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It's Demand, Stupid


Oil prices not work of evil speculators.

Politicians, please note: supply and demand, not evil speculators, are responsible for skyrocketing oil prices.

Imagine that.

A research report from Goldman Sachs (GS) says, "Current prices are supported by supply and demand fundamentals. The commodity markets are not behaving in a way that a speculative bubble would suggest."

This is an election year, so you've got to expect the level of flapdoodle to be high. Democrats, who are often hostile to markets, or ignorant of their arcane ways, have repeatedly blasted "speculators." Even Republican John McCain has called for an investigation of speculators.

Crude oil recently fetched $141.96 a barrel on the New York Mercantile Exchange, up $1.75. The Organization of Petroleum Exporting Countries, which pumps about 40% of the world's oil, blames speculators for the current price rise and says it's powerless to restrain future increases. Some fear the price could rise to about $175 a barrel.

Last week, the U.S. House of Representatives approved a bill directing the Commodity Futures Trading Commission to invoke emergency powers to "curb immediately the role of excessive speculation" in the oil futures market.

Here's betting President Bush will veto the measure if it reaches his desk, giving the usual suspects another chance to yowl - which is almost certainly the intent of the bill.

But Goldman Sachs analysts Jeffrey Currie and David Greely say, "It is not speculators moving the market, it is the information on forward supply and demand fundamentals that they are conveying."

Translation: Tight supplies in the immediate future drive up prices as demand in India and China pressure long-term production.

Moreover, the Goldman Sachs research report says that removing future bids on the price of oil from the process would force the market "to function with less informed views, degrading the price discovery mechanism."

Don't expect this bit of incidental intelligence to change a thing with politicians, and don't look for prices at the pump to come down any time soon. In that Never-Never Land known as the District of Columbia, producers such as Exxon-Mobil (XOM), ConocoPhillips (COP), Chevron (CVX) and BP (BP) are in league with the devil and his henchmen - those evil speculators.
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