Americans now face sticker shock at the gas pump, as the average cost of gasoline veers towards $5 per gallon.
And that has oil speculators in the futures market now in the regulators' bulls' eye, as the price of crude has about doubled in a year. The spike has effectively vaporized the $140 bn in fiscal stimulus checks now in the mail.
Ignored here are some basic supply and demand facts. Nigeria is pumping about a third of the amount it was a few years ago. Russia has major oil infrastructure problems, same with the geriatric refineries in Iran, where the oil mullahs as well as Venezuela are delighted to stick it to the US and Europe.
Meanwhile, the Mideast, including Iran, as well as Venezuela, China, India, Malaysia and Indonesia, all shield their citizens from the full rise in oil prices with fuel subsidies. Together the countries that subsidize fuel account for half the world's population and a quarter of the world's fuel use, one report says.
And countries that subsidize their fuel account for all of the current demand growth, because demand in developed regions such as the US, Europe and Japan is either flat or contracting, as drivers feel the hit of unsubsidized fuel costs, a report says.
Another factor too: The world's spare capacity, the oil cushion as it were, has dwindled to just over 2 mn barrels per day with global demand at 86 mn barrels a day.
That's way down, by more than half, from 5 mn nine years ago, says the U.S. Energy Information Administration. And much of today's surplus is sour crude, high in sulphur, which refiners loathe.
Shoddy and corrupt oil supply data, detrimental weather and ethanol mandates, all cause oil prices to gyrate too.
And a key driver is the strength of the US dollar. Since oil is traded in dollars, the plunging value of the US dollar likely has traders scrambling, as the amount earned from future oil sales may get slammed as the dollar loses real value.
However, oil speculators are now held solely to blame for price spikes. But they are not even largely to blame.
Think about it. As proof that oil price spikes match speculative investments, hedge fund manager Michael Masters told Congress recently that $240 bn sits in commodity index funds, up from $13 bn five years ago. Some have put that figure at $250 bn.
Paul Horsnell of Barclays Capital, an investment bank, puts the total value of index funds and other similar investments at $225 bn. Horsnell cheekily notes that figure is less than half the market capitalization of Exxon Mobil, but more importantly is a tiny fraction of the $50 trillion-odd of transactions in the oil markets each year.
The Commodity Futures Trading Commission says that some $5 tn worth of futures and options transaction flow through U.S. exchanges and clearing houses daily. Can that $225 bn to $250 bn in investments, a drop in this $5 tn ocean of money, really move prices?
But what happens in an oil futures trade?
No physical barrels of oil are traded. Instead, futures contracts exchange hands, which are essentially bets on the future direction of oil prices, often a year out or as long as eight years out. On the other side of the transaction sits a trader who bets oil is going down.
These trades are matched. If a big investor is buying oil futures contracts, on the other side is somebody willing to unload a lot of oil futures contracts to them. Airlines, trucking companies, any heavy user of oil use these futures contracts to lock in now their oil costs, in other words, by hedging their future oil costs. No barrels exchange hands.
But the fact is that if oil was really a speculative bubble, then the future forward contracts should be a lot higher. But they are not, the December 2016 is marked at $136 as well.
Those who do set the price of physical barrels look to the futures markets for a sense of where prices are headed, but mostly those prices are set by supply and demand.
Take note of the nearly 90% average price mining giant Rio Tinto disclosed in iron ore for its voracious customers in China to get a sense of what demand can do to commodities prices.
However, you may have seen the data from the Commodity Futures Trading Commission that showed speculators have increased their share of oil futures contracts in West Texas Intermediate crude on the NYMEX to 71% in April from 37% in 2000.
But that figure may be inflated due to double counting, as the CFTC says that 70% figure includes both long positions, or bets on a price gain, and short positions, or bets on a fall, held by swap dealers and speculators.
Moreover, swap dealers, because they tend to hedge their bets, have a virtually neutral position in the crude-oil markets, the CFTC has said, as they are almost equally long and short in the marketplace. Acting CFTC Chairman Walter Lukken said a large portion of those swaps deals would be for commercial businesses looking to hedge fuel costs, such as airlines.
Instead, the CFTC has said that speculators only make up about 30% of the market.
Should you blame the shorts and not the speculators? In June 2008, a report from oil analyst Theodore Butler notes that the spike in oil prices began when the credit crunch started in August 2007, primarily due to short sellers buying back futures contracts so as to cut their losses.
A run on contracts caused momentum trades in oil to spike the price higher, the thinking goes. Short sellers borrow a stock or in this case an oil futures contract from a broker and then sells it, in the hope of repurchasing that stock or contract later at a lower price.
Butler says that "index funds are holding the same size, or smaller, long positions in crude oil than they held 10 months ago, when crude oil was $70/barrel." Butler adds that "the buying back of previously sold short futures contracts, primarily in the commercial category, account for the bulk of the buying over the past eight months or so." Meaning last fall.
August 2007. Why should that date stick in your mind? What's the action here? Why did the spike in oil prices begin, as Butler says, in August 2007?
Because it's when the Federal Reserve opened the monetary taps to save Wall Street. Let's go to the tape.
The inflation adjusted price of a barrel of crude oil traded on NYMEX generally stayed around under $25 a barrel up until 2003, much as it had the prior 20 years. In 2004 the price spiked above $50, a year later in August 2005 it topped $60, mid 2006 it briefly surpassed $75, dropped back to $60 a barrel in early 2007, then rose inexorably to $99.29 a barrel for December futures in New York on November 21, 2007.
