Hold all bets, please
June 10, 2008 3:06 PM   Subscribe

How much of the Oil Shock of 2008 is peak oil, and how much just speculation? Will the cavalry ride to the rescue?
posted by ilovemytoaster (49 comments total) 14 users marked this as a favorite
Per your first graph, the solution to expensive oil is simple: rampant inflation!

I, for one, welcome our new 15% interest-bearing saving account overlords.
posted by GuyZero at 3:12 PM on June 10, 2008

In related news: GOP Blocks Tax on Oil Profits.

And: "McCain wants to continue these 'special' tax breaks to Big Oil, not stop them. McCain’s signature tax cut plan would deliver $3.8 billion to the five largest oil companies"*
posted by ericb at 3:12 PM on June 10, 2008

I like to imagine a cavalry mixed with elephants and donkeys; but then a rational side tells me that would be silly.
posted by ilovemytoaster at 3:13 PM on June 10, 2008

BTW -- the Wikipedia entry on "peak oil" is full of interesting information, resources and links to the topic.
posted by ericb at 3:17 PM on June 10, 2008

In related news: GOP Blocks Tax on Oil Profits.

It's amazing how broken the system is, that the GOP is still in charge of the country's energy payola policy, even after they are voted out of office.
posted by Blazecock Pileon at 3:22 PM on June 10, 2008

Yada yada yada. It's hedge funds monkeying about. For now peak oil may happen but even then it'll be gradual. Go long on the airlines you think can ride it out.
posted by Damienmce at 3:23 PM on June 10, 2008

Nah, the previous lower price was lower because of speculation. This looks like a more reasonable price for now, given supply & demand issues. The Libyan oil people are the first to admit to a global peak, for instance, not that it wasn't obvious.

Links available via a shameless self-link.
posted by imperium at 3:38 PM on June 10, 2008

Gosh seems we were just talking about this a couple of weeks ago? In any case, I've got some of my prior comments about here somewhere, many of which are echoed in this article ...

Many folks believe we're seeing a classic asset bubble with oil prices now. There are two key drivers of this price surge that seem to be largely responsible for the price spike observed in the market - retail money and the ole' boogeyman, Hedge Funds. When I say 'key' I mean factors that are driving volatility in this market, not longer term, demand increases (i.e., China, India demand) which would cause a much smoother increase in the demand side.

First of all retail: there are several ETFs ( Exchange Traded Funds) that are allow retail money to take a view on oil. Just a few (tickers in parenthesis): There are others, and undoubtedly several more being formed & launched.

Every newspaper article you read talking about the increase in oil prices drives money to these funds. They typically assume positions in Oil by purchasing nearby (i.e., shortest time to maturity) NYMEX Futures contracts, with the exception of USL which is active in One year (12 month) contracts.

That's the first driver - lots and lots of retail money being poured into this sector.

Second driver - Hedge Funds.

While futures contracts traded on NYMEX and other exchanges are (heavily) regulated and tracked, there are a large number of OTC contracts traded by Hedge Funds and other Institutional class investors. These are exempt from Commodity Futures Trading Commission (CTFC) regulation, but are written so they are economically identical to the NYMEX futures contracts.

The FPP I made recently about "dark pools of liquidity" is almost applicable here, but substitute "Commodity Futures" for "US Equities". There is a fair amount of trading going on that CFTC doesn't see and can't regulate.

But most importantly, the current situation isn't a surprise to lots of people, the US Government included.

During the Summer of 2006 Senators Levin & Coleman (at that time Ranking Minority Member and Chairman of the Senate Permanent Subcommittee on Investigations) released a report [.pdf] which found "that market speculation has contributed to rising oil and gasoline prices, and that too many energy trades are occurring without regulatory oversight.".

