The Philippine Onion

Lies and half-truths shall set you free

Why gasoline prices might suddenly dive

Posted by commiedyan on November 30, 2007

by e-kunomista

It’s really fundamentally a supply and demand thing, with the former not rising as fast as the latter. The major sources of demand growth in the past few years have been China and India. The fast pace of growth in China and the even higher growth in energy consumption has in fact made it the world’s largest emitter of greenhouse gases this year, overtaking the United States.

(We are a bit intrigued by the allusion of the respected economist Ciel Habito to possible price manipulation in the local petroleum market in his latest column in the Philippine Daily Inquirer. It was under his watch in the NEDA that the downstream oil industry was deregulated. Perhaps this is politically motivated).

But oil analysts agree that a big part of demand is speculative, coming from hedge funds trying to find shelter from the falling US$ by buying into commodity futures, minerals, agricultural staple, and oil. In the old days, speculation could be limited by physical storage capacity, but these days what’s influencing prices are futures contracts lodged in code in cyberspace. No need for Mr. and Mrs. Shady to hide oil barrels under the bed.

In normal markets, speculators play a positive role in stabilizing prices because they buy when prices are low and sell when high, thus narrowing the range and reducing volatility. Otherwise they’d lose their underpants if they do the reverse, right? But when a few hedge funds collude, they might be able to keep prices high with their self-fulfilling prophesy. But what feeds speculation are mainly geopolitical and weather-related events. Some researchers say that without the speculative element, prices should be within the $50-60/barrel range. (An earlier body of work of the Nobel economist Joseph Stiglitz focused on price stabilization and speculation).

The silver lining is that persistently high prices of oil and coal fuels development of cleaner alternatives. But what if oil and coal prices are artificially high because of speculation? What will happen to the alternative energy developers who based their feasibility studies on wrong relative price projections?

Granting that a few players have cornered the futures market, they still take large risks, especially if a spate of good news develops:

  1. If peace suddenly breaks out in the Middle East despite George W.’s fumbling and bungling and perhaps because of the anticipated victory of either Barack Obama or Hillary Clinton, or perhaps the sudden death of Osama;
  2. The discovery of large oil reserves, in Brazil or in the Tañon Strait between Negros and Cebu;
  3. The successful development of much cheaper alternative energy sources and other engineering innovations, such as the ones described here and here.

High prices, of course, are the motivating force for both the second and third. In the short run, having studied the local and world oil markets for some time, I pin most of my hopes on number 3. For the past few days I’ve been studiously following the stock with the symbol URX in the Nikkei stock exchange. It seems very large funds have been accumulating the stock, sending it to some intra-day spikes.

The speculation is that the company is about ready to come to market with its new product, whose name has come out of the mouths of executives who have been ridiculed for their pronunciation: “Gasorine, gasorine.” Gasorine will allegedly be retailed at half the price of conventional gasoline, with a higher energy content and octane number (RON=98). It is a special mixture of 20% conventional gasoline and 80% concentrated urine.

If the speculation is borne out and the product reaches world markets in the next two weeks, speculators who’ve catapulted oil prices to the $100/barrel level will have to eat their own shit. Meanwhile, our Christmas will not be as bleak as expected. We can say to our neighbors, friends and lovers: “Pee to you and Goodwill to All Women and Men.

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4 Responses to “Why gasoline prices might suddenly dive”

  1. naught101 said

    🙂

  2. […] Gas prices are rising, but they can suddenly fall again […]

  3. […] parties we haveControversial Standard columnist bags 2 honors in Catholic Mass Media Awards (GE)Gas prices are rising, but they can suddenly fall againPhilippine ‘typhoon corridor’ bill breezes thru House on third readingRepent and prepare…Catholic […]

  4. […] “Que calamidad!” a stock trader at the Bovespa in Madrid said. At the Chicago Mercantile Board, an analyst said “gold has lost half its luster forever.” She revealed hedge funds were dumping gold in favor of oil and onions. Oil prices had begun to slide despite the decision of the Organization of Petroleum Exporting Countries to maintain current production levels, probably because of a recent Japanese invention curtailing demand. […]

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