Shane's Drivel

The other root cause October 6, 2008

Lost in the endless discussion about how asinine mortgage decisions lead to the current financial crisis is the role of oil. Over the last year, anyone who thought that the doubling and then tripling of oil prices was the work of evil hedge funds and market speculation and or manipulation was summarily dismissed by the mainstream media and “mainstream Wall Street thinking” (whatever that is).

Yet as oil reached upwards of $100, and later to $147, people had to choose between food, gasoline, and their home. Homes came in 3rd place. Mortgage defaults skyrocketed. Foreclosures did too. But too many foreclosures lead to a large enough plummet in housing prices that banks couldn’t recover the mortgage debts and BAM we have a financial crisis.

What if so many people hadn’t overextended so much on their mortgages? I think that would have only delayed the inevitable. Oil may have been allowed to hit $200 or $250 before everything collapsed. Our breaking point may have been $5 or $6 gasoline instead of $4 gasoline, or a $6 gallon of milk instead of a $4.50 gallon of milk.

So while overextended mortgages were a legitimate problem, these mortgages were merely our weakest fault line which gave way first under the pressure of sky high oil prices.

So was there a legitimate demand for $147 oil? Clearly there was not. The tectonic mortgage problem started cracking in the fall of 2007. At that time, oil was $75. So you could say our demand for oil was somewhere south of $75. How much less than $75 – I don’t know. You could make similar statements about the international demand for oil, as the rest of the world is also experiencing our troubles only a few months after we do.

The price of oil has broad-ranging impacts. It takes months to see all the effects to filter through the system. Yet Wall Street greed incessantly bid up the price of oil on a daily basis on the grounds that the sky didn’t fall when a new high was reached in the previous 24 hours. Obviously, rationality from greed that strong knows no limits.

I read a good book by Jim Cramer which pointed out that major shifts on Wall Street are determined by a very small group of people who collectively lead the nation’s four or five largest investing institutions. These people control enough money that whatever security or commodity prices they approve of are what the entire market trends to. I am not a big conspiracy theorist. But facts and circumstantial evidence lead me to believe that only a dozen or so, perhaps two dozen, very greedy assholes on Wall Street have crashed the entire world’s economy in just 18 months. Amazing.

If true, these guys have just accomplished what the world’s greatest tyrants could only have dreamed about.

Remove oil from financial markets May 8, 2008

The value of the US Dollar is the most common reason given for oil’s march to $124 from $60-$70 a year ago. But in that time, the Dollar is down less than 15% against the Euro and less than 5% against the Pound.

Another major claim for oil’s meteoric rise is increased demand from emerging nations in Asia. But all signs the past few months point to reduced demand for oil.

Every financial commentator correctly states that there’s no technical or legitimate reason for the 100% increase in the price of oil over the last year. Clearly, the price of oil has been driven by investors. Long-term concern about oil consumption in Asia, minuscule disruptions by terrorists on oil piplines, and a modest decline in the Dollar have given way to hype, speculation, and self-fulfilling prophesy by investors. So let’s take investors out of the equation.

At some point in the 70′s, oil couldn’t be traded on financial markets. I say we return to that policy. Imagine if the FTC, SEC, and international regulators said “no more buying and selling oil unless you’re shipping or receiving barrels of oil”. I think we’d see $50 within a month. Let’s do it.