July 1, 2008 1:36PM
Part Two: Oil Speculators vs Supply and Demand
By Elizabeth MacDonald
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.
Comment by G. Bagwell
Jul 1st, 2008 at 2:36 pm
Lady, you need help. Try Ed Wallace, Inside Automotive.
Comment by Greedom
Jul 1st, 2008 at 2:51 pm
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 ?
Comment by Greedom
Jul 1st, 2008 at 2:55 pm
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.
Comment by Greedom
Jul 1st, 2008 at 2:58 pm
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 ?
Comment by Ted
Jul 1st, 2008 at 3:01 pm
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.
Comment by Greedom
Jul 1st, 2008 at 3:01 pm
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.
Comment by Ted
Jul 1st, 2008 at 3:05 pm
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.
Comment by Greedom
Jul 1st, 2008 at 3:06 pm
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.
Comment by Greedom
Jul 1st, 2008 at 3:12 pm
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.
Comment by Greedom
Jul 1st, 2008 at 3:19 pm
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.
Comment by Greedom
Jul 1st, 2008 at 3:27 pm
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.
Comment by Carrie
Jul 1st, 2008 at 3:28 pm
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.
Comment by Greedom
Jul 1st, 2008 at 3:42 pm
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 ?
Comment by Greedom
Jul 1st, 2008 at 3:54 pm
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.
Comment by Steve
Jul 1st, 2008 at 4:45 pm
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.
Comment by Greedom
Jul 1st, 2008 at 5:06 pm
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.
Comment by Greedom
Jul 1st, 2008 at 5:15 pm
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 !)
Comment by Barry
Jul 1st, 2008 at 5:24 pm
Drill drill drill drill drill
Comment by Charles Upchurch
Jul 1st, 2008 at 5:52 pm
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.
Comment by Ken
Jul 1st, 2008 at 7:37 pm
So… How much money do YOU have in the oil market, Ms. MacDonald ?
Comment by Ted
Jul 1st, 2008 at 11:20 pm
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.
Comment by Robert Laps
Jul 1st, 2008 at 11:42 pm
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
Comment by Dan
Jul 2nd, 2008 at 12:16 am
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.
Comment by Dan
Jul 2nd, 2008 at 12:17 am
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.
Comment by david wilkerson
Jul 2nd, 2008 at 12:18 am
Well it’s 08. I’m been telling everybody i know since 05, that if yall think gas is high then, then JUST wait till 08. Last year the two foxes are in the chicken coop so its pig out time. Duh, people there two in the white house that tied up with oil so Duh it don’t take a guiness about what is going on DUH!!!!!!!!!!!!!!!!!!
Comment by rdw
Jul 2nd, 2008 at 5:58 am
drill here, drill now!!! create good paying jobs in this country now!!
elininate the speculation if it is the speculators, because if you drill here, and drill now…. the speculation turns against middle east oil and towards home grown oil production. I could care less about what a frigging environmentalist or georgie think. you can not run this country without oil. friggin democrats are such idiots!!!!!!!~!
Comment by Roy
Jul 2nd, 2008 at 6:34 am
Seems like price fixing to me. In other industries when you discuss what price you will charge you go to jail.
Comment by Steven Harrell
Jul 2nd, 2008 at 7:03 am
All I can say is NObama!
Comment by Jerry Tindel
Jul 2nd, 2008 at 7:06 am
How has the money being paid for an actual barrel of oil changed in the last year? What is actually being paid to Saudi Arabia, Mexico, or any of the other producing countries by our domestic oil companies? What is the price be paid to producers and oil rights owners in this country? If we knew how the actual cost per barrel of oil has changed during this period, we could understand better all that has been written above. If someone can write on this, show the price both in dollars before thhe Fed shored up Wall Street in 2007 and current inflated dollars.
Comment by Joe Solters
Jul 2nd, 2008 at 7:40 am
So far no comments focus a major problem with crude world prices. Arguments directed to inflation and the dollar’s value are trivialized nonsence, and always invoke basic supply-demand, free market dogma. As long a OPEC exists, crude oil pricing is NOT a free market commodity. The usual “free marget” dogmas simply don’t apply. So all these “let the market work” speeches are worthless noise, and will never solve the current price issue, and it’s attendant misery. The debate needs to focus other solutions. Let’s start with US domestic crude production, which is about 60% of US consumption. US crude sales contracts contain short term escalators which track world crude price indices. That’s why gasoline pump prices jump so quickly. US oil producers are simply reflecting prices controlled, in large part, by OPEC’s effort to curtail swing production volumes; ie, Saudi Ababia swing production. The real political and economic question is: Are US domestic supplies entitled to charge world prices, when the price doubled in 6 months and goes up daily, and is ruining the lives of most Americans? The answer is NO! Price controls?Probably the only short term emergency solution. Free market speeches notwithstanding.
Comment by bubba j
Jul 2nd, 2008 at 7:57 am
the dollar is weak because of the bush economic policies, start a war, give big business huge tax breaks and fund the war by letting foreign countries by commodities in the u.s., i work in europe and it is truly sad to see the u.s. dollar so week, but then again, the bush economic policies let the dollar get weak so that big business would be competitive against european products, sad thing is, the europeans have such hatred for bush, they dont buy american, at the same time, the german economy is so bad that the people can barely afford anything with the euro
Comment by R. Hancox San Antonio, TX
Jul 2nd, 2008 at 8:06 am
There is some merit to economics fundamentals being PART of the problem. But the real problem is people moving their money out of other investments and into the oil market. As the fed continued to lower interest rates (as though blind to the rest of the world) oil became more and more attractive.
