When Down Means Up

Trey Smith

Since the beginning of October 2011, some six months ago, the price of Brent Crude Oil Futures on the ICE Futures exchange has risen from just below $100 a barrel to over $126 per barrel, a rise of more than 25%. Back in 2009 oil was $30.

Yet demand for crude oil worldwide is not rising, but rather is declining in the same period. The International Energy Agency (IEA) reports that the world oil supply rose by 1.3 million barrels a day in the last three months of 2011 while world demand increased by just over half that during that same time period.Gasoline usage is down in the US by 8%, Europe by 22% and even in China. Recession across much of the European Union, a deepening recession/depression in the United States and slowdown in Japan have reduced global oil demand while new discoveries are coming online daily and countries like Iraq are increasing supply after years of war. A brief spike in China’s oil purchases in January and February had to do with a decision last December to build their Strategic Petroleum Reserve and is expected to return to more normal import levels by the end of this month.

Why then the huge spike in oil prices?
~ from Why The Huge Spike in Oil Prices? "Peak Oil" or Wall Street Speculation? by F. William Engdahl ~

I have admitted before that Economics wasn't my best subject in school; I struggled to eke out a D! While I never really grasped a lot of the complicated in and outs of economic theory, I did grasp the basic element that demand exerts a huge influence on the costs of services and products. Generally speaking, when demand goes up, prices go up and when demand goes down, prices go down.

I've watched this principle at work in my local community. My good friend Paul runs our local mini mart and, from time to time, I help him a little with inventory. Over the past year, it's been amazing to watch the fluctuations in beer prices from week to week and month to month.

Sometime last Fall, beer prices increased across the board. I'm guessing that the costs of production had increased and so all the beer distributors raised their wholesale prices accordingly. After the prices went up, beer sales dropped and they remained lower than usual for several weeks.

At this point, one of the distributors dropped their prices back to where they were before the price rise and, unsurprisingly, beer sales increased. Since that time, beer prices have yo-yoed. Each time the price goes up, sales go down. After a while of lower than expected sales, the distributors lower the price and then sales bounce back up again.

While this "demand-based" formula appears to hold true for consumer items like beer, milk and bread, it no longer holds much sway with oil prices. As Engdahl points out above, demand is down, yet prices are surging ever upward.

The only logical explanation for this phenomena is that speculators are driving prices higher. Speculators -- to date, at least -- don't play betting games with run-of-the-mill consumer products, so the demand component is not tampered with. If one day oil speculators became beer speculators, we would find that this same dynamic played out in beer prices as well.

What is so galling about this "arrangement" is that the federal government allows speculators the ability to play Russian Roulette with the world's economy. Sooner or later, as the speculators spin the chamber of the gun, one of the shots will contain the bullet.

However, unlike when singular humans play this risky game, Wall Street doesn't have to worry about blowing their brains out. When the bullet strikes and the hemorrhaging begins, we taxpayers will yet again be forced to stop the bleeding. A band-aid will be placed over the gaping wound and, before we know it, the speculators will be allowed to spin the chamber again and again and again.