But the only reason speculators have their toe in the door is because the demand, the putative demand, is volatile. If the demand falls, speculators will still make money by betting on lower prices. What component of falling prices will you attribute to speculation?

It seems we are therefore not militarily impotent, by your definition. Building a country is NOT a military goal. Keeping order in a country is NOT a military goal. The military very effectively took out the regime in power. That IS a military goal.

Now all you have to do is define what our goal in Iraq is (any commentary on why so many people cannot get on board with that would be appreciated). We can then, perhaps, figure out whether the perception of US weakness is accurate, why it is so, and what to do about it.

I don’t believe that anybody said otherwise. I have yet to hear any rational analysts claiming collusion between the traders and the oil companies.

In traditional economics, “demand” is defined as demand for the good itself, based upon the utility that can be derived from using it or selling it to someone else. The speculators are not demanding the product per se, but are betting on price movements. They are currently a large enough force in the market to affect prices to some degree.

The issue here was whether a component of the oil price is due to speculation, and it’s pretty clear that some of it is. The good news for consumers is that when the bubble bursts, those speculators will get wiped out and the price will fall a lot, as is the case when other bubbles burst. There will come a point when oil prices will be due for a big slide, as the greater fool theory steps aside in favor of the market asserting its authority.

Is your point that we are impotent because we are overextended? Our military is too small? We lack moral courage? What?

Impotence is a measure of failing to achieve our goals and the message that this failure sends to the world. Clearly, Iraq is unstable and the US did not accomplish what it set out to accomplish. This failure erodes the US’ image as a superpower , which is bad for US foreign policy.

The only way that this could be changed would be for the US to turn things around and win the war, i.e. establish a stable government that can maintain peace within the country and maintain its sovereignty. If the US can’t do this, then it needs to leave, because staying only reminds everyone (but Americans, apparently) that the US failed. The sooner that the US can move forward, the better it would be for the US.

IOW speculation thrives with inconsistent demand.

Suddenly people decide that oil, or tulips, or Beanies, are more desirable (or less). Speculators profit from the changing prices. So unless there is collusion between the producers and the traders, your speculation premium is ultimately a demand premium, whether the demand is rational or not.

In the case of Beanies, the speculators controlled supply, and created a crazy bubble market for something of little intrinsic value. For oil traders to do the same, they’d have to be working with OPEC.

Is your point that we are impotent because we are overextended? Our military is too small? We lack moral courage? What?

I can’t agree/disagree if I don’t understand what you mean.

Vietnam showed the US to be a paper tiger on the global stage, unable to project power on a whim at every corner of the earth. The US stayed embroiled in the conflict, long after it had become clear to other nations that the US was beyond the point of no return and was fated to withdraw, because Americans were unwilling to see what everyone else could clearly see from a distance. Ultimately, the decision to stay long after defeat was obvious only made it worse for the US, because it emboldened its opponents (OPEC) to form a cartel against its interests, and encouraged the Iranian fundamentalists to topple the Shah and attack the US embassy knowing that they could get away with it.

During the Vietnam war and in its aftermath, the markets showed their discontent with US policy by pushing up gold prices and devaluing the dollar — the Bretton Woods system collapsed, thanks largely to the economic burdens imposed on the US by the Vietnam War. And because it was largely a US policy initiative, the US was left holding the bag for the policy and could not share the cost among many of its allies.

Staying in Vietnam not only failed to provide peace with honor, but it also hurt the US both during and after the conflict. Had we remained there, the subsequent economic recovery and toppling of the Soviets could not have occurred, because the US would have continued to fail in the eyes of the world markets and the US would not have had the money to pay for the Cold War finale.

We are seeing a replay of events — an overextended US that is being punished by the markets for its overextension and its hubris. Everybody, except for the American public, recognizes that the US has been defeated in Iraq. The world markets respond to the continued quagmire by devaluing the dollar, which pushes up oil prices.

This is all disturbingly analogous to what is happening in Detroit. By trying to live in the past, by failing to recognize failure, and with its unwillingness to adjust to changing conditions, the US maintains policies that go against its own interests. Restoring US prestige will take many years, but the sooner you start, the sooner you’ll get there. If we don’t get started, then we’ll have to see a US Death Watch column that shows how these types of corporate mistakes carry over into the public sector as well.

Would you please qualify why were are supposedly impotent? I agree if you mean we are unWILLING to act. Somehow, I don’t think that’s what you mean.

To say this war is like Vietnam without qualification or explanation is sort of like saying a car is “good”. It means nothing. So when you then go on to make a point, the whole rest of your statement is meaningless as well.

It’s akin to the dot-bomb, which was a bubble that eventually imploded rather spectacularly. At some point in time, some traders will be left holding an empty bag. But for now, they are driving up prices, as they try to earn a profit and grab hold of the wave.

