Oil prices scrutinized

Once again the price of oil has started to do damage to global economic recovery. And once again people are starting to cry foul with unjustified price increases.

There is absolutely no doubt the price of oil can stifle any economic recovery effort as there are certainly enough points on the chart now to plot this. However governments remain muted on acknowledging this fact, although they do in a very round about way hint at it.

To recap the problem, the people who set the price of oil are looking way too far into the future. Pricing oil today on what MAY be in 2010 is just absurd. The time from oil pump to gas pump is about 8 weeks so giving them the benefit of the doubt, 12 weeks should be plenty of time to initiate adjustments. Any more time than that and the risk of damage to the economy is greatly increased.

What is happening is people are forced to pay prices that the economy can not support, and just like bringing in fish that are too small, the food supply is eventually depleted and people go hungry.

Right now the magic number is roughly $50.00 per barrel. Any more than that and money that should be invested into economic recovery is diverted to buy oil. The further and the longer the price of oil is over this magic number the greater the damage is. $147.00 per barrel was entirely unsupported in 2008 by the economy and hence the crash.

Although at the moment bad banking practices are the scapegoat, and certainly they did contribute, they are only a small part of the problem. The price of oil is much further upstream in the cause and effect chain than bad banking practices. Had the price of oil stayed in the $50.00 range, the economic crash would have been much less severe if any at all. Adjustment of banking practices could have happened and other than a few moans and groans life would go on. It would be little more nuisance than discovering your store was out of stock of an item you wanted. Now the banks are doing their best to double dip to recover.

So now people are starting to take a closer look and are starting to question the wisdom in pricing oil by predictions of 30 or more weeks into the future.  That amounts to wearing winter clothing in the summer because you know it will be cold. This recent downward adjustment comes essentially from their error in pricing oil and damage caused. The end user simply can not afford the purchases needed to stimulate the economy because they are diverting that money to oil.

Clearly their needs to be some intervention in oil pricing, but that may be seen as interference with a free market economy. History has shown that oil can be easy money and the temptation of greed has been noted on more than one occasion. So the oversight of this commodity is somewhat justified based on history. In the US there have been several occasions congress has called the oil companies to sit in the hot seat while investigating price gouging. The fact that an oil company grilling seems to be a semi regular event in congress strongly suggests more oversight is needed.

One Response to Oil prices scrutinized

  1. Funny you don’t mention the FED and Obama administration in this, as wtih the money they are giving the banks they choose to survive- this money goes into buying oil and storing it in offshore tankers while they buy paper futures to push up the price then sell back the oil at a profit?

    How many times must the taxpayer pay these guys? Once for the AIG bailout, a second time directly to the banks, and a 3rd time at the pump. Now tha’t’s change you can believe in.