Gas on the rise part 3

In the first two posts I discussed why government regulation on the production of oil and refining capacity has lowered the supply of oil for years in this country and is the number one reason that gas prices are skyrocketing. We covered the demand that is rising not just in the United States where standards of living and thus per capita (or per person) consumption of energy is rising but the demand in China and India where one-third of all the world's population is also rising at alarming rates. When production and thus supply ceases and demand rises, prices rise exponentially. Finally in the last post I discussed why oil companies need to have big profits and how political rhetoric can be deceiving when in fact oil companies make less per dollar than many companies in the world. I also mentioned that oil companies reinvest most if not more of those "obscene" profits into new sources of oil and energy.

Today I want to mention an area of the market that few talk about because their understanding or knowledge of this is at a minimum. Tomorrow in fact congress is meeting (lecturing) speculators about their part in the price of oil being so high. The press is also picking up their attacks on speculators for their part in the ever rising price of energy. What politicians, pundits, and other media outlets condemn speculators of is in fact true. Some experts have said that speculators have caused the price of oil to rise anywhere from $20 to as much as $60 a gallon. Allow me to explain why this happens and even more importantly why this is a good and important thing. I will do this by referencing to a recent May 28 article written by one of my favorite authors and economist- Walter Williams of George Mason.

Say today the price of corn is $6 a bushel. If I'm an economist and can predict that in the future- say a year down the road, that due to bad weather, supply and demand, or war that corn will go to $12 a bushel I could buy up extra corn today, store it for a year, and sell it for a 100% profit in a year. If my prediction is correct then I have just made a ton of money. This happens everyday at exchange centers such as the Chicago Mercantile Exchange. Some would argue that I am taking advantage of a situation and trying to profit from it. That would be true and you can call me greedy if you would like, I will not lose sleep over it. I could also guess wrong and the price of corn could go down to $3 and thus I would have a huge loss of money on my hand. But why are these speculators so important?

If there is going to be a drought, bad weather, war, or huge rises in demand in the future there is a great chance that there will be a shortage of corn. But if I have wisely bought extra corn up now in order to prepare for the future (despite my main objective being massive profits) there will be no shortage. Thus massive starvation around the world will not happen and I due to my "greed" will save millions of lives if I am one of the hundreds or thousands of speculators buying up food resources. If most speculators are guessing future prices to rise due to those factors then they will all buy up now which is a rise in present demand and thus what happens to the current price? If you said it goes up immediately then as Williams says, go to the front of the class. You are right. But this rising of the price causes people to conserve and use other resources that are not in fear of being in short supply in the future and thus we do not have empty food shelves like the Soviet Union did right before it collapsed. Of course if domestic production was much higher then these speculators would not have to worry about war in the Middle East and other issues which would allow the prices to drop again.

The real issue with oil prices is education. Until we Americans stand up and get rid of the teacher unions and stop government from running and operating our education system then economics will never be taught because with great knowledge of economics means the losing of political strength. When Americans know about economics they will also know why government must get smaller and why competition is needed in schools which will in essence end the role of teacher unions. This is why I think there is a conscious to down play the importance on economics in school. I hope I can get enough Americans to stand with me and demand "Good Change" not to be confused with "Real Change" (the hopeless slogan of the Obama Campaign).