This year alone has seen record oil prices, with oil now marching toward $150 a barrel. "The number of transactions involving oil futures on the New York Mercantile Exchange (NYMEX), the biggest market for oil, has almost tripled since 2004. That neatly mirrors a tripling of the price of oil over the same period" reports The Economist Magazine in May 2008.
Not surprisingly, the steady march upward in oil coincides with the steady plunge in the value of the dollar after the Fed opened the money spigots in August 2007 to rescue Wall Street.
Does the short action signal a potential strengthening of the dollar, has the jawboning lip service paid by Federal Reserve Chairman Ben Bernanke in a recent speech (not official policy yet, mind you, the strong dollar), worked its magic here to cause the futures markets to think oil prices will go down?
Still the regulators want to have their say. And indeed they are. Next: The regulators move in on oil speculators.
Some experts believe that as much as 60 percent of the cost of a gallon of gasoline or heating oil can be attributed to pure speculation and abusive –even manipulative – trading practices, yet most trading is “dark” and federal authorities can neither fully police or see the data in the majority of the trading markets.
The energy trading markets were originally set up to provide energy producers and distributors with an environment to manage risk and produce the best possible price for their customers. But they are clearly no longer the driving force in the market. Profiteering speculators and investment banks care little about establishing a price for energy based on supply and demand Go to csapn.org and put in Energy Market Manipulation, June 8 and get the truth.
Larry King needs to interview Michael Greenburger and Mark Cooper both in the Congress debate. The CFTC could stop this out of control speculation tomorrow.
July 2, 2008 at 12:16 am
Robert Laps
Dear Mom
My job at the Inter Continental Exchange here in Atlanta is going great. I have made a lot of money here for uncle Abdullah. I have learned a lot from
these commodity speculators here in America. They have shown me how to make lot’s of money for myself as well. You see these people here in America want to buy all of Uncle Abdullah’s oil. They only want to pay 35 dollars for a barrel of it though. You know It cost uncle Abdullah 10 dollars to get it to them and he wanted that new home in Dubai so I will do all I can to help out. I found out that I can buy 30 barrels for 5% or less than 2 dollars a barrel on the commodities exchange and he doesn’t even have to pump it out of the ground or even ship it. They buy it with there guaranteed pension and insurance funds so uncle Abdullah’s money is real safe. And when I purchase it is so easy to hide you see they don’t have transparency. That means I can buy and sell it raising the price each time and know body knows its me. It even gets better you see these purchases are called contracts and I get paid for each contract . This is such a great country.. Sometimes I buy and sell a barrel as many as 30 times before Uncle Abdullah’s ever gives one barrel to the oil company.
Gotta go I will write later
Osamah
July 1, 2008 at 11:42 pm
Ted
Carrie: Here is an article I posted earlier that may enlighten you and help to clear up some missconceptions you have about free markets. Although Oil appears to be a good hedge against inflation, a lower dollar and a low oil supply, in reality nothing could be farther from the truth. The main thing driving inflation is oil prices and as inflation goes higher investors buy more oil driving inflation higher again. Some experts predict this will trigger the worldwide recession. This will result in lower gas consumption and it will free up more gas supplies. Contrary to what US Energy Secretary Samuel Bodman says I don't think supply and demand are really causing the problem. There are to many other factors at play here. Too many middle men skimming profits. The price of oil doubled in price in just one year and gas went up a third and yet figures are coming out that indicate we are using less gas, not more, probably because people are cutting back on gas. That clearly means supply and demand have nothing to do with these prices. Speculation is driving prices !!! Lawmakers blame loopholes in commodities trading like the Swaps loophole or Enron Loophole. Whatever you want to call it, It's a get rich quick scheme and not much less obvious than a pyramid scheme. There is no way supply is causing this gas crisis. I put the full blame on speculators and commodities traders The meeting in Saudi Arabia hasn't achieved any substantial results from what I can see.
July 1, 2008 at 11:20 pm
Ken
So... How much money do YOU have in the oil market, Ms. MacDonald ?
July 1, 2008 at 7:37 pm
Charles Upchurch
Thank you Elizabeth for taking it apart this well. It has occurred to me that the numerous cuts by the fed have made oil the safe place to hide money. Inflation, demand, instability can be blamed but don't make the difference that the lowered dollar does. Of course, this situation is exacerbated by a congress (democrat ruled and somewhat republican supported that can't get themselves to consider the American people in their decision to fight drilling stateside. ) No, they are working on the important issues so they think and have put off the drilling vote again for after the fourth of july. The people are aware of congress' lethargy and will be keeping track as members of congress assume reelection while grilling big bad profit motivated oil. The right isn't always right but the left here is totally deaf.
July 1, 2008 at 5:52 pm
Barry
Drill drill drill drill drill
July 1, 2008 at 5:24 pm
Greedom
Carrie
That's a neat point demonstrating that printing up money to hand out - in the end - renders it valued less. I do say - (I have to stop saying I do say !) makes me wonder if it damages everything in the end, unless there is a planned rate increase OR some bonus US GDP export growth expected, you know ? Kind of like a known bumper crop coming in, so you extend the credit line just a bit more in July to have a bigger ho-down party ? I'm no farmer, nor do I know if there really is such a thing as a ho-down party BUT - you make a good point.