Key findings (Levin/Coleman 2006):
  • Rise in Speculation. Over the past few years speculators have expended tens of billions of dollars in U.S. energy commodity markets.
  • Speculation Has Increased Prices. Speculation has contributed to rising U.S. energy prices, but gaps in available market data currently impede analysis of the specific amount of speculation, the commodity trades involved, the markets affected, and the extent of price impacts.
  • Price-Inventory Relationship Altered. With respect to crude oil, the influx of speculative dollars appears to have altered the historical relationship between price and inventory, leading the current oil market to be characterized by both large inventories and high prices.
  • Large Trader Reports Essential. CFTC access to daily reports of large trades of energy commodities is essential to its ability to detect and deter price manipulation. The CFTC’s ability to detect and deter energy price manipulation is suffering from critical information gaps, because traders on OTC electronic exchanges and the London ICE Futures are currently exempt from CFTC reporting requirements. Large trader reporting is also essential to analyze the effect of speculation on energy prices.
  • ICE Impact on Energy Prices. ICE’s filings with the Securities and Exchange Commission and other evidence indicate that its over-the-counter electronic exchange performs a price discovery function – and thereby affects U.S. energy prices – in the cash market for the energy commodities traded on that exchange.
I'll leave it to you folks to peruse the pdf for their recommendations (all fair and well balanced IMHO).

So there you go - this spike shouldn't be a surpise. The US Government most certainly knew about this issue. Many folks in finance did as well. I also remember Levin expressing some frustration that the media hadn't picked up on this report, maybe September 2006.

Ok, but now my interest - asset bubbles.

I've seen some research (unfortunately dead tree so I can't link) recently from Lehman Brothers where they're siding towards asset bubble. Some of the numbers are compelling - commodity index funds have grown from $70B in 2006 to roughly $235B today, with some $90B of money being added in past six months.

That's a serious amount of cash to chase a limited commodity.

I've read some industry research hypothesizing oil is currently overpriced by 60% or so, but this isn't my area of research so I don't have a view which doesn't reflect personal opinion.

Finally, at the end of May a bunch of guys were short July delivery and got nailed, big time. Classic short squeeze, and their buying activity (to cover the short side) also contributed to the push abover $135. Seems as though lots of folks are short this market, but its not clear whats driving it up.

Meanwhile, Gazprom, Russia’s gas monopoly, on Tuesday predicted oil prices would reach $250 a barrel in 2009, The Saudi's wanna have a sit down to talk about sky high oil prices and T. Boone Pickens says there isn't a conspiracy.

This market is clearly a mess with lots of different opinions being offered. If you choose your side properly, you can make some serious money (think short).

A funny thing about bubbles is it's difficult to predict when they'll deflate. But they always do. This one might get bigger before it bursts, but it will deflate at some point.

As I mentioned before, I'm not going to speculate on fair value - I'm not active in this asset class, and don't really know this market - there are some professional commodity traders here on MeFi I chat with from time to time, and perhaps they'll join in.
posted by Mutant at 3:46 PM on June 10, 2008 [31 favorites]

T. Boone Pickens says there isn't a conspiracy.

Keeping the government from looking into why oil-based energy is expensive also keeps oil expensive. Inflated oil prices create an incentive to invest in Pickens' new wind farm, which is profitable for Pickens. Of course there isn't a conspiracy.
posted by Blazecock Pileon at 3:52 PM on June 10, 2008 [1 favorite]

In related news: GOP Blocks Tax on Oil Profits.

Wait, do you seriously want the government to be able to determine what a "reasonable profit" companies will be able to make? It's a truly absurd idea.
posted by gyc at 3:55 PM on June 10, 2008

Doesn't the weakening dollar have something to do with the rise in oil prices? After all, were the price of oil calculated in Euros, the rise is certainly still bad, but not as bad. This time last year, oil was at 75$ (or 56 Euros, at the exchange rate of .75), and today it's at $131 (or 84 Euros, at todays exchange rate of .64). Dollar-wise, that's a 74% increase. Euro-wise? A squidge over 50%. I don't think it'll be long before Euros become the currency oil is traded in, at which point it'll appear a bit more stable.

Could this also be an element of cash no longer finding refuge in real estate (in the form of mortgage-backed securities) and so more of that cash going into oil investment? Clearly Mutant knows a hell of a lot more about this than I do.
posted by incessant at 3:59 PM on June 10, 2008

While speculation certainly plays a role, it's almost impossible to untangle the effects of the market from the price of oil. It is noteworthy that the second linked article extrapolates the "$60 of the current price of a barrel of oil is due to speculation" statement from a Senate investigation in 2006, which the writer simply project forwards and boosts, without a linked citation of the Senate inquiry or much in the way of reliable data.

Now it is true that with the credit crisis there is a gigantic pool of money sloshing around, looking for reliable investments, particularly in commondities. And oil is certainly one play. But it's a reliable play because of the very basic curves of supply and demand that underwrite its production.

