Who is Oil Speculator Expert Michael Masters?

Just to give perspective to the discussion, below are my notes of the 6-23-'08 hearing. Mr. Masters, Edward Krapels, Roger Diwan, and Fadel Gheit, all wih impeccable credentials, made up the expert panel before the subcommittee, and were in unanimous agreement. HOUSE ENERGY AND COMMERCE SUBCOMMITTEE HEARING, JUNE 23,2008 The price of oil, and also therefore the price of gasoline at the pump, could be reduced by 40% to 50% within 30 to 60 days if Congress would act immediately to restore the regulations on oil futures trading which were in effect from 1936 to 2000. That was the unanimous testimony of the panel of oil industry analysts and consultants before the House Energy and Commerce Subcommittee, chaired by John Dingell, of Michigan, on June 23, 2008. The conclusion of all of the panel members was that the market price of oil, absent the distortion caused by the bubble of speculation in the oil futures market, would be in the $50 to $65 per barrel range, and that the excess speculation is attributable to a relaxation of its rules by the Commodity Futures Trading Commission beginning in 2000. The steps recommended by the panel to be taken to bring immediate first aid relief to the U.S. economy are: 1. Re-establish position limits on investors in “paper barrels”; that is, speculators who have no need to ever take delivery of the oil purchased in their futures contracts, and who are unable to take delivery. This would limit the amount speculators could invest in oil futures, particularly through commodity index fund investing, which is purely speculative. 2. Increase the margin requirements for investing in oil futures contracts, with higher requirements for those who are not true hedgers in the market to protect the cost of the oil they will need in the future, i.e., speculators; and lower margins for true hedgers who actually take delivery and use the oil they contract to buy. 3. Require transparency, by requiring investors to disclose publicly their oil futures holdings. The panel agreed that there are two problems facing the U.S. regarding oil prices: (i) the acute economic distress caused by the present unsustainably high prices for oil caused by excess speculation, and (ii) the structural problems involved in the need for the U.S. to decrease demand and to increase domestic supply. Michael Masters, of Masters Capital Management, used the analogy of a grossly obese patient, who needs diet, exercise and other long-term treatment, but who has had a heart attack. The heart attack must be treated immediately to save the patient. The long term matters can then be addressed. Similarly, he stated, the steps outlined above need to be immediately implemented to save the U.S. economy from further damage caused by current oil prices. Some members of the subcommittee asked questions expressing concern that pension fund investors in oil futures might be turned upside down by a sudden drop in the value of their oil futures holdings. Mr. Masters, responded, and other panel members agreed, that oil futures make up only 1% of the portfolios of these funds, and that they are heavily invested in stocks, the value of which is being rapidly deflated by the current oil price crisis. The rapid drop in the cost of oil, and of gasoline at the pump, would reverse the stock losses, and more than off-set any losses in their oil futures speculation. The country would benefit by putting a stop to the destruction now occurring in the airlines, auto industry, trucking industry, and others, and the damage being done to American families by present oil prices. The panelists, in addition to Mr. Masters, were Edward Krapels, Senior Director, Energy Security Analysts, Inc.; Roger Diwan, partner and head of Financial Advisory at PSC Energy Consultants; and Fadel Gheit, Oppenheimer & Co., Senior Oil Analyst and Manager. The unanimous recommendation of the panel members was that the position limits, margin increase, and disclosure requirements regarding oil futures holdings be implemented immediately, without phase-in. While none wanted to make predictions, all agreed that the world oil price would drop 40% to 60% within 30 to 60 days after re-regulation, and probably less, and that an immediate drop in the retail price of gasoline would occur. Issues were raised of whether the “free market” must be allowed to run its course, however destructive to the public good. The panelists disagreed with this free market argument. The panelists pointed out that the oil market is not free. The supply is controlled by the producing nations. The demand, in China and the Mid-East where the demand increase is coming from, is artificially supported by government subsidies. Mr. Gheit pointed out that the difference between gasoline prices in the U.S. and the higher prices in Europe is the additional taxes imposed in Europe; and that the difference between U.S. prices and the lower prices in China and the Mid-East is subsidies. The panelists further agreed that the present mess has been caused mainly by excess speculation resulting from de-regulation of the oil futures market, and that immediate first aid relief could be achieved by restoring the 1936 regulations, which worked well until 2000, when their “relaxation” began. The issue was raised of whether speculators would merely go to another market. Here again the panelists agreed, stating that the only other market which might be used would be in the U.K., and that requiring that all contracts to be used in the U.S. must comply with U.S. regulations would prevent circumvention of those regulations. My Conclusion: Public pressure should be brought on Congress immediately to restore our prior regulation of the oil market, and to require that any oil futures contract to be used in the U.S. must comply with U.S. regulations. Simple action is available that would deflate the speculative bubble in oil prices, which is not being taken. Meanwhile, the high oil, gasoline and diesel prices are causing unacceptable damage to U.S. industry and financial markets. The pundits are still telling us that nothing can be done to affect the price of oil in the near term, and that gasoline will go to $7.00 a gallon. They state with no sense of impending disaster, that Chrysler, and maybe all three American auto manufacturers, and some principal airlines, will probably disappear in bankruptcy. That is not acceptable.

