The disaster of windfall-profits taxes to return?

posted at 7:10 pm on May 2, 2008 by Ed Morrissey

If we elect Barack Obama or Hillary Clinton, we will get a rerun of the windfall-profits fiasco that Ronald Reagan finally ended in the early 1980s. Obama has added his own plan to Hillary’s on the stump, which would hike taxes on oil companies while gas prices go through the roof. Not only does this make little sense, but we already have a history of failure that proves it, as Investors Business Daily reminds us.

First, Obama’s plan targets all revenues above $80 a barrel, without really explaining why he chose that particular number:

Among the options Illinois Senator Obama is mulling is imposing a 20 percent tax on the cost of a barrel of oil above $80, said Grumet, who spoke at a conference in Washington today.

“The industry has profited greatly — over $150 billion in 2007 — due to global instability fueled by conflict in Iraq, failing domestic fiscal policies that have weakened the U.S. dollar and skyrocketing global demand resulting from a lack of investment in alternatives,” said the Obama fact sheet.

Energy companies argue that new taxes will discourage production at a time when supply is needed most.

Clinton would impose a $20 billion windfall profits tax on oil companies over the next decade and repeal $30 billion in tax breaks over 10 years to pay into a so-called strategic energy fund, said Brian Deese, Clinton’s economic policy director.

Profited “greatly” depends on which measure one uses for that determination. The industry did make $150 billion in profit, but that came from more than $1.7 trillion in sales. Their profit margin came to a whopping 8.3%, which underperformed the entire manufacturing sector as a whole. For investors in the oil industry, and 8.3% return on investment doesn’t exactly equate to screamingly fabulous growth, especially when looking at pharmaceuticals (18.4%) and beverage makers (19.1%).

Describing an 8.3% return as “windfall” demonstrates the economic illiteracy of the Democrats. Of course, so does the notion of combating high prices through an increase of the tax burden. Where does Obama believe that tax goes? It gets paid by hiking prices at the pump, as the relatively thin margins on sales will dissipate rapidly without a price increase to balance it. Otherwise, it will come out of the pockets of investors, which means people who own stock through 401Ks and mutual funds. That means millions of Americans will have to delay retirement, as lower growth will require more years and more contributions to earn enough money to stop working.

IBD reminds us that the Carter-era policy flopped the last time we tried it:

Besides, we’ve tried windfall profits taxes before, in the early 1980s, and they were an utter failure. As the Congressional Research Service found, revenues produced for the government were nearly 75% below what was expected. Meanwhile, domestic oil output fell 8%, while oil imports surged 16%. ….

Oh sure, Big Oil’s profits are up. But so are the taxes they pay. In 2006, that came to $90 billion — up 334% in just four years.

This is how Clinton-style populism works. It starts with ignorance and ends with serious damage to our economy.

Oil prices aren’t high because profits are up; they’re high because we don’t have enough oil. By clamping down on drilling, refusing to move forward on nuclear energy and hitting producers with punitive taxes, Congress is doing all it can to ensure we don’t have enough in the future.

Once again, industries have three ways to lower prices: produce more, lower demand, or reduce cost overhead on production and sales. The Obama and Clinton plan essentially kneecaps oil companies by refusing to lift restrictions on drilling and then making it much more costly for them to buy and sell gasoline. It’s a prescription for even more reliance on foreign oil, skyrocketing prices, and economic instability.

Related Posts:

Breaking on Hot Air


Note from Hot Air management: This section is for comments from Hot Air's community of registered readers. Please don't assume that Hot Air management agrees with or otherwise endorses any particular comment just because we let it stand. A reminder: Anyone who fails to comply with our terms of use may lose their posting privilege.


Trackback URL


Basically Obama thinks that if he levies huge taxes at some random number, we’ll instantly see oil drop to below that number.

amerpundit on May 2, 2008 at 7:14 PM

Unqualified to run a 7-11 let alone our Republic.

bbz123 on May 2, 2008 at 7:15 PM

How about a WindBAG tax?

