Dumping Oil Speculation (and Other Bad Habits)

New Eyes on an Old Industry
By Hilton Price

This year, I finally managed to do something I’d wanted to do for years; quit smoking. Before I worked for the greatest website in the oil & gas sector, I was in television news. If you’re unfamiliar with the behind-the-scenes goings-on of a TV news station, allow to me to impart one important fact: Quitting smoking is next to impossible when you work in TV news. I always promised myself once I left the industry I’d finally quit, and a few short weeks after beginning my tenure with PennEnergy, I made good on my promise.

I remember being a smoker very well. I remember the anticipation of my next cigarette break, especially if it meant getting away from my daily workload for a few minutes. I remember the soothing feeling nicotine had on me, truly a sign of my (at the time) serious addiction. Most of all, I remember how I always knew how bad those little sticks were for my health, and how I smoked them (sometimes eagerly and happily) despite this knowledge.

I bring all this up because in learning about the oil & gas industry, I have been reminded my former tenure with cigarettes. Smoking cigarettes is a lot like oil price speculation. If my new eyes on an old industry understand this right, neither makes any logical sense and seems to only cause harm, yet the practice continues largely unabated every single day.

The process of speculation is headache-inducing due to its complete lack of regard for supply and demand. Oil pricing revolves around futures, essentially a pre-set price for a delivery sometime down the road, making the classic supply/demand model no longer applicable. Now, oil sellers need only offer a price that they believe the buyer will agree to, no matter how the price is determined. The final price could be determined by a gust of wind, conjured from animal bones, or simply pulled from the ether by the imagination of an inebriated hobo. As long as the buyer agrees, congratulations! You just set the price for oil!

It’s a wonder every business across the globe hasn’t adopted this approach to pricing. If they could, I’m sure every store at my local mall would love to implement this. Instead of paying $120 for a pair of jeans today, shoppers would now agree to buy a $500 pair of jeans in 5 years. Denim futures would create a whole new generation of millionaires. Personally, I think having to sign promissory notes would make the whole shopping mall experience a lot more interesting. And don’t get me started on the food court. Panda Express would be the new high-water mark in upscale dining, with reservations made 3 years in advance.

Smoking (and exaggeration) wasn’t my only pointless habit. I’ve also always been a bit of a collector (trading cards, comics, games,) so I understand that sometimes things are priced excessively high. Every comic book store has a few books hanging behind the counter because they are “collectible.” The demand may not be obvious and immediate, but since the book is rare, it can demand a higher price than others.

But we’re not talking about some niche collector market. This isn’t baseball rookie cards or obscure comic books from the 50s. This is the one commodity, besides food, that nearly everyone in every industrialized nation is using. So, we’re essentially ignoring the demand on one of the few items that will always have demand. The growing interest and shrinking cost of renewables means demand for oil will one day be replaced by demand for something else. So, not only are we ignoring the massive demand for oil, we’re failing to take advantage of that demand while it exists! Save the futures and speculator nonsense for 100 years from now, when every home has solar panels and our cars are powered by canola oil. That will be the time to charge prices pulled from thin air. That will be the time to sucker buyers with talk of future pricing. Today is not the time for imagination in pricing. Today is the time to sell the oil to the people that want it for a reasonable price.

But, instead, the success of our speculator market has other countries interested in their own game of financial make-believe. Much like younger friends I had who once considered smoking because they saw me do it, now other countries are considering picking up our bad financial habit. Although, the U.S. is younger than China, so the metaphor is getting a little shaky. Point is, speculation has been successful for some, and now others want in. Meanwhile, there may be a chance that rational thinking could one day return to our own markets.

President Obama, always a favorite topic around the office, announced plans to crack down on speculation. At least, I think I saw that somewhere. As the 24-hour news cycle does, it was soon replaced with other stories. But I swear he said that, and whether it’s a political ploy or a real concern for the man, it’s very much needed. People are getting rich making stuff up, and not in a cool way like Stephen King or DEVO or those guys behind LOST. Their making up pricing, and we’re playing along because we think there’s no other way.

I remember another time I felt like I did something because there was no other way. I smoked cigarettes. Why? Because I had smoked for years, and I was addicted, and it was just part of who I was. Well, then I quit. Now, I don’t smoke. It’s dumb and dangerous and I don’t want any part of that. Speculation is the same. Together, as a planet, we need to quit, and keep our friends, the other countries, from starting. It’s dumb and dangerous and trust me, we don’t want any part of it.