On the supply side, every production indication is that the spigots are, in essence, completely open worldwide: everyone is in full production, and it still isn't enough. Certainly some areas could produce more if they were domestically calmer (Iraq, Nigeria) but it's at the point in which even a temporary maintenance shutdown on the North Slope sharply brings up the price. There's no spare capacity, and Saudi Arabia's status as the world's sole swing producer has evaporated.

Yes, there are fields and projects still to come on-stream. But they're small, difficult to access, and will take several years to start production, while every other major field is in decline. They're not enough to maintain the growth of production, and are likely only going to make the slide down the other side of the supply curve a little bumpy.

So. You have a commodity that is the lifeblood of the world, and which peaked in production 18 months ago. Even in a recession, there's a base-level demand for oil that is deeply inelastic, and certainly higher than 85 million barrels per day. If you're an investor with money in his pocket, where are you going to put it?

It's a predictable line, blaming investors. What will be interesting is when oil hits $200, the gloves come off, and "Jews and Arabs" is substituted for "speculators".
posted by Bora Horza Gobuchul at 4:08 PM on June 10, 2008 [3 favorites]

anyone who's young enough to consider the current oil situation a 'shock' is either much younger than me or just plain stupid.
posted by msconduct at 4:09 PM on June 10, 2008 [1 favorite]

"We have absolutely no connection with our research department," said Donald Casturo of Goldman Sachs.

posted by quonsar at 4:11 PM on June 10, 2008 [2 favorites]

"You have a commodity that is the lifeblood of the world, and which peaked in production 18 months ago."

Where does that "18 months ago" statement come from?
posted by 517 at 4:13 PM on June 10, 2008

We're all living in rented rooms back behind the casino, being kept awake at night by the unending hum of their ventilation systems, as the value of oil, housing, currencies, wheat, rice, bananas, copper and aluminum goes for a ride on red.
posted by TimTypeZed at 4:14 PM on June 10, 2008 [1 favorite]

For now peak oil may happen but even then it'll be gradual

But of course. Everything is "gradual", if you haven't been paying attention.

We are in a period of "price discovery" now. A gallon of gas at $5 still has a tremendous amount of utility/$ vs. eg. a gallon of milk or a gallon of Pepsi.

A gallon of gas at $5 can get me 20 miles around this city, enough to go to the store and two or three other errands in a timely, safe, and efficient manner, compared to navigating the public transit service, which would take two or three times as long and cost nearly as much.

There are no alternatives at the moment, other than engine conversion to natural gas, or ripping out the engine and putting in a buttload of handtool batteries, electric motors, etc.

Each of these alternatives to has high start up costs and a higher inconvenience cost compared to $5/gas.

I predict there won't be much demand destruction of $5 gas, and that pump prices will continue upwards, seeking the true consumuer value of sweet, sweet juice.
posted by tachikaze at 4:17 PM on June 10, 2008 [3 favorites]

Wait, do you seriously want the government to be able to determine what a "reasonable profit" companies will be able to make? It's a truly absurd idea.

Trivial for resource extraction. Where there are rents, there should be taxes.
posted by tachikaze at 4:19 PM on June 10, 2008

A good start for looking at peak oil discussion
posted by robbyrobs at 4:21 PM on June 10, 2008

517; unfortunately I have to leave the office for a bite to eat before evening classes, but this should get you started if you're interested. Deffeyes is using "Thanksgiving Day 2005" in a rather tongue-in-cheek manner, and I'm slightly more positive on production from unconventional oil sources, closer in line with Matthew Simmons - thus the 18 month statement - but I'm in general agreement with him.
posted by Bora Horza Gobuchul at 4:22 PM on June 10, 2008

Robert Reich: Why is gas at $4 a gallon?

(3) Global investors (including, perhaps, your own pension fund) are anxious about the American economy, and looking to hedge their bets against future declines. Oil is one of the commodities that looks like a good bet. Hence, there's speculation in oil futures. This isn't a nefarious plot. It's the way the market works. A bit of a speculative bubble is forming, so beware. I attribute a big part of oil's price rise over the last few weeks to this.

