Ask Money

Cheaper oil on the way?

Scott Jagow Aug 24, 2006
HTML EMBED:
COPY
Ask Money

Cheaper oil on the way?

Scott Jagow Aug 24, 2006
HTML EMBED:
COPY

SCOTT JAGOW: Oil prices are yo-yoing at the moment. They fell 2 percent yesterday. They inched back up again today. Latest price: About $72 a barrel. The yo-yoing has actually been going on for some time now. And the main reason, says our economics correspondent Chris Farrell, is a huge upswing in the amount of speculative money in the oil market.

CHRIS FARRELL: So this is money that’s betting that the price of oil’s going to go higher. And that’s up 1,500 percent from several years ago.

JAGOW: Why is there so much speculative money now?

FARRELL: Part of it has to do with what’s been going on in the commodity markets the past couple years. I mean, think about it, Scott. Year after year, the price of oil has gone higher. And originally we were talking about, “Well, it’s not going to get much higher than $40 a barrel.” Then all of a sudden it’s at $50 a barrel. And then all of a sudden it’s at $60 a barrel. And so, more and more money has been betting on this bull market in the price of oil. And speculators have been doing well because there’s been a lot of events, from the hurricanes of last season to problems in Nigeria. Recently we had the problems in Alaska and Prudhoe Bay. It’s just been a lot of things that have driven the price of oil higher.

JAGOW: I gotta say my first reaction is to be pretty upset about this. Because, if it was just good old fashion supply and demand, I could probably live with it. But the fact that it’s speculative and that I’m seeing that at the gas pump, kinda makes me mad.

FARRELL: See, I love speculators. Because, here’s what’s happening. One of the reasons I think the price of oil is going to go low is because with all this speculative money in there and the price of oil going higher, we’re finding energy sources all around the world. And right now there’s actually, I think, an excess amount of oil around. There’s more energy than we really need. Particularly with the US economy slowing down. And strong signs around the world that high energy prices have reduced demand and increased conservation, and brought more energy and oil out of the ground, and gas out of the ground. So what the speculators help do is improve the fundamentals. They do affect the forces of supply and demand. Nobody ever likes speculators but I kinda do. I think they’re really important.

JAGOW: Alright, I can buy that argument. So, if it does drop, say, to $50 a barrel, what happens to our new-found energy conservation efforts?

FARRELL: I don’t think they stop at all. In fact, I think they continue to accelerate. There’s a couple reasons. First of all, at $50 a barrel it still isn’t cheap. It still makes your alternative energy sources, and some of your technological innovation, attractive. So the American consumer is going to be more energy conscious. And it’s also happening around the world in China and elsewhere where there are genuine concerns about conservation. So I think that momentum will continue even at $50 a barrel.

JAGOW: Alright, Chris, thanks a lot.

FARRELL: Thank you.

As a nonprofit news organization, our future depends on listeners like you who believe in the power of public service journalism.

Your investment in Marketplace helps us remain paywall-free and ensures everyone has access to trustworthy, unbiased news and information, regardless of their ability to pay.

Donate today — in any amount — to become a Marketplace Investor. Now more than ever, your commitment makes a difference.