Others have pointed out that the money handed out is just going to be collected in 2009 taxes anyway. I'm leery (I FINALLY got the spelling on that right at age 40 yea !) when 'stimulus' monies need to be handed out. Intuitively I feel like it's a 2nd grader pretending it's not wet out side because they're snug inside of a cardboard box in the back yard. Okay, crazy example there. I find it a red flag that stimulus in cash which in turn diminishes the value of that cash would even be attempted.
oh well - maybe this admin knows of some 'bumper crop' that's coming in, or some big win that's coming for the US that will render the currency going back up.
I STILL vote for a full 1% rise in rates just to shock futures exploiters.
I'd settle for a 0.25 % rise (I'm a realistic, really !)
July 1, 2008 at 5:15 pm
Greedom
I just pondered an analogy that describes a way to view how I see people mistakingly leaving inflation out of the picture regarding why oil is rising.
I observe above the author DOES promote the falling dollar as severely influential - and agree.
I pictured the dollar as a block of ice in the desert.
People are going 'wow, everything is getting bigger, including us, look at the block of ice, it hasn't changed in size, it's the rest of the universe that's getting bigger'
Meanwhile, of COURSE the block of ice is smaller - it's in the desert, and the desert is JUST the place if you want isolation, or if you've borrowed from too many folks and are hiding out ! heh
Ok, I'm not suggesting the US is hiding from the debt it owes China.
China all in all keeps the lower lower class feeling like they're not 3rd world in the US through Chinese exports pumped through wal-mart, hey, it's a fair exhchange.
Anyway, my point is - people don't connect that it's not so much oil going up, as the dollar being worth less, and therefore requiring MORE dollars to purchase it.
If everything else wasn't going up ? hey, I'd say oil is going up. It's the dollar.
No way core inflation is 2% though.
July 1, 2008 at 5:06 pm
Steve
We can play the blame game all we want and it will not help. The law of supply and demand is at work and no finger pointing is going to change it. Until we decide that to be energy independant means we need to produce and process our own energy, the problem will only get worse.
July 1, 2008 at 4:45 pm
Greedom
Comment by G. Bagwell
2008-07-01 14:36:30
Lady, you need help. Try Ed Wallace, Inside Automotive.
Bagwell - just to share some insight, no one is without needing help at one point or another, but there are those I observe in this world that demonstrate leadership in simply 'being' - MANY - and then there are those that are working on that, and then there are those that don't work on that at all. I'm probably in the middle.
I think MacDonald though is at the top in figuring out bringing out the best in humanity. I know good people to spot em ! Often it's writers, really, there are terrific people all over - and then again, more people fall into the bell curve I think. I currently am trying to learn to listen more, Sam Keen is a philosopher I came across that shared some insights on wanting this. I just observe MacDonald to be one of the few people that listens carefully, doesn't interject with fragments, truly respects the dialog, and when she has something to say, it's clearly reflective of the listening process. Many people just want to bandstand their own insecure position for whatever disillusioned device of satisfaction, I don't observe this with MacDonald. On Fox ? this is VERY rare if you ask me. If one wants to call civilization of humanity one long drawn out dialog ? then respect of the dialog is the best we could ever seek. And if someone DOES need help ? seeking to ostracize them isn't helping, but that's not germane to this subject on oil.
July 1, 2008 at 3:54 pm
Greedom
Comment by G. Bagwell
2008-07-01 14:36:30
Lady, you need help. Try Ed Wallace, Inside Automotive.
-end post.
G. Bagwell- Do you actually have anything to contribute to this subject on oil futures ?
Or is the eeeeenternet your free anger management therapy today ?
Don't get me wrong, I've disconnected and gone off in forums - but I'll say this, THIS author to me ? I find as a role model - always reverent - always insightful - strange enough, pretty much always interesting, at least alive in the subject on the table. I only see a sincere journalist seeking to bring forward the truth and offer up insights to further understanding.
No time for insults - and I should probably be fair and not offer up compliments either and just keep to the subject matter.
Do you think the dollar's position against other currencies is contributing to the 'appearance' that oil is actually goin up G Bagwell ?
If so, what do you think is bringing the dollar down so badly ?
July 1, 2008 at 3:42 pm
Carrie
I would like to respond to the following comment: "The government needs to step in and do something about commodities trading."
Uh, no. Let's go back to econ 101...free trade w/ perfect competition achieves the greatest benefit for all parties; thus, Government intervention is not the way to go. Remember the President that thought it would be a good idea to "do something" about the oil situation in the 70's? Remember the lines waiting for gas?
The true enemy is inflation and it smacked the US double-hard when the Govn't released "stimulus checks" and the Fed kept cutting the rate. Let's go back to monetary policy 101...when you cut the rate of borrowing money, it becomes cheaper to borrow money, in turn, the "value" of money drops. Same with the stimulus checks: if the Govn't is just giving out greenbacks, actual cash is valued less b/c there's "more of it" floating around in the economy (hence the increase in the value of gold); stop printing money and allow the interest rate to adjust accordingly.
July 1, 2008 at 3:28 pm
Greedom
To be fair, I don't want to suggest I'm 'posing' as different people here, I have posted using some different nicks - for fun only.
I'm sure people can tell it's me by my over-use of carriage return, the Eugene Robinsonized use of the hyphen too much - and oh ? general stream of consciousness approach otherwise.
