Factors behind oil cost


Ted (Vaill), surely you jest! (Malibu Times 6/5/08).In your haste to condemn Bush and the nasty Republicans, you embrace an ill-conceived pork laden Farm Bill. Why? Because the bill contains a provision which, according to you, would depress the price of oil. Given the enormous misallocation this Farm Bill would engender, this pesky little provision had better provide for some massive benefits. But it doesn’t.

Rather than offer substantive evidence to support your position, you rely mostly on two logical fallacies. The first suggests that because something occurred prior to something else, the former was the cause of the latter. You suggest that the current spike in oil prices resulted from a 2006 decree by Bush to allow the ICE to use OTC terminals in the US thus bypassing regulation by any US agency. How else, you assert, can you explain the increase in oil prices? Well consider. Venezuela with its clearly unstable ruler, Nigeria facing strikes against Chevron and (earlier) Exxon, Israel threatening to attack Iran’s two million bpd supply of oil, potential demand surges in India and China, and if that’s not enough, how about the current expectation that we are facing a pretty ferocious hurricane season. Who then could blame speculators for driving up the price of oil to almost $140 per barrel? Future supplies are tenuous at best. There is no need to resort to arguments of collusion among traders, market manipulation or “excessive” speculation.

Fallacy number two is the old appeal to authority. “I’ve been in the oil industry for 20 years so I know, trust me.” Why should we, given your faulty analysis that somehow current stocks of oil and refinery capacity solely dictate prices? Future conditions do matter and the current price is affected by trader’s expectations of future conditions.

Despite the lack of identifiable harm, you demand that the Commodity Futures Trading Commission expand its oversight of OTC electronic trades. To you this omniscient body has the knowledge, resources and capacity to somehow oversee and regulate the world market (for it is a world market) and instantaneously judge which trades are collusive and manipulative and which are not. I for one suspect that your prescription would generate more harm than benefit as traders incur costs to initiate trades beyond the CFTC’s jurisdiction. But that’s another story.

Perhaps your 20 years in the oil industry just was not enough?

Lester F Saft