EJDolbow on May 2, 2008 at 7:20 PM

The argument over taxing oil company revenue is bs, but it’s still a winner for the democrats. Their profit margin is average at best, it’s just that the numbers are so huge.

BadgerHawk on May 2, 2008 at 7:21 PM

Eh, I should have read the whole post before repeating what Ed said.

BadgerHawk on May 2, 2008 at 7:22 PM

Because there’s not a chance in hell the oil companies will ever pass it on to the customer…

Chuck Schick on May 2, 2008 at 7:28 PM

Basically Liberals subscribe to a command and control Marxist economy. Everything is arbitrary.

Don’t worry, it will take less time to wreck the economy this time around than it took Democrat Jimmy Carter to work his magic. As the English have shown, it’s a short time.

tarpon on May 2, 2008 at 7:28 PM

More evidence neither of them can learn tricks not in the marxist playbook. Completely sterile minds whose first solution to every problem is either coercion or punishment.

It is accentuated by being lawyers married to lawyers, if you think like the Dutch. Works for me.

Harry Schell on May 2, 2008 at 7:35 PM

Once again, industries have three ways to lower prices: produce more, lower demand, or reduce cost overhead on production and sales.

You make the mistake that Obama wants prices to go down. I’m sure it’s been pointed out before, but this is a classic liberal catch-22. Higher prices means less consumption mean less GHG emmission = save the world. Higher prices means poor people (and women and minorities, of course) hardest hit means political malcontent means Bush’s fault! So high prices are saving the planet and it’s Bush’s fault!!!!!!eleventy!1!

They can’t have it both ways (or they shouldn’t be able to).

VolMagic on May 2, 2008 at 7:36 PM

I am not an economist, but even I know that if you raise taxes on a business, they pass on that cost to their customers, and guess how they do that? They raise their prices on goods and services, natch.

You can’t raise taxes on businesses because you are never never never taxing the evil rich white capitalist when you do so–you’re taxing the little people who have to pay it out in the long run.

How is this not obvious?

Bob's Kid on May 2, 2008 at 7:36 PM

If I was an oil company, here in the US, I would not spend one single penny here in the US. Why? Why do reserch on anything? The next pres. will tax the daylights out of everything the company makes. Don’t drill, don’t give the stock holders any profit much less the tiny profit the company makes. Contrary to popular knowledge, they do NOT make a huge profit. The mentally of most American’s, with the education system we have, they are the ‘evil’ oil companies, the dem’s and the msm tells us daily they screw222 us all. No new refineries in how many years? China and India are sucking up most of the oil, but we can’t tell anyone about these ‘friend’ of us. We can’t drill for oil because some deer might be harmed?
My question, who’s palm in congress is being greased by this mess?

letget on May 2, 2008 at 7:36 PM

skyrocketing global demand resulting from a lack of investment in alternatives

I keep coming back to the repeated references to Obama as “brilliant”, which come not just from media figures who pee themselves when he talks, but also from conservative types who laud his silly books, etc.

This is what passes for brilliance in our political discourse; it is referred to as ignorance in our high school economics classes. And yet, one can be awarded a bachelor’s degree from Columbia and a JD from Harvard without knowing better than this. Pathetic.

Jaibones on May 2, 2008 at 7:36 PM


Sorry, but the more I think about it the more it pisses me off. It’s just stupidity. Even the aforementioned 7-11 manager would know better than this.

Bob's Kid on May 2, 2008 at 7:38 PM

If only more people understood this. They see high prices at the pump, and they just want the companies to pay for it. And politicians are all too happy to play off that, and impose more taxes while they’re at it. It’s so frustrating.

brak on May 2, 2008 at 7:38 PM

Who does he have consulting him on this idea? Mugabe?

