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  • July 2, 2008 09:41 AM EDT by Elizabeth MacDonald

    Part Three: The Oil Speculator Witch Hunt

    Before I get to the thunder bolts being thrown at oil speculators from Mount Washington--some of it a needed attempt at more transparency in oil trading--there's more lazy thinking on the oil supply and demand front that ignores the bigger, macroeconomic factors at play.

    Don't let the facts get in the way of the narrative here, the thinking goes, don't let the truth ruin a polluted stream of oil consciousness. I find the oil witch hunters a tedious, self-serving, unreflective and rather boring crowd. They are habitually self deceiving, and listening to their orgy of self-righteousness, I can feel my brains running out of my ears.

    They tend to lead with their muscle and not with their minds, because it's oh so much easier to get out the rakes and torches. Especially elected officials who find it easier to pass the blame buck in this political season, with scapegoats now in season, rather than make the tough legislative decisions to make energy affordable for cash-strapped American taxpayers hit with soaring costs for health care, college tuition, you name it.

    Thinking about their daily struggle, I find myself constantly grinding my teeth into Tic Tacs on their behalf.

    Now you'll hear an attempt at a reasonable argument from the witch hunt theorists who say oil speculators are solely to blame for oil price spikes--which on closer look is just lazy spitballing that ignores what the pros are saying.

    Trust me, I think oil speculators are partly to blame, but they are part of a much larger picture. I've said so repeatedly on camera and in prior blogs, based on my reporting--no one can say definitively and with any veracity how much oil prices have risen due to oil speculators. You'll see estimates that are all over the map.

    However, watch what the Paris-based International Energy Agency, the big oil industry think tank, just said about oil speculators, that there is "little evidence" that large investment flows into the oil futures market have sparked an imbalance between supply and demand and led to the surge in oil prices.

    Or that the IEA specifically said that "money flows and speculation can have a day-to-day influence on prices, but it is not one that can be sustained for any length of time without a market imbalance being apparent," adding in its report that "the economy is impacted by fluctuations in spot oil prices, not futures prices."

    Or that the IEA says demand is to blame as demand for oil is rising, as it is still forecasting global consumption of oil products will increase 1.6% a year on average through 2013, largely due to demand from non-OECD countries, including China and India.

    Or that the agency also says because oil production is slowing worldwide, that caused it to cut its outlook on global oil supply levels in production from the Organization of Petroleum Exporting Countries members and non-OPEC nations.  The IEA also said that poor supply performance since 2004, combined with strong demand from the developing world, started to push prices higher.

    Despite those facts, you'll hear from the oil speculator witch hunt crowd that oil price spikes are not a supply and demand issue, because US gasoline reserves are at their highest levels since the early 1990s, laudable since the nation's refineries like Valero (VLO) have been dialing back on their gas production as their margins have declined.

    You'll hear too from the oil speculator witch hunt crowd that there is no supply problem because average gasoline reserves on hand have risen since this past October, and the US oil stockpiles in this country have gone up nearly every week this year.

    To wit, the argument is that because there's more stockpiling going on, there's no shortage of gasoline or oil in the U.S. today, because we have near-record reserves on hand.

    You have just witnessed an advanced case of severe rectal cranial inversion.     

    What's missing in this argument? The reason why countries stockpile and set up reserves to begin with: because countries are doing so in the face of rising demand or supply shocks. 

    Just as a publicly traded company books increasing cookie jar reserves to take care of future losses, (witness the financials now), so, too, do countries stockpile to protect against future rising costs and/or losses in oil supplies. Or in the face of growing demand. As China is now doing with its offline stockpiling so it won't face embarrassing shortages during the summer Olympics in Beijing.

    And as reserves rise, it's the quality of the oil increasingly coming on-stream that has also helped oil prices go ballistic. There is a glut of sour crude, sulphurous grades that is way more expensive to refine than the sweeter crudes, now becoming increasingly rare, say oil traders and oil statisticians at the IEA.

