Greed Is Not Good

aka: A Quick Lesson in Avarice, Economics, and Oil Speculation

Time for a quick show of hands — anyone seen the movie Wall Street? For those who haven't, one of the main characters is a corporate raider named Gordon Gekko, who in an Oscar-winning performance by Michael Douglas, utters the line "Greed, for lack of a better word, is good." And while he might be the bad guy, he's also the most memorable character in the movie. It's probably a coincidence, but the concept that greed is a good thing has been taken far too literally by actual people actually on Wall Street, as well as every other financial district you can name.

Now, I won't claim to be an economist, but anyone with a basic understanding of how the free market economy works should realize that essentially it functions on greed. It's the flipside of communism, which essentially functions on altruism. Of course, since people are generally more greedy than altruistic, communism doesn't function all that well, but that's another topic for another day.

Now, the same people out there with the aforementioned basic understanding of the free market economy are probably saying "What about supply and demand? That's how the economy works." And yes, that's what everyone is taught, and it's how it's certainly supposed to work, and in fact it's how things work much of the time. But then can someone explain to me why the price of oil went to $147 a barrel last summer, only to drop down to $30 six months later? Now it's back to the $70-$80 range, and basically holding, one has to wonder how exactly the laws of supply and demand are operating here. It's not like the demand or supply for oil has fluctuated anywhere near that much.

Last year doomsayers were calling for $200 oil in the near future, and predicting the end of life as we know it was at hand. Of course, life as we know it continues largely the same, although one imagines that now is not the time to acquire a Hummer dealership.

Life doesn't continue quite the same as before, though. Ever since the price of petroleum went crazy, people have been watching their fuel costs a lot more carefully. Sales of scooters are up, sales of big SUVs are down. Folks who used to drive a Crown Victoria are now behind the wheel of a Prius. The new reality — fuel will never again be as cheap as it used to be — is sinking in.

It's not just gasoline, if anything, the price increase at the gas pump has been relatively mild. Diesel and home heating fuel have seen stronger swings and higher overall price levels. What's more, higher costs for those fuels actually does more damage to the pocketbook than gasoline inflation. Everything you buy at a store got there on a truck — a truck that runs on diesel. If you don't live somewhere where natural gas is readily available, odds are your home and workplace are heated at least in part with oil. Those are all costs that you can't really get away from. When the price of oil goes up, it's bad for everyone.

Well, almost everyone. People who sell oil make more money when the price is higher. That's only to be expected. But there is another group who can make even more money from volatility in the price of petroleum, and they are the speculators.

Time for a very quick lesson in commodity markets. If you have enough money to play with, you can buy ridiculous amounts of all sorts of things — 5000 bushels of wheat, 1000 barrels of oil, 20 tons of frozen pork bellies, that sort of thing. Of course, most of us don't need or want to own such things, and certainly not in those quantities.

For those of us who are not running a flour mill or an oil refinery, but still have money to buy these things, there's some good news — you don't actually have to take home what you buy on a commodity market, at least not right away. Traders often buy futures contracts; i.e. an agreement to buy a certain amount of a product at a future date, perhaps several weeks in the future. The trader can then turn around and sell this contract to someone who has an actual use for 20 tons of frozen pork bellies, and, assuming the price goes up, turn a profit. If the trader can sell it to another trader, who then sells it to someone who will use it, they can both make a profit. So if prices are going up, there's lots of money to be made.

But wait, there's more. You can also make money if prices are going down, so long as you guess correctly. By agreeing to sell something at a higher price, if the price drops and you can buy it at a lower price, you can potentially fulfill the first contract and sell it at the original higher price and make money. If someone knows what he's doing, there's a lot of money to be made. Of course, guess wrong, and there's just as much money to be lost.

So to be clear, people who had no use whatsoever for oil can buy a lot of oil, and sell it to other people, who sell it to other people, and eventually sell it to someone who actually has a use for the oil. And all this time the oil can be sitting on a tanker halfway across the world, with the ownership changing hands right up to the day before it's delivered. And every time that ownership changes hands, someone makes money. Money that has to come from somewhere, and just might show up on your next fuel bill.

Where does this leave us? It leaves all of us paying more for fuel, for heating, for food, for almost everything, while a very small group of obscenely rich people become even richer. While I'm all for the free market economy, it doesn't seem very free when a select group of privileged people gets to play fast and loose with something that is so essential for everyone.