I’m lucky to live in the Dallas area for a variety of reasons, mostly to do with all the extended family around. However, another benefit is hearing Ed Wallace on the radio every Saturday morning. His reporting never fails to inform and illuminate, such as this story explaining why there is no gas shortage.
But wait, you say, gas prices are higher, so demand must be outstripping supply. That’s normally correct, but as Ed details, other forces have overwhelmed the cause and effect of supply and demand. These forces are the same ones that turned the home mortgage business into a swamp pit of incredible shrinking value, and they’re on the upside of the same process with oil futures. Lots of speculators and no regulation makes for a bizarre market.
When 20 times more oil futures are bought and sold each day than actual oil, something is wrong. Sound like the housing mortgage market? When speculation multiplied Joe and Kathy’s house loan into a hugely leveraged investment vehicle, everyone made money. At least they did until Joe and Kathy fell behind, couldn’t pay their mortgage, and defaulted. Normally that would be problem for just Joe and Kathy, but it appears a global financial empire rested on a few ill-advised loans. Seems for each loan that defaulted, an over-leveraged hedge fund dropped through the floor.
What happens when the oil speculation bubble bursts? Ed hasn’t told us, but I’m betting it will be uglier, and more far reaching, than the mortgage mess we’re in.
Of course, the little people (homeowners and people buying gasoline) lose the most. Speculators tend to sneak away into the night with bags of money, leaving bags of IOUs for suckers like you and me to pay off via more taxes and bailouts.