The most incredulous reason for the spike in prices is the whimsical reaction to simple quotes from “important” people. Some oil minister says the price will reach $170 soon and the price goes up $5 in a day. What was really different that day? Did a bunch of oil just go off the market? Did an oil field somewhere just get bombed? No, someone with a stake in the game made a comment.
It is absolutely irresponsible of all those involved to allow a commodity, that is basically at the root of today’s economic system, to rise so rapidly. The mear fact that such a commodity is allowed to be traded the way it is, is irresponsible. To be treated, as someone put it, like poker chips is beyond me. And we’re the uneducated ones.
Comment by Joe
Jul 2nd, 2008 at 8:22 am
Oil is the lifeblood of the global economy and it should not be used as a gambling tool by speculators and investors to destroy entire economies. It’s funny how people who are profiting from rising oil prices seem to always blame supply issues rather than their own self-serving greed. If speculators continue to drive oil prices beyond consumer’s affordability, people are simply going to stop buying many products and services which will have a far greater impact on the total global economy. To allow these few “scum bags” to line their pockets at the expense of a total economic collapse is irresponsible. I wish congress and regulators would get off their lazy asses and do something fast to stop the bleeding before it’s too late…
Comment by scott bourne
Jul 2nd, 2008 at 8:31 am
World Proved Crude Oil Reserves, January 1, 1980 - January 1, 2008 Estimates
1980 - 644+ BILLIONS BARRELS = 644,000,0000,000
AS OF jANUARY
2008 - 1,331+ BILLIONS BARRELS = 1,331,000,0000,000
http://www.eia.doe.gov/pub/international/iealf/crudeoilreserves.xls
??????????????????????????????????????????
Who the heck is getting rich now off of a so called shortage?
Guess you won’t post this one either.
Comment by 6ftrabbit
Jul 2nd, 2008 at 8:33 am
A message for environmentalists and politicians concerning oil: “GET THE HELL OUTTA THE WAY!!!
Comment by Roger Myers
Jul 2nd, 2008 at 8:45 am
As a commodities broker I can tell you this is nothing more than party line rhetoric disseminated by speculators. ICE contracts have no position limits and have no possibility for delivery being cash settled. Trade in this market, which profoundly impacts actual delivery markets, is nothing more than gambling based upon technical signals and has little to do with supply and demand.
Comment by Steve
Jul 2nd, 2008 at 8:46 am
What I find most frustrating in the whole oil debate is the fact that EVERYONE wants to blame someone else, when in fact, it is ME and ALL of you who are to blame. Oil companies do what businesses do, they try to earn money. Gas wholesalers do what they do, try to make money. Gas retailers do what they do, they make money. WE all make money. WE all get ourselves into credit debt, make stupid financial decisions (See recent Housing Crunch) and obtain ignorant interest only, and variable rate loans, all the while thinking we got a sweetheart deal on a house we couldn’t afford to begin with. THE BEST thing the FED can do is raise interest rates by at least 2 points, to make idiots like us save money, which brings the dollar back, and then we can listen to all the EMOs (Those who run on emotion rather than common sense) whine and cry about the poor oil investor and oil companies who just lost their shirts as the bubble burts and oil is back at 50 bucks a barrel, where it belongs. Stop pointing fingers people, look in the mirror, and then let the idiots in DC (ALL of them) know we aren’t gonna sit by anymore, while they sit on their fat assets and the rest of us suffer.
Comment by Johnny35
Jul 2nd, 2008 at 9:00 am
Sometimes there comes a point when some of you people who like to “OVER ANYLIZE” things need to be told to “SHUT UP AND PAY ATTENTION TO WHAT IS REALLY GOING ON!”
Greedom - YES, everybody agrees that when the value of the dollar falls, it takes more dollars to buy oil. There is NOBODY disputing that. But you people, including E-MAC need to stop trying to anylize everything to death and pay attention to what is REALLY going on!
EXAMPLE - One of the reasons that everybody claims is a leading cause of the price jump in oil is ‘Supply and Demand’ The fact that the reserves have gone from 5 bn barrels to 2 bn barrels. So the Saudis agree to increase production, this should now help to relieve the ‘Supply’ side, thus relieving the price. Did it? NO! Instead it went up based on concerns that “If the Saudis increase oil production, they will run out of their oil supply to quickly” BULL! Nobody believes that, do you honestly believe if that were true, the Saudi’s themselves would go ahead with the increase?
The truth of the matter is, EVERYTIME some little thing happens, the market can find a way to link oil to it, and raise the price. You can tell this just by reading the news. Nearly every artile that addresses the Mideast, has a reference to what it did to the price of oil. The HURICANES, yes did damage several oil platforms and cause SOME oil loss, but theloss was FAR LESS than that of the EXXON Valdez. So why not a bid increase when that happened?
Comment by Pete
Jul 2nd, 2008 at 9:06 am
If it’s primarily the value of the dollar, why is the rest of the world feeling the pinch as well?
The fact of the matter is the recent spike is all emotions and if we begin to show the rest of the world that we’re willing to become less dependent on foreign oil and increase our own supply, the market will immediately react. Speculators would follow suit.
Just let us start drilling here even if we don’t believe it will do anything. It can’t hurt (the price of oil)!
Comment by Spirit of '76
Jul 2nd, 2008 at 9:12 am
Rise in oil prices is largely due to government meddling and supposedly “doing good for the people”, worldwide.