If speculation didn’t exist, there would be no economic history of bubbles bursting. It’s hard for bubbles to emerge if demand is consistent and prices are at equilibrium.

As it turns out, there are plenty of examples of bubbles that do emerge from time to time. Bubbles eventually deflate, so they aren’t sustainable over the long run, but that doesn’t mean that prices won’t be driven up in the meantime.

Well now, the standard view couldn’t possibly be wrong could it? All things are for the best in this, “best of all possible worlds.” As I see it, there seems to be a chicken-and-egg situation wrt speculation. Traders put capital into oil and other commodities, betting that demand will increase. When the demand does increase, analysts claim that speculation was responsible for higher prices.

If the traders do exert that level of control over the market, and since the traders can also make money by correctly anticipating lower prices, they should be more interested in volatility than steadily raising prices.

Again, this is very much like Vietnam. We have already proven our impotence to the rest of the world; we are the only ones denying it. The external reputation is lost and squandered, the only question now is when the emperor realizes that he is naked.

We can predict aspects of the future because we have history to provide the proxy. The US dollar is exceptionally weak against currencies that aren’t supported by fundamentally stronger economies. There is no reason for the EU with its aging population, sluggish growth rates and higher structural unemployment to have a currency that is thrashing the dollar, yet it is doing just that. This tells you that the problem isn’t that the euro is strong, but that the dollar is weak.

With the US as overextended as it is, that market pessimism is not surprising to see. If you want to make the markets feel more confident about US economic prospects, then reduce its burn rate and free it up from Iraq so that it can do other things. If you really are fearful of losing US prestige, then what should concern you is that a new crisis arises that demands attention that cannot be provided because the US is stuck. That would make the US look like an even bigger paper tiger, and could prove to be the nail in the coffin, in which case you’ll be yearning for the days that a euro was worth as little as $1.50

Thanks,
Eric

I will also point out that your memory is short. Post WWII Germany looked a lot like post WWII Iraq only we have not been able to get rid of many of the trouble makers with wholesale executions. We also had the advantage of the people in Germany realizing that A, they HAD been conquered, and B they were saved from the Russians by us (at least those in the west).

Either we had not start any wars without first demonizing the enemy and deciding that they deserve to die, or we should give up and stay home. It is long past time that we decide unilaterally, and declare openly, that ALL governments exist through the consent of their peoples. Only in this way, can we then use military power, or not, properly. Otherwise, we cannot wage war due to our own contradictory beliefs.

Since we have set the standard of benevolent invasion so ridiculously high, we cannot “win” a war because we cannot fight one. Germany and Japan were successes because those peoples realized that they were getting an insanely good deal. They were beaten. Their civilians were bombed ON PURPOSE.

Now that our magnificent benevolence is the expected norm, our brutal enemies manage to foment hatred and terrorism by pointing out things like property damage and lack of electricity. Worse, many of our so called leaders agree with them. It’s just silly.

We are unwilling to break eggs, so we cannot eat omelettes anymore.

The markets don’t view it that way. This is reminiscent of the tail end of the Vietnam War, when the US was wrestling with its political demons and collective ego — it was unwilling to accept that it had already lost the war, whether or not it remained in Vietnam as an occupier.

Meanwhile, the markets knew what was up and were unambiguous in their assessment — they responded by devaluing the dollar and by pushing up the price of commodities. (Sound familiar?)

Had the US won in Iraq, oil supplies would have been stabilized and US prestige would have been secured. Iraq would have shiny new infrastructure and Western talent to get the oil out of the ground, while the US would have had bases to protect it. The victory would have sent the message that the US was the dominant power, a force to be reckoned with that has the ability to secure global stability.

The US held that sort of position at the end of World War II and in the wake of Gulf War I, which showed that the US does well when it forms effective coalitions, instead of trying to go it alone. Policies that are results oriented, rather than control oriented, are generally more effective.

You made one good point about the deficit, the rest isn’t so great (except the part on speculators which we agree on). Like I said, we know we can debate this one on and on, so let’s not. You say our presence is part of the problem, I say our absence at this point would be worse. We are done with that as far as I am concerned.

What I do find curious is your comment about had we won. What would our winning have looked like, and can you give me an example where a similar thing happened, ever?

What I’d like us to do is use renewables where we can. Solar to supplement our electrical grid, wind too. Use more efficient transportation. I don’t think a 10% full city bus roaming the streets 10 hours a day is efficient. That’s 4-5 people in a vehicle getting 8-9 mpg. Put 20 people on it and we’re doing better than a 4 cars.

We ought to do whatever we have to do that does not pollute our country more than it is already to make ourselves more self-sufficient without paying for oil from unfriendly countries.

We can do it but it won’t be the cheapest or the easiest way to do business. Long term though I think it will be the best way to do business.