I didn't want to suggest my different posts with different nicks were different people.
I just like the blog/forum here because I think the author brings forth fresh ideas and insights, BACKED by data, good research (NO one is perfect, but this is as good as it gets I think), and in general, a rare unbiased drive to just reach an understanding regarding matters of the economy/global economy.
MORE so, I find the wikipedia entry on Liz MacDonald revealing in her success in to some degree, insuring integrity exists in ALL matters of the markets/economy. I had no idea on the tax research/journalism. This forum seems to be to me what journalism ought to be - served up down the middle- hits you in the face, leaves you to think for yourself at the same time bringing excellent constructive criticism to all facets of the formal inquiry.
Back to work for me - Wonder if there will be a part 3 on inflation and US dollar influencing oil futures - AND all other futures.
July 1, 2008 at 3:27 pm
Greedom
my second part here to my point.
My point is, if oil is sold in US dollars and US dollars are worth LESS ?
of COURSE it will appear as if oil is worth more - but that's ONLY if someone is ignoring the relationship of the dollar to the rest of the world.
I think PERHAPS - as I write to learn (I actually do my best thinking mid sentence) - maybe the US still lives as IF the US currency is #1, in some isolationist stance.
Maybe that's the problem. In truth, the dollar is sliding against many currencies.
Maybe the problem is people live in denial that the dollar isn't worth as much as it used to be. Where is inflation included in these inquiries into whether oil is up on demand or speculation ?
The president of OPEC sides with my conclusion here, that it's the dollar falling.
Once one gets past denial, the healing process can begin !
Now, there exists a danger in someone getting into oil thinking - wow - look at the price per barrel, it's going up, when in a GLOBAL reality, it's not, it's just the dollar worth less. THAT danger is when people who THOUGHT they were actually profiting discover, uh oh, I don't have what I thought I had resulting from all this exploitation of the oil futures. Enter Muriel probably saying 'now, do some REAL labor if you want to earn a living'.
It's not JUST oil either that's going up, oil is just culprit to being the new gold lately in my view. Gold is less pegged to the USD at least.
July 1, 2008 at 3:19 pm
Greedom
I am puzzled though this article didn't bring in inflation as a third component.
I am not an economist, so I have to struggle to even feel I can validate theories on is oil up due to speculation or demand. I see the Saudi's saying last week - flat out - 'we can increase production ? but we have no buyers' coupled with US oil corporation CEO's saying 'no shortage we're aware of'. From that I conclude- GOOD points on some unreliable data as to who IS using how much oil mentioned in this article aside, I settle that demand isn't the cause.
I probably should conclude I'm simply not competent or qualified to assess if speculation could ride or exploit oil futures to no end. I suppose if someone has enough money to create an artificial demand and is willing like in a pyramid scheme to absorb losses long enough to pass on one planned HUGE loss to the suckers left holding the bag in the end, perhaps.
But I see the Sterling approach 1.99 to 1 nearing 2 to 1 (today I think it hit 2 to 1) and the Euro to Dollar ration shifting again towards 1.60 and I am left thinking gee, with oil pegged to the US Dollar, as I KNOW at the grocery store - I get less lettuce now for my dollar. 2 liters ? I used to use to gauge the area I was travelling in via a diet coke ? once at $0.85 or so ? now ABOUT $1.65 where I live. That's over a few years.
Continuing my point in a second post on this one.
July 1, 2008 at 3:12 pm
Greedom
Here Bretton Woods comes back to haunt us.
Bretton Woods only works to the US favor IF the US currency is #1.
It's not anymore.
Somewhere, citizens of the United States have become elitist - thinking the ancient Greeks knew nothing of democracy. That the Roman's knew nothing of democracy. That Japan in the 10th century knew nothing of these desires for mutual respect of human beings/rights.
US does NOT have dibbs on democracy. Abu Graihb came from the US. Period. Shock and Awe came from the US - period. US 3 billion aid from Bush sr. as head of the CIA to Bin Laden to fight Russia came from the US - period. The US isn't all people crack it up to be.
People are just FINE in Germany, France, these are nations that have far far far longer track records than adolescent America.
If the US Dollar is allowed to fall further, it will take MORE US dollars to buy the same amount of oil. Anyone who doesn't see that isn't thinking in terms of a global economy.
It's not 1930, or 1940, or 1950 for that matter anymore.
Oillie North can TRY to promote the isolationist US #1 message on War Time Stories, but hey, bellevue has a full floor of people who think they're jesus too.
July 1, 2008 at 3:06 pm
Ted
I find it interesting that billionaire financier George Soros calls this OIL phenomena a market Bubble when everyone else sees it as a sharp spike in oil prices. He says he believes there are lots of bubbles building in financial markets, including OIL. To quote him he says "He believes better regulation is necessary to keep commodity prices at more reasonable levels." The government needs to step in and do something about commodities trading. First of all, OIL and Gas should not be traded like poker chips. The consequences of a mistake are far too grave. When fear, greed and suspicion surround an activity what does that tell you? The commodities market needs a good overhaul to bring some credibility back into commodities trading. New regulations are necessary because a huge greed driven spike in oil can cause fear among all other investment sectors that are adversely affected by high oil prices. That fear would trigger a market reversal of grand proportions that would far out-weight any gains made by oil. These high prices are not sustainable and jeopardise economic growth globally, The true market value of oil is probably closer to about 80 dollars a barrel. Imagine if all these investors suddenly decided to switch from oil futures to wheat futures and the price of wheat started to run away. Would the government just sit on their laurels and do nothing until a bushel of wheat was $200 or $500 or $1000?. Think it couldn't happen? Think again.
