Friday, December 12, 2008

Direction of the Market

In my last two posts, I argued that price fluctuations convey valuable information about the current capacity and consumption of the fuel supply and that is possible to create futures programs to help people match consumption to demand to reduce peak capacity problems.

These observations are basic common sense. Price in a healthy economic system passes information from producer to consumer about local capacity. This information directly aids in the optimization of resources.

A corollary to the above statement is that, if prices aren't reflecting this ebb and flow of local consumption v. demand; then there is something wrong with the economic system.

When we look at the history of energy, we find a world where prices thrash from extreme to extreme. In this world, we find business warriors and third world dictators conspiring to push prices down to extremes to drive alternative technologies and capacity off the market. The conspirators then reap the spoils in the inevitable spike.

During the presidential debate, there was a great deal of animus aimed at independent speculators in the market. Some candidates were making suggestions that the spike in gas prices was the sole result of speculators and that there should be greater restrictions on who is allowed to participate in the market.

I am not buying the line that independent speculators are the problem, nor do I accept that they are bad. Independent speculators only make money when they manage to buy low and sell high.

In a futures trading system, the speculators should have a net positive effect in honing in on prices; otherwise, they would simply lose money.

Speculators are not the problem. Manipulators are.

Problems seem to occur because the energy market is structured in ways that allow manipulation on both the downside and upside.

(Personally, I think the deep dips in oil prices have a worse impact than the spikes as the dips drive companies providing alternative fuel under.)

Anyway, to solve our energy problem, we need to look beyond who is participating in the system to the over all structure of the system.

In earlier economic times, the energy market was largely local. Prices would be set in direct negotiations between energy producers and consumers.

The Twentieth Century saw the rise of centralized markets dominated first by Standard Oil, then later OPEC. Oil prices are set on commodity exchanges that are far removed from production and consumption.

My thoughts are that the path to energy independence should involve more direct negotiations between energy producers and consumers, and that we should be gearing the market toward a system with a large number of small local independent energy producers selling directly to energy consumers.

The market is heading in the right direction. To be labeled green, businesses have started buying directly from local wind and solar farms, and many small firms are eyeing the energy business.

Unfortunately, I fear that in our time of political "change," that the political machine is set on greater centralization of the market. I believe the better path to energy independence involves the creation of a large number of small firms. I fear we will head on a the path of large social programs that will peter out and fail to achieve sustainable energy market.

No comments: