Posted by: thefinancedude | May 28, 2008

Two Pennies – May 27, 2008

Is the Oil Market Manipulated?


From MoneyEnergy on May 23, 2008:

“Do you think the oil markets are being manipulated?
Media talk about “supply threats” and other obstacles in Nigeria etc. are easy straw mans to prop up in order to explain the price of oil.

As long as oil’s traded in greenbacks, the price of oil reflects the weakness in the greenback. The price of oil doesn’t go up as much against the pound, or gold.”


However, there are very few people who benefit when prices rise as fast as they are.  Kings, sheiks, perhaps oil execs and I’m open to discussion of who benefits from higher prices.  Collusion would serve a very small group who would stand to endanger the larger whole.  We don’t understand basic paradigms as easily as we believe we understand complex ones.  Energy is the basis for all life.  We could pull up a formula from science and convert those BTU’s in a gallon of gas to calories to put the value of gas into perspective. The fact that humans discovered millions of years of solar energy in the form of black goo propelled our numbers exponentially.

From here I get one gallon of gas worth 124000 BTU’s and from Google I get one BTU = 252.1644 calories. In total a gallon of gas is roughly worth 31268385.6 calories.  The purpose of all this is to understand how valuable this one gallon is relative to a person.  You need roughly 2K calories to maintain bodily functions.  You must take in more than that to not kill yourself if you’re working real hard and converting those calories into useful energy. At $4/gal it’s roughly .25 cents a cup and worth MORE than the Starbucks coffee you were paying more for. That is why gasoline is aggressive at the moment.  Yes it is in a bubble, but that does not affect the fundamentals in place.  Remember Keynes when he warns…”Irrational markets can last longer than you can stay solvent.”

Consider the oil men we have elected.  They think they know oil, but in fact they know oil markets of the past.  Our brain is wired to react, not to assimilate data and draw meaningful conclusions.  Consider both DICK and BUSH went to the Kingdom of Saudi Arabia (KSA) to basically plead for them to do something.  They have a long history that Bush believes will pay dividends now.  Turns out he cashed in a long time ago when he invaded Iraq and now there’s hell to pay.  KSA can’t increase their production beyond three years ago.  When KSA peaks, the WORLD peaks.

One last point, yes oil priced in anything but a dollar would have insulated you from this problem.  Case in point check out the graphs below…

Oil in Euro's/Gold

So yes, our dollar is the problem mostly.  However there are always several layers of analysis. If you’re really worried about manipulation of the oil market, consider OPEC’s decision in the late eighties to nearly double their reserves as a unit in a high stakes poker game designed to flush out USSR which it did resulting in their demise in the early nineties.


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