The US has been printing money hand over fist for so many years that it is catching up with inflationary rise of the prices everywhere. The biggest evil that descended upon this nation is the unbridled money explosion by the Feds to “keep the interest rate low” to create economic stimulus. Free market economy will have cycles. Constantly expecting the politicians to protect us from any adverse economic cycle results in inflation.
Other nations have been indulging in subsidizing fuel prices by keeping them low. That creates artificial demand. Again, the governments are the culprit.
Unfettered markets and free trade are required for basic economic factors to determine pricing.
On top of everything else, the US government is prohibiting exploration and production of energy resources based on economic efficiency. Our coal reserves are vast and so are our petroleum and natural gas reserves. But we can’t get at it. The governments in the US owns majority of those lands. I thought only the kings used to own vast tracts of lands. We actually fought the English king over that type of behavior.
If we want price to go down, increase the interest rates, stop printing money and reduce the size of the US governments of all sizes. Volcker increased interest rates in the 1980’s to bring the dollar back. It was painful.
Comment by Patty
Jul 2nd, 2008 at 9:17 am
Will somebody please tell me if ICE, the non-regulated speculators, have anything to do with the high prices. Did Morgan Stanley and Goldman Saks form this company?
Aren’t the oil companies like Exxon and financials trading and driving the prices up?
Isn’t this a conflict of interest? Is this correct?
Why isn’t anyone mentioning ICE. They only mention it briefly on O’Reilly
and they don’t even mention the two companies that formed it?
Aren’t they driving their own product up by trading on this site??
Aren’t the screwing the American people by doing this??
Why are they allowed to do this?
Comment by Johnny35
Jul 2nd, 2008 at 9:20 am
If you don’t believe this, the just do a little research, and I will prove to you what I’m talking about.
Get a notebook, for one month, write down the days closing price of oil, then write down the price per gallon of your local gas station. Pick one station, and one grade. Here is what you will find out (based on hypothetical numbers)
Monday oil is $140/barrel and gas is $4.00/gal
Tuesday oil rises to $142/barrel and gas rises to $4.10/gal
Wednesday oil rises to $143/barrel and gas rises to $4.15/gal
Thursday oil drops back to $139/barrel and gas drops to $4.05/gal
Friday oil rises to $140/barrel and gas rises to $4.10/gal
Now, tell me why gas costs $.10/gal more to make it out of Friday’s $140 barrel, than it did to make it out of Monday’s $140 barrel.
Do the research, you will find out it’s true. And as far a Russia and Iran’s infrastructure, it didn’t turn old and decrepite in a year, that’s just another in a long list of excuses.
Yes the government needs to get involved, because totally free trade is only good until is begins to hurt the ‘common man’.
I have 1 son, and 3 step sons. I have to drive 200 miles per weekend to see my son. What use to cost $20 to due now cost $60+. It is getting to the point where I have cut back everything but food, do I have to stop feeding the kids to buy gas, or do I stop seeing my son?
Comment by Bill Rains
Jul 2nd, 2008 at 9:21 am
Energy futures are also traded in this country otr through ICE an international organization which is NOT regulated by the commondity futures exchange. The ctr only regulates the nymex exchange. You have left this out of your story which leads me me belive you DO NO KNOW WHAT YOU ARE TALKING ABOUT. The price of oil is driven by speculators because of this unregulation by the US govverment in this county. The ctr does nothing because of loop holes in the law and the Bush administration knows this.
Comment by Ted McKeown
Jul 2nd, 2008 at 9:24 am
Carrie: Here is an article I posted earlier that may enlighten you. 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 and oil prices continue to rise.
Comment by Johnny35
Jul 2nd, 2008 at 9:27 am
If you want total and free trade that is great, but then you start by dissolving OPEC. Make the Middle Eastern countries put in bids. I GUARENTEE that if we said that all of our tankers would be sent to Saudi Arabi, there would be a great deal of price reduction then. Because no matter how much Iran and Venezuala say they hate the US, they still want and NEED our money.
Comment by rlock
Jul 2nd, 2008 at 9:28 am
There was a report out about a month ago that said they were producing the same amount of oil worldwide today as they were in 2005. Demand is going to catch up to supply sometime and raise prices dramatically as it did.
Comment by mike t
Jul 2nd, 2008 at 9:33 am
Supply and Demand Theory doesn’t work if the producer doesn’t lower price when supply goes up. Last week or the week before (can’t recall), oil price dropped $5 and the price of gas only dropped $0.002 (not even a penny). At that rate if oil dropped $5 a week from 135 all the way to 50, the price of gas would fall 3 cents. Congrads!
Supply and Demand theory is just that a theory…it doesn’t apply when there is no competition and the product is so unique that people depend on it to live. You could increase supply 100 times…the oil companies don’t have to lower the price…they’ve identified the point were people are cutting back, so they set the price right at that line.
Remember at the rate gas fell last week when crude fell $5, if you increased supply to drop the price of crude all the way back to 50, you have dropped gas price by 3 cents…3 cents.
Comment by MattB is STL
Jul 2nd, 2008 at 9:35 am
Point 1
Trade is not “fair” with China. Just like in our old SALT treaties. We’ve failed to change our approach as the economies change. The tax differential ALONE, between imports and exports, makes it nearly impossible for small business to compete. This should have changed a LONG time ago. One reason that it possibly has not, is because many business owners have moved there business off-shore “to compete”. They found (essentially) slave labour and they can keep the profits off-shore and skip paying taxes. There have been efforts to remove the tax loop-hole. But until the citizens of the United States educate themselves on what is going on a demand a change….well….the politicians aren’t going to change anything.