July 1, 2008 at 3:05 pm
Greedom
I still say, it's not that oil is all of a sudden WORTH 140 to 150 a barrel.
It's that the dollar is worth LESS that it requies MORE dollars to buy it.
It's not hard to make that jump.
Oil is pegged to the Dollar
As the dollar falls, hey - simple reasoning here folks -
oil requires MORE dollars.
That's all.
In a global economy, it requires more intelligence though that Wilsonian Pre OR Post Bretton Woods isolationism regarding concepts of currency.
The dollar doesn't simply fall, relationships exist.
The dollar holds according to it's relationship to OTHER currencies.
July 1, 2008 at 3:01 pm
Ted
I find it interesting that billionaire financier George Soros calls this OIL phenomena a market Bubble when everyone else sees it as a sharp spike in oil prices. He says he believes there are lots of bubbles building in financial markets, including OIL. To quote him he says "He believes better regulation is necessary to keep commodity prices at more reasonable levels." The government needs to step in and do something about commodities trading. First of all, OIL and Gas should not be traded like poker chips. The consequences of a mistake are far too grave. When fear, greed and suspicion surround an activity what does that tell you? The commodities market needs a good overhaul to bring some credibility back into commodities trading. New regulations are necessary because a huge greed driven spike in oil can cause fear among all other investment sectors that are adversely affected by high oil prices. That fear would trigger a market reversal of grand proportions that would far out-weight any gains made by oil. These high prices are not sustainable and jeopardise economic growth globally The true market value of oil is probably closer to about 80 dollars a barrel. Imagine if all these investors suddenly decided to switch from oil futures to wheat futures and the price of wheat started to run away. Would the government just sit on their laurels and do nothing until a bushel of wheat was $200 or $500 or $1000?. Think it couldn't happen? Think again.
July 1, 2008 at 3:01 pm
Greedom
When the US Dollar hits 1 to 1.75 ?
I think ebay will be gone for US consumers, and EuroBay will show up.
People will want direct access to the Euro - and selling their assets - trinkets, whatnot will be the path.
Maybe there is something to this freak idea of Euro Bay ! heh
it will be European shoppers taking advantage of clearing out the US
after Abu Dhabi buys up 1/2 the US real estate - 'for fun' ?
Europe can buy up the goods in the homes sold to Abu Dhabi.
Hey, Maybe Dubai should just stop in it's tracks and Abu Dhabi just buys NYC entirely ?
July 1, 2008 at 2:58 pm
Greedom
Regulators ought to move in on the Fed and protect the dollar.
As the dollar falls, everything goes with it.
2 to 1 on the Sterling
I think when we see 1.6 on the Euro- you might as well just go Amish and get a horse.
July 1, 2008 at 2:55 pm
Greedom
Just starting to read this article:
from article:
"The spike has effectively vaporized the $140 bn in fiscal stimulus checks now in the mail."
First thought is, this really shows how much money is being MADE here. Or it shows how much money is being lost to our friend inflation.
I have trouble sorting it all out, I get closer, then I retreat. I currently think it's inflation allowing the futures to go uncapped. But there ARE those - as Muriel Siebert points out that short oil futures and live to short it - never ever actually interested in the product, only the system that can be played.
Perhaps Vegas needs to impose some stricter rules in the casinos eh ?
July 1, 2008 at 2:51 pm
G. Bagwell
Lady, you need help. Try Ed Wallace, Inside Automotive.
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Dan
Some experts believe that as much as 60 percent of the cost of a gallon of gasoline or heating oil can be attributed to pure speculation and abusive –even manipulative – trading practices, yet most trading is “dark” and federal authorities can neither fully police or see the data in the majority of the trading markets. The energy trading markets were originally set up to provide energy producers and distributors with an environment to manage risk and produce the best possible price for their customers. But they are clearly no longer the driving force in the market. Profiteering speculators and investment banks care little about establishing a price for energy based on supply and demand Go to csapn.org and put in Energy Market Manipulation, June 8 and get the truth. Larry King needs to interview Michael Greenburger and Mark Cooper both in the Congress debate. The CFTC could stop this out of control speculation tomorrow.
