It's a free market

I was randomly reading blogs the other day using the Next blog option, have a look in the top right corner of this page. After a few pages of autonomously generated advertising blogs (splogs?) I came across a guy whose ‘about me’ bit included the terms Right, United States and screaming capitalist. Fair enough, so I settled into my lunch hour eager to get into the head of an alien.

The first entry ‘screamed’ out at me. It was a rant about big oil ripping of the average Jo. He was so assertive that the Majors were colluding to fix the price of crude oil (and subsequently fuel) by fixing the market while the lazy regulators let them get away with it. I saw red. It was just wrong and stupid (I know I should never read politically motivated stuff generated by or for low IQ red necks). I had to vent. I know it was a waste of a lunch time but here it is, cut and pasted, so its not relay a complete waste ……


It is a free market. Entry to oil production is relatively straight forward. The entry fee is bidding on an exploration permit, hiring the seismic team, drilling a hole, then production and shipping facilities and your are in business. The risks are huge but it fits neatly on the standard risk reward curve. There are literally thousands of independent oil producers in the world. I am not sure of how big oil has or can manipulated the market. They are only taking advantage of a market condition

Maybe you don’t understand how crude oil and other energy commodities are traded. (or maybe I have got it wrong, if so please explain how the energy markets and not open and fair). The price is made by the market. Companies and traders buy and sell on marginal advantage. OPEC used to control the market but all members are currently producing well above the cartel agreed rates or at there maximum capacity – even Saudi Arabia. The majors are all producing at there maximums as well – trust me on that one.

I used to take exception at how crude was traded but that has been largely fixed in recent years. The last example of market manipulation I can think was at least 5 years ago and that was in the Singapore market (please exclude Enron – I don’t follow local politics).

All players play the futures game and this is where it has become unstuck but not for any devious reasons – you are generally buying physical crude on some margin above or below the marker (west texas or brent) at a point when you take delivery – this can be months after the trade. During this period you are exposed to fluctuations so you hedge which every way you think is prudent – at the moment the arrow is pointing up due to uncertainty (read IRAN, etc).

Big oil grabs the headlines but they actually only control 25 or 30% of all hydrocarbon production. As a rule they have overstated there reserves, as have many of the nationalised oil interests (have a look at the Shell debacle or proven reserve figures for the middle east countries year by year – notice that big rise between 1985 and 87). Big oil plays the share holder game just the same as any other listed business. At best there long term planning might stretch a few years out. They are as trapped by the short term nature of share price as any other enterprise. Sure there are fun and games lobbying to prevent legislated green house gas reduction or mandatory fuel minimum fuel efficiency but on the whole they are public companies which are easy to pull apart and have a look at.

Now you mention follow the money. Unfortunately most of the estimated $20/bbl premium on crude can be traced back to the recent actions of the US administration. As for price gouging on finished product, would it be fair to force a private company to give away product for below the cost that it can be unloaded elsewhere? I understand there was price gouging in the aftermath of Katrina by individual retailers but on the whole the Majors were subsidizing product in that region (and hopefully they will get a tax credit for this action).

I was only going to write a few lines but, well, I can’t help it. Please read more widely there are lots of sources of reliable information out there.