Point 2
This is not supply and demand. This is market manipulation. Pick your conspiracy theory to blame. But someone is manipulating the market for profit, either monetary…or worse.
Point 3
Bashing the US will not when you any friends. Once you start done that road, most travelers will not make the journey with you. So you end up talking to yourself.
Comment by Mark
Jul 2nd, 2008 at 9:41 am
This is a good article. You people might as well quit blaming oil speculators. They are NOT the problem. The futures market (for oil and other commodities as well). It helps with price discovery and sends market signals on how to use current supplies and what should be done about future supplies. I see some of you complaining about the intrinsic market element that causes oil to shoot up $3-$5 in a day when some threat is made in the Middle East or some top analyst says oil is likely to go higher. Your argument is that it doesn’t change anything about the actual supply of oil. Well, I’ve got a counter to that argument. What if a leading research company said they had developed a new hybrid vehicle that would help us displace 70-80% of our oil use as a country but it would be at least 5 years before it was commercially available. I can guarantee you that oil prices would retreat significantly. Why? Because the market would be sent a signal that it would be oversupplied in the coming years. Did anything change in the present? No. But it’s going to change. This goes the same for the argument in trading for wheat, corn, etc. We need these “bets” to provide market signals and help with price discovery. We could do everything on the spot market, but the swings in prices would be violent and severe. You think things are tough now. Imagine yourself in a situation where one week gas is $2/gallon and then spikes to $6 or $8 the next. Then back down and gyrating wildly.
Comment by Greedom
Jul 2nd, 2008 at 9:43 am
from the article:
“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.”
Reading this part gives me an idea to suggest that futures should be mandated to have an actual use for the oil ?
That is, you could buy in IF you could vouch that you actually had a real world use for the oil. With Special Drawing Rights moving to paper, just something I started learning about - in Feb. 2008, I wonder if those will get involved in futures ?
That is will nation states start gambling on who will be borrowing what in the future.
This use of futures sounds like what DARPA had setup only using world political events to place wagers on. This project was shut down as soon as it hit the press some many years ago (6 ? ). People were upset that participants could wager on an assassination.
And now ? people are upset that people are wagering on a high utility/high use product, and their wagers are apparently altering the real world pricing of the utility -oil in this case.
So, perhaps the solution is to say - if you are to play into oil futures you HAVE to be willing to actually BUY that days order and pick it up, or have it delivered ! heh
Just a thought starting my day.
Comment by O'Malley
Jul 2nd, 2008 at 9:44 am
Paying high prices for oil is a cloud with a silver lining. It is driving alternative transportation energy development. Transportation based on electricity, either by battery power or compressed air is being fueled (so to speak) by these high oil prices. Electrical energy distribution is already in place with a 97% efficiency and the generation of electricity can, and does, come from many sources…some more “green” than others.
Tech development for cars based on electricity is advancing rapidly with no end in sight. It will be similar to the rapid development of the PC (Moore’s Law) delivering mainframe power in a laptop for less than $1K.
O’Malley’s Law: E-car’s range per charge will double every 5 years based on similarly sized vehicles.
Squalk all you want, but once I buy an electric car, I am never going back to gas.
Comment by Greedom
Jul 2nd, 2008 at 9:47 am
from comments:
Comment by Charles Upchurch
2008-07-01 17:52:26
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.
-end comment
Charles,
I have read this too, that money prior used in the markets has moved over to oil now. Early on in the oil futures skyrocketing I got the impression that oil was the new gold. That it offered more volatility too, if worked right. I don’t own any claims on any commodities, or stocks - but as of late I’ve concluded that I think it’s inflation #1, then that oil has become the new gold as #2 for people wanting to do something with their money - OUTSIDE of investment banks, hedge funds, mutual funds etc because of the lack of stability or faith in Wall Street. ESPECIALLY with BS collapsing and surely others to follow, I wager people want to place their money SOMEWHERE, and well - this COULD be in part (in whole ? I’d have to change a lot of thoughts ! heh) why oil is up.
Comment by Mark W
Jul 2nd, 2008 at 9:52 am
Inflation, speculation, ignorant monetary policy = the Perfect Storm for oil. I live on the Gulf Coast of Florida…every time someone mentions the words “hurricane” and “Gulf of Mexico” in the same sentence, local gas prices and world oil prices jump…and most of the time the hurricane they were worried about never even gets close to oil interests in the Gulf. Words used to manipulate the market. I could be easily convinced that those invested in oil hire “town criers” to sound the alarm just to drive the price up. Last week it was the Israeli military exercising military scenarios that involve attacking Iranian nuclear (not nucular Mr. President) development. An implied threat only, and yet oil bumps $3 a barrel the day after that tidbit hits the news. They’re just words folks.
My hope is that in the near future we hear these words: “new technology will make gasoline burning cars obsolete in two years.” Then we can give OPEC and Exxon-Mobil et al the middle finger.
Comment by Jeff Robinson
Jul 2nd, 2008 at 9:54 am
Sugar Cane Ethanol — $2.65/gallon in Brazil
Sugar Cane has much higher energy output than corn
Why is Gov Crist shutting large tracts of sugar cane production in Florida and strapping the taxpayers with $1.7B to turn sugar cane fields into swamps? So that big oil can push for more leaseable land for off-shore oil driling? Give me a break, we should be ramping up sugar cane production in the southeast and weaning ourselves off of complete fossil fuel dependency.
Then oil prices will drop like a rock. And the Saudis will be begging us to pay $70/barrel for their commodity.