Robert Laps
Dear Mom My job at the Inter Continental Exchange here in Atlanta is going great. I have made a lot of money here for uncle Abdullah. I have learned a lot from these commodity speculators here in America. They have shown me how to make lot’s of money for myself as well. You see these people here in America want to buy all of Uncle Abdullah’s oil. They only want to pay 35 dollars for a barrel of it though. You know It cost uncle Abdullah 10 dollars to get it to them and he wanted that new home in Dubai so I will do all I can to help out. I found out that I can buy 30 barrels for 5% or less than 2 dollars a barrel on the commodities exchange and he doesn’t even have to pump it out of the ground or even ship it. They buy it with there guaranteed pension and insurance funds so uncle Abdullah’s money is real safe. And when I purchase it is so easy to hide you see they don’t have transparency. That means I can buy and sell it raising the price each time and know body knows its me. It even gets better you see these purchases are called contracts and I get paid for each contract . This is such a great country.. Sometimes I buy and sell a barrel as many as 30 times before Uncle Abdullah’s ever gives one barrel to the oil company. Gotta go I will write later Osamah
Ted
Carrie: Here is an article I posted earlier that may enlighten you and help to clear up some missconceptions you have about free markets. Although Oil appears to be a good hedge against inflation, a lower dollar and a low oil supply, in reality nothing could be farther from the truth. The main thing driving inflation is oil prices and as inflation goes higher investors buy more oil driving inflation higher again. Some experts predict this will trigger the worldwide recession. This will result in lower gas consumption and it will free up more gas supplies. Contrary to what US Energy Secretary Samuel Bodman says I don't think supply and demand are really causing the problem. There are to many other factors at play here. Too many middle men skimming profits. The price of oil doubled in price in just one year and gas went up a third and yet figures are coming out that indicate we are using less gas, not more, probably because people are cutting back on gas. That clearly means supply and demand have nothing to do with these prices. Speculation is driving prices !!! Lawmakers blame loopholes in commodities trading like the Swaps loophole or Enron Loophole. Whatever you want to call it, It's a get rich quick scheme and not much less obvious than a pyramid scheme. There is no way supply is causing this gas crisis. I put the full blame on speculators and commodities traders The meeting in Saudi Arabia hasn't achieved any substantial results from what I can see.
Ken
So... How much money do YOU have in the oil market, Ms. MacDonald ?
Charles Upchurch
Thank you Elizabeth for taking it apart this well. It has occurred to me that the numerous cuts by the fed have made oil the safe place to hide money. Inflation, demand, instability can be blamed but don't make the difference that the lowered dollar does. Of course, this situation is exacerbated by a congress (democrat ruled and somewhat republican supported that can't get themselves to consider the American people in their decision to fight drilling stateside. ) No, they are working on the important issues so they think and have put off the drilling vote again for after the fourth of july. The people are aware of congress' lethargy and will be keeping track as members of congress assume reelection while grilling big bad profit motivated oil. The right isn't always right but the left here is totally deaf.
Barry
Drill drill drill drill drill
Greedom
Carrie That's a neat point demonstrating that printing up money to hand out - in the end - renders it valued less. I do say - (I have to stop saying I do say !) makes me wonder if it damages everything in the end, unless there is a planned rate increase OR some bonus US GDP export growth expected, you know ? Kind of like a known bumper crop coming in, so you extend the credit line just a bit more in July to have a bigger ho-down party ? I'm no farmer, nor do I know if there really is such a thing as a ho-down party BUT - you make a good point. Others have pointed out that the money handed out is just going to be collected in 2009 taxes anyway. I'm leery (I FINALLY got the spelling on that right at age 40 yea !) when 'stimulus' monies need to be handed out. Intuitively I feel like it's a 2nd grader pretending it's not wet out side because they're snug inside of a cardboard box in the back yard. Okay, crazy example there. I find it a red flag that stimulus in cash which in turn diminishes the value of that cash would even be attempted. oh well - maybe this admin knows of some 'bumper crop' that's coming in, or some big win that's coming for the US that will render the currency going back up. I STILL vote for a full 1% rise in rates just to shock futures exploiters. I'd settle for a 0.25 % rise (I'm a realistic, really !)
Greedom
I just pondered an analogy that describes a way to view how I see people mistakingly leaving inflation out of the picture regarding why oil is rising. I observe above the author DOES promote the falling dollar as severely influential - and agree. I pictured the dollar as a block of ice in the desert. People are going 'wow, everything is getting bigger, including us, look at the block of ice, it hasn't changed in size, it's the rest of the universe that's getting bigger' Meanwhile, of COURSE the block of ice is smaller - it's in the desert, and the desert is JUST the place if you want isolation, or if you've borrowed from too many folks and are hiding out ! heh Ok, I'm not suggesting the US is hiding from the debt it owes China. China all in all keeps the lower lower class feeling like they're not 3rd world in the US through Chinese exports pumped through wal-mart, hey, it's a fair exhchange. Anyway, my point is - people don't connect that it's not so much oil going up, as the dollar being worth less, and therefore requiring MORE dollars to purchase it. If everything else wasn't going up ? hey, I'd say oil is going up. It's the dollar. No way core inflation is 2% though.
Steve
We can play the blame game all we want and it will not help. The law of supply and demand is at work and no finger pointing is going to change it. Until we decide that to be energy independant means we need to produce and process our own energy, the problem will only get worse.
Greedom
Comment by G. Bagwell 2008-07-01 14:36:30 Lady, you need help. Try Ed Wallace, Inside Automotive. Bagwell - just to share some insight, no one is without needing help at one point or another, but there are those I observe in this world that demonstrate leadership in simply 'being' - MANY - and then there are those that are working on that, and then there are those that don't work on that at all. I'm probably in the middle. I think MacDonald though is at the top in figuring out bringing out the best in humanity. I know good people to spot em ! Often it's writers, really, there are terrific people all over - and then again, more people fall into the bell curve I think. I currently am trying to learn to listen more, Sam Keen is a philosopher I came across that shared some insights on wanting this. I just observe MacDonald to be one of the few people that listens carefully, doesn't interject with fragments, truly respects the dialog, and when she has something to say, it's clearly reflective of the listening process. Many people just want to bandstand their own insecure position for whatever disillusioned device of satisfaction, I don't observe this with MacDonald. On Fox ? this is VERY rare if you ask me. If one wants to call civilization of humanity one long drawn out dialog ? then respect of the dialog is the best we could ever seek. And if someone DOES need help ? seeking to ostracize them isn't helping, but that's not germane to this subject on oil.
