A very interesting article in the Sunday Chronicle tried to explain why the uptick in oil prices is defying the golden economic rule of supply and demand. The gist of it is that it's all because of people who speculate on oil "futures". According to the story, these investors on Wall Street and other global mercantile exchanges are gambling that the recession is at or near its end and that demand for oil will once again rise.
What confuses me is how these guys affect prices at the pump. So what if they bet on what oil will cost six months from now, what has that got to do with what Chevron charges me today? Do these speculators (think pork bellies) somehow influence what the oil companies do in the day-to-day world? What are "futures" but gambles that something is going to cost more (or less) later down the road. What has that to do with what it really does cost?
But back to supply and demand. A barrel of crude is $61.67 now, up 26% in just the last month alone. Yet the world is awash in oil. Surplus oil stocks in the US alone is at the highest level in 19 years. Worldwide an estimated 100 million barrels are sitting in anchored tanker ships because onshore storage tanks are full to capacity.
When the economy melted down last summer demand for oil plummeted. We continue to drive less and buy less gas yet China's thirst for it seems to be heating up again, which could fuel the price rise. This, and the looming end to the recession is apparently what is fueling the future speculators.
I'm going to write the author David Baker (dbaker@sfchronicle.com) to try and better understand futures. Are these guys buying up supplies ahead of time, making less oil available at a future date, thus driving up the price?
Comments / explanations welcome.
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