[Denny]

It seems that most people have studied the concepts of Adam Smith that demonstrate the supply-demand price relationship. As scarcity develops, prices go up. In turn, that both stimulates production and restrains consumption which leads to another equilibrium price. Seems simple and most of us have even passed tests on it.

Yet, more and more these days, we see polticians and the media decrying speculators as the bad guys in the run up of oil prices.

Like this CBS news item.

"Josh Landis and Mitch Butler of The Fast Draw narrated the tale of "Gus" -- a gallon of gas -- in a brief animation portraying crude oil's journey from the ground to your car's tank.

The animation traces Gus' travels across the sea to the United States, explaining how his initial five-cent -- that's right -- five-cent value grows through -- speculation -- and the law of supply and demand. Add the cost of refining and delivering the product, not to mention taxes, marketing, and your local gas station's cut, and Gus goes from five-cents to $4.

"We were most surprised," Landis later told co-anchor Harry Smith, by the fact that, before the oil even reaches the shores here, speculators and the law of supply and demand have already priced the final price up to within 80 percent of its final amount. ... "

I find it a bit strange that no mention is made in this story of declining spot inventories or the overwhelming saga, over so many years now, that discoveries have dminished compared to production as the key point of interest. And, the chronicle seems childish to say the least to make a cartoon character out of an inanimate object.

I guess its easier to blame speculators, as even the name sounds nasty. But, in leading people to look for an external villain, does it not turn them into avoiders of their own role in demanding so much oil? If our economy is built on the economic concept of the open market and free enterprise, why do people want to create an artificial enemy out of speculators who have a valid place in the economy?

I fear the next step will be price controls and that will lead to real shortages, just as we had in the 70's. It may even encourage "shut in" oil, in essence a producers strike.

[cipi604]

$666 , and after that $1000

[Twilight]

How about this?

Oil prices are high because of speculation, pure and simple. That’s not an assertion, that’s a fact.

What if we just stopped the speculation?

No, you can’t do that! That would be interfering with the “free” market.

Hey, the “free” market is starting to get awfully expensive.

Tell me, how is it free when speculators rule the roost?

[CrudeAwakening]

Whether or not speculation is a significant contributor of today's prices, you have to love the hypocrisy of the free market cheerleaders who sat on their hands while speculation boosted the value of their houses, stocks, etc.

Only when speculation hits them in the pocket personally do they begin to cry foul.

If it truly is a bubble, they should either (a) get on the rollercoaster and make some money, or (b) sit and wait for the bubble to burst, and SHUT UP, as the Fox commentators like to say.

[keehah]

I guess I'm in the lost faith (delusions) camp when the following seems to me like a decent description of WallStreet's current invisible hand game:

When an individual not familiar with the shell game encounters a game on the streets, it appears that bets are being placed by numerous players, when in reality, most of the persons standing around a game are in league with the operator in a confidence ring. Shell game gangs generally prefer to swindle one "player" (victim or mark), at a time. The apparent players actually serve various roles in the swindle: they act as lookouts for the police; they also serve as "muscle" to intimidate marks who become unruly and some are shills, whose job is to pretend to play the game, and entice the mark into betting. Once a mark enters the circle of apparent players and faces the operator, the gang surrounds them to discourage an easy exit and to keep other pedestrians from entering and disrupting the confidence trick gang's action on the main mark. The job of crowding around also protects the operator from any incriminating photographs being taken of the act. The operator and the shills will try to get the mark into a heightened state of anger or greed. Once this is accomplished, one shill will pretend to disclose a winning strategy to the mark. It is all a ruse to get the mark to place a large bet.

The operator's trick is sleight of hand. A skilled operator can remove a pea from under any shell (or shells) and place it (or not) under any shell (or shells) undetected by a mark. So it is never of any benefit for the mark to watch the movement of either the shells or the operator's hands.

