But Now You Know

Why Oil and Gas Prices Are Falling

We all know that high gas/energy prices, driven by high oil prices, are a large part of what has crippled the US economy.

But what has caused that?

Oil prices are not set by oil companies, but by futures and commodities speculators, who bid on the oil at auctions. The companies have no more control over the price than someone selling with a regular auction on EBay.

The speculators decide what they are willing to pay, based on what they believe the future of oil to be.

How Prices Rose

In 1999, the monopolistic oil cartel OPEC started cutting production, specifically to help themselves and their allies get rich by driving up the price of oil. Speculators, naturally, started bidding more for oil, expecting there to be a shortage. It went from well under $20 per barrel to over $30.

Then George W Bush got elected.

People assumed, because wealthy oil barons in Texas and Saudi Arabia were largely responsible for financing him, that plentiful oil was in their future. This ignored history, of course, because plentiful oil is cheap, and cheap oil is bad for oil barons. The more expensive oil is, the better. It would have made more sense to expect Bush to do things that would drive up the price of oil.

Bush holds hands with a member of the Saudi tyranny, top state sponsor of terrorism, and leader of the push to keep oil prices high

But they assumed it’d be plentiful, so they bid lower on it, and the price fell. It got almost back down to its natural, under-$20 price range.

But that was bad for Bush’s financiers.

In fact, there was a lot of loud public worry, among oil barons, about how the price of oil was returning to normal.

Then came September 11th, 2001. 

Afghanistan

After 9-11, there were many ways America could go. 

The way Bush chose to lead, was to first attack Afghanistan. He said this was because they were harboring bin Laden. He promised, though, that he was going to exhaust all diplomatic means, and only attack them as a last resort.

But before he attacked, the government of Afghanistan, a long-time US ally whom Bush had just recently sent, openly and on record, a great deal of grant money for their help, offered to turn over bin Laden for war crimes trial.

Bush ignored the offer, refusing even to discuss it with them. When they offered a second time, the US attacked the very next day.

Speculators saw this as a very bad sign for oil, because Afghanistan was closely aligned with many oil-producing countries, and they bid more for it, driving the price into the high $20 range, fifty percent higher than its natural price.

Iraq

Then Bush began threatening to attack Iraq. Now Afghanistan had at least some association with Al Qaeda…but Iraq, of course, was ruled by Al Qaeda’s #2 enemy after the US: Saddam Hussein.

Oil speculators found this pretty scary, and confusing. The price of oil rose to close to $40, more than twice its natural range.

Gradually, it declined, on the promise of cheap oil from Iraq, even though every government projection of conquering Iraq anticipated years of quagmire and turmoil, jeopardizing oil supplies for a long time to come. This is why his father had not done it.

(more after this K-rad graphic)

Oil Prices, Real and Adjusted, from 1990 to mid 2008

Sure enough, as time war on, the war got worse, and the speculators responded by bidding ever-higher for oil.

General Belligerence

What’s more, whenever the price was finally stabilizing a bit, the Bush administration would do something else that threatened the oil supply, like picking fights with Hugo Chavez, or threatening to attack Iran. Each time, investors were frightened, and the oil price climbed.

Eventually, this kind of belligerent foreign policy pattern pushed it up to $140 per barrel, over 700% above its natural price of just a few years earlier.

Sane Foreign Policy?

Then, in early 2008, it began to grow increasingly likely that Barak Obama would be the Democratic nominee. Unlike Hillary, he had always opposed this kind of foreign policy. Speculators began to weigh the possibility of a different foreign policy into their price bids.

As Obama's election grew more likely, oil buyers became reassured that oil supplies might be secure, and bid less, driving down prices.

As he clinched the nomination, and then began to dominate the polls versus McCain, the amount speculators were willing to pay steadily declined.

By the time he was elected, which had been seen as a probable for some time, they had built a peaceful foreign policy into the price, so that it was half its peak. 

The day after he was elected, the price fell dramatically. 

Now it remains in a holding pattern, a fraction of its peak just a year ago…waiting to see if Barak Obama is going to keep his promise of sane foreign policy. If he does, we could see oil falling down to its natural price, which by now is probably little more than $30 a barrel.

Ironically, sane foreign policy has an even greater impact on what the investors in oil are willing to pay, than Obama’s own position as a Liberal enemy of the energy needs of Americans.

November 24, 2008 Posted by kazvorpal | Economy, International | bush, conservatism, conservative, energy, environment, gasoline, green, neocon, obama, oil | 3 Comments