FARAI CHIDEYA, host:
From NPR News, this is News & Notes, I'm Farai Chideya.
A barrel of oil costs more than 143 dollars. Nationally, folks are paying a record four dollars and nine cents per gallon of gas, that is record setting break the bank money. So can you finger anyone with the blame? Oil speculators for one, and how are folks coping? This week on News & Notes we are doing a special multimedia series called Road Trippin' that gets to all of these issues with plenty of personal stories. Here to kick things off is economics contributor Bill Spriggs, he is chair of the economics department at Howard University. Bill, good to have you back on.
Professor BILL SPRIGGS (Chair of the Economics Department, Howard University): Thanks for having me.
CHIDEYA: So before we dive too deep into oil, I heard something pretty incredible about the finances. Analysts are saying that June has been the worst month for the stock market since the Great Depression. How is - do you think that that is true? And how would they be calculating those numbers?
Prof. SPRIGGS: They are talking about in terms of a percentage drop, so that's the way that they are making the comparison. And so yes, it is true, and it's the market discounting information about the future. We know that General Motors and Ford are going to be in trouble because of declining auto sales, and we know that the airlines are going to be in trouble as they cut back to adjust to higher fuel oil cost, so this is the market sort of forecasting where things are going to be. They are troubled with their financials, they are worried about the amount of capital that many banks and investment banking houses have had to raise, so they are showing their concerns about the future.
CHIDEYA: I have noticed my own 401(k)s getting hit by this, because when you have things invested in the market, even passively through retirement funds, you get to see them fall. Now, this is a question that is a little bit off from what I was going to ask, but at one point, you know, I was talking to someone who is nearing retirement, who is very concerned about the fluctuations in the market. Would you have any advice or, you know, what would you say to someone who is like, what should I do? Should I pull all my money out and put it in bonds, if you are nearing retirement age?
Prof. SPRIGGS: Well, if you are near retirement, you shouldn't be in the stock market. If you are that close to retirement, anyway, you can't really deal with the short-term fluctuations. But this rollercoaster ride that we had, the bust to the dot-com bubble in 2001 and now this rollercoaster ride down again, signifies why individuals have a hard time taking on market risk. And when you hear people say that, well we should privatize social security, it is precisely this type or risk that individuals can't handle, that we have social security, and why is not such a good idea to privatize that risk.
CHIDEYA: At the end of this week, we are also going to see new unemployment numbers. What do you predict for that?
Prof. SPRIGGS: We've had five straight months of declines. I think we are going to see another month of decline. Maybe not as severe. The stimulus package help out retailers quite a bit, so hopefully the number won't be too bad, but it is likely that we are going to continue this slide.
CHIDEYA: All right Bill, let's get to the meat of the issue we mentioned at the top, which is oil, oil and gas. Speculation, what is that? Who would be an oil speculator? And what would that job entail?
Prof. SPRIGGS: Well there are a number of ways in which people can enter into the oil market. Speculators can enter into it by trying to buy futures contracts, which - say that I will agree to buy so much oil in the future, for delivery in September, as an example, these are highly leveraged purchases. Normally they are buying an option, so they are buying an instrument that says I have the right to buy. This allows them to put a small amount of money down, and for small movements in price they gain a lot, and so the type of leverage that is involved encourages speculation.
The gamble that you have, if you are a speculator, is because you don't really want the oil, that you bid up the price to the point where you can't find someone who then wants to buy the contract from you, and you get stuck with (unintelligible) barrels of oil that you don't have any use for. So that's the gamble. In the short run is not that much of a gamble, though, because the people who really need oil - if you are an airline, if you are a railroad company, if you are a major utility company - you have to have oil, you know that you have so many flights that you have to fly, you have so many trains that you have contracted to run, and so you have to buy the oil. So a speculator actually gets to move the price up, forcing those who really need the oil to match that new price.
CHIDEYA: Does that, is that one of the reasons why oil is so expensive?
Prof. SPRIGGS: Well, it is very curious. Those who want to say it is pure market forces have to explain why the pricing to spike just at the time that the housing market crashed in the United States, and we know people fled, putting money into the housing market. And then the question becomes, where did they put those billions of dollars when they took them out of housing? And a lot of people believe that that money went in to oil speculation. People like to put money into commodities when the markets look bad. Normally it is gold, but gold is a fixed thing, you can only bid up the price of gold so much. Then there is black gold, which is a lot more liquid and easy to dispose of, and so a lot of people think that's where the money went.