Comment by rmulligan
Jul 2nd, 2008 at 9:58 am
Being the largest consumer of oil on the planet gives us a great deal of control over prices. For all the talk of drilling or not drilling, the largest potential oil reserve lies in harnessing our appetite for oil. Many of the fuel efficient cars being introduced in the United States are larger versions of cars being made for other markets. Auto makers know that Americans will never buy the Nissan Versa or the Honda Fit sold elsewhere with a more efficient 90hp engine, even if it meets the needs of millions of commuters. Why? Because of the American “preference” for horsepower we almost never get the opportunity to use in our suburban commute. If we’re so outraged at the oil companies, why not ween ourselves and hit them where it hurts? We could probably cut our oil consumption by 10-15% if we just observed the posted speed limits. Drilling for more oil makes little sense until we change our own habits.
Comment by Mick Edwards
Jul 2nd, 2008 at 10:04 am
Why are so many unable to grasp speculation as the cause? Hurricane season brings high prices but when no hurricanes happen we still pay the “fear price” of oil and are never refunded that money. This shows that speculation is a real concern and problem. The supply and demand theories no longer apply. If supply and demand were the cause then diesel would be just as expensive in Mexico as it is here in Texas, it’s not. Economics 101 taught about “Guns and Butter” but now we have a new category “Fear and Beer”.
Comment by jeronne
Jul 2nd, 2008 at 10:09 am
The oil companies do not buy crude daily on the spot market.. They operate with contracts for delivery at a future date, some of which are 6 years out.. Why then do the oil companies raise prices with the instantaneous increases on the daily spot market when it is not a true reflection of cost?? The oil companies will not drill, develop, and try to bring down prices when they are making record profits under the present structure and pace.. Why would they create competition and trim profit margins unless they were forced ?? — Congress needs to grow some cojones and not only allow drilling but they should encourage it .. And, they should encourage new oil field developers into the mix.. The same old oil companies have Congress addicted to money and freebies.. Congress is at fault for the log-jam…
Comment by RockyB.
Jul 2nd, 2008 at 10:10 am
I found this article informative and discovered many aspects of commodity trading that I did not know. Could somebody please answer these questions for me? Index funds were mentioned as a way to hedge against price increases. Number 1, My concern is that index funds, such as those funds people are using for retirement, have no reason to be in this volatile of market, unless they understand or want that level of risk. Number 2, Hedging your bet makes sound ecomonic sense, but if factors are in play (look at currency bailouts around the world last 5 years), commodity trading and hedging are being used for malicious gain. Hello, Mr. Soros. Number 3, what happens if the bubble bursts? How many outstanding contracts at this increased price will be held with a commodity that is being sold at a fraction of the price? (see real estate, and hopefully not, corn futures after we fall out of love with corn ethanol) I enjoyed the comments, and would appreciate some experts opinions on my questions. I truly believe that our government should always get the hell out of the way…
Rocky
Comment by Geoff
Jul 2nd, 2008 at 10:12 am
The value of the dollar should be tied to the price of gold.. Wouldn’t that eliminate most of the confusing fluctuations and speculations against the dollar??
Comment by Gerald Bartone
Jul 2nd, 2008 at 10:18 am
Lets have a list of names of the people and how much they are investing in these futures. Im sure you will see that there are groups investing just for the purpose of spiking the prices. You would see a group of Venezulans and Iranians buying futures from each other to manipulate the price. This has been done before for other commodities in the past.
Comment by Frank
Jul 2nd, 2008 at 10:26 am
Forget basic economics, they do not apply to oil. If someone (anyone) says that there will be more hurricanes this year, the price for oil goes up. The hurricanes don’t show. No commodity brokers/speculators/suppliers/etc. lose any money. The price goes up even more because of the next Chicken Little statement. WE THE PEOPLE are stuck paying for it anyway!! Look at China. One day they say they are going to decrease the amount of their susidies and the price for oil goes down because the Chinese consumer will not be able to afford as much gas anymore. THE NEXT DAY the price goes up because the financial papers say that Chinese (communist) refineries will make more profit selling the same gas to the people who could not afford it just 24 hours before!! STOP THE LIES!! Oils should be taken off of the markets and we should go to a more accurate supply and demand system. The world wants to eat and we want cheap(er) oil. Simple math. When this “bubble” bursts I bet we are going to be expected to bail the oil companies out and give them even more of our money! Meanwhile we are making our enemies even richer…..I wonder who is manipulating the overseas markets???
Comment by Gerald Bartone
Jul 2nd, 2008 at 10:29 am
Back in the 70’s all we talked aboout was developing alternative energy sources like wind and solar power. If we had done any action on that we wouldn’t be in the mess we are in. And, we wouldn’t be paying billions of dollars to these oil countries and terrorists. I blame the oil companies for dampening all the plans for alternative energy sources and relying on oil for all these years. We should have acted sooner. What ever happened to the cars that went 60+ miles to the Gallon? (in the oil companies file cabinet)
Comment by Not Buyin' It
Jul 2nd, 2008 at 10:32 am
I dunno, i can not see how you guys KEEP getting it SO WRONG. Where on earth are you getting the data to write such nonsense? Previous comments have suggested that you look into the excellent and long history of reporting on this subject by Ed Wallace, of Inside Automotive. I concur. His last article in Business Week would have been a good place to start for you to gather some facts that can be verified.
Letting the facts speak for themselves should be a basic tenet of reporting on such an important issue. Mainstream media must have some type of agenda going on i don’t get, because you all keep trying to tell us things that just aren’t true. Or you’re not doing your own research, i dunno…
Comment by Caveman
Jul 2nd, 2008 at 10:42 am
Lets talk about what the real issue is, Congress and those that vote them in.