TheSitRep on May 2, 2008 at 7:39 PM

Didn’t you say the other day, Ed, that the profit by the oil companies amounted to was $40B on $220B of sales? That’s like buying new stuff at full price to sell at a yard sale. To add a windfall profits tax to that would be like a city changing its $5 yard sale permit fee to charging a percentage of your meager profit at the end of the garage sale. Who’d bother having yard sales anymore?

Connie on May 2, 2008 at 7:39 PM

Scrap the “was” in that paragraph. Sometimes I’m right the first time and mess it up on the preview. Go figure.

Connie on May 2, 2008 at 7:42 PM

Let’s say a restaurant sells lobster dinners for 45.00 and the Govt puts a tariff of 5.00 on lobsters.

The will restaurant raise the menu price to 60.00

Less people will eat lobster.
Lobstermen take a hit.
Waitors take a hit.
Busboys take a hit.

Every body looses. Someone tell that dumbass that.

TheSitRep on May 2, 2008 at 7:47 PM

Don’t criticize Bambi you bunch of racists.

Besides, this is just a distraction from the real issues.

misterpeasea on May 2, 2008 at 7:49 PM

Possible windfall profits tax
No new drilling
No new refineries
Increasing environmental standards
Possible cap & trade carbon exchange and attached taxes

Bottom line, gas prices are only going up, and no one will do anything about it.

brak on May 2, 2008 at 7:50 PM

It would be nice if Ed got the numbers straight. They would still support his point and wouldn’t leave him open to having the facts wrong.

It isn’t the margins that matter. Its the return on Equity. If I create a company that makes widgets for a buck and can sell a billion of them a year for 1.05, my margin isn’t high. If it only costs me $100 to create the business, I am really doing well. If I had to invest $200M, I’m not doing as well.

XOM has lower margins that MSFT and lower ROE.

APPLE has numbers similar but slightly behind Exxon.

OBQuiet on May 2, 2008 at 7:50 PM

Every body looses. Someone tell that dumbass that.

TheSitRep on May 2, 2008 at 7:47 PM

The people who thrive off the Government teet do not take a hit and that is who Barack is after.

EJDolbow on May 2, 2008 at 7:51 PM

Democrats always need a scapegoat to get their voters activated. Hating whitey is a flop, as is hating General Petraeus, so we’re back to hating the oil companies.

Meanwhile, since the House of Representatives exempt themselves from pain at the pump, this sort of folly takes hold, no matter how illogical or disastrous for the American people.

This is where we need someone like a Mitt Romney to point McCain in the right direction as he is wandering around aimlessly right now.

Buy Danish on May 2, 2008 at 7:56 PM

You know, this conversation doesn’t help my kids.

My collie says:

Yes, he was kidding.

CyberCipher on May 2, 2008 at 7:56 PM

$5 yard sale permit fee
Connie on May 2, 2008 at 7:39 PM

That’s a joke right? A fee for a yard sale? Tell me you’re just kidding…Please.

Oldnuke on May 2, 2008 at 8:01 PM

I have never understood why people like Obama assume that the war in Iraq caused high oil prices. In fact I shudder to think of what would happen to the price of oil if the United States did what Obama says we should and just abandons Iraq.

Imagine Saddam Hussein foot loose and fancy free with $110 oil. Oh yeah, we could keep him in a box. Sure we could.

Terrye on May 2, 2008 at 8:03 PM

One strange thing about the oil prices is that they do not seem to respond to anything real. I mean they were going down for a couple of days and then the news came out that the job picture was not as bad as some people feared, and they went up over $3 a barrel. It had nothing to do with actual supply and demand, it had to do with fears and concerns. Sometimes I wonder if we could be swimming in the stuff and the speculators would just keep jacking up that price.

Terrye on May 2, 2008 at 8:08 PM

Who is able or willing to point out the fallacies to the public about punishing oil companies through “windfall” taxes? Oil companies cannot do so credibly in the minds of John Q. Public because consumers have been taught by their corporate-hating masters in the Dem party to be suspicious, that the energy industries are just protecting themselves.

