Oil and onions
First Big Oil loomed in the sights of Congress. Cheating and gouging, not pumping or selling overseas cried Chuckie Boy Schumer and Socialist Bernie Sanders, two of the Senate’s peltless conspiracy hunters. When this failed to deflect the voting public’s unrest, wild finger pointing commenced, searching out “speculators” and oil cheats.
A huge dilemma occurred with that game drive; it bagged the voters’ 401(k)’s, IRA’s, stocks and mutual funds, yes, their retirement accounts.
Needless to say, that model didn’t get out of the showroom.
The following we have this from people who know, unlike those clowns in congress that put us in this position to start.
Onions have no futures market, yet their recent price volatility makes the swings in oil and corn look tame.
The bulbous root is the only commodity for which futures trading is banned. Back in 1958, onion growers convinced themselves that futures traders (and not the new farms sprouting up in Wisconsin) were responsible for falling onion prices, so they lobbied an up-and-coming Michigan Congressman named Gerald Ford to push through a law banning all futures trading in onions. The law still stands.
And yet even with no traders to blame, the volatility in onion prices makes the swings in oil and corn look tame, reinforcing academics’ belief that futures trading diminishes extreme price swings. Since 2006, oil prices have risen 100%, and corn is up 300%. But onion prices soared 400% between October 2006 and April 2007, when weather reduced crops, according to the U.S. Department of Agriculture, only to crash 96% by March 2008 on overproduction and then rebound 300% by this past April. [snip]
I assume you have seen this in the papers and in all the nightly news reports.
Archived in: 2008 Election, Big Oil, Congress, Economy, free marketsJuly 9, 2008 at 5:18 pm | Trackback
6 comments
So now perhaps commentators should look more closely at the very tight balance between demand and supply in the crude oil market.
If onion prices can be so volatile without a futures market, consider that the problem with oil is the shortage of the in-demand NYMEX light, sweet crude, the benchmark which has been making all the headlines.
When the recent Jeddah Oil Summit declard tha Saudi Arabia would pump a further 300,000 barrels a day, NYMEX WTI actually rose. This is because a growing proportion of the crude from OPEC’s Middle Eastern producers is the heavy, sour grade, and unleaded gasoline is mainly a distillate of light, sweet oil.
So increasing the supply of heavy sour does not address the shortage of light sweet, which is why the NYMEX WTI benchmark keeps setting record highs.
The solution is to build new refining capacity that can deal with the heavy sour oil and convert it into gasoline.
David, that is a cogent explanation except it’s wrong. Haven’t you been listening to Nancy Pelosi? The polar bears are the reason gas prices are so high along with the redfish. Drilling for more oil can’t solve the problem since we don’t have the refining capacity and we can’t have that because, because…don’t ask those questions.
Besides it takes 10 years to fix the problem so why start.
Good post, David. Thanks.
But I do wonder why oil obtained and refined within our borders will necessarily be cheaper without govt intervention. All oil is part of the world market and subject to world prices…unless its Saudi or Venezulean or Kuwaiti, where there are price supports.
Maybe someone can explain it to me. Except for relative price reductions due to increased supply, why would American oil be cheaper on the American market than say, Canadian or Mexican oil?
Hotspur, the word you want is fungible.
Some oil, like Venezuelan oil is so high in sulfur, we have special refineries to handle their product. Alaskan oil has a high sulfur content too which is why we ship it to Japan as crude.
North Sea Brent, Texas Tea and Oakie crude are light sweet oil which make for cheap refining and more distilates with less work. This is the same oil found in the Permian basin that Mexico, Cuba via China and the US drill for offshore.
The oil companies own very little oil; they buy theirs on the open market through contracts like everyone else.
Now why should they sell their product for less here when they can sell it somewhere else for more. We do not ask any other company to do that.
David, I was being flippant before. Here is my considered take on the subject.
Thanks, VW. That clarifies my suspicion that the hack phrase “drill now, drill here, pay less” is incoherent. The “pay less” part would require market restrictions and some form of price controls, and proves once again - to me - that some on the right are an embarrassment.
Domestic sourcing is necessary for strategic reasons and for supply reasons, with the latter the only factor that can have an effect on price. And if it effects price, it effects price everywhere to roughly the same extent.
Then, if the link below is true, we could also be a major supplier if we can microwave enough shale to give up the goods.
http://www.powerlineblog.com/ShaleOilChart31.php
There is one part of the drill here that does relate to lower prices. Calculate in the cost of shipping the oil from point of extraction and subtract that.
More of anything will lower the price, HOWEVER, pumping more oil without more refineries to process it maintains the bottleneck. The price for refined product stays high; get more refined product to market and the price goes down.