-Shell Game

[vetusfirma]

Especially when Calpers is one of the biggest speculators. A lot of peoples retirements are tied up in oil, and they don't have a clue that they are they ones getting the 'wind fall'.

[dorlomin]

The invisible hand is at work right now, closing down SUV factories and boosting the sale of the prius.

[Micki]

Of course they blame the speculators. TPTB wants a skapegoat.
99% of people haven't even begun to understand how manipulated the markets are. Adam Smiths invisible hand in not the market, it is the PPT, the treasuries, the CB's.
The house of cards is starting to swoon so you can bet they will try to nail the blame on someone else.

[Kingcoal]

The free market is sending us a message: "OIL DEMAND IS EXCEEDING SUPPLY." That's the writing on the wall, what you do with it is your business.

[MrBill]

You do not have to study or understand physics to be affected by gravity. Most people are quite happy when prices are falling in real terms, and their own purchasing power and living standards are rising. And, if not, then obviously someone else is to blame!

[Plantagenet]

I fear the next step will be price controls

China and India already subsidize fuel and control the price.

Venzuela, Saudi, Mexico and some other big exporters sell gas from their own production at below market prices in their home markets.

[Micki]

China and India already subsidize fuel and control the price.

Venzuela, Saudi, Mexico and some other big exporters sell gas from their own production at below market prices in their home markets.

Subsidies is not the same as price controls.
Besides, most of these countries will shortly cease subsidising as it hurts their economy too much.
Just the other day there was an article here with Malaysia facing bancrupcy if they don't rapidly cut back on subsidies.
Mexico will probably be next in line as they move from major exporter to importer.

The big problem will be when they try to control price by limiting trading, putting price controls in retail level etc.
It usually results in drop in supply and thriving black markets.

It is especially hard for any single nation to do anything to cap the price as if a product can't be sold more profitably to someone else, it will be.

[threadbear]

It's happening now. The invisible hand is great in a resource rich nation, with a collective sense of fairness, decency and proportion. In other words when the hand is invisible but open and friendly and has access to limitless resources, people have a great deal of faith in it.

But when CEO's of failing corporations make multi millions per year, plus bonuses, while they lay workers off, the average Joe feels the invisible hand has just balled itself into a fist and punched his lights out. When resources become scarce, he experiences a one two knock out punch. After he comes out of his coma, is no time to lecture him about the individual's responsibility for his own mistakes. BS. We lived in a world of free market propaganda 24/7, all of our lives. We have had few decent leaders, fewer real heroes, and real meaning has been stripped from our lives, in a system we DIDN'T ask for. No wonder people used to tank up and try to drown their miseries with the banality of shopping.

[MrBill]

Who DID ask for the system we have? The invisible hand of the state has been picking the taxpayers' pockets for generations. In some cases 50-percent of every honest dollar earned every year. It makes the recent run-up in prices seem insignificant in comparison.

When Average Joe is suffering it is very easy to try to link that issue to Fat Cat CEOs pay packets. It is easy, but not very helpful. It obscures why those layoffs are happening in the first place.

We are going through a painful economic transition that I fear will end in lower living standards for nearly everyone. We have to understand the real reason that is happening and plan accordingly.

Everything we have done up to now. 10%. What we do next. 90%!

[cube]

It's happening now. The invisible hand is great in a resource rich nation, with a collective sense of fairness, decency and proportion. In other words when the hand is invisible but open and friendly and has access to limitless resources, people have a great deal of faith in it.

But when CEO's of failing corporations make multi millions per year, plus bonuses, while they lay workers off, the average Joe feels the invisible hand has just balled itself into a fist and punched his lights out. When resources become scarce, he experiences a one two knock out punch. After he comes out of his coma, is no time to lecture him about the individual's responsibility for his own mistakes. BS. We lived in a world of free market propaganda 24/7, all of our lives. We have had few decent leaders, fewer real heroes, and real meaning has been stripped from our lives, in a system we DIDN'T ask for. No wonder people used to tank up and try to drown their miseries with the banality of shopping.