Politicians who support our energy sectors, especially oil, are assumed to be on the take by the gullible who have bought into class envy.

Who will educate the masses that seem so willing to bear further burdens of taxation because their political “saviors” are promising to bring Big Earl to his knees? Can a nonprofit like Heritage Foundation provide graphic video spots for television comsumption to demonstrate how taxation and idiotic regulation is costing them at the pump?

onlineanalyst on May 2, 2008 at 8:10 PM

Terrye, from what I have been reading, the oil speculators who are creating havoc with the price of the commodity are betting against our dollar’s recovery. A sound (or recovering) dollar apparently drives down the cost per barrel currently being demanded.

onlineanalyst on May 2, 2008 at 8:17 PM

Yes, it seems that a stronger dollar sends people back into currencies and away from commodities. Gold is down and oil seems poised to come down. But something happens and the cycle begins again. I have wondered if the bottom might just fall out of it all and prices might begin a decline much like housing.

Terrye on May 2, 2008 at 8:40 PM

How STUPID do you have to be not to know that raising taxes on a disfavored industry is NOT going to cause prices of their product to fall???

Have Obama or Hillary ever thought this through?? Or is it enough that they’ll be seen as “sticking it to Big Oil”, thus impressing the economic illiterates that comprise most of their base?

Cicero43 on May 2, 2008 at 8:41 PM

onlineanalyst on May 2, 2008 at 8:17 PM

That’s what Kudlow is saying.

Heck, he’s saying we’re already out of the woods.

Or one of his guests did.

misterpeasea on May 2, 2008 at 8:45 PM

How STUPID do you have to be not to know that raising taxes on a disfavored industry is NOT going to cause prices of their product to fall???

Cicero43 on May 2, 2008 at 8:41 PM

Remember Bambi’s take on raising capital gains taxes? Increase in revenue, decrease in revenue, no matter; it’s about fairness.

Raising taxes on Big Eeeevil Oil isn’t about prices, it’s about fairness. Sticking it to those Greedy Rich Oil Barons.

Know what I think? It’s not about fairness, and it’s not about revenues, and it’s not about punishing Greedy Rich People.

It’s about raising taxes.

misterpeasea on May 2, 2008 at 8:48 PM

misterpeasea: That’s where I read the explantion–at Kudlow’s comments over at “The Corner”.

He has been harping on the importance of strengthening the dollar for some time.

onlineanalyst on May 2, 2008 at 8:50 PM

Has anyone explained it to these a-holes that the oil companies wouldn’t be showing these “excessive” profits if the government would let them expand their drilling operations in the gulf and elsewhere? They would be spending a lot of those “excessive” profits on, oh…WAGES for people who need jobs about right now. On supplies, which would increase the demand for said supplies and therefore allow the suppliers to hire more employee.


PappaMac on May 2, 2008 at 8:52 PM

Balderdash. They know exactly what will happen. All that matters is that X has a pie that Y wants. Y breaks X’s leg to get it then moves on the the pie Z is holding.

They are stupid. The boni just want to make sure everyone knows who’s boss.

Limerick on May 2, 2008 at 8:55 PM

If the culprit is the dollar and the speculators, then we might not need to increase demand so much as we need to stabilize the market. I remember the oil shock of the 70′s and people were in line for gas. There have been no shortages, the demand is high, but there has been no problem with meeting demand. Maybe the dollar really is the biggest problem right now. I honestly do not know.

Terrye on May 2, 2008 at 8:57 PM

Sure, it’s about raising taxes. One way or another, the Dems want to initiate their social programs from Central Planning. The only way to make those higher taxes palatable to the voting yokels is to scapegoat corporations a la the Chavez sleight of hand.

Voters need to be educated into recognizing that they will be paying for all of the freebies they desire, whether through direct taxation or through increased costs through hidden taxation.

