I listened to yet another radio discussion of oil prices a few days ago, after they had surged to $137 a barrel, I think. I am miffed that it is so hard to get a straight and uniform answer out of the market experts about the cause. As usual, there was someone who said that the price rise is due to a speculative bubble on futures contracts. It is a bubble in the sense that the sharp upward trend is not primarily a reflection of underlying supply and demand factors, but is just based on speculative bets on the future direction of oil prices, and the value of holding oil contracts.

And yet there was another expert who was absolutely convinced that the price rise had little if anything to do with speculation, and is primarily the result of rapidly surging global demand together with limited capacity around the world to increase supply, or limited willingness to increase supply, or both.

Of course the policy the government should follow depends crucially on what the truth is. What the hell is really going on? Whom should I believe?

My modest involvements in my own corner of the business world tell me that when prices rise, the people involved in setting those prices usually know precisely why the hell they are raising them, and have a very solid grasp of the underlying market factors. So why is it so hard to get a straight answer here from analysts?

I have 3 words on how to handle what is happening in the oil markets...windfall profits tax.

If the point was made to whoever is responsible...oil companies, speculators, etc...that obscene profiteering off oil would come with a price it would go a long way to burst the bubble.

Plus the tax money could be used to develop alternative forms of energy, comprehensive mass transit and even for non-energy related issues like health care.

BTW, it's not an oil bubble.

The Saudis really can't pump more.

We could open ANWR and all of our coasts and not get enough oil to effect global prices.

This isn't a bubble.

This is basic supply anc demand.

We're running out of supply. The Saudis know it. They said they're saving reserves for future generations. That's a lie. They want to sell everything they can at current prices, in order to cash in. After that, they're through.

More generally, what are the ways and means, if any, by which the government should try to pop bubbles, whether dot.com or real estate or commodities?

Wrong question. Was it supposed to be a trick?

A: Bubbles pop themselves. That's why they're bubbles.

The better questions are:

How to avoid bubbles?

How to deflate, but not catastrophically "pop" the bubbles we've had and are still in?

How to do so without just inflating new bubbles?

The quick answer to all of the above is: don't be Alan Greenspan, who for ideological reasons did just about everything wrong. There's plenty of criticism of his monetary policy.

Also, the blame resides on every President and Congress over the last few decades pursuing laissez faire policy. There's been lousy trade policy, debt, and energy policy which has inflated the tech, housing, and now oil bubbles.

Sorry for the double post, but I meant to ask - (Where do we go from here?)

People who talk about windfall profits, the naughty Saudis, "bubbles", or any other issues have miss the point.

Speculators control the price of oil now.

In fact, while world production of oil will fall on a predictable curve, oil available to the US will fall even faster because the exporters (a) have more domestic use needs and therefore ship less (we are already seeing that in Mexico) and (b) are beginning to sell less oil on the open markets (i.e. the special deal that Venezuela and China have).

May I suggest my most recent blog (of today) which addresses these issues and the foolish government response thus far:

http://tpmcafe.talkingpointsmemo.com/talk/2008/05/oil-well-not-ending-well.php

I would also recommend two books by Kevin Phillips:

AMERICAN THEOCRACY
BAD MONEY

Both available at Amazon.

Brazil is ahead of the rest of the world. They use suger ethanol, made from sugar cane and therefore need no oil imported. I understand sugar ethanol is 7 times more efficient, cleaner burning and higher octane and cheaper, than corn ethanol.

Plants in Brazil make sugar AND sugar ethanol from sugar cane.

http://yaleglobal.yale.edu/display.article?id=6817

Why let bubbles develop in the first place? A Pigou or Tobin tax of one fifth of one percent on ALL financial market transactions - stocks, bonds, options, futures, swaps and whatever else is out there - would do much to prevent the formation of bubbles in the first place.

Second, simply force hedge funds to operate under regulations like all other financial actors. That would eliminate the high gearing of leverage that is unique to hedge funds, which explains a lot of the money flows that go into a bubble. A study by the New York Federal Reserve a year or two stated that hedge funds account for 40% to 60% of all trading in various U.S. financial markets.

Third, repeal the Commodities Modernization Act of Phil Gramm from 2000, which exempted OTC trades from regulation and reporting. Gramm - who is now an economic adviser to John McCain - included a number of other provisions that were literally written by Enron lobbyists and lawyers; his wife Wendy was later made a director of Enron after serving as head of the CFTC.

If compliance with new rules and regulations is not forthcoming, landing a brigade of the 82nd Airborne and having Elliot Spitzer lead an investigation of all the secret bank accounts seized will do wonders for changing the minds of recalcitrants on Wall Street and in the futures pits of Chicago. The City of London is going to be a big problem though. For people that re-locate their financial business offshore, there should be a stiff tax paid for moving capital out of the country. Finally, a few covert ops, such as Henry Kravis "falling" off his yacht will probably also be required.

WHAT OIL BUBBLE? It's not an inflating oil bubble... It's a DEFLATING DOLLAR BUBBLE. From what I've read and heard from those with independent, far sighted vision is that the rise in fuel prices relates directly to the loss in value of the deflating $.

It's the Euro vs. The Dollar. (it's the dollar economy stupid) Everyone but US wants to trade oil in Euros. For Christ's sake that's a major reason that we went into Iraq. It was to stop Saddam from switching to the Euro.

Wise people say that if you "DO THE MATH" you'll see that for every penny the dollar drops there is a correlating increase in the price of a barrel of oil.