Note my bold emphasis added. This is either insanely great or insanely scary. Or both.
posted by Cool Papa Bell at 4:23 PM on June 10, 2008 [1 favorite]

Aren't plastics going to go way up in price too?
posted by Flex1970 at 4:30 PM on June 10, 2008 [1 favorite]

Aren't plastics going to go way up in price too?

depends to some extent on how much gross margin is in their present price points.

Absent wage inflation, what we're going to see is a reorganization of the post-1980s price regime that developed around cheap oil and Chinese imports.

Without wage inflation, there will be demand destruction, shrinking margins, substitution, etc effects shaping who makes money, who survives, and who has to downsize.
posted by tachikaze at 4:37 PM on June 10, 2008 [1 favorite]

Brian B, that was beautiful. Key point:

"Ordinarily, we shouldn't want the government to decide when profits become "excess." But the case of huge profits from the run-up in oil prices is different for two reasons. First, it is unusually clear that these profits have nothing to do with productivity. Diverting them to the U.S. Treasury would have no effect on the incentive to extract more oil from American ground. Second, some or all of these profits are directly related to a situation that is imposing huge sacrifices—financial and otherwise—from others; that is, the Iraq war."

We, too are "floating on a sea of oil" and can pass the windfall profits from resource extraction through a severance tax regime to help pay for our government, at zero cost to anybody outside of the bloodsucking social parasites we call speculators.
posted by tachikaze at 4:43 PM on June 10, 2008 [1 favorite]

The theory of speculation being the cause of the price increase has a major problem. If speculators are driving up the price, then they must be buying oil and storing it for future profit but we don't see that. Where are the inventories?
posted by JackFlash at 4:53 PM on June 10, 2008 [2 favorites]

While I'm all for taxing oil companies, be warned that this sort of tax scheme has been tried before with poor results: The National Energy Program.
posted by GuyZero at 4:53 PM on June 10, 2008

Anyone know how much we subsidize the oil industry? Why is it done now?
posted by Postroad at 5:12 PM on June 10, 2008

"Greenpeace believes Europeans spend about $10 billion or so (USD equivalent) annually to subsidize fossil fuels. By contrast, it thinks the American oil and gas industry might receive anywhere between $15 billion and $35 billion a year in subsidies from taxpayers."

Why is it done now?

Two reasons.


posted by tachikaze at 5:25 PM on June 10, 2008

The theory of speculation being the cause of the price increase has a major problem

I think it's more complicated than that. For one, TMK it's futures speculation that is driving up bid prices; when the futures become current the spot price is driven up to match given the overall stressed supply/demand relationship.

As I said above, I think spot prices can and should [in the theoretical sense, not normative] go up until demand actually drops and there are producers who can't sell all the oil they want to produce.
posted by tachikaze at 5:32 PM on June 10, 2008

"I would work with our friends in OPEC to convince them to open up the spigot, to increase the supply."

ees no workin'
posted by tachikaze at 5:33 PM on June 10, 2008

Gasoline prices will drop. They are artificially high due to lack of refinery capacity and speculation and nerves in the oil market. Next year will be a better time to buy a hybrid than this year. Long term, it's going up baby, prepare for the ride. If you want to make some money place good bets (yeah, that is the hard part "good") on green tech. It's going to be the next bubble, maybe.
posted by caddis at 5:34 PM on June 10, 2008

They are artificially high due to lack of refinery capacity



posted by tachikaze at 5:40 PM on June 10, 2008

gyc wrote:

Wait, do you seriously want the government to be able to determine what a "reasonable profit" companies will be able to make? It's a truly absurd idea.

When the resource can make the difference between someone living and dying I damn well sure want the government regulating profits. What if an investment company bought the rights to all the fresh water in a certain city and decided to raise prices 60% overnight so some people couldn't even afford it, would that sit well with you? People need oil to live, it's fucking blood money. By the way, that example I gave you was already tried by Bechtel in Bolivia. So don't think it can't happen here.
posted by any major dude at 5:42 PM on June 10, 2008 [6 favorites]

Seems odd that just a few years ago, quite a few people seemed to have their collective underwear in a bunch because oil was too cheap, it was being wasted, etc.

Well, now the market's correcting itself. Yes, it's probably overswung by a bit, but anyone who didn't think this was in the cards eventually just wasn't paying attention.

I'm as annoyed as anybody by having to pay $4/gal for gas, but overall I think this is a good thing -- far better than trying to artificially depress the price of gas to $1.30 a gallon until every last drop of the stuff has been burned in our gas-guzzling SUVs.