The Dems want to play this election on their domestic agenda.

A smart Republican counterplay needs to make dollar and cents’ issues understandable to the average voter, push for health savings accounts, free social security to allow private investment, and initiate drilling,refining, and exploration/development of alternative sources of energy. They need to present these options as opportunities to create jobs, to build our economy, and to secure our nation.

Why an executive order to countermand the stifling anti-energy regulations of Congress has not been instituted in the name of assuring national security is beyond my understanding. We would not be underwriting hostile nations if we took this step.

Powerlineblog had a thread yesterday that perfectly demonstrated the cluelessness of our Congress. Nancy Pelosi was bloviating in an incoherent manner about our energy policy and the environment that would have confused the most patient listener. How can such idiots have so much control over our nation?

onlineanalyst on May 2, 2008 at 9:07 PM

How can such idiots have so much control over our nation?

onlineanalyst on May 2, 2008 at 9:07 PM

One secondary school at a time.

Limerick on May 2, 2008 at 9:11 PM

Lets tax politicians by a rate of 65% of the amount they increase taxes by. On the third tax increase they will be penalized by a 20% surtax.

allrsn on May 2, 2008 at 9:29 PM

OK. Hold on. I’m actually an energy economist, so I’m about to get all pedantic on your sorry butts.

When the dollar falls in value relative to other currencies it means that the things that you buy from those countries cost more dollars. Since oil is a global commodity, it costs more in dollars when the dollar is worth less. The same is true of Korean microwaves and Swiss chocolate, which is why a falling dollar is inflationary. Too much money chasing too few goods.

Next, don’t blame oil “speculators” for pushing up the prices. They aren’t doing it. Remember that the spot market (effectively the market for actual phyical oil) has to clear. That is, the supply must equal demand. The price at which that happens is the price you observe. The only way, then, for someone to force the price of oil up is to physically remove it from the market. For speculators to do that, they would have to buy massive amounts of physical oil and store it somewhere! There just isn’t enough storage available to do that and, trust me, somebody would notice.

Now, speculators could, in theory, push up the forward (think futures contracts) price of oil, but for every buyer there must be a seller, so half the market must be on the other side. And if people noticed that the forward price of oil was consistently higher than the eventual spot price (which must clear!) they would start shorting futures and they’d take the “speculators” to the “cleaners”.

jl on May 2, 2008 at 9:31 PM

jl on May 2, 2008 at 9:31 PM

I like pedantic. I had to look it up but I like it anyway.

Great post.

Limerick on May 2, 2008 at 9:36 PM

jl on May 2, 2008 at 9:31 PM

I’m about to get all pedantic on your sorry butts.

Since no exitsting poster has challanged your position, and since most of the posters at HA understand at least some degree of economics HOW THE HELL DOES THAT SATEMENT FIT IN?

allrsn on May 2, 2008 at 9:41 PM

allrsn on May 2, 2008 at 9:41 PM

It was self-deprecating.

Pedantic – adjective

1 : of, relating to, or being a pedant
2 : narrowly, stodgily, and often ostentatiously learned
3 : unimaginative, pedestrian

jl on May 2, 2008 at 9:45 PM

Hey, if the windfall tax doesn’t work , which it won’t, to lower prices, then we’ll just have to have a price freeze and really screw the investor as the oil companies decrease exploration for new fields and reduce R&D on better environmental and safe drilling methods.

At least McCain acknowledged he didn’t know as much as he should about economics; but the two Democrats haven’t learned from history and just know everything about economics except how it works in the real world.

amr on May 2, 2008 at 9:45 PM

Or, if you’d prefer:

marked by a narrow focus on or display of learning especially its trivial aspects

jl on May 2, 2008 at 9:46 PM

Windfall profits tax? Who gets to decide the level at which profits become “windfalls”?

Exxon’s effective tax rate for the previous fiscal year was 42.4%. The left’s darlings, Starbucks and Google had tax rates of 35.6% and 25.3%.

