August 24, 2006
by: jovial_cynic
I listen to National Public Radio (NPR) every day, to and from work, and it only dawned on me today that they post their content online as well as on the radio. That's fantastic, because it's much easier to provide a link to a story online than it is to provide one to a radio spot.

I drove to the grocery store to pick up some ingredients for dinner, and heard Adam Davidson talk about oil prices, and about a potential new source for the rising costs.

The traditional thought on rising oil prices are (in no particular order), chaos in the Middle East, increase in demand in countries like China, India, and the US, and political unrest in other countries like Nigeria, or the recent Alaskan pipeline closure.

An until-recently obscure factor in play originates right in the United States. US investment bankers are purchasing what is known as "futures" contracts. Long story short, it's the practice of buying a lot of commodities (in this case, oil), and then selling a contract to buy the some of the oil at a future date at a higher price. Buyers are willing to pay the contract for the higher price because the expectation is that the asking price will still be lower than the actual selling price in the future.

The biggest players in the market?

Some of the biggest players are U.S. pension funds, which have put billions of dollars into oil futures. At least one analyst thinks that pension funds have become part of the machinery driving higher gas prices.

"I think if you saw all the pension funds walk away," says Ben Dell, an oil analyst at Sanford Bernstein, "you'd probably see a $20 drop in the crude price."

Some analysts disagree, but the amount of money being spent on futures contracts certainly can't be ignored.
np category: corporations


Luke said:
August 25, 2006

jovial_cynic said:
Yeah -- kind of shocking, no? But we're certainly happy about the investment our companies are making to support our pensions, which creates a dreadful conflict of interest. When we're just talking about the government raking in tax revenue on oil, we can decry the greed of both the oil companies and the government. But when it comes to our own retirement money, suddenly it's a more difficult debate.


August 25, 2006

deek said:
I doubt the price of crude would go down. China is using our debt to buy as many oil futures as possible. If the pension funds leave, the Chinese and others who own our future earnings will jump in to fill the void.
August 28, 2006

jovial_cynic said:
Different analysts say different things, so their predictions will vary. I stated at the bottom of the post that "some analysts disagree," which covers that. But I think the point is that oil futures are what's keeping the market as high as it is right now.
August 28, 2006

deek said:
Agreed here. Future will keep oil at or higher than its current price. Google "peak oil", it explains what you should expect from the industry in the next fifty years.

Bottom-line? Cheap oil is a thing of the past. Good in some ways, not so good in others.

August 30, 2006

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