World Oil Prices: Who Really Sets World Oil Prices?

I watched the CBS News show “60 Minutes” Sunday night, and saw the piece on world oil prices done by Steve Croft. I realize that their format doesn’t allow for a detailed, in-depth investigation of any topic, but this seemed to be a broad-brushed finger pointing session.

Have you ever watched a skilled magician do his act? He will divert your attention with activity in one hand, and do the “magic” with the other hand. That’s what this segment reminded me of.

Croft and his gaggle of “experts” led viewers to believe that the commodity speculators were entirely to blame for the spike in oil prices in 2008, and also responsible for its collapse in the last quarter of 2008.

But is Croft telling the truth?

Maybe. But only partially, in my opinion.

World oil prices are set on two criteria, or two particular oil products; West Texas Intermediate Crude (Sweet Crude), and North Sea (Brent Crude). Those prices are set in New York and in London, not by the oil producing nations of OPEC.

West Texas Sweet comes from the oldest major producing fields on the planet. North Sea Brent comes from the most difficult and highest cost oil field on the planet. So, world oil prices are set based upon the two places on earth where the production cost is highest.

There are places where oil is plentiful and easy to produce. It’s almost like sticking a pipe into the sand and oil comes out. The production costs for those kinds of oil fields is much lower than in the North Sea, so those oil fields are much more profitable.

But do you ever hear anyone telling you that? No. What you hear on all the news shows and from government jabberers is that OPEC has the rest of the world in its clutches.

Next point to challenge is the blaming of the speculators. In any transaction, there is a buyer and a seller. Both parties are making their best effort to profit from the transaction. When someone buys a future contract on a commodity like oil, they are betting that either the price will rise or that the price will fall before a certain future date. Buyer and seller are both gambling, and one will be right.

So who are the speculators? I don’t know. But the major commodity exchanges are in New York and London. There are speculators buying and selling in every single commodity, from bacon to frozen orange concentrate to crude oil. Curious that no one is crying about speculation in the other commodity markets.

My business is as a Claims Consultant and a Risk Manager. It seems to me that commodities futures contracts are very similar to buying insurance to protect against certain losses. Skilled insurers make a profit, and unskilled insurers lose money. No different here in the oil business.

Remember also that during the same time period, the US Treasury and Federal Reserve flooded the world with trillions of new dollars, causing inflation everywhere. You did notice that prices for nearly everything escalated in 2008, didn’t you?

Finally, in an oil-related story, Georgia state government regulators recently assessed fines against about a dozen gas stations that allegedly did “price gouging” during the run-up on oil prices in 2008. That must mean that property rights in the State of Georgia don’t mean anything. A merchant who spends HIS OWN MONEY to buy a product should be free to sell that product to whomever he chooses for whatever price buyer and seller can agree to. No one forced any buyer to buy gas from these stations at any price. The sellers offered their product and willing buyers bought it. However, seems that some of those buyers like Fascism more than Capitalism, since they called the State bullies and complained. I hope that the stations marked for punishment are fighting back in the courts.

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