Commodities Markets- a Primer

From WaPo:
"A Senate committee yesterday announced an investigation into taxes paid by major oil companies and asked the Internal Revenue Service for the companies' tax returns.
The Senate Finance Committee promised "a comprehensive review of the federal taxes paid" by the 15 largest oil and gas companies. The panel said it wants to inspect their tax returns for the past five years."

Ok, this is just blatant political grandstanding. Ditto Bush's "we'll look into this" speech from the other day. Why? Because unless these people are morons (which, in the case of our illustrious president, may not be too far off the mark), they understand the nature of the world market for oil, which operates not unlike the world market for coffee. Here's a brief explanation:

World demand for oil is increasing daily, as countries like China and India industrialize. But, you say, what of supply? There have been no hurricane Katrinas lately, no major bombings of oil pipelines or the like. Increased demand should be met by increased supply, right? And the markets should balance out accordingly? Well, not really in commodities markets. Commodities markets are ALL ABOUT speculation. What is setting oil at $70/barrel is fear of future diminished supply. You see, right now traders are bidding on oil contracts for delivery three to six months from now. How do these traders know what the state of oil supply/demand will be in July or August, you ask? They don't. We're all paying the price for their best guess. But the guess is educated. They look at oil use in the summer in industrialized countries- it goes up, right? They look at the growing demand for oil worldwide. That's not going to lessen. AND they look at the political situation in those places where oil is plentiful. Middle East? a mess. Nigeria? disaster. Venezuela? Chavez wants to deprivatize. These things are not good in the eyes of speculators. Any one situation- a turn for the worse in Iraq, Iran, mass chaos in Nigeria, Chavez making good on his threat- will cut hardcore into supply. So they bid with this in mind, and they bid high. Thus $70/barrel.

What does this have to do with Exxon et al? Well, as much as we may hate it, they're entitled to their profits, just as Sara Lee or Kraft would be entitled to profits if the coffee market began behaving in a similar fashion. They are not withholding supply. Why would they? They are supplying, and traders are bidding very high for what they supply. Unless they are responsible for fomenting conflict in those oil-rich areas of the world, they are not doing anything illegal by profiting from the high price of oil. It's business, people. It is what it is.

But maybe they should act altruistically, and cut into their profits to relieve our woes at the pump? But then they would be beaten on the market by foreign oil companies such as Elf or Total/Fina or Shell who have no such humanitarian impulses. This doesn't seem fair, from a business perspective.

So who is to blame for this? Not the oil companies. They're only acting as they should. Who then? Why, the Bush Administration. Completely. Here's why:

The "Bush Doctrine"- the starry-eyed fairy tale that told us that we would be greeted in Iraq as liberators, that the war would take a few weeks, that the entire middle east would follow suit and suddenly become capitalist democracies, and that Iraqi oil wells would quickly pump oil, paying not only for reconstruction but stablizing world oil prices. And, by the way, we'd suddenly have a lot of influence in a market that was heretofore not ours to control. Wouldn't that have been nice? Trouble is, the world doesn't work that way. Instead, we hit a hornets' nest with a baseball bat, exciting sectarian tensions which Saddam had (cruelly, yes) tamped down, and creating tension in an oil-rich part of the world where there was less tension before. So now, instead of Iraqi oil freely flowing and under our control, Iraqi oil is flowing nowhere, Iran is building nuclear weapons, Al Qaeda has found new training ground, and the whole region is a bloody, unhappy mess. And because of this, oil is more expensive than it has ever been. Oops.

More on this later.