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Bryan Doherty: A matter of supply

04/29/2011 @ 2:23pm

This past week, president Obama suggested that traders and speculative interests were at the heart of higher energy prices, or at least, an investigation is warranted. While speculators add liquidity to the market, it's unlikely that from a long term perspective, speculators can add or take away from the major fundamental factors that move a market. Energy prices are higher, not because of speculative interest, rather because of expectations for tightening supply. The novice or inexperienced reporter will continue to point to the current supply of oil and indicate that there is no short-fall, therefore, prices are being manipulated. The experienced economist will look long-term and say that, while supplies are adequate now, they see fearful indications that, down the road, inventory could become very tight. Therefore, despite current inventories which are adequate, prices move higher. 

To put this in an analogy, let's say a farmer has a bin full of corn, and the rest of the nation's crop is burning up and not producing a crop. The inexperienced observer would argue that there are plentiful supplies in a farmer's bin, therefore, it should be cheaply priced. Yet, the rest of the country is in peril, and those who can see the big picture would argue that it is a matter of supply. That's the case in the oil market. It's been a supply- driven market for four decades, and when supplies become tight, prices move higher. Demand is nearly autonomous. When the perceived supply decreases, prices move even higher. 

The inability to access plentiful oil supplies here in the U.S. is naturally going to put upward pressure on prices. It's perhaps a better idea for the administration to look at ways to invest in technology to help avoid accidents or minimize environmental impact should a spill or leak occur. This is a likely better approach, rather than to point fingers and try to blame someone else for an inept energy policy. 

If you have questions or comments please contact Bryan Doherty at 1-800-TOP-FARM ext. 129

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