Spike In Oil Not Necessary

Evidence suggests the spike in oil may have been due to misleading analyst perceptions led by Goldman Sachs and the U.S. Energy Department, and speculators in the market. The 2008 spike in oil may have been prevented and was almost certainly unnecessary as it did not seem to be driven by decreases in supply or increased demand. The speculative side was proven to be a part of the equation by a "squeeze play" on September 22nd when oil shot up $25 dollars. Speculators were forced to cover their positions or actually take the shipment of oil. They had to buy back their shorts or take the shipment. This showed traders were looking for a profit and not actually interested in taking on shipments all along. Demand was actually dropping all year while the government reported back in April that we had more gasoline on hand than at any point since 1992. While this was happening, both George Bush and Energy Secretary Sam Bodman gave credence and legitimacy to the speculators arguments. Demand in the beginning of May was reported by the Energy Department to be lowering by 190,000 barrels compared to historical averages. Soon after knowing that Saudi Arabia was sitting on huge tankers of oil with no place to ship, they raised the demand destruction numbers to 400,000, then 800,000, with it now at nearly 2 Million less than historical averages.

It looks as though the government held off admitting demand was actually decreasing instead saying that supplies were tightening. The bubble would not have inflated as large as it did if they had admitted what was really happening. Also, speculators should not be allowed to move such an important market in wild directions when they are not planning on taking shipments. The consequences of these actions has sent GM into a spiral with huge declines in their sales over the prospect of never being able to drive SUVs again. Individuals and business's will feel less of a strain with lower prices as they strive to adjust their budgets, especially if they are dependant on oil. The lower oil prices provide tax cuts that may soften the blows of a deepening recession as they should have without the spike in oil.

http://www.businessweek.com/lifestyle/content/oct2008/bw20081023_350289.htm