Threadbear, when (not if) the current economic system gets replaced, Joe Sixpack isn't going to be any better off then he is today.
History has shown that whenever the title "world superpower" changes hands the economic rules that everyone else must abide by gets "revised" a little.
Call it whatever you want, the invisible hand or the invisible fist. US economic policy really isn't that bad.
What type of economic policy will China + Russia + India implement when they become the next world powers? Perhaps a hint of the future can be seen by looking at their current economic policies today.
If that doesn't give you goosebumps I don't know what will.
//
Complain all you want --> this is as good as it gets!

[Petrodollar]

After reading Daniel Yergin's 682-page magnum opus on the history of oil - The Prize - plus numerous other books, I think its fair to say that the "invisible hand" of the market regarding oil supply and oil prices has really only existed in 2, or at the most 3, periods over the past 149 years. Looking back at the first half of the Age of Oil, one can notice these historical developments:

In the Beginning...

1859 thru 1870: oil prices = invisible hand of the market = lots of volatility.

1870 thru 1911: oil prices = Standard Oil, which exercised monopoly control over domestic US oil prices and effectively control over Baku oil prices as well (at least until the US Supreme Court used anti-trust laws to splinter Standard Oil into 34 separate companies in 1911)

1919 (or arguably 1930) until 1970: Texas Railroad Commission = monopoly over US and global oil prices (at least until the US reached peak oil in Dec 1970 - opps - and thus the Texas Railroad commission allowed 100% production in the lower 48 states)

1971 to 1973: Quasi-invisible hand of the market

1973 to 2003/4: OPEC = monopoly over global oil prices by supply manipulation.

Backdrop: The Oct 1973 attack on Israel results in OPEC demonstrating it near monopoly control over global oil prices, - but again the invisible hand of the Americans (i.e., Kissinger) reportedly asked Saudi and Iran to raise oil prices by about 400%. So, the initiation of the petrodollar recycling period was basically an "invisible fist" that was forced upon both highly industrialized and developing nations in the 1970s - resulting of course in the debt crisis of the early 1980s.

Things calmed down and OPEC subsequently agreed in the 1980s to a dollar price band of $22 to $28 per barrel. Hence, OPEC was the "invisible hand" - at least until Saudi Arabia's spare capacity for producing light sweet crude oil effectively dried up, and the world reached a plateau in global oil production circa 2005 - opps.

2005 - to present day = the "invisible hand" of the market: at last!

So, according to this history, over the past 159 years, we've only had the "invisible hand" of the market controlling prices for about 15 or 16 years. The other 90% of the time it was one of numerous monopoly forces of some sort - and certainly not free market economics.

Concerning today, and IMO, these invisible "speculators" that we hear so much about are simply providing a most excellent scapegoat for all the politicians who might otherwise might have to discuss with the People the disconcerting fact that oil production from the top 15 producers declined by 2.5% in 2007 vs. 2006.

Of course Congress threatening to "sue" OPEC nations also serves as a convenient scapegoat to feed the increasingly bewildered and angry masses. Moreover, we can expect anything and everything will be used by the politicians to avoid discussing the actual geophysical limitations on planet Earth with regard to global oil supplies.

Synopsis: What we are witnessing now is Mother Nature's invisible hand - she is ushering in the epochal second half of the Age of Oil - and unlike mankind's machinations over the past 150 years, she does not negotiate, or obfuscate. She establishes her owns limitations and boundaries - regardless of our economic theorems.

Indeed, without scaleable substitutes for the world's continued consumption of 86 m/b/day of liquid fuels - we are witnessing in real time what will likely be described by future historians as the greatest market failure in world history. Adam Smith would not be pleased...but of course back in 1776 he could not have forseen the profound depth of our addiction to fossil fuels, and its even more profound impact to the global marketplace.

[threadbear]

It's happening now. The invisible hand is great in a resource rich nation, with a collective sense of fairness, decency and proportion. In other words when the hand is invisible but open and friendly and has access to limitless resources, people have a great deal of faith in it.