Supply v. Demand is a very real issue. The Crude Oil supply isn’t the problem and that’s easily proven by YOUR OWN PERSONAL research. Do the research and don’t read the Blogs, following the rhetoric of others. Who controls formulation and refinement (construction) in the U.S.? That is your area of focus and that would be Congress.
We can’t refine any more Crude Oil than we already are and we can’t make all the formulations, we import some. California doesn’t want to build refineries but they want cheaper gasoline? The environmentalists run Congress…a handful of WHACKED OUT NUTS are telling you what gasoline costs.
Wait until WINTER folks! You think your wallet hurts now? What do you really know about Crude Oil, Natural Gas and Home Heating Oil? Who did you vote for?
Comment by Glen
Jul 2nd, 2008 at 10:43 am
Supply and demand is causing the price of oil? Yea right!! Why can we price a commodity on something that has not even happened? If it is supply and demand why aren’t we running out? The futures say we are? How do they know that there is not a new mother load that might come in tommorrow. I read that there are millionares being made every day in North Dakota with new oil wells. The Traders cause the spike. NO you say? Oh that’s right every time one of the major traders like the Sanchas group says it is going up it goes up. (within minutes I might add)The way I see it the speculation needs to be taked out of the market and then supply and demand might work like it is suppose to.
Some of you might say that the dollar going down is causing this. Not exactly true. I have been watching the dollar very closely for the last several months. The dollar would gain as much as .02 against the eruo and .01 against the pound and 5.70 against the Yen and the price3 of crude would jump 3-4 dollars a barrel. Why? Not sure.
I wish that I had alot of money to invest so I could make a claim that there is going to be s supply shortage because the whales are blocking the ships in the atlantic ocean so my stock would go up.
Get Real!!
Comment by Kurt
Jul 2nd, 2008 at 10:52 am
Interesting, your 3-part hit piece on Michael Masters and commodity speculators only focuses on one commodity - oil. Most of Masters’ evidence of the detrimental effects of the growing clout of speculators is in fact in other commodity categories like corn, wheat, and metals.
BTW, the same arguments you make today for the lack of power of speculators could also have been made with the Tech and Housing bubbles of the past decade, but we all know now that they were indeed largely fueled by harmful speculation.
Comment by American Man
Jul 2nd, 2008 at 10:53 am
We have in the Whitehouse the worst enemy the United States has ever had. He is a coward and rarely comes out of hiding. When he does it is only to protect the assets of the International Wealthy.
On 9/11 he hid for hours while the mayor of NYC took action.
During Katria we watched a city be destroyed while he hid for days in the Whitehouse then responded with a moron like himself to run FEMA.
George Bush allowed one thing after another to be visited on the people of the USA in favor of the rich.
He favors a sinking dollar not for us but for the Corporations and International Wealthy.
He favors illegal labor which undermines American Wages and fills the pockets of the rich.
He favors high prices for oil not caring one wit how it affects the people. He proves this by saying and doing absolutely nothing.
He is a parrot. “Tax cuts for the rich”, “Money in your pocket”, “More tax cuts for the rich”. In short he is a moron.
This is why Obama will be president and those people who have made money beyound their wildest dreams at the expense of America can expect no mercy.
Class warfare? You bet cha, Georgie Boy. Millions of us want to get even.
Comment by William
Jul 2nd, 2008 at 10:57 am
Anyone notice that the “cushion is only 2 rather than 5-7 billion barrells a day? In an era when consumption was 20% less, the cushion of excess was 3 times of what it is today. So we ahave aproximately a 10 percent cushion as compared to more normal price days.
A strong signal from our government that a series of new well will be drilled starting now and that new refineries will also go underconstruction can only be seen by the market as a worning sign that the good times may end. If there is any government regulation of any of this, it ought to be that the oil companies be FORCED to spend present profits on new oil finds and construction. That there be almost a requirement that new wells and refinerees go up and that the new found oil may only be used in this country. Not sold on the open market.
A strong government intervention in all the funny environmental standards needs to be brought about too. Having one blend of regular unleaded and medium, high octane would be very beneficial. San Francisco and Los Angeles can do without and any city that feels the need for more stringent environmental regulations can do without.
Comment by Dana
Jul 2nd, 2008 at 11:01 am
This whole argument is based on one statement: can a small ammount of the oil market actually manipulate the price of the whole market? the true answer is YES!!!!!!
If the there is a 2% surplus of supply over demand and then someone trys to buy 3% to manipulate prices, the entire lot is now bid to the same price.
There is information out there that there is a group of investment bankers with underground oil tanks doing this very thing. And because they know that oil prices are held up, they can play the futures market and make their $$$ on the margins. The second $$$$ generated is they will sell the oil in their tanks a later date when oil prices have been driven up……………
Comment by Jeff Robinson
Jul 2nd, 2008 at 11:12 am
Sugarcane Ethanol $2.65/gal in Brazil
–Sugarcane has higher energy output than corn
WHY is Gov Crist shutting down vast tracts of sugarcane in Florida and strapping the taxpayers with $1.7B? Smells like a big oil play under an environmental guise to push for more offshore oil drilling and shut down opportunities for further development of renewable energy. We should be expanding sugarcane production and weaning ourselves off of fossil fuel dependency?
Then we would see oil drop like a rock to $50/barrel where it should be.
Help stop the madness and push for renewable biofuel development!