BacaDog on May 2, 2008 at 9:47 PM

jl on May 2, 2008 at 9:45 PM

It was self-deprecating

Ok sorry you depreciate your self.

allrsn on May 2, 2008 at 9:48 PM

allrsn on May 2, 2008 at 9:48 PM

No probs. I think I proved that I’m pedantic by using the word pedantic!

jl on May 2, 2008 at 9:53 PM

Near sighted politicians (being redundant, I know), and just liberals in general don’t understand that taxes levied against businesses get passed on to their customers. The oil companies are not just going to sit there and take the extra cost, denying them profit. They are going to raise their prices even more to acommodate the extra tax.

Besides, such as times in the 1980′s when the oil companies were all losing money because oil was so cheap, if the oil companies start losing money in the future, is the federal government going to step in and give them subsidies? (They sure as hell are not going to sunshine the taxes!)

Weebork on May 2, 2008 at 10:00 PM

This idea of “taxing corporations” is one of my favorite rants. Corporations are really just legal concepts or legal fictions. The concept exists only to make contracting more efficient and, hence, cheaper.

Imagine that you wanted to explore for oil in the Arctic and there were no corporations, nor any reasonable facsimiles thereof. Would each supplier (for pipe, trucks, food, air transportation, labor, shipping, information, capital, etc) contract with each of the other suppliers? What a mess! So the law creates a central point through which all contracts flow, and they call it a “Corporation”. So when the government taxes corporations, they are actually using the resources of the corporation to collecttaxes.

So, corporations never pay taxes, they just gather them. The problem is that it’s very hard to tell who is actually paying them. It might be the consumer, it might be the employees, it might be the providers of capital – it all depends on the nature of each of those markets.

Of course, to the government that’s fine, because there’s no one to complain. The people who are actually bearing the burden of the tax don’t even know. It’s a scam!

jl on May 2, 2008 at 10:03 PM

jl: I appreciate your clear explanations. Now, work on an ad to make the points understandable to the consuming public. Let the taxpayers know how they are being bamboozled by the legislative tax schemes.

onlineanalyst on May 2, 2008 at 10:12 PM

Of course, to the government that’s fine, because there’s no one to complain. The people who are actually bearing the burden of the tax don’t even know. It’s a scam!

exactly the masses do not understand they pay th corperate tax when they buy the product. Corperate tax ends up being a hidden tax +. + because the consumer also pays the cost of collecting the tax.

allrsn on May 2, 2008 at 10:14 PM

Can we make basic accounting and finance courses mandatory for all majors? It is disgusting hearing all these allegedly educated people not being able to read a simple balance sheet and income statement.

As much as the price of gasoline sickens me, I’d like to see a permanent tax holiday to lower the price. To make gasoline appear more affordable, I’m doing the same thing I did after Katrina when all the stations jacked up their prices, I fill up every other day a few gallons.

Mooseman on May 2, 2008 at 11:12 PM

I thought the objective of the global warming crowd was to reduce carbon emissions. I don’t understand why they are now screaming about getting what they asked for. Didn’t they tell us we would have to suffer a little to save the planet? Did they not mean it?

Sue on May 2, 2008 at 11:55 PM


Thank you and I understand what you are saying. My point is why did the price of oil go up $3 in one day on the fear of short supplies. That is exactly what the Bloomberg report said. They did not say that physical supplies failed to reach a market. So far as I know, none have.

Terrye on May 3, 2008 at 7:12 AM

But I do think the dollar thing might be the biggest culprit and if that is true, additional supplies are less important than a stronger dollar.

Terrye on May 3, 2008 at 7:17 AM

Why don’t we just seize the means of production of any company that makes a profit above “x” and shoot the running-dog capitalist pig executives?

That will cure the problem of price excessive profits and before long we won’t ever have this problem again.

moxie_neanderthal on May 3, 2008 at 7:22 AM

The only thing increasing levels of CO2 drives is taxes. That’s all it is ever about with Liberals.

