ARC's 1st Law: As a "progressive" online discussion grows longer, the probability of a nefarious reference to Karl Rove approaches one

Tuesday, April 18, 2006

Bill O'Reilly Is A Pinhead

Bill O'Reilly has been on a tear over the gas prices... blaming the increased prices on the oil company gouging based on "speculators." This is surprising language from a graduate of Harvard's Business School, but I guess an Ivy League education probably isn't what it used to be.

Bill said tonight that speculators were driving up the price of oil and the oil companies were exploiting this to hit the consumer. He said that there's no lack of supply in oil, so these speculators were being irrational when they drove up the prices (apparently due to the situation with Iran). Now, I'm not an oil industry operative, but I do know something about economics... although my MBA didn't come from an Ivy League school, but a midwest school close to my wife & kids.

While Bill says that speculators are driving up prices ignoring the supply and falsely blaming it on Iran, what is actually happening?

"Speculators" (also known as investors, commodities traders, etc) are reacting to potential problems with future supply, which surely has an effect on the cost of the current supply. If there's a potential that the oil supply will be severely restricted in the near future, the cost of oil today will increase.

If there appears to be an anticipated shortage in gold 6 months from now, what would happen to the price of gold today?

Bill also read an email he received from a viewer in Idaho. The viewer basically said that the oil companies do not operate in the free market, because all of the gas stations sell the gasoline at the same price. This is nonsense. If you go from one grocery store to another and compare the price of a gallon of milk, you'll see that the price variation is effectively zero. The same holds for gasoline.

What is the true cause for the increase in gasoline prices? Here are few things you might want to consider:

  1. China's rapacious appetite for oil...
    China's Quest for Oil: The Middle Kingdom can't find enough oil to meet booming domestic demand—and the world is paying the price at the pump

    While many of the factors that have caused the oil-price spike appear to be fleeting, there may be no respite from Chinese demand for the foreseeable future. The country's industrial base is gobbling up vast amounts of petrochemicals to make everything from fertilizer to Barbie dolls. The number of cars on mainland roads—about 20 million—is expected to increase by 2.5 million this year alone. Even if China's blazing GDP growth of 9.4% this year moderates to 8% in 2005, as the Chinese Academy of Social Sciences predicts, the country is now a permanent major player in the global competition for oil. "More than a billion Chinese are joining the oil market," says Bo Lin, an energy specialist at the Asian Development Bank. "How can prices go down?"
  2. It's that time of year when refiners have to switch to the summer blends... blends which are formulated for each city of the country, instead of regional variations. This always produces a springtime bump in the gasoline prices as the refiners have to operate at peak capacity to meet the demand for all of these different formulations.
    Fuel Prices May Again Top $3 This Summer, Paper Says
    ULSD, Gasoline Formulation Concerns Could Cause Spikes

    Gasoline and diesel retail prices may jump to more than $3 a gallon this summer during the traditional peak driving season, the Philadelphia Inquirer reported Thursday.

    With crude oil prices about $9 a barrel higher than a year ago, analysts said formulation changes for gasoline and diesel could lead to the fourth straight summer of record prices, the Inquirer said.

    The Energy Department has said that both formulation changes to the fuels have the potential to cause regional supply disruptions with periods of increased volatility, the paper reported.
  3. Iran and the broader Middle East. There were two over-riding factors that made realpolitik the desired course for the 2nd half of the 20th century: 1) The Cold War; and 2) Oil. Instability in the region is a clear factor in the pricing of oil... if only our nation was wholeheartedly behind winning the war in Iraq, we'd be able to point to the successful transformation of a Middle Eastern country and enrich its people as they sell their oil on the market.
  4. OPEC: It is true that oil does not operate in a free market, but only in the sense that the highest concentrations of oil are in places that do not subscribe to free market economics.
  5. Refining capacity: The US has been very slow to approve new refining capacity, ensuring that any hiccups in the supply chain will prove costly.
  6. Oil exploration - NIMBY is the rule here in the US..... unless it is your backyard and you're an Eskimo... then the rule is Not In Your Back Yard (NIYBY).
  7. Lack of alternative energy solutions. Solar's alright, but nukes do it all night... and ethanol should be pursued, as well. If it's economically viable, we should have automobiles that can run it.

Now, the Left is probably all atwitter that Bill is hitting Big Oil, but I wonder whether he would recommend some of the steps that the Left would point to... such as price controls, excess profits tax, etc.

Implementation of those types of policies would result in lower gas prices... but, only at the expense of no gasoline at the pumps.

Surely his Harvard education taught him something?

Unfortunately for Bill, this isn't the first time that he's been a pinhead on this subject.

Your Co-Conspirator,
ARC: St Wendeler

Comments (6)
Monterey John said...

Ah Saint, I have been holding off on saying anything about this. As you may recall this is an area in which I like to think I enjoy some expertise (others may disagree). But I offer the following thoughts.

First most, if not all, of what you said is quite true. You have put your fingers on much of what keeps us in a marginal supply situation and the impact of OPEC. Certainly the increased world demand is also an issue. As one wag said, "The average Indian has learned it is a lot more fun to ride around in a Mustang than behind a water buffalo."

Assuming all that to be true, my sense tells me something very funny is going on just now. The abrupt runup in crude prices with no concurrent causes, like Katrina, is not in the least typical. It simply has been too dramatic and too abrupt.

My guess? Speculation in the commodities market. Folks out there are running up the crude futures... a lot. Words like panic and bubble come to mind. I think someone is going to get left holding the bag on all this in the not so distant future.

As to your main point, I agree, Bill O'Reilly is an idiot. To my knowledge, Big Oil, is not involved in this type of transaction. I could be wrong, and there could be crooks there, but I doubt it. I think it is folks like the idiots who tried to corner the silver market back in the 70s. If it is, they are even more stupid than I think.

Well, now a gallon of gas has caught up with a gallon of milk. Which one has higher production costs? Which one has higher profit margins?

Cheers,

China Law Blog said...

I thought I read something somewhere that due to increasing energy efficiency in China their consumption of oil is barely increasing. Are you aware of anything out there on this?

Brian said...

Interesting piont Monterey. So if it is speculating, then it would eventually come back to "normal" levels.

Not through anything government, or Big Oil, could do.

Monterey John said...

Exactly right, Brian.

Ice Wolf said...

"but I guess an Ivy League education is probably isn't what it used to be."

How embarrassing. You should fix that and then delete this post.

St Wendeler said...

Thanks for catching my typo, Ice... fixed.