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The Problem with Economists and Oil September 1, 2008

Posted by Jim Satterfield in Business & Society, Economics.

Seems to be that they just don’t learn from the past. A few years back we were told over and over again that the market was what was driving the gyrations of the California electricity market. Stuff happened. Plants shut down all the time. It’s just market forces doing what they do, which is always the best thing. We learned that was all BS and that in fact companies like Enron and others in the “energy trading” game had been rigging false shortages and playing other games with the market all along. The economists were wrong. The people who said that the markets were in fact easily manipulated by the big players were right.

Now the economists tell us the same thing about oil. This may not seem like as big a deal with prices currently falling but once you read this from the Washington Post I think you’ll agree that it is very important to keep their indadequacies because of their beliefs in the markets in mind. It tells the story of one company that the regulators thought of as a basic trader that helped companies that needed to acquire oil for their own use. In fact regulators just learned in July that this company, Vitol, in fact was holding huge stakes in oil as a commodity for the sake of investment. In fact at one point they controlled 11% of the oil contracts on NYMEX.

What was discovered when more digging happened because of this discovery?

The CFTC, which learned about the nature of Vitol’s activities only after making an unusual request for data from the firm, now reports that financial firms speculating for their clients or for themselves account for about 81 percent of the oil contracts on NYMEX, a far bigger share than had previously been stated by the agency. That figure may rise in coming weeks as the CFTC checks the status of other big traders.

Will any of the economists who have been pushing the classic economics meme of supply and demand actually read about this? Will they learn anything this time that previous examples of even huge markets being rigged for the traders didn’t teach them? Don’t hold your breath.



1. BIGFOOT - September 8, 2008

OK . Now that we know who is to blame then how come no one is talking about compensation for the public. That’s right. We all got ripped off at the pumps and we want our money back. Vitol, goldman Sachs, Morgan Stanley and the rest of the scoundrals have an obligation to make it right again and the CFTC should be disbanded and punishment administered to the ones that covered up this massive mistake

2. Jim Satterfield - September 13, 2008

Well, most of those people have proven to be so incompetent that they’re busy losing their jobs right now. They make money vanish so well that David Copperfield is green with envy.

3. Rick Bertz - September 16, 2008

Why pay a huge fine to the gov’t when a modest contribution to a campaign is cheaper?

4. Jim Satterfield - September 16, 2008

True. There’s also probably an ego issue involved. And the current drastic drop in prices proves that the people insisting that it was all supply and demand were wrong yet again.

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