Crude oil price is about $70 now, down from above $145 a few months ago. On June 5th and 6th, there were price run ups of about $5 and $10. Federal Reserve economists calculated a GDP drop of 0.5% based on this rise in price. This is a pretty large impact to the GDP. And until the current financial crisis, energy prices seemed to be the hot topic of the day.

There are two camps on the cause of the price increase. One group says it is due to the fundamental supply and demand picture. With limited supply of oil and demand increasing, especially in India and China, the price was bound to go up. Generally the price of each barrel of oil is based on the marginal cost of production (cost of the last barrel). If anyone charged more, others would undercut that price to sell more barrels. But if supply is limited, then the marginal cost is not relevant, because there is no next barrel to produce – this causes the price to increase to the point where people will not buy or use oil any more. This is called the price of demand destruction.

The other group suggests that the rapid increases in price is due to speculators and investors who buy and sell 500 million barrels of oil a day on the Nymex, while the world only consumes 86 millions barrels of the physical product every day. This includes institutional investors such as Harvard University who buy and hold oil futures, sometimes for long periods, as part of their investments.

The stock market is different from the commodities market as far as speculation-driven prices are concerned. When speculators buy and sell stock of a company, 99% of the time it is the same stock – it is not increasing or decreasing the number of stocks and the stocks are not being consumed, they are merely exchanging hands. If the price of the stock goes up or down, it only affects the holders and no one else – and hence price bubbles can last for a long time. On the other hand, for commodities such as oil, the commodity is consumed daily to run the businesses and lives of most people. If the price of the commodity is driven up by speculation, it affects everyone in the economy. When this happens, demand destruction sets in and prices start to come down. Thus oil price bubbles should be short lived.

K.K.R. is famous for its leveraged buyout of RJR Nabisco in 1989, described in the best-selling book Barbarians at the Gate.

Here are some highlights of what smart meters can do:

• Instant readings transmitted back to the power company allow power prices to be varied hour by hour. This gives customers an incentive to reduce consumption during peak hours. The FERC calculates that peak demand can be reduced by as much as 7% in this way, saving $15 billion a year.
• The smartest (genius?) meters can also control electric appliances like air conditioners and turn them off during peak demand times.

Enel believes, however, that demand reduction is just one of the benefits of smart meters. The other big benefit is improved customer service:

• 98% of customer complaints and requests are now handled within 24 hours
• Outages are detected and repaired more quickly
• Customers who fail to pay their bills can have their power shut off or their consumption automatically limited, shielding the company from losses

Most of this can be done remotely, resulting in an estimated 6 million fewer visits by field personnel.