But when CEO's of failing corporations make multi millions per year, plus bonuses, while they lay workers off, the average Joe feels the invisible hand has just balled itself into a fist and punched his lights out. When resources become scarce, he experiences a one two knock out punch. After he comes out of his coma, is no time to lecture him about the individual's responsibility for his own mistakes. BS. We lived in a world of free market propaganda 24/7, all of our lives. We have had few decent leaders, fewer real heroes, and real meaning has been stripped from our lives, in a system we DIDN'T ask for. No wonder people used to tank up and try to drown their miseries with the banality of shopping.

Threadbear, when (not if) the current economic system gets replaced, Joe Sixpack isn't going to be any better off then he is today.
History has shown that whenever the title "world superpower" changes hands the economic rules that everyone else must abide by gets "revised" a little.
Call it whatever you want, the invisible hand or the invisible fist. US economic policy really isn't that bad.
What type of economic policy will China + Russia + India implement when they become the next world powers? Perhaps a hint of the future can be seen by looking at their current economic policies today.
If that doesn't give you goosebumps I don't know what will.
//
Complain all you want --> this is as good as it gets!

No, the American system isn't as good as it gets. Do a little traveling.

[cube]

...
No, the American system isn't as good as it gets. Do a little traveling.

Perhaps you misunderstood what I was trying to get at.

Everybody (aside from a very small group) on this planet plays by American economic rules. That's one of the privileges of being a world superpower --> you get to make up the rules that everyone else has to follow.

[MrBill]

So, according to this history, over the past 159 years, we've only had the "invisible hand" of the market controlling prices for about 15 or 16 years. The other 90% of the time it was one of numerous monopoly forces of some sort - and certainly not free market economics.

You are confusing Adam Smith's Invisible Hand with supply and demand fundamentals determined by prices.

Potential demand is unlimited. While actual supply is limited. Prices whether set by free markets or by dictat bring potential demand into balance with actual supply. Demand cannot exceed physical supply, so price is the determining factor. If OPEC or anyone else wants to sell crude at $1 per barrel they will simply encourage more potential demand, while further limiting the search for non-OPEC supply.

The invisible hand has to do with the division of labor, and pursuing the greater good while each pursuing one's own best interests.

"...every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good." Adam Smith.

Synopsis: What we are witnessing now is Mother Nature's invisible hand - she is ushering in the epochal second half of the Age of Oil - and unlike mankind's machinations over the past 150 years, she does not negotiate, or obfuscate.

Mother Nature, of course, does not have an invisible hand. She sets physical limitations on growth based on natural laws and finite resources. Consumption causes scarcity. Not the market. Therefore, bumping up against our physical limits to growth is not the greatest market failure in world history, but an ongoing part of human evolution.

However, the market you so deride is part of the solution as workers stop pursuing activities as soon as they become uneconomical or they can no longer pay for them with their labor.

[Petrodollar]

Original post:

It seems that most people have studied the concepts of Adam Smith that demonstrate the supply-demand price relationship. As scarcity develops, prices go up. In turn, that both stimulates production and restrains consumption which leads to another equilibrium price. Seems simple and most of us have even passed tests on it.

Yet, more and more these days, we see polticians and the media decrying speculators as the bad guys in the run up of oil prices.

...it was the original question to which my post was directed. The "supply-demand price relationship" and the "invisible hand" were used methaphorically in this question, and in my post. In case you missed the point, the content of my post was to illustrate the historically reality regarding the "supply-demand price relationship" and how price has has not been determined by free market forces.

Therefore, bumping up against our physical limits to growth is not the greatest market failure in world history, but an ongoing part of human evolution

Huh? The subject of human evolution in the context of this thread regarding economic theory is a non sequitor - its irrelevant. I stand by my observation that Peak Oil will likely be viewed by future historians as the greatest market failure in world history. Only time will tell...