So here is how Democrat Jimmy Carter did it, he put in a the windfall profits taxes, then when prices went sky high he put in price controls. Simple fix. The result was you got to stand in line for half a day to try and obtain five gallons of gas. It was cool, the watse of time. But hey, the rest of the economy was crushed under his sky high interest rates so you had plenty of time to stand around for your rations.

Soviet planned command and control economies failed, but they didn’t try hard enough. All the Soviets needed to succeed was more money.

tarpon on May 3, 2008 at 7:43 AM

Excellent summary of the problem, Ed, and why liberals’ inability to understand wealth generation results in disastrous policies. We should make a fact sheet and hand one out to every lefty who opens his mouth to bitch about gas prices.

whitetop on May 3, 2008 at 7:45 AM

But this is how the Democrats appeal to their illiterate followers…they go after the BIG BAD OIL companies. They know that their followers are envious of success and BIG BUSINESS is success in their eyes.

I don’t know why the Republican party can’t get a PR campaign started that shows how idiotic a “windfall profits” tax is for everyone, including the followers of Democrats. A campaign like this should be broadcast on every major media outlet from now until the election.

Education is the only answer to the pandering that has prevailed in the Democratic party for decades. Not all the followers of the Democrats are stupid…they can understand and have common sense. All that is needed is an awakening of that common sense yet the Republican party has failed to provide the alarm clock!

Maybe the Republican party still needs a “wake up” call. You would have thought after losing the House and Senate they would be insomniacs but evidently they are still asleep at the switch.

Golfer_75093 on May 3, 2008 at 9:00 AM

One secondary school at a time.

Limerick on May 2, 2008 at 9:11 PM


misterpeasea on May 3, 2008 at 11:34 AM

Terrye on May 3, 2008 at 7:12 AM

Good question! I don’t know about the specific case, but here’s a couple of things to think about.

1. When the financial press says the price of oil has gone up or gone down, they are generally talking about the “nearby” futures contract, which is the price of the next futures contract that will expire, not the spot price of oil.

2. When the financial press says the price of something went up or down because of blah, blah, blah, they are usually talking nonsense. The prices are the results of transactions taking place among thousands of market players who are trading for lots of different reasons. The only thing you can say for sure is that the price rose because there were more buyers than sellers at the old prices.

3. Having said that, the explanation given is not irrational. If the chances of lower supplies for next month go up, then the expected spot price should rise, and so the nearby futures contract should also rise. Nothing nefarious here, just thousands of people each acting in their enlightened best interests.

4. This is a little bit more arcane, but the spot price should also rise with an increase in the nearby futures price. To see why, imagine you own a storage terminal that is only half full, and the price of next month’s crude oil goes up by $3.00/bbl. and the spot price doesn’t change. You know that you can store a barrel of crude for $0.50. What do you do? You buy spot oil, stick it in your tanks and sell the futures contract. You pocket a riskless $2.50/bbl. You keep doing that until the spot price rises/futures price falls or you run out of storage.

Make sense?

jl on May 3, 2008 at 1:58 PM

Economic illiteracy and/or cynical manipulation is pretty much reaching a crisis stage.

Every time some jackass starts in on the “recession” thing, for example. I point out that the economy has survived seven years of press corps and political trash-talking without actually HAVING a recession, and that’s pretty remarkable.

The trash-talkers are traitors AFAIC, economies run on information and CONSTANTLY feeding false and harmful information into an economy in the hopes that it will create a collapse is sabotage, plain and simple. And it has hurt economic growth, WHICH HURTS PEOPLE, especially people who need economic growth the most!

So the next time someone trash-talks the economy, just ask them why they hate poor people.

And Obama’s a socialist, which means he’s economically illiterate pretty much by definition – and deliberately so.

Merovign on May 3, 2008 at 3:25 PM