Simplistic Speculators

Walter E. Williams of Investor’s Business Daily Editorials has done an excellent job explaining how futures trading helps stablize commodity prices by using corn as the example in his article titled, “Stop The Scapegoating Of Oil Speculators And Give Them Good Reason To Go Short.”

“Say that today’s price of corn is $7 a bushel. I have a hunch that because of Midwest flooding, higher demand due to droughts and war in other parts of the world, that in May 2009, corn will sell for $12 a bushel.

I stand to make a lot of money by buying corn now for $7 a bushel, holding it, and in May 2009 selling it for $12 a bushel. If many speculators share my hunch and buy more corn now, today’s price, sometimes called the spot price, is going to rise, let’s say to $10 a bushel.”

The trouble is that analogy only goes so far.

“Congressional attacks on speculation do not alter the oil market’s fundamental demand and supply conditions. What would lower the long-term price of oil is for Congress to permit exploration for the estimated billions upon billions of barrels of oil domestically available, not to mention the estimated trillion-plus barrels of shale oil in Wyoming, Colorado and Utah.”

Corn is not the same kind of commodity as oil.  Corn is to grain as oil is to energy.

Many products that come from corn (as opposed to grain, in general) can ONLY come from corn.  Oil is only one form of energy.  The real commodity is ENERGY and oil is only one example of that commodity.

If there are trillion-plus barrels of shale oil in Wyoming, Colorado, and Utah, that’s great!  Assuming those states agree to the process of rendering that oil useful, why drill off-shore when oil is so abundant in these three states! 

The citizens of Wyoming already enjoy the benefits of tax revenues generated by coal.  Include shale oil and the per-unit tax burden to the energy companies might be less than it is now.

Still, oil is only one form of energy and energy is the commodity of concern.  People generally believe that sustainable alternatives are a long, long way off.  Researchers at MIT think differently:

“Inspired by the photosynthesis performed by plants, Nocera and Matthew Kanan, a postdoctoral fellow in Nocera’s lab, have developed an unprecedented process that will allow the sun’s energy to be used to split water into hydrogen and oxygen gases. Later, the oxygen and hydrogen may be recombined inside a fuel cell, creating carbon-free electricity to power your house or your electric car, day or night.”

Anne Trafton’s article in MIT News is well worth reading.

Then reread Walter E. Williams’s article, substituting “energy” for “oil.”  Does “drill here, drill now,” with the prospects of using oil from new exploration 10 years away, still seem like the only hope we have to “pay less” now?