26 Aug 2008

Why Do We Want Low Oil But High Stock Prices?

All Posts No Comments

The short answer is that (usually) oil is quickly consumed while corporate stocks are pure assets. When the price of oil drops, it allows people to consume more oil and get more benefits from it–they can drive more, produce more oil-based products, etc. In contrast, if the price of Fannie Mae drops 10%, nobody says, “Great! Now I can use the stock certificates to wallpaper the baby’s room! The wife told me last month that it was a ridiculously expensive notion, but she can’t say that now!”

Of course, for people who do own large stocks of oil, then rising oil prices are a good thing. And countries that are net oil exporters do well when world oil prices skyrocket. But since the US is a net oil importer, the country as a whole is worse off with high oil prices.

What’s really amusing about all the hand-wringing over speculators is that they allegedly can do whatever they want with prices. We are told that the evil hedge funds aggressively buy oil futures, which itself pushes up oil prices and earns them huge profits. At the same time, we are told that the evil speculators short-sell (sometimes without even wearing undies) financial stocks, again in a self-fulfilling prophecy that guarantees them money. Meanwhile, Joe Sixpack has to pay $4 per gallon, and his bank collapses.

Do you see how truly despicable these speculators must be? Why can’t they have the decency to make their guaranteed profits by pushing down oil prices and boosting up financial stocks? What jerks!

(To avoid confusion: I am being sarcastic. The answer of course is that the speculators can’t drive prices against fundamentals, in the long run. Oil is up because demand has outgrown supply, and financial stocks are getting hammered because of the bad loans made during the housing bubble.)

Comments are closed.