My Humble Opinion on Oil

The world is filled with ignorant mofos who don't know nothing about finance but assume, because the economy is all over the news, that they understand just what is going on in the market.  Too many ignorant people are jumping all over a complex topic mainly because they want to sound smart at parties.  And well, I'm so freaking fed up with dumbass speculation that it's a good thing I'm not legally allowed to own a firearm for the next few months. 

You see, there are three major rumors going on about why oil is so expensive and they are all dumb-diddy-damn super-stupid.  The following three "reasons" for the crazy price of oil have been told to me by a guy who owns a pool company, a guy who owns a painting company and the guy who runs the pizza shop next to my place.  Despite the fact that about a fifth of my job involves finance, they are all sure that I am wrong.  Rumor number one is my very least favorite. 

Rumor Number One:  Hedge Fund Managers and Speculators are Driving Up the Price of Oil. 

When the pool guy told me this, I said to him, "No they're not."

His response: "Uh, I saw on the news that they are."

My response:  "Oh, well at least you've done your research.  Can I ask you a question?"

"Sure," he said. 

"How are hedge fund managers and speculators driving up the price of oil?"

"Dude, don't you know anything about the stock market?"

"Indeed I do.  But we're talking about the commodities market.  You understand the difference, right?"

He elected to take that moment to pick up his cellphone and pretend like he had an important call to make. 

"Excuse me," he said. "It's work."

Douchebag.

Rumor Number Two:  OPEC (the legal cartel that controls oil distribution in most parts of the world) won't increase oil outputs. 

This rumor has some level of truth to it but really follows the new American habit of blaming other people for our problems.  OPEC is not increasing output because it's not necessary.  There is no oil shortage.  We're not having trouble getting oil.  We're having trouble paying for it.  This is not the fault of OPEC (which I have trouble defending because they suck ass in general but the truth is the truth and they say it may even set you free, but I doubt it).

My friend (and he is a good friend) who owns a painting company had this to say to counter my opinion that the high oil prices are not OPEC's fault. 

"Saudi Arabia even came out and said oil was about fifty dollars a gallon too much."

"Yeah, but you just got the sound byte version, man.  The intent of their statement was to accuse us of making them do all the work to create oil while we refuse to increase our output.  Everyone else is tearing their chunk of the world apart looking for oil and our congress hasn't even so much as approved one refinery or off-shore drilling contract in the least twenty years or so.  The Saudis were basically saying that we have two choices: we can lead the way for oil exploration and refinery by increasing both, or we can pay more at the pump.  You can blame your own government for that.  Not OPEC."

He didn't believe me because I had facts to support my claim and he watched a three-minute bit on God Morning America about it or some such shit. 

Never Forget! 

Never forget how dumb the citizens of this country are.

Rumor Number Three:  We're shipping all our oil overseas to fight the Iraqis. 

I swear to Christ, the guy who runs the pizza shop next to my place actually said this to me.  And you know how sometimes one of your friends says something so stupid that you immediately want to reevaluate your friendship?  That's how I felt when he said this to me.  I almost got in an argument with homeboy but quickly realized that I just didn't have the energy to battle stupidity (I hadn't eaten lunch yet). 

In the interest of education, it is now time to dispel the rumors and tell you the why, in my humble and slightly educated opinion, oil is cruising towards $150 a barrel. 

First, there is international demand.  China, India and many Latin American countries are experiencing an emerging middle class like never before.  They are building armies and factories; many of their citizens are moving from mammalian transport to automotive transport.  The demand for oil globally has shot through the sky like a rocket filled rocket.  That causes things to get more expensive... big time. 

Second, many of these developing countries are also refining their own oil, which means that many countries (in Latin America, especially) are able to keep gas prices low for their citizens because they don't need to go to the big cartels to get their crude juice and they can get rich selling us and the rest of the world their reserve oil.  America has enough oil in the ground to pull off this trick but our government doesn't believe in exploiting its resources if it helps its citizens.  We want to exploit other people's resources so the rich get richer.  Don't believe me?  Ask the Native Americans. 

Third and freaking finally are all the little peripherals: the fact that it's summer (Americans and Europeans drive more in the summer), the upcoming Chinese Olympics (dudes use a lot of fuel for that), the aforementioned war in Iraq, the strength of the dollar, etc. 

Oh, and just so you know, commodities speculators (especially in oil) don't actually buy a product and then sell it.  They also don't buy into oil companies to push the price up.  They buy futures contracts (which are essentially bets as to what the price will be in the future).  But they don't control supply and demand.  They can affect the price a little (much in the way that an excessive amount of gamblers picking one team can move a spread a point or two) but they cannot seriously affect oil cost. 

The news manages to take little bits of the reasons for high oil prices and make them seem like the big picture.  That's ‘cause most news companies are owned by the companies who lobby Washington to keep us asleep and most people want to stay asleep. 

After all, it's easier to dream when you're asleep.