There's a finite amount of oil available for human use, and it's rather useful stuff. The price is going to increase. It's going to keep increasing. Eventually, it's going to cost a lot. Hopefully, the price increases will happen gently enough that the increasing prices will encourage us to find alternatives for most of what we use oil for.

The worst possible thing I think we could do, both as a nation and as a planet, would be to pursue a "cheap oil" policy, and tell people that they can continue to use oil for low-value uses (which is what keeping the price low does) when it's really a very, very dear substance. Especially because that would just put us in an even worse position when it eventually does run out -- which it will, sooner or later.

I'm neutral on the idea of severance taxes. Theoretically, they're not terribly expensive to me; extracting nonrenewable resources from land seems awfully like an externality to me, and recovering the cost of expenses that the public ends up bearing because of private activities seems like a legitimate function of even the most minimalist governments. The issue that I have is with letting government get a foot in the door to any kind of oil price control, which seems a lot more dangerous, and like a very slippery slope given how shortsighted the voting public can be when they're hit in the pocketbook. I'd hate for a well-meaning severance tax today to be the basis for an Iranian-style fuel subsidy down the road, when people start feeling the pinch and don't want to make (necessary) lifestyle changes.
posted by Kadin2048 at 5:53 PM on June 10, 2008 [4 favorites]

Typo correction:

Theoretically, they're not terribly offensive to me...

Whether they'd be expensive or not, I'm not sure.
posted by Kadin2048 at 5:55 PM on June 10, 2008

Wow. I was going to post an extensive FPP on this last Sunday, but I decided that Mutants comments in this thread (and substantially repeated above) covered most of the bases. The main thing I wanted to add, and the centerpiece link of the FPP that I didn't make was a video of recent hearings of Senate committee investigating the role of speculation in the price of oil and the role of the CFTC. Here's the video. Witnesses include George Soros and Michael Greenberger. By far the most interesting stuff is Greenberger's testimony, which comes in at around the 33 minute mark. You can safely skip the first 25 minutes (jawboning by various senators), to get to Soros' testimony. Greenberger's contention is that the so-called Enron loophole, passed in late 2000 set the stage for the manipulation of the California electricity market in late 2001, but was never closed or eliminated. Greenberger goes on to say that what oversight their is in the oil futures market is out of the hands of US regulators, and are the responsibility of London and Dubai. Traders are not required to disclose their speculative positions, making it impossible for the CFTC or anyone else to get a good sense of how much of the oil price is due to the combination of inelastic demand + tight supplies + fuel subsidies in Japan, China and India versus how much is due to speculation.

One counterpoint: Krugman's argument in a recent blog post and column that is skeptical of the role of speculation in driving up oil prices. His point is that since you have to take delivery eventually, and since oil is difficult to store, there are physical limits to speculation.

Finally, I just printed off this paper by James Hamilton (pdf) today, but haven't gotten around to reading it. Perhaps Mutant can comment on this -- it is quite technical for those without a formal economics background (eg. yours truly).
posted by bumpkin at 5:56 PM on June 10, 2008 [1 favorite]

Aren't plastics going to go way up in price too?

4" x 6" x 3 mil poly bags jumped from $8 to $11 per thousand (in lots of 50 thousand) last month.
posted by quonsar at 6:33 PM on June 10, 2008

Awesome Bumpkin and Mutant. It's the point/counterpoint that I'm loving.

I did read about the "london loophole" (Bpk called the enron loophole) covered in the senate hearings (allowing for non-regulation of trading and out of control automatic trade feedback loop), but all the tidbits are good for more me-reading.

I find it increasingly difficult to sift through the oildrum-beat (we were right! yay for us! we all iz skrewed!) to get to the current edge of understanding. I think Simmons was at that edge two years ago, but now that the price is up and there's so much noise in the medias, I lost the pulse.