I’ll be investing in solar for our house in the next two years. The payoff appears to be around 10 years according to what I have read. I have not run my own numbers though. Ultimately I want to build an EV if I can’t buy one for a commuter and want to have enough solar capacity to keep the house powered and the car charged.

Regarding the auto industry, in the late 1970s the CAFE requirements were first taking effect, so Congress would have been loath to place more burdens on the automobile industry.

Chrysler was technically bankrupt by 1980, and would have gone out of business without the federal loan guarantees. Ford’s financial condition wasn’t much better. AMC was forced to sell a controlling interest to Renault just to stay afloat.

No one was in a rush to place more burdens on the domestic car makers in the late 1970s, after the passage of CAFE in 1975. Market conditions and events smothered his proposals in the crib, not some shadowy conspiracy.

Would you pay me more to do your job than your boss pays you? Assume your boss pays you 100K, but you’d rather golf all day. Just pay me 101K, and go golfing. Works for me, but how long is that going to work for you?

By the same token, if you need 100K gallons of diesel fuel, are you going to use 101K gallons to recover 100K gallons from underneath Antarctica? Why not just use the 100K you’ve already got?

That’s not to say that supply and demand aren’t relevant here. Nobody is claiming that oil is going to return to the $15 level, for example, the increase in demand from China, India, etc. certainly comprise a large part of the price increase. But supply and demand alone don’t explain 100% of the price differential. To claim this would be akin to arguing that Enron’s supply chain manipulation had nothing to do with the California electricity crisis.

Where I disagree with PCH is the idea that ending the war would lower the price of oil. This would only be true if tensions in the region would be reduced by our absence.

The instability driving the speculative price premium is not with the Middle East per se, but with the effect of the quagmire on the US budget deficit and the US’ ability to project power throughout the world, the latter of which is vital for maintaining the US’ superpower status. The value of the dollar is a measure of the market’s perception of US prestige and economic power, which are both being weighted down by the war.

End the war, and you reduce the budget deficit while freeing up the US for the next crisis. Reduce those burdens, and the dollar rebounds. Increase the value of the dollar, and the price of oil goes down due to the currency appreciation.

Iraq has large oil supplies but is not a large oil producer, so its contribution to the petro pool is currently a non-factor. (It could have been had the US won, ramped up their production, and kept them out of OPEC, but it’s a bit late for that now.)

If the war in Iraq is contained as a civil war without US involvement, the US avoids the quagmire tarnish and the region is unaffected. If Iraq could be a threat to its neighbors, then it could be a problem, but there isn’t much chance of that in the near term — the factions are having enough problems controlling their own country, let alone destabilizing somebody else’s.

I expend more energy to charge my laptop battery than I get out of it, for instance. So it might make sense to expend more energy to get the oil because it is portable.

Also, a lot of oil is not used for energy; its used in many industrial uses. The question there is how expense does the oil have to get before people start looking at alternatives, if any even exist.

PCH is correct, and also wrong. Speculators ARE driving up the price. Not all barrels are ever traded on the open market. I am not enough of an economist to explain my intuition that this is driving the price up, but I do believe this disproves the idea that speculators are a wash.

Where I disagree with PCH is the idea that ending the war would lower the price of oil. This would only be true if tensions in the region would be reduced by our absence. We can clearly see the longterm benefits of American military presence in other parts of the globe. We can also see the short and long term problems with past withdrawals by western powers.

PCH and I can debate this one for weeks, so let’s not. Just so the point is made that withdrawal may, or may not, have the effect of reducing fears of supply interruptions.

Seriously, this government couldn’t even truck a few thousand people out of New Orleans, and you want to habd them something as complicated as the oil industry? Good luck with that!

Developing nations are desperate for oil. There’s a very long list of countries that are cutting electricity every day because they can’t afford fuel to run their generating plants.

Ending the “war” will be complicated. We charged into a 4GW situation and have no idea if leaving will create a huge power vacuum. We’ve already spent more than we would have made if they had simply given us their oil. And all three Prez candidates are more or less committed to maintaining a US presence.

Personally, I think that’s a bit conservative. Oil demand in developing nations should decrease slightly as a global recession reduces demand for their exports. Dial in an increase in the value of the dollar, and prices should fall further still.

So what would increase the value of the dollar? End the war. Global investors lose confidence in the US due to the war and the resulting budget deficit, which hits the value of the dollar, which increases the price of oil, which creates this spiral. End the war and you end the spiral. I’m willing to guesstimate that ending the war would reduce oil prices to something approaching $60-70/ bbl. (I’ll go with the EIA’s $90 figure based upon the current exchange rate, and then presume that the dollar could rebound by at least 20-30% if the US would withdraw from Iraq.)

Never meant to claim that Carter’s stand on energy efficiency, across the board, was what ended his presidency. The hostage crisis had its large part, definitely.

But his proposals on US energy independence put him in the crosshairs of powerful lobbies and interest groups, who were more than pleased to dead-end his presidency.