Thursday, April 27, 2006

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.

7 Comments:

At 7:46 PM, Blogger Sodium Pentothal said...

I agree with most of your post with a few exceptions:

"The "Bush Doctrine"- the starry-eyed fairy tale that told us that we would be greeted in Iraq as liberators"

Oh but we were! That is precisely the reason why the voter turnout was so large. Of course, we were not greeted by the terrorists, if that's what you mean. Surely you don't value their opinion...

"that the war would take a few weeks"

That's exactly how long it took. Less than one month - Mission Accomplished.

"that the entire middle east would follow suit and suddenly become capitalist democracies"

We were never told that.

"and that Iraqi oil wells would quickly pump oil, paying not only for reconstruction but stablizing world oil prices."

Yea we got screwed on the reconstruction bill, but there was never a promise of stabilizing oil prices since they weren't unstable back then. That said, we should be taking Iraqi oil as we speak. Should be, but Bush is too afraid of the Dems saying "See - they did it for oil!"... and you know it. If not for liberals we'd have that oil right now.

 
At 10:11 PM, Anonymous Pocket said...

Wouldn't it make more sense to blame the consumers who demand oil that they don't necessarily need?

 
At 11:15 AM, Blogger Noisette said...

Pocket- yes.
SP- wow, I knew you were a conservative- didn't realize you were delusional. Poor dear.
I don't have time to respond to your entire comment, but here's my first response. You say:
"that the entire middle east would follow suit and suddenly become capitalist democracies"

We were never told that.

This is from whitehouse.gov, September, 2002:
"Finally, the United States will use this moment of opportunity to extend the benefits of freedom across the globe." Hunh. Looks like they told us.
whitehouse.gov. That liberal ragsheet. How dare I quote from there???
Will respond to your other points later.

 
At 11:17 AM, Blogger Noisette said...

Oops- cut off the important part of the quote. Sorry.

"Finally, the United States will use this moment of opportunity to extend the benefits of freedom across the globe.We will actively work to bring the hope of democracy, development, free markets, and free trade to every corner of the world."

 
At 11:23 AM, Blogger Noisette said...

PS- I luuuve that you blame liberals for the fact that oil isn't flowing out of Iraq. Priceless. Completely logic-free, but priceless.

http://www.iags.org/iraqpipelinewatch.htm
TOTALLY the liberals' fault. Totally.

 
At 1:19 PM, Blogger Noisette said...

Ok, still swamped, but more on the idea that a "free" Iraq would convince other Mideast nations to "assume the mantle of freedom" or whatever crap metaphor is in vogue. This is from a Bush speech in November 2003:

"This [democratizing Iraq] is a massive and difficult undertaking -- it is worth our effort, it is worth our sacrifice, because we know the stakes. The failure of Iraqi democracy would embolden terrorists around the world, increase dangers to the American people, and extinguish the hopes of millions in the region. Iraqi democracy will succeed -- and that success will send forth the news, from Damascus to Teheran -- that freedom can be the future of every nation. (Applause.) The establishment of a free Iraq at the heart of the Middle East will be a watershed event in the global democratic revolution. (Applause.)"

Granted, this was after the invasion- but as soon as the WMD lie turned out to be- a lie- the administration started falling back on this reverse domino-effect principle- that once Iraqi democracy is established, countries across the Middle East will follow suit. Of course, functioning democracy has NOT been established in Iraq, so I suppose this sea change could still take place, but I'm not holding my breath...

 
At 9:57 AM, Blogger Noisette said...

Ok, one more comment (I love that I'm the only one commenting on my own blog...)

"that the war would take a few weeks"

That's exactly how long it took. Less than one month - Mission Accomplished.

Wow. I bet the parents and spouses of the 2000 some odd troops that have died since May 2003 would be very interested to know that the war ended three years ago. What exactly did they give their lives for, then? A skirmish? An occupation?
Even Bush admits that the Iraq war was only just beginning when he brazenly proclaimed "mission accomplished." Get your facts straight.

 

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