One of the most frequently misquoted facts about plastics is the supposed relationship between oil prices and resin prices. They're related, of course, but in North America, the price of resin is more closely connected with natural gas. And the reality, as any economics professor could tell you, is that pricing is determined by supply and demand, not by feedstock prices. Still, although the connection is not as solid as many in the business press believe, there are many definite disadvantages to high oil prices for the North American plastics industry. And, conversely, when prices appear to be a bargain, like they are now (let's hope not temporarily), it's good news for manufacturers. U.S. News and World Report has an interesting story about oil prices. The premise is that the supply/demand equation today is is precarious, and while prices are low now, spikes upward are inevitable. One of the interesting passages has to do with the role that speculators play in driving up costs:
With oil poised to be one of the world's hottest commodities, it was perhaps inevitable that new investors would attempt to cash in. Most observers now agree that speculators are causing the market to react more quickly, and perhaps more dramatically, to fleeting news of political unrest or harsh weather. "Demand from investors who have accumulated large, net long positions in distant oil futures and options is expanding," Federal Reserve Chairman Alan Greenspan observed in an October speech on high oil prices. It's not just hedge funds that are roiling the market. Mutual fund and institutional investors also have gotten into the game. Energy analyst Katherine Spector at JPMorgan Chase & Co. estimates that money from this "passive investor class" has increased from $10 billion to perhaps $30 billion to $40 billion in just a couple of years. "Supply and demand determine the price, but the path we take to get there is increasingly influenced by speculative interest," says Spector. "That accounts for some of the peaks or troughs we've seen."Traditionally, speculators take on a lot of risk when they trade commodities like oil, and they play an important role in the economy. But is the part they play in energy pricing becoming too important?