” like there is no tomorrow. I’m sorry I need some help on this one, we have been aware of the problems of dependency on oil and other non-renewable fuels since the 70’s and yet here it is in 2008 and instead of having vehicles that use less fuel we have the biggest vehicles in our history. Newsflash – Crossover vehicles are not smaller fuel efficient SUV’s, they are giant station wagons.

Not exactly. None of this price run-up could be possible without the unbridled consumption of oil in the United States, by far the largest oil user, and the soaring consumption of rising economies such as China and India. Increasing political tensions make shortages a possibility, and markets factor in that risk, which drives prices higher.

"I think the biggest problem is pure fear. Right now there is no supply problem," said David Wyss, chief economist for the New York rating agency Standard & Poor's. "What happens if Venezuela goes to war in Colombia? What happens if various crises in Nigeria get loose? Iran is always making noises."

Fearing the potential for shortages, investors are willing to pay a premium.

"They're not buying oil, they're buying insurance," Wyss said.[2]

Now we are forced to go hat in hand to the Saudis and other oil producers to beg for an increase in production in the hope that this will reduce prices. The second problem is that it isn’t just about production, it is about our oil policy. It is about an oil policy that rewards the big oil companies with tax incentives to continue to buy foreign oil while we spend nothing on research for renewable sources and reduction in consumption. Our energy policy eerily resembles our drug policy, instead of trying to stem consumption we spend billions of dollars to eradicate the problem in the countries where it isn’t a problem. The Saudis do not have an energy problem, we do. So while President Bush wants to continue giving his big oil friends and family tax breaks our economy rapidly approaches meltdown. And all the while we hasten the process by purchasing vehicles that don’t meet our needs but instead meet our egos.

There is no oil shortage. What there is a shortage of is common sense and willpower. I recently saw a commercial from one of the big oil companies promoting how they are now part of the solution to our energy needs. Whenever corporate profits exceed any justifiable limit they immediately roll-out these PR ads stating how they are using all of these ungodly profits not to benefit the corporate elite, but average Joes like you and me. I sleep better already just knowing that big oil is working to create renewable energy sources that will conceivably put them out of business. Remember, ignore the man behind the curtain and focus on the great Oz. The greedy see an opportunity to enrich themselves again with commodities so don’t be surprised if the price of oil is not the only thing that rises. All of which will continue to put inflationary pressure on our economy and push us closer to the brink.

Instead of having regulatory agencies that protect the consumers from this type of speculation we have “free market” forces that for some strange reason are only good when they favor the wealthy. Why aren’t free markets good for all products? Why are we subsidizing commodities like produce, oil, and sugar? The truth is that we continue to subsidize these markets because our politicians have been bought and sold like so many bushels of corn and will continue to allow industries to write their own legislation and regulate themselves and in the end we will all suffer. We will continue to have to choose between gas and food or gas and medicine. Isn’t free enterprise wonderful? This bubble will eventually burst just like the previous ones, but in the process many families are going to be hurting and that will be the real tragedy.

[1] http://www.mcclatchydc.com/homepage/story/29586.html
[2] Ibid