Oil Prices

My carpool conspecific knows more about economics than John McCain, that is to say not much. He is absolutely convinced that "speculators" trading in oil as a commodity are conspiring to drive up oil prices. If they were forbidden to speculate, he claims, we would at last have the "real" price of oil. He reckons speculators are buying and selling oil contracts to each other and that their activity sets the price of oil that we have to pay at the gas pump or for heating oil or what have you.

"But the speculators are gambling on what the price of oil will be, and they might be wrong," I point out. Says carpool dude, "They're speculating on what might happen in the future, and that shouldn't have any impact on prices!" "Huh?" says Vache Folle. Carpool man thinks that a disruption in the supply of oil, say from an insane attack on Iran by some whackos, should not affect prices until it happens. Of course, he has been known to hedge on oil prices himself by locking in a heating oil contract, but that's different for some reason.

Mrs Vache Folle, who is an economist, assures me that speculators have not cornered the market on oil. She reckons that the wailing and gnashing of teeth are associated with the fact that we have been relyiing on cheap oil for so long that we have rendered demand for it quasi-inelastic (my word, thank you). We've organized our lives and public infrastructure around the cheap oil, and we can't make substitutions or even reduce our demand all that much overnight. My car burns gasoline, and I probably can't even get a hydrogen car if I wanted to. I live where I live and have a long commute and can't change that unless I sell my house and make other radical adjustments. My furnace burns oil, and it would cost a lot to change it to something else. All those trucks, trains, jets and ships run on some product of oil and can't be retooled easily.

I have an idea to reduce demand dramatically: institute a 4 day work week. If businesses would establish a 4 day week, that would cut commuting down by up to 20%, and that adds up to many a barrel of oil. Businesses could be encouraged to permit telecommuting for further reductions in demand.

Meanwhile, it appears that carpool conspecific has learned nothing from my libertarian rants these last 4 plus years. He wrote our Senators demanding that speculation in commodities be outlawed.