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Brandon: The oil futures game

Paying more for gasoline gives us more gasoline. Or at least that’s the contention of a market analyst I heard on the radio.

Noting that per barrel oil prices have risen more than 1,500 percent over the past several years, he said that much of that increase has been driven not by market forces or the law of supply and demand, but (to no one’s real surprise) by speculators.

They have, he said, pretty much had a gravy train post-9/11 as wars, hurricanes, Alaska pipeline maintenance problems, political posturings — and greed — have come together in a perfect storm to push the market higher.

But speculation isn’t all bad, he contends, because the higher oil prices go, the more oil companies will be spurred to explore and find more oil.

Following that reasoning to absurdity, one could surmise that if gasoline were $10 per gallon, there would be such a flurry of exploration that we’d be drowning in oil — or at least until we’d used it all up.

Of course, at $150 to fill the average family sedan (we won’t even think about SUVs and Hummers), there likely would be a lot less demand and, theoretically, sales would decline and prices fall.

Speculators play an important role in determining price of a product, the futures market folks say, whether it be oil or cotton or gold.

But while speculators are profiting from driving up the price of a commodity, Joe and Jane Consumer get to pay higher prices for all the products associated with that commodity.

Adam Davidson, in another report on National Public Radio, offered interesting insight into the effect of futures in the current oil market.

While the media headlines blame high oil prices on burgeoning demand from China, Middle East wars, Iran’s blustering, weather and other uncertainties, Davidson says “people who have nothing to do with the oil industry are buying oil futures and holding them as can’t-lose investments.

“Investment banks, from Morgan Stanley to Goldman Sachs, are making so much money from oil futures that they’ve become a hot investment for all sorts of big-money players. Some of the biggest are U.S. pension funds, which have put billions of dollars into oil futures.”

He quotes Ben Dell, an oil analyst at Stanford Bernstein, that “if you saw all the pension funds walk away (from oil futures), you’d probably see a $20 drop in the crude price. It would be like losing all of China’s incremental oil demand.”

Iran and China have simply “become a scapegoat for everything else,” Dell said, in commenting on how futures are driving the market.

Another oil analyst, Phil Verlegger, said oil futures speculation is “like taking candy from a child,” with virtually risk-free returns of 15 percent to 30 percent.

Dell said he believes when the world’s oil storage capacity is reached, the bankers and fund managers will look elsewhere for profits and that oil prices could decline. But other analysts disagree, saying prices will stay high as long as there’s trouble in the Middle East.

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