    Oil prices go up after Nigerian oil attacks because Nigeria pumps out light sweet crude that's cheaper to refine, versus the sour grades swamping the markets, according to sources. The Sauds pumping more sour crude--when it has historically pumped sweet--is not a good sign for the markets. And has been taken as a negative, which is why oil futures have risen.

    You can talk all you want about how gas reserves are at their highest levels. But if all the world has to refine is an increasing amount of sour crude, then listen to the oil pros and oil majors who say that going forward, you can expect a squeeze on those reserves. Which is why oil prices are going up.

    "Refiners are paying record premiums for the high-quality crude oil they use to produce diesel and petrol, a sign of strong demand in the physical oil market that calls into question claims that soaring oil prices are being driven by speculators," the Financial Times reports.

    It's a big reason why Valero Energy may sell one-third of its refinery operations due to poor margins in recent months.  

    You'll also hear arguments from the Cotton Mathers in the oil-speculators-are-solely-to-blame crowd that this is not a demand issue, because demand in the US is flat-lining or expected to go down due to higher gas prices. The US is the world's largest oil consumer with 20.7 mn barrels of oil consumed in the country daily (a quarter of the world's consumption).

    Now it's true that the US government's energy officials now expect US demand will be lower than had previously forecast due to the recent gas price surge. The IEA has predicted that global oil product demand in 2008 would grow by 0.9% or a teensy 800,000 barrels a day, with predictions that US demand would drop up to 2.5% this year, down to 20.3 mn barrels daily.

    But yes and let's sit on our couches with our remotes and Cheez Doodles (*(I love cheese doodles, the hard kind) and never go outside our own front door to see what else is going on in the world.

    It's expected that 1.8 bn new entrants will join the middle class next 12 years by 2010. The world's middle class will grow to a staggering 52% of total world population, up from 30% now. That means increasing demand for gasoline.

    Explosive middle class growth in formerly poor countries, such as China, Russia and the Middle East means they will consume more crude oil than the U.S., burning 20.67 mn barrels a day this year, an increase of 4.4%, according to the International Energy Agency in Paris.

    Economic growth of more than 8% in China and India, coupled with increasing car ownership among the countries' combined populations of 2.45 bn people, will more than compensate for falling U.S. demand, the IEA says. Oil use worldwide will increase 2% this year because of growth in emerging markets, the Paris-based IEA says.

    China has a tiny 15 passenger cars for every 1,000 people--meaning it's Japan circa 1963, when Japan had 13 cars per 1,000.

    China has 1.6 bn people. Which is why the US automakers are saving themselves by piling into the Middle Kingdom. Which means gas consumption will soar in this country for decades to come.  

    Demand is rising everywhere. Last year Mideast's six largest petroleum exporters, Saudi Arabia, United Arab Emirates, Iran, Kuwait Iraq and Qatar curbed output by 544,000 barrels a day. At the same time their domestic demand increased by 318,000 a day.

    You'll also hear arguments from the Pierre de Lancres of the oil speculator witch hunt crowd, that oil production is still moving apace, with some suggesting oil production is expected to increase by 3.3% in the second quarter, and by as much as 4.1% by the third quarter.

    The game here is this: throw a dart at stats pasted to a barn door, with the game's rules saying you get 1,546,789 tosses to hit the stat you like to suit your argument.

    Officials at OPEC and the IEA say oil production is decreasing in 54 of the world's top 60 oil producing nations, including the US which produces 5 mn barrels a day, down fm 11 mn in 1970. The overall amount of oil discovered has been falling for 40 years. Sadad al Husseini a former top executive at the state-owned oil company Saudi Aramco, says Saudi production already hit a peak and will begin dropping in 15 years or less.

    I'm exhausted, there are more oil production stats I can give you, but I am getting bored.

    Ok I'll go on.

    You'll also see the argument from the witch hunters that all is well, that the U.S. daily buffer for oil production against demand, which was a paltry 1.5 million barrels as recently as 2005, is now up to 3 mn barrels in excess capacity today.