Comment by Dana Swan
Jul 2nd, 2008 at 11:15 am
This is suppliment to my previous comment.
For validation on the information about the investment bankers manipulating the oil markets, contact Frank Lohan @ KNX news radio in L.A.
Another issue about to effect oil prices is the impending attack on Iran’s nuke facilites by Israel. This must occur before the Nov. elections. The result will spike oil well over $200 a barrel for an unknown time. The wild card is if Iran has purchased any black market nukes. If they attempt to use them, Israel will eliminte Iran….
Comment by Karnak ..
Jul 2nd, 2008 at 11:37 am
Gov. Crist is shutting down US Sugar because of the incredible pollution over the decades that has impacted the Everglades.. Sugar cane can be grown practically anywhere, though.. In north Fla and all through the South there are a lot of farms that have suffered with the loss of tobacco sales.. They could be easily converted.. And, the cotton overplanting could be converted..
Comment by Brad (Houston, TX)
Jul 2nd, 2008 at 11:42 am
If there is still a worldwide surplus of crude as noted in the article, then the basic laws of supply and demand don’t support a rise in prices yet. The Saudi’s have said that they are meeting demand.
I would love to see someone tell us exactly who sets the price of crude. It is not supply and demand if there is a surplus and true competition. Since neither of those factors are present here, stop calling this a supply and demand issue.
Another point that is basic ecomonics is that there are limited number of suppliers, major barriers to entry and inelastic demand. When those items are present, basic supply and demand rules don’t apply. That is why we have price fixing laws in our country.
Stop the game. Big oil can’t set the price of crude. It is obvious that our speculators use things like “tension in the middle east” to quote why they think the price of oil will go up. Last I checked, tension in the middle east has been there my whole life and I was born in the early 1960’s.
Anytime someone can make money by driving fear they will do it. The speculators will quote anything they can to raise their futures price. They are all make huge money and the oil producers are just going along with it. The oil producing nations have to be laughing until they are sick at how we are self destructing.
Wake up everone.
Comment by MattB in STL
Jul 2nd, 2008 at 1:57 pm
60 MPG cars! Ha.
They’ll just charge twice as much as with the 30 MPG cars.
Like it has been said here, this is NOT Econ 101 supply and demand.
Pure capitalist will tell you to not get involved, let the market right itself. But it is obvious that there are not proper corrective mechanisms in place. The system IS broken and someone is capitalizing on it. Just like the mortgage markets of recent, the internet dot-bombs of the 2000’s and the strip malls of the 80’s and countless other times when a handful of harmful people, who obviously don’t believe in honesty, see an opportunity to stick it to someone and get rich quick. They drag us all down. And then, to top it off, we have to bail the (name your industry here) out.
I know this is really hard for some of you to believe but…
We are the most empowered people that the planet has ever seen.
As citizens of the United States have unbelievable rights guaranteed (at least at this point) by our Constitution. We also have the ability to vote with our pocketbooks.
Somebody, somewhere, knows who these speculators are. I urge them to step up for their country and release the information. We can then decide how we want to react to their greed.
Just like with the possible hostile take over of Busch beer. If the board had decided to sell. I was going to do everything in my legal power to find out what the other interests of the board members are and go after them fiscally. Is it right. Maybe. Is it MY right. YES!
Comment by R Mason
Jul 2nd, 2008 at 3:02 pm
Congress and the general public they play to always wants simple answers to complex questions. First it was “big oil” excess profits, now it is “speculators” and soon it will be another.
The true “fix” is to get off oil and go to a hyrogen based system. All we need in the infrastructure as most car companies today can produce these cars and they do not use a single barrel of oil. Google hydrogen cars and read the articles!
Comment by Scott Bourne
Jul 2nd, 2008 at 4:00 pm
O’Malley,
I wonder how far the advance of electricity will go with out wire which is coated with an oil by product, I wonder how far solar power can go when the collection plates are made from an oil by product. People scream for all this great change but fail to realize with out oil products their great green change is nothing. People need to educate them selves about the myths of the so called “Tech advancement” most of which would never have been possible with out oil.
Comment by Chad
Jul 2nd, 2008 at 4:15 pm
It shows you how great God is. Supplying us with a fuel that we must have to survive. Yet we’ve allowed whacko, tree hugging enviromentalist to take it away from us. If god has given us a resource on which to live, by all means drill. They keep saying, “what if something bad happens.” $4.00 a gallon is pretty bad. We are begging all these countries to drill yet we aren’t willing to do it. Lets drill and use our oil and let these other countries have to drink theirs.
Comment by Bruce
Jul 2nd, 2008 at 4:33 pm
I’m not a economics expert or an direct investor. But I have watched bloomberg everyday this year and although I agree there are some supply and demand issues and dollar issues. The one thing I see every day is a story of gloom and doom happening somewhere and the price of oil rising. Now that is the true measure of speculation and is driving oil prices. either Nigeria rebels are attacking or something is going to happen in Iran or some other problem and price goes up. Its the chicken little syndrome and every day the sky is going to fall. This is the facts though, there is no shortage of oil, there is no shortage of gasoline, there is no shortage of diesel. Now, until that changes we will have 200 dollar a barrel oil soon, for no other reason but that something MAY happen which hasn’t and nobody is going to change it because too many people are making ungodly amounts of money because of it.
Comment by Greedom
Jul 2nd, 2008 at 4:58 pm
Wow
Dow down 160 today
what’s it going to be like when the resets start showing up on peoples balance sheets ?
sheesh
9500 dow ?
