On being an advocate of the free market
For the most part, I’m a believer in the free market. Working for Investor’s Business Daily for the past nine years has reinforced that belief. Left to its own devices, the economy tends to sort itself out. Tha’s not to say that I’m an absolutist, that I don’t think we need any regulation of industries (we do, witness Enron, and the housing crises) or that there’s no obligation to reach out to those less fortunate (there is). For the most part, though, I believe that government intervention in economic matters often does more harm than good.
With that said, the surge in crude oil prices is getting ridiculous. You can talk all you want about booming demand in fast-growing economies like China and India, the weak U.S. dollar, tensions in the Middle East and a dozen other factors. But at the end of the day, there’s no getting around the fact that rampant speculation by futures traders is a huge reason why worldwide oil prices are skyrocketing. Today alone, the price of a barrel of crude oil is up more than $10. Which is amazing, because just yesterday, oil rose more than $5 a barrel, setting the all-time single-day record for a price increase (not percentage increase, granted, but a huge gain nonetheless).
Covering the stock market, as I’ve done every day for the past nine years for IBD, is already a huge daily challenge. But trying to make sense of the market when hedge funds, commodities speculators and the like get to run wild is a nearly impossible task. Of course, my challenge is nothing compared to what companies that rely on petroleum-based products, not to mention everyday people shackled with surging gas and food prices, have to face. At some point, hopefully soon, something will need to be done to curb manipulation of commodities prices, and markets as a whole. This is getting out of hand.
Expect gas consumption to continue to fall in the U.S., for SUVs to accelerate toward extinction, and for local industries–everything from local steel to local food producers–to become all the more vital, as we race toward “reverse globalization.”
Jonah,
I think that politically/economically we align very closely, however, I wonder about blaming speculators for the sky-rocketing rise in oil prices, and thus petrol prices at the pumps.
Speculators are driving up costs, I will not deny that, but why are they bidding on oil? Because they anticipate the price in the future will increase. Why will the price in the future increase-because speculators in the future will anticipate a future increase in price, or is there an actual market based mechanism that is causing the price increase? Such as the expanding lack of easily-exploited fields, the political instability of Iran and Venezuela, the poorly run Pemex. Also, the developed world, comprising the US, most of Europe, and Japan has actually seen their consumption of oil decrease over the past year. The vast majority of the increase has come from India and China.
Internationally, the subsidies in the developing world, where oil is not priced at a market level but significantly below is causing an excess of demand that is far outstripping supply. http://www.economist.com/finance/displaystory.cfm?story_id=11453151
This article from the Economist talks about the mismatched supply/demand and how foreign government subsidies are not truly allowing the global oil system to react on a market system.
Great stuff, thanks. That Economist article was fascinating. The fact that worldwide petrol subsidies is widely known. It’s pretty amazing to see how big some of those subsidies are, though.