The global research link was the first I'd read to really challenge my 'peak oil is the fundamental reason for this current price spike' understanding, so I thought I'd share. Have to admit Mutant's on the ball, and provided a lot of good reading I'll need to chew through tonight. It's just too tempting to get drawn in into the doom-pr0n aspect of peak oil, when what I really want is
1) to understand, and
2) know next steps (live local, eat more veggies, be healthy etc.

and for the hard core PO folks still reading, I'll toss in another link posted before:

Amory Lovins predicting that we can save the world* through lighter cars (previously mentioned in this post here. )
*(maintain current rate of consumption of energy as oil peaks, that is)

keep up the good work, all.
posted by ilovemytoaster at 6:52 PM on June 10, 2008

The question really is: how much of this is due to a low US dollar. The answer is: a lot. The question is: who will solve it? The answer is: G-7. OK, how many got that right?
posted by wallstreet1929 at 7:38 PM on June 10, 2008

Someone Riddle Me This, then:

Unlike a housing bubble, or tech, or tulips, what pulls the plug if oil is speculated out of proportion to actual supply, since "supply" seems like a huge unknown, or at least cryptically guarded secret. Does some geologic think-tank publish a groundbreaking report that says oil reserves are triple that which was previously believed to exist and extraction techniques are going to improve tenfold?
posted by docpops at 8:41 PM on June 10, 2008

4" x 6" x 3 mil poly bags jumped from $8 to $11 per thousand (in lots of 50 thousand) last month.

Not to mention shovels and quicklime.
posted by docpops at 8:43 PM on June 10, 2008 [2 favorites]

Unlike a housing bubble, or tech, or tulips, what pulls the plug if oil is speculated out of proportion to actual supply, since "supply" seems like a huge unknown, or at least cryptically guarded secret. Does some geologic think-tank publish a groundbreaking report that says oil reserves are triple that which was previously believed to exist and extraction techniques are going to improve tenfold?

While a fair amount of oil demand is inelastic there is still a rather large amount of the developing world that uses state subsidised fuel. As developing nations begin to pull the plug on keeping market prices artificially low your trickle of people who can't afford oil will go from third world losers to a torrent of struggling people in the developing world up to flood of the lower end of the first world.

If you think watching gas going from $3/gal to $4/gal is tough, imagine getting your fuel subsidies cut/removed and watching your gas go from 50c/gal to $4/gal.

The developing world is about to get clobbered by oil prices.
posted by Talez at 9:57 PM on June 10, 2008 [1 favorite]

Not to mention shovels and quicklime.

Inxnay on the assmay ravegray uppliesay.
posted by codswallop at 10:31 PM on June 10, 2008

Not to mention shovels and quicklime.

These are 4" x 6" bags here - what exactly are you burying? A mass grave for gerbils?
posted by GuyZero at 11:57 PM on June 10, 2008 [1 favorite]

If you look at oil producer stock prices, they aren't reflecting sustained high oil prices going forward (more like $80 a barrel). So the market is betting oil will be lower long term.
I think there has been a change in the oil market, and that demand has reached current supply constraints. This has allowed suppliers to price oil at whatever the market will bear, rather than a cost plus price. No speculators are needed here to have substantial, rapid price rises, as the end oil customers will bid up oil till its price reaches its value to them.
Is this peak oil? Maybe, if there aren't sufficient resources in Saudi Arabia to make it worthwhile to drill new wells - that is, expand maximum output. Everything else is a sideshow, new discoveries are nowhere near replenishing our use, so if the Middle East doesn't have sufficient easily accessible reserves (and many believe they massively overstate their reserves) then we are indeed at Peak Oil.
That is all the peak oil theory is - that there will be no more sufficiently easily extracted oil to keep up with our growth, even though there is as much still left in the ground as we have used to date.
Our ability to bring alternatives online is limited, and will not be sufficient to support current growth rates, so without a technology miracle, we will be in a fix.
And the result of that will be sustained, continually raising oil prices, combined with (probably) stagflation.
posted by bystander at 1:12 AM on June 11, 2008

Since cortex kindly went ahead and deleted the FPP I was writing this for, a link to this in the middle of me writing it, I'm gonna post it here. :P

That rising oil prices is just a speculation bubble makes a lot of sense, but I think there's two more factors involved. Firstly, the prevalence and acceptability of speculation and investment as a primary means of making money. This is a relatively new thing, a trend that arose through the 1960's to 1980's, and IMO directly results from the "budgetist" mindset, the same mindset that gives rise to "internal cost charging" and similar extremely detailed and cumbersome accounting practices.

