Stein on the declining dollar and speculative bubbles in the market for oil

Speaking of Ben Stein, here he is in the New York Times on economics, talking about mutually beneficial trade the "trade deficit" (hat tip: Linda Christiansen)...

After a creative opening, he gets to the nuts & bolts:

Look at oil and gasoline and natural gas. They have immense uses as consumer products. They power our cars. They heat our homes and our swimming pools. When their prices rise here in the United States, drivers, homeowners and swimmers cut back on the use of these fuels.

But there is much more to the story than that. First, the price we pay is denominated in dollars, and as the dollar falls, the price in dollars rises. Buyers who pay in euros or won do not see the same price appreciation because their currencies have been rising against the dollar. Hence, the commodity in question may be higher in dollars — suppressing demand here — but may be barely changed in euros day to day. This is one reason that worldwide demand is not much affected.

In fact, demand for some energy sources is softening ever so slightly in the United States, but world demand continues strongly upward.

This has little to do with the oil companies — usually called the "big" oil companies to distinguish them from the small oil companies we all have in our backyards. They just float along with the tide, the way we consumers do. They are at the mercy of the traders, as we all are.

And consumer prices, when left to themselves, are behaving more or less the way prices are supposed to — rationing supply and adjusting demand.

But there is another hugely important factor now in world energy markets: the pricing of energy as a speculative item. Traders can and do buy vast amounts of energy futures. Right now, there is a worldwide mania to invest in them. In this situation, when investors and traders are pouring buckets of money into thimbles of energy quanta...the price is bid higher and higher.

And, as the price goes up, demand does not fall. It rises, because investors and traders think that it will keep rising and they will make money on it in the future. (Oil, gasoline and natural gas can be stored indefinitely.)

It's like the bubble in Miami Beach condominiums. As the price of them soared, traders did not stay away. Instead, they kept buying, anticipating more or less endless gains.

Right now, the Hedges of Greenwich are bidding up the prices of hydrocarbons into the stratosphere by buying energy futures. Your switching from a Cadillac to a Prius won't tilt the balance back to falling energy prices. Your earnest little efforts at conservation mean nothing when compared with the upward push coming from the speculative bubble.

And now the big boys have been joined by you and me. Little folks like us can buy our very own energy baskets of exchange-traded funds and the like, and are doing so in big numbers.

Now, the alert reader will notice two truths at this point: One, bubbles always end, and almost always end badly. So will this one. There is always some supposed reason that "this time is different," but it never is. Second, the fact that small players are getting into the game is almost always a sign that the end of the bubble is near.

This will be good news for us drivers, homeowners and swimmers. But it will be bad news for those who thought that buying baskets of commodities would make them rich...