People say, well, it can't be speculation because if people are speculating they'll get the price way above what the end users really would want to pay, and as a result we should see rising inventories. Well actually, we have seen rise in inventories. The first quarter, when you look month over month, shows that the OECD, which are the industrialized countries, show an increasing number of days of oil supply on hand. If there really was supply-and-demand, we would expect tight markets, we would expect inventories to drop to some dramatic level, if that were the case.
CHIDEYA: What about the government? And what I mean by that is that there is multiple bills in Congress right now about, you know, tightening up regulations on oil speculators. Do you think this is really an issue where the government needs to get involved?
Prof. SPRIGGS: I think so. I think it is an area where, again, letting the market do what the market wants to do isn't necessarily getting to what economist believe. Economists believe that people who are in that oil market are suppliers and demanders of oil, not somebody trying to manipulate the price. So to the extent where we can get those folks out of the market place, we would all be better off. It is a difficult thing to see, because the oil market is kind of complex. Some of the inventory buildup can actually just be oil staying in the ground. As an example, oil production in the United States in the first quarter actually was down over last year. When people say we need to have more drilling, well, we have oil companies with the right to drill, we have them lowering the amount that they are pulling out of the ground at the moment compared to last year, so more drilling doesn't seem to be the answer. There is something more complex going on.
CHIDEYA: Well, speaking of drilling, there is a lot of land that is actually owned by the government which could be used to drill oil. There is, if you talk about off-shore drilling, on U.S. coasts, there is a 27-year moratorium on a lot of US coast drilling. What do you think politicians are going to do? There was that huge fight over Anwar, the Arctic National Wildlife Refuge, back-and-forth over whether or not you could drill there. But in general, do you think those kinds of fights are going to break out between different branches of government?
Prof. SPRIGGS: Those fights are going to break out because it sounds like a solution, but we know from history that that is not going to be a solution for right now. The oil that we allow to come out of Prudhoe Bay in Alaska, is just now making a difference in the marketplace, and that was almost 20-some years ago. So if we do something with drilling rights today, you're not going to see that oil for another 20 years. So that's not going to change the price of oil any time soon. People may want to give in to that because it sounds like a solution, but it's a solution way off. It's not going to answer today's problem.
CHIDEYA: What are Senators McCain and Obama's stands on off-shore drilling?
Prof. SPRIGGS: Well, McCain has reversed himself. Initially he opposed that. He, of course, has tended to be strong on environmental issues, but now he has decided that he would rather give in on the idea of letting drilling take place off-shore.
In the case of Senator Obama, he has been very suspect that increased drilling isn't going to answer the problem, that we need a long-term solution for what we need down the road, but more immediately that speculators probably do need to be reined in and we need to be a lot more careful about what they're doing in the market place.
CHIDEYA: If you put on your crystal ball, take it out, take a look, what do you see ahead in the next six months or year in terms of fuel prices, whether it's gas or jet fuel etc.?
Prof. SPRIGGS: It's going to be very interesting to see what happens. The U.S. slowed up during the first quarter and yet we saw the price of oil go up. And the idea that demand is driving it means that you're saying that China and India are growing at such a rapid rate that they're making up for the slowdown in the U.S. economy.
We can see that in the future the airlines have already cut back, announced cutbacks on the number of flights they are going to have in the fall. We know that auto production is down that people are making switches out of SUVs and trucks and into smaller cars. So the demand for oil is going to drop even more than it has in the first quarter of this year. It's hard to see how high prices are going to sustain themselves in the face of the drawbacks that people are making both at the pump and that companies are making, like airline companies.
CHIDEYA: All right Bill, great to talk to you, thanks.
Prof. SPRIGGS: Thanks.
CHIDEYA: Bill Spriggs is the chair of the department of economics at Howard University. He is also the co-author of "Beyond the Mountain Top: King's Prescription for Poverty." He joined us from NPR's headquarters in Washington, D.C.
NPR transcripts are created on a rush deadline by Verb8tm, Inc., an NPR contractor, and produced using a proprietary transcription process developed with NPR. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.