The central tenet of the budgetist credo is that everything, absolutely everything, is fungible through the miracle of money. A unit of billable work: a dollar amount. An employee: a dollar amount. An item of raw material: a dollar amount. Any employee, sub-department, machine, governmental division, etc whose largely-fudged and illusory input exceeds its output is called "underperforming", and each and every individual one is so assessed. Because most of us have watched this shit parade march past for all of our working lives, we are under the impression that it is the natural way of things. It is not. It is an ideology, not a natural law, and it has few desirable and a great many pernicious consequences.

One of those consequences is fungibility of income. The reasoning goes: if I am assessed on the money I produce from my work, rather than on my work, by my employers, my stockholders, my government, my family, and so on, it does not actually matter what work I do. I could stick wood together to make furniture or I could shuffle papers or I could shovel money from one place to another. It's all good, or bad, inasmuch as it produces income.

This is an utterly destructive idea to the coherence of society and the dignity of human beings. Why? Because it elevates two unpleasant and undesirable classes of human being: the scam artist (because the margins are always best with a scam) and the speculator, or self-inserted middleman.

Assume A makes something. Furniture, say. D wants to buy it. In a village-based economy, A would pay D. In a wider world, B might say to A, sell me your furniture, and I will aggregate it in my shop, and sell it on to all the Ds who walk in the door. There's a clear efficiency gain there to D, but this is paid for by A's reduced margin (shops pay less than customers) and by the increased price B charges to D. C, the proprietor of a supermarket, might come along and say, I'd like to buy a whole lot of furniture, as well as a whole lot of other things, and I will provide it directly to all the Ds who walk in through my store. Again, D gets an efficiency gain from it, but it's paid for by A, by B, and by the increased price C charges (or some combination thereof - sadly, poor old A gets to pay most of it).

Obviously there are other roles in this model economy: people who buy old furniture back from D to repair and resell, transportation between each of these steps, and the actual investors without whom any of the participants couldn't participate.

Now enters the speculator, the self-inserted middleman, a different kind of participant. He can be defined by one key attribute: without him, the economic transactions would go on. It would all rattle along just fine. At some point in the process, the speculator buys something from A and sells it to B at a profit, or from B to C, or from C to D. The speculator adds no value. He merely adds a cost, which becomes his profit. He buys a house, from a builder, or from its present owner, and sells it on to a new owner at a profit. He buys oil from B, offering marginally more than C would, thus inducing B to sell to him rather than to C, then sells it off at an increased price to C. And so on.

Since "it's all just money", the moral worth of the work is irrelevant. The speculator, if it even crosses his mind to consider the value of what he does, dismisses it, or is induced to dismiss it by demands made on him.

(It's secondary to the key point, but on top of speculators we get meta-speculators, who go to the trouble of setting up As, Bs, and Cs just so that, at whatever stage in the process looks most vulnerable, they can take their profit. Halliburton's the obvious example of this. Meta-speculators do a lot of market corruption, buying off individual decision-makers, to make sure that even when less expensive options are available, the option that profits them is the one taken.)

Now the second factor: rapid information transmission. Everyone can see and hear about new methods of making money. So, when something comes up that's working particularly well, vast numbers of people jump on it. (Since it doesn't matter what you do, you might as well do what produces the most money.) This will drive up the costs to everyone, to squeeze out a profit for everyone; once the profit's gone, the flock will move on, leaving the unlucky latecomers who couldn't make the initial profit rush holding the detritus.

Later, a new potential insertion point is spotted by a few early speculators. The signal goes up. The flock descend, to ruin yet another thing for everyone, so as to channel a bit of profit out of it for a few.
posted by aeschenkarnos at 6:34 PM on June 18, 2008 [1 favorite]

aeschenkarnos: you seem to assume things only go up in price in your model economy. (the same assumption the US made about house prices for the last 10 years)

It is 4 years since $40/barrel oil. I don't know many speculators who would hold a long position for that period in the size necessary to drive the price up this far. And if they did, whats going to happen to the price when they come to sell this HUGE inventory?

Oil is going to stay expensive(if thats what it is, I tend to agree with tachikaze on how inexpensive it is)for a while now, it was just too cheap before and we built a dysfunctional economy on the basis of it being cheap.

Unfortunately some people (I mean poiliticians not parties) seem to have got it into their heads that this is someone elses fault.
posted by fistynuts at 6:35 AM on June 25, 2008

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