    What's missing here? A worldwide outlook-enough with the US-centric focus here. You need to compare the worldwide spare cushion to overall daily demand, and that comparison is terrifying.

    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 vs 76 mn barrels consumed daily, says the U.S. Energy Information Administration. And again much of today's surplus is sour crude, high in sulphur, which refiners loathe.

    Don't forget that the oil price spike story is a weak dollar story too.

    David T. King, a former chief of the New York Federal Reserve's Industrial Economies Division, noted on the editorial page of the Wall Street Journal earlier this year, when oil prices were at around $120, that last August the dollar price of oil was $70. King points out that the current spike in oil and other commodity prices coincides almost exactly with the Fed's decision to turn on the monetary spigots to save Wall Street.

    The day that the barrel price of oil in dollars was exactly the same as in Euros was in 2002, when both were about 25, King notes. Since then oil has risen by 50 Euros in the past five and a half years. It now stands at 75 Euros, triple what it was then.

    But check this out: in the US, the price is over $120, about five times what it was then, King says. He says that the collapse of the dollar exchange rate explains at least half of the increase in the pump price of gas over the past five years.

    The falling value of the dollar has caused the price of gasoline to soar. Gee that was hard to figure out wasn't it?

    I've said at the outset that speculators are adding to the price spikes, we just don't know by how much. The hope is that more sunlight in their trades will help market watchdogs and regulators stop the torquing that goes on, especially when a hedge fund like Amaranth Advisers or a miscreant firm like Enron want to game the system.

    Really?

    NEXT UP: The regulatory blow torch aimed at oil speculators.

    FOOTNOTE: After this story was published, the IEA released a report stating that supplies may not keep up with demand, noting that the growth in global spare capacity will peak at about 2.5 mn barrels daily in 2010, dropping to--watch out--less than a million a day for the ensuing three years. Crude oil prices hit a record in trading after hours on the report. Already the haymaker of inflation has come a cropper, due to oil price spikes.

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Zoidy

Just took a break to watch the MyGallons article from yesterday - when Liz MacDonald hosted Cavuto (awesome job there too!) - I find myself towards the end of the video thinking about the comment above on 'crushing Tic Tac's thinking of how badly the everyday - average person in America ' (rewording there - do pardon)... And then this interview - I kind of feel like it's the mother asking the child 'now, again, at the playground Steven, who's idea was it to steal the money ? ' jk I liked the point that you can't sell to another customer, I mean, sheesh, you MIGHT as well be into commodities then I guess. Neatest point in this interview - and I intuit to agree - is if someone is out there to 'make gas more affordable for me' ? chances are - as usual, I'm just late- and I'm the sucker to help someone else sit back with an extra yard ornament while I walk by their house in envy going 'darn, I wish I had all those lawn ornaments and was successful with more money to buy them - ugh!' heh either way, good point, on is it the top - that we start to see people offering the ability to lock in prices. I mean - if mygallons thought things were going to go down ? they'd be standing with a losing business model right ? interesting piece.

July 2, 2008 at 1:34 pm

TB

lady, your just wrong on this article. The witch hunting people you are refering to are not the voice of those that think speculators are too blame, they are just the crowd you picking out for whatever agenda you have because they have a weak argument. The IEA said that speculation usually adds $9 to the barrel of oil, and that lately speculation is adding about $40-$60 a barrel. Speculators are looking for any excuse to use to bring up the price of oil, such as an attack in nigeria, refer to Dan's comment. The other half is the weakness of the dollar, and trading in other currencies. The weakness of the dollar is something our government is horrible at controlling, and if the reserve and congress would get their act together, this credit and housing debacle would have never happened. This is what doesn't make sense, the housing market fell through because the value of a home fell. The real reason is because no one was keeping mortage companies in check and allowing people to get interest only loans on homes way outside their means. Saying speculators don't influence oil is like thinking an interest only loan is a good idea...you are on the wrong side of this argument.

July 2, 2008 at 1:21