About $80 oil
Watching the establishment media try to explain certain events can be both an illuminating and a frustrating experience. So it goes as I read the Washington Post try to explain why oil hit $80 a barrel yesterday (just as our Kevin Kerr forecast on CNBC last week, and that's only one of many among his profitable predictions). The lede to the story featured a grab-bag of explanations common to stories like these:
Crude oil prices hit a record yesterday, briefly topping $80 a barrel as the Energy Department reported an unexpectedly sharp drop in U.S. inventories, a hurricane warning closed the Houston Ship Channel and oil traders discounted the significance of OPEC's announced plan to slightly raise its output.
I can't really fault the Post, I guess. Explaining day-to-day fluctuations in any market necessarily entails a rundown of the short-term noise that drives traders' shifting moods. And by the third paragraph of the story, the piece actually gets into a meaty long-term trend:
Oil experts warned that the latest spike in prices was part of a long-term trend in which oil-rich countries restrict access to their resources and keep just enough petroleum off the market to boost prices at a time of steadily rising demand in places like the United States, China and the Middle East.
"People should understand the fundamentals," said J. Robinson West, chairman and founder of PFC Energy, a District consulting firm. "This challenge of meeting surging global demand isn't over yet. And inventories are such that the whole situation puts OPEC in the driver's seat."
This doesn't really explain the whole phenomenon of "resource nationalism," the fact that more than three-quarters of the world's oil reserves are now in the hands of state-owned oil companies, many of them run by economic chowderheads like Hugo Chavez and Mahmoud Ahmadinejad, but I'll take this as a sign of progress.
Still, the reporter stumbles badly at the end of the piece, quoting Edward Morse, the chief oil economist at Lehman:
Morse said another factor bolstering petroleum prices was the credit crunch in the United States. He said it was driving some investors out of equities and into commodity funds comprised largely of oil.
Well, yes, right now, this week. But it was only a couple of weeks ago when funds stuck with trying to meet redemptions from investors spooked by subprime found themselves forced to sell whatever they could most readily unload from their portfolios — including (or especially) natural resources.
Another factor the reporter overlooks, and kudos to Dean Baker for calling him out on it: A significant reason oil has reached a record high is that the dollar has reached a record low. Baker points out that oil in euros has stayed relatively constant over the last month or so.
Then there's the whole issue of calling $80 oil a record in the first place. Adjusted for inflation, it's not. The record in current dollars is close to $102.
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