Greedom
Comment by G. Bagwell 2008-07-01 14:36:30 Lady, you need help. Try Ed Wallace, Inside Automotive. -end post. G. Bagwell- Do you actually have anything to contribute to this subject on oil futures ? Or is the eeeeenternet your free anger management therapy today ? Don't get me wrong, I've disconnected and gone off in forums - but I'll say this, THIS author to me ? I find as a role model - always reverent - always insightful - strange enough, pretty much always interesting, at least alive in the subject on the table. I only see a sincere journalist seeking to bring forward the truth and offer up insights to further understanding. No time for insults - and I should probably be fair and not offer up compliments either and just keep to the subject matter. Do you think the dollar's position against other currencies is contributing to the 'appearance' that oil is actually goin up G Bagwell ? If so, what do you think is bringing the dollar down so badly ?
Carrie
I would like to respond to the following comment: "The government needs to step in and do something about commodities trading." Uh, no. Let's go back to econ 101...free trade w/ perfect competition achieves the greatest benefit for all parties; thus, Government intervention is not the way to go. Remember the President that thought it would be a good idea to "do something" about the oil situation in the 70's? Remember the lines waiting for gas? The true enemy is inflation and it smacked the US double-hard when the Govn't released "stimulus checks" and the Fed kept cutting the rate. Let's go back to monetary policy 101...when you cut the rate of borrowing money, it becomes cheaper to borrow money, in turn, the "value" of money drops. Same with the stimulus checks: if the Govn't is just giving out greenbacks, actual cash is valued less b/c there's "more of it" floating around in the economy (hence the increase in the value of gold); stop printing money and allow the interest rate to adjust accordingly.
Greedom
To be fair, I don't want to suggest I'm 'posing' as different people here, I have posted using some different nicks - for fun only. I'm sure people can tell it's me by my over-use of carriage return, the Eugene Robinsonized use of the hyphen too much - and oh ? general stream of consciousness approach otherwise. I didn't want to suggest my different posts with different nicks were different people. I just like the blog/forum here because I think the author brings forth fresh ideas and insights, BACKED by data, good research (NO one is perfect, but this is as good as it gets I think), and in general, a rare unbiased drive to just reach an understanding regarding matters of the economy/global economy. MORE so, I find the wikipedia entry on Liz MacDonald revealing in her success in to some degree, insuring integrity exists in ALL matters of the markets/economy. I had no idea on the tax research/journalism. This forum seems to be to me what journalism ought to be - served up down the middle- hits you in the face, leaves you to think for yourself at the same time bringing excellent constructive criticism to all facets of the formal inquiry. Back to work for me - Wonder if there will be a part 3 on inflation and US dollar influencing oil futures - AND all other futures.
Greedom
my second part here to my point. My point is, if oil is sold in US dollars and US dollars are worth LESS ? of COURSE it will appear as if oil is worth more - but that's ONLY if someone is ignoring the relationship of the dollar to the rest of the world. I think PERHAPS - as I write to learn (I actually do my best thinking mid sentence) - maybe the US still lives as IF the US currency is #1, in some isolationist stance. Maybe that's the problem. In truth, the dollar is sliding against many currencies. Maybe the problem is people live in denial that the dollar isn't worth as much as it used to be. Where is inflation included in these inquiries into whether oil is up on demand or speculation ? The president of OPEC sides with my conclusion here, that it's the dollar falling. Once one gets past denial, the healing process can begin ! Now, there exists a danger in someone getting into oil thinking - wow - look at the price per barrel, it's going up, when in a GLOBAL reality, it's not, it's just the dollar worth less. THAT danger is when people who THOUGHT they were actually profiting discover, uh oh, I don't have what I thought I had resulting from all this exploitation of the oil futures. Enter Muriel probably saying 'now, do some REAL labor if you want to earn a living'. It's not JUST oil either that's going up, oil is just culprit to being the new gold lately in my view. Gold is less pegged to the USD at least.
Greedom
I am puzzled though this article didn't bring in inflation as a third component. I am not an economist, so I have to struggle to even feel I can validate theories on is oil up due to speculation or demand. I see the Saudi's saying last week - flat out - 'we can increase production ? but we have no buyers' coupled with US oil corporation CEO's saying 'no shortage we're aware of'. From that I conclude- GOOD points on some unreliable data as to who IS using how much oil mentioned in this article aside, I settle that demand isn't the cause. I probably should conclude I'm simply not competent or qualified to assess if speculation could ride or exploit oil futures to no end. I suppose if someone has enough money to create an artificial demand and is willing like in a pyramid scheme to absorb losses long enough to pass on one planned HUGE loss to the suckers left holding the bag in the end, perhaps. But I see the Sterling approach 1.99 to 1 nearing 2 to 1 (today I think it hit 2 to 1) and the Euro to Dollar ration shifting again towards 1.60 and I am left thinking gee, with oil pegged to the US Dollar, as I KNOW at the grocery store - I get less lettuce now for my dollar. 2 liters ? I used to use to gauge the area I was travelling in via a diet coke ? once at $0.85 or so ? now ABOUT $1.65 where I live. That's over a few years. Continuing my point in a second post on this one.
