We Have Met the Enemy and It Is Us

The Late Bloomer, one of our favorite correspondents, writes from his vantage point: public relations for nuclear power plants. (Really.)

Alright, you asked me about oil, so here's my two cents. (A) It's a fucking disaster. (B) At least 20%-40% of the current price reflects the demand from commodity speculators. So, who are these miscreants? It's not just the people we love to hate, like hedge funds, although hedge funds surely play a major role. I suspect, though, that an even larger role is being played by mutual funds and even pension funds like CalPers who have been persuaded by Wall Streeters that they need "alternative investment catergories."

These "investments" are an alternative to the stock market and real estate.

Blow away the deceptive verbiage and what you have is a shitload of retirement money gambled on commodities, nothing more.

This creates a policy dilemma. On the one hand, the combined effect of this huge money pool chasing oil futures, for instance, is that prices for everything we buy are driven inexorably higher. On the other hand, take steps to push them out of the market and you'll see losses accumulating in pension funds on a huge scale, which will not make the nation's retirees and soon-to-be-retirees stand up and cheer.

I see this "alternative investment" fad as a financial timebomb, and the sooner it's defused, the better. If I were Obama, that's where I'd be aiming.  The approach I might take is to float the partial truth that oil prices are being driven more by "speculators" than by basic supply-demand considerations, and that as president, I will order certain steps to be taken.

Among these would be sales of oil from the strategic petroleum reserve. This dumped supply-- even the threat of a dumped supply--will turn the longs into shorts, and you should see prices head back down toward an already-rich level like $80 per barrel. (That level is more than enough to bring on new production--most of which was planned anyway when prices were closer to $65 per barrel.) The beauty of it is that you may not even have to sell anything out of the SPR--just the threat of doing so could be enough.

That's it from the cheap seats.