Thursday, September 14, 2006

Oil: A Manipulated Market?

Today, over at the Of Two Minds blog, Charles Smith discusses the possibility that the oil market is manipulated.

You could certainly make a good argument that it is. The price of oil seemed to spike almost instantaneously over the last year. Just today, I heard the D.J. on K-LOVE radio mentioning how he read that the price of a gallon of fuel will fall to $1.15/gallon over the next few months. I doubt that that prediction will come true. The cost of extraction of oil is just too much at this point.

Other factors that factor in to the price of fuel at the pump include: the cost of transportation, refining capacity, marketing costs, taxes and the cost of the extraction of the crude itself. There is another factor that is not discussed on the mainstream sites like That is the price of fear. A lot of the premium price of crude oil futures is the "fear factor." That is where price manipulation can take place. We have seen how the threat of terror has allowed politicians to manipulate Americans to constantly be in fear. In a lot of ways, the threat of war is used to manipulate the price of oil.

I do think that there is such a thing as "peak oil." The theory of peak oil states that at some point, the availability of cheap oil will pass because the extraction costs will rise due to the difficulty of getting the oil that is left in the earth. Although there is estimated to be a 100-year supply in the sands of Canada, the extraction costs (not to mention the environmental destruction costs, which in some ways is an externality -- a cost that is not easily quantifiable) are only justifiable as oil rises over $40/barrel.

So, the best evidence suggests that although the price of oil has been dropping as of late, the long term prospects says that the price will have to rise due to demand from developing markets, rising populations that will need it to heat their homes, fuel their cars and farm implements and generate other forms of energy. Also, in the long term, it will be necessary to develop efficient alternative renewable forms of energy (wind, solar, hydro and possibly nuclear).

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