Saturday, May 24, 2008

Speculating on Oil

This morning the Doug Stephan radio show was on. In the past I have stated my firm belief Doug Stephan is nearly a total idiot, however on Saturdays he host a financial/economic adviser by name of George Yared. George I think is good antidote to Doug.

This morning they were talking about the oil situation. George made the contention that what we are seeing is a speculative boom in the price of oil. He noted there is supply enough to meet the demand and supply adequate profit at something under $100/barrel, I want to say at about $60-$70/barrel of oil but do not recall his exact thought. He noted speculative houses and hedge funds were bidding the price of oil up as a haven from...can you guess? I'll leave that open and see if you know or can guess.

Anyway, George's comments led me to one thought bubble. When prices of any commodity are driven up by rank speculation there is bound to be a day of reckoning for the speculators and someday the oil bubble will burst. Now, in recent years we have seen two similar bubbles a tech-stock market bubble and a housing market bubble. Bubbles pass, irrational exuberance turns into irrational FUD. In this case, I think many of us will be glad for the bubble to burst.

George then went onto to discuss how to lance the bubble. It is in strengthening the dollar. The dollar is weak against other currencies. There is no correct just trade offs between a strong and a weak dollar. Have a strong dollar the rest of the world's goods are cheap but our exports suffer, have a weak dollar the rest of the world's goods are expensive but exports soar. Count oil as one of those expensive goods.

George says the Federal Reserve and our nation will be in a position to start strengthening the dollar in the near future. He stated the Fed had some domestic situations to take care of first namely dealing with stabilizing interest rates and the housing bubble crisis.

I have heard other economists also state they felt the oil markets were being pushed by speculative forces more than supply and demand. So, get the dollar strong again and the hedgers and the speculators will stop running to oil and the price will come down. Let us hope.

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