Sure it sucks hard that the Republican administration, the Republican Congress, and the Republican Federal Reserve, all run by short term Corporate interests have run the dollar into the ground. Just don't be a suicidal IDIOT and vote Republican again.

The way to effect the price of oil would be in the cash market, so you need to be able to actually buy it and take delivery, or sell it.

The US could effect the price by dumping oil from the SPR at a low price to refineries here in the US, and threaten to do so again in the future at unannounced times.

This way would scare the tar out of minor speculators. Big deal.

It's effect would be temporary and would do nothing to reduce our need for foreign oil, the decline of the US dollar and ever increasing prices at the pump.

Green technologies are the future, no matter what naysayers and flatearth types brute. While humanities demise may not be imminent, if we continue on the current vectors, - it will be unavoidable.

No one is saying there will be an instant transition to some new unknown unknown technology, - there are huge political and economic obstacles to surmount, and an entire infrastructure to design and build, but investment in, and focus on clean, more effecient green technologies is imperative. First diminshing demand on oil will alleviate stress on the oil markets over time, theoretically push prices downward, and contribute to the development of new non-fossil fuel based technologies.

That said, the Bubbles-r-us economy of the US is teetering on the brink of collapse. The cause is the focus on irredeemable debt, wherein various inventive highly complex synthetic debt instraments, or collateralized debt products are used as the primary means of capitalization. This debt financing debt ponzi scheme worked fine when America was productive, prosperous, and relatively fiscally responsible. Those days are gone, - now the debts are coming due, and the entire global system is coming to the realization that America debt based economy is a house of cards. Soros has a number of intriguing theories along these lines.

What is most striking is Mr. Soros assertion that the underlying system of capitalism is deeply flawed, and totally dependent on the state, or governing authorities to "bale out" failing, and often borderline criminal malfactors to support the underying system. This cycle of financial malfeasance creating markets capitalized by debt instruments leads to "self reinforcing, eventually unsustainable boom bust cycles." In every bubble situation (S&L, Junk Bonk, Housing, Credit, the impending Credit Default Swap crisis) as debacles devolved to crisis - the government steps in, and redirects, and funnels billions of the peoples dollars to bale out, rescue or stabilize the malfactor industries responsible for the crisis, the socalled markets, and the irredeemable debt system. No one is held accountable. No regulations are tolerated. Nothing changes except the invention of the next synthetic instrument that will cause the next boom, bust, bubble cycle.

What Soros also makes clear is that there are no free markets, and there is no equilibrium in the markets.

What I term the predator class can invent or conjure any sort of financial fantasmagoria, or "synthetic instruments" (CBO's, CBS's, Credit Default Swaps, or other derivative congjurings) based on the complex buying and selling of complex debt intraments. As Soros clearly points out, this system is a total failure, as proven by the fact that derivative instruments the applicable ratings institutions formally rated as AAA, ar now reduced to "junk", as in actual ratings terminology based on return on investment as "junk". Golden one day, dross the next.

The market fundamentalist (those who proselytize the selling of synthetic debt as a means capitalization) depend on "imperfect understanding of the markets to cloak problems - and are in bed with the authorities, or the government, or the state who are forever pillaging the peoples dollars to bailout abusers, decievers, and malfactors in the finance sector.

Recently the Fed has funnelled more than half a trillion dollars of borrowed money into the financial sector since December to inject capital and stabilize the credit crisis and housing crisis concocted, promoted, sold mismanaged, and ignored by the same financial sector.

This robbing from poor and middle class Americans to feed the superrich, or what I call the "predator class" malfeasance was motivated by purely political ends, intended to cloak the Bush government's responsibility and accountability for complicity in perpetuating both the Housing and Credit, and soon to show it's ugly head Credit Default Swarp crisis, - for the failure to recognize, thwart, or warn of these crises, - and for heaping the crushing costs, debts, and flawed system onto the next leadership and the shoulders of our children.

The markets may (may?) have stabilized, and the worst of the crisis may - (and that is itself a big 'may') be behind us, - but the underlying flaws and the terrible crushing unsustainable debt remains unchanged and matasticizing.

This article touches on the same issues and makes a good case for the brutal end of days of "irredeemable debt".

http://www.atimes.com/atimes/Global_Economy/JE02Dj05.html

First, we do not have the right to tell other countries what they can and cannot trade. We can change the rules here in the US, and put pressure on our allies, but, only if 100% of all countries agree to restrictions, all the hedge funds will move their money to those countries or exchanges where there are fewer restrictions.

Secondly, the purpose of "speculators" is to provide liquidity to so that both the producers and users of any commodity are better able to hedge in order to guarantee their profitability. If we think we are seeing fluctuations now in the oil market, removing the speculators would produce wild swings beyond anything we've seen so far.

Speculators play both sides of the market, in so doing, all they do is provide liquidity. For everybody betting the price will go higher, there is someone willing to bet it won't. That's not the cause of the problem.

Bee:

Discoveries in Brazil are irrelevant to the general argument. World *peak* discovery happened in 1965. That doesn't mean discoveries don't end -- it just meant they peaked.

As far as my other comments about the swing producers being the a) US then the b) Saudis and now c) no one, that is a fact.

You have become simply a contrarian living your life in apposition to truth. Your arguments (when you have them) consist of finding an article and using a line to prove your assertion. I have yet to see you synthesize over a broad set of facts and present an insight.

You have already complained about heating oil prices last winter -- guess what? If I were you, I'd start saving immediately for next winter.

Or just claim I have no clue about anything.

You are definitely someone who would cut their nose to spite their face... that's impressive.