As you try and discredit Masters, one of the few standing up for the rights of the badgered American consumer, tell me this. Do oil speculators commonly paraded on TV daily, blowing incessant hype and verbal flatulence in the face of the camera, not have skin in the game? Most certainly they do. But don't let that get in the way of your highly partisan article. And a news flash for you, oil does not move from $122 to $139 (in less than two days) like it did last month on supply and demand concerns. Especially with demand destruction here in the US. It moves like that when you turn a commodity into the new and unimproved dot-corn mania. This event is the greatest fraud being perpetuated on the American public and stock markets that I have ever witnessed. The silence is deafening.

As you try and discredit Masters, one of the few standing up for the rights of the badgered American consumer, tell me this. Do oil speculators commonly paraded on TV daily, blowing incessant hype and verbal flatulence in the face of the camera, not have skin in the game? Most certainly they do. And this article is most certainly hack speak. And a news flash for you, oil does not move from $122 to $139 like it did last month on supply and demand concerns. Especially with demand destruction here in the US. It moves like that when you turn a commodity into the new and unimproved dot-corn mania. This event is the greatest fraud being perpetuated on the American public and stock markets that I have ever witnessed. The silence is deafening.

"Michael Masters" Hedge Fund manager and Expert on what other people are doing wrong about oil!!

Phil I disagree. There is no independence in a global economy. America Le Hermitage is closed for good. How can any nation state ? America for one - promote international trade and yet seek independence ? What's next ? those that want to drill for oil in the US to bring less dependency on oil imports want to support no exports of that product ? If oil is promoted for drilling in the US, you better BET the US will be seeking buyers internationally. The price is SET internationally, and you know ? You have the Saudi's AND US oil corporations saying 'no, there is no shortage we are aware of' ? This isn't a demand issue. I find issue that people who promote oil in the US would turn around and say - now, let's export it for profit ! you bet they would, all of a sudden ? where'd all the patriotic lollygaggers go ? Nationalism died in advent of nuclear weapons. Globalism is here to stay, economically, and culturally. The internet is here, sure we had international calling on phones before, but nothing like this. Anyone who continues to seek isolationist stance as a nation state BETTER be willing to say they don't need to export. For you can't claim isolationism and STILL promote the rest of the world should import your exports.

I also agree that there is a confluence of factors going on here. But there is not one word in any of her blogs about what it takes to bet on futures. In order to bet on a $1 million contract, only 5% of that needs to be put up. Where is the loss? If you stand to make even $1 per barrel, isn't that well worth the risk. Heck, there's more risk in betting on red in Vegas. And $42 of speculation taken out of the market could well bring oil prices back to sensible market levels around $70 - $80 per barrel.

The opinions are about evenly split between many intelligent people as to whether speculators are playing a major part of the price run up. If the demand for "paper oil" wasn't tied to the real thing, the speculators could chase their paper all day and no one would care. That is not the case, however, and a lot of people are being hurt while somebody else is making a ton of money. I can't help but think about the Enron scam related to energy prices in California where the price run-up was preceded by the passing of favorable commodities legislation that Ken Lay lobbied for and won (with the help of some friends in Congress). Masters may have some interest in the price of oil, but that doesn't mean he is wrong about speculators causing the price run-up. If Enron did it, so can somebody else.

I would agree with the confluence of factors, but I would say the conflence of factors are the weak dollar due to the imbalance of trade and deficits, the control of OPEC which is a cartel that sets the supply, and with the supply set,and any geo-political unrest the speculators know how to place trades. I suspect that if oil is a 140 a barrel that at least 25% to 30% is in speculation or about 42.00 per barrel. That along with a monopoly by the 5 large oil companies: Exxon-Mobile, Chevron-Texaco, BPP, Hess, and Shell control the refining copassity. No new refineries have been built in the last 25 to 30 years so demand of gasoline has out stripped our ability to produce it;therefore, you have the other reason for high prices. The oil companies are right in their doing their part. Now 60% of the cars sold this year have been 4 cyclinders and the American public is driving about a billion miles less this year than last year, and milage per car is going up as price is going up as the public ditches the SUV gas gluzzers; therefore in theory the price at the pump should be dropping, but it isn't,and why, I would say the speculators and the geopolitical unrest in the middle east. In this election year energy indepence should be the number one priority and should include a combination of sources that get us away from imported oil to include wind, solar, nuclear, hydrogen, building of additional refineries and additional drilling of interrior and off shore locations.