I filled up my car’s petrol tank at the weekend. The cost was just a couple of pounds shy of £100. We’ve all heard the reasons behind the recent oil price rises, demand from China, concerns over supply from unstable parts of the world, dollar weakness, speculation, etc. Of course, this is just economists doing what they do best, blathering on without having a clue. I’d really like to know some numbers behind all this. Although I’m sure all of the above reasons have a role to play, just as I’m sure high oil prices are going to be more important in the short to medium term than global warming, but for most of those reasons the timescale is wrong. The dollar isn’t falling that fast, the suppliers have always been in dodgy parts of the world, China’s demand may be growing but let’s keep a sense of proportion here. (The 1970s rise in oil price was dramatic too, but that oil crisis can be unambiguously blamed on OPEC.) So, I’d really like to know how much of the rise is due to speculation? Speculation, as seen in bubbles throughout history can cause prices to rocket in a very short period of time.
I’d like to know about the role of speculation because the man in the street is being affected by what goes on in the world of high finance. A few greedy mortgage lenders in the US make a fast buck, the idea catches on, clever quants then repackage the loans, pass them on to all and sundry, at every stage people in expensive suits take out a nice profit, thank you very much. Next thing you know we are in a recession, all lending dries up, and house prices fall. It will be pretty disgusting if it turns out that those people in the expensive suits are to blame for the oil price rise as well.
Next thing you know, the banks will be telling us that all those investments that they’ve written down to zero over the last few months have value after all! "Sorry, man in the street, the crisis was all a false alarm. Your house price has just collapsed and you owe more that it’s worth? Never mind, I’ll buy you a beer with the big fat bonus I've just got from the windfall CDO profit!"