Greedom
Here Bretton Woods comes back to haunt us. Bretton Woods only works to the US favor IF the US currency is #1. It's not anymore. Somewhere, citizens of the United States have become elitist - thinking the ancient Greeks knew nothing of democracy. That the Roman's knew nothing of democracy. That Japan in the 10th century knew nothing of these desires for mutual respect of human beings/rights. US does NOT have dibbs on democracy. Abu Graihb came from the US. Period. Shock and Awe came from the US - period. US 3 billion aid from Bush sr. as head of the CIA to Bin Laden to fight Russia came from the US - period. The US isn't all people crack it up to be. People are just FINE in Germany, France, these are nations that have far far far longer track records than adolescent America. If the US Dollar is allowed to fall further, it will take MORE US dollars to buy the same amount of oil. Anyone who doesn't see that isn't thinking in terms of a global economy. It's not 1930, or 1940, or 1950 for that matter anymore. Oillie North can TRY to promote the isolationist US #1 message on War Time Stories, but hey, bellevue has a full floor of people who think they're jesus too.
Ted
I find it interesting that billionaire financier George Soros calls this OIL phenomena a market Bubble when everyone else sees it as a sharp spike in oil prices. He says he believes there are lots of bubbles building in financial markets, including OIL. To quote him he says "He believes better regulation is necessary to keep commodity prices at more reasonable levels." The government needs to step in and do something about commodities trading. First of all, OIL and Gas should not be traded like poker chips. The consequences of a mistake are far too grave. When fear, greed and suspicion surround an activity what does that tell you? The commodities market needs a good overhaul to bring some credibility back into commodities trading. New regulations are necessary because a huge greed driven spike in oil can cause fear among all other investment sectors that are adversely affected by high oil prices. That fear would trigger a market reversal of grand proportions that would far out-weight any gains made by oil. These high prices are not sustainable and jeopardise economic growth globally, The true market value of oil is probably closer to about 80 dollars a barrel. Imagine if all these investors suddenly decided to switch from oil futures to wheat futures and the price of wheat started to run away. Would the government just sit on their laurels and do nothing until a bushel of wheat was $200 or $500 or $1000?. Think it couldn't happen? Think again.
Greedom
I still say, it's not that oil is all of a sudden WORTH 140 to 150 a barrel. It's that the dollar is worth LESS that it requies MORE dollars to buy it. It's not hard to make that jump. Oil is pegged to the Dollar As the dollar falls, hey - simple reasoning here folks - oil requires MORE dollars. That's all. In a global economy, it requires more intelligence though that Wilsonian Pre OR Post Bretton Woods isolationism regarding concepts of currency. The dollar doesn't simply fall, relationships exist. The dollar holds according to it's relationship to OTHER currencies.
Ted
I find it interesting that billionaire financier George Soros calls this OIL phenomena a market Bubble when everyone else sees it as a sharp spike in oil prices. He says he believes there are lots of bubbles building in financial markets, including OIL. To quote him he says "He believes better regulation is necessary to keep commodity prices at more reasonable levels." The government needs to step in and do something about commodities trading. First of all, OIL and Gas should not be traded like poker chips. The consequences of a mistake are far too grave. When fear, greed and suspicion surround an activity what does that tell you? The commodities market needs a good overhaul to bring some credibility back into commodities trading. New regulations are necessary because a huge greed driven spike in oil can cause fear among all other investment sectors that are adversely affected by high oil prices. That fear would trigger a market reversal of grand proportions that would far out-weight any gains made by oil. These high prices are not sustainable and jeopardise economic growth globally The true market value of oil is probably closer to about 80 dollars a barrel. Imagine if all these investors suddenly decided to switch from oil futures to wheat futures and the price of wheat started to run away. Would the government just sit on their laurels and do nothing until a bushel of wheat was $200 or $500 or $1000?. Think it couldn't happen? Think again.
Greedom
When the US Dollar hits 1 to 1.75 ? I think ebay will be gone for US consumers, and EuroBay will show up. People will want direct access to the Euro - and selling their assets - trinkets, whatnot will be the path. Maybe there is something to this freak idea of Euro Bay ! heh it will be European shoppers taking advantage of clearing out the US after Abu Dhabi buys up 1/2 the US real estate - 'for fun' ? Europe can buy up the goods in the homes sold to Abu Dhabi. Hey, Maybe Dubai should just stop in it's tracks and Abu Dhabi just buys NYC entirely ?
Greedom
Regulators ought to move in on the Fed and protect the dollar. As the dollar falls, everything goes with it. 2 to 1 on the Sterling I think when we see 1.6 on the Euro- you might as well just go Amish and get a horse.
Greedom
Just starting to read this article: from article: "The spike has effectively vaporized the $140 bn in fiscal stimulus checks now in the mail." First thought is, this really shows how much money is being MADE here. Or it shows how much money is being lost to our friend inflation. I have trouble sorting it all out, I get closer, then I retreat. I currently think it's inflation allowing the futures to go uncapped. But there ARE those - as Muriel Siebert points out that short oil futures and live to short it - never ever actually interested in the product, only the system that can be played. Perhaps Vegas needs to impose some stricter rules in the casinos eh ?
G. Bagwell
Lady, you need help. Try Ed Wallace, Inside Automotive.