8500 ? as 100’s of billions slam wall street - leaving people going
‘but but - I was doing so well on oil, no, not now ! not now ! ‘
Is that part of it ?
people are AFRAID to invest ? because they deep down KNOW there’s going to be some serious fallout yet to come ?
and they’re all playing in the commodities sand box ?
The idea just crossed my mind.
Comment by Todd
Jul 2nd, 2008 at 7:03 pm
All the Chicken Littles out there need to shut-up and go home. There is NO SHORTAGE of oil. There is only the dubious “threats” of oilfield disruptions, hurricanes, etc. I am so sick of it. I am so disgusted with the media blowing all this junk out of proportion so that a person might get too scared to leave their house.
Speculators are driving the gas market up, just as they are driving the grain markets up. It’s just sad that nobody is willing to tell the truth because that might mean 1. They have to admit that there is TRUTH to begin with, and 2. They have perpetrated the biggest lie since we heard Clinton say “I did not have sexual relations with that woman”.
Comment by Bill
Jul 3rd, 2008 at 2:30 am
Dear RDW and others of like mind,
At some point in time THIS nation and ALL others will have to live without oil because every last drop will be pumped out of the ground! That may be 50,100, or 200 years into the future, but it WILL happen, and at that point in time we all will have found alternative energy sources or all hell will have broken loose. So your statement that we Have to have oil is ludicrous! We choose to be dependent on oil. Additionally drilling in anwar and off the gulf will not give immediate relief as this will be predominently exploratory drilling, and it will take YEARS to ramp up viable production. Additionally, have any of you people actually looked at in ground oil reserves in the US and then did the math to see how long our oil would last if we used mostly our oil? What happens then to the price WE pay for oil when we’ve pumped every last barrel of our oil out of the ground and are totally dependent on foreign sources?
Comment by Geoff
Jul 3rd, 2008 at 11:18 am
Bruce is correct.. The rise in oil prices is not due to actual cost increases but to the prospect that something negative MAY happen.. That sort of emotion is what makes speculators act.. If there is no actual event to disrupt production and there is no product shortage then the prices are driven by speculation.. The normal(?) market forces of supply and demand do not apply to oil today..
Comment by Ron Grubb
Jul 3rd, 2008 at 3:05 pm
You want to stop speculation in oil? EZ If you buy an oil contract. You now own that oil and you will take phyical delevery of that oil.
The oil needed to fuel the word is not a poker chip in a game of Texas Hold em.
Comment by Thomas Kolker
Jul 7th, 2008 at 9:10 am
As a memeber of the N.Y.S.E. for 22 years, involved in arbitrage and having seen the “Hunt Silver Corner/ Manulipulation”, the oil speculation is absolutely no different!!! The increase in speculation 10 fold with agressive buyers fearing devaluation of the dollar’s worth, has led to rampant speculation combined with ridiculously low margin requirements. So long as you can trade oil futures with 2% margin and allow institutional investors with billions of dollars behind them, the price will continue to climb. Teh only outcome will be a collapse of the world economy and ours. Oil will not fall until the perception that it is no longer economicaly viable or there are governmental restrictions imposed.
Speculators serve an important function, under normal circumstances. However, when they can manipulate markets with their buying power, you are seeing the result. The N.Y.S.E. dealt with a similar problem, program trading, when it originated in the 1990s by instituting limits. If one does the same in oil markets, and limits the actions of money cartels. this nonsense will stop.
Comment by jeronne
Jul 7th, 2008 at 10:19 am
Normally I do not like gov’t intervention or meddling with market forces. However, the oil market is obviously being manipulated and consumers are being abused by a few heavyweights in the oil industry.. Thomas Kolker is correct.. Gov’t intervention and/or trade limits of some sort are needed to stop the abuse.. Commodities that are controlled by so few players are ripe for abuse and have to be more closely regulated.. The big problem seems to be that the Congressmen are in the pockets of big oil and are reluctant to take action against them.. - “Please come back, Teddy R.”
Comment by Craig pribil
Jul 7th, 2008 at 11:03 am
Elizabeth, wake up. The dollar hasn’t declined anywhere near as much as the price of oil has increased. The ‘hedge against inflation’ rationale is being played over and over again as an excuse. Moreover when the dollar strengthens oil prices don’t decrease eqivalently to the amount they increased.
Secondly, even though some oil producers are pumping maybe 10% less there are no shortages(like after Katrina). Shortages drive the price up in a free market system not speculation of a shortage. Let me add this to my argument about oil supplies: A. the saudis have increased pumping and they feel the world supply is adequate. B. NONE, and I mean not one, of these ‘reasons’ for a shortage of oil has materialized into reality over the last 3 years(since katrina). C. Last week the saudis reported they will spend $12,000,000,000 to open a little used field near their capital. Additionally, on the same news day, the Iraqis were taking offers from large oil producing companies to increase their oil production. Please explain why oil prices didn’t retreat “drastically” after this news!!!!!
Third, ‘capacity’ may have to be redefined. A few years ago 90 days supply of oil was considered ‘full capacity.’ Today the amount may be 30 days. As far as I’m concerned as long as there is no shortage capacity is okay. A US 30 day supply versus a 90 day supply is no cause for a 33% speculative rise in oil prices. In a logical/rational free market system devoid of manipulation,greed,collusion shortages drive prices up drastically, not the idea of shortages. I’d be willing to bet that since Katrina there have been at least 50 ‘maybe,possibly,could be,probably shortage excuses which have increased oil prices.
Fourth, speech speculation price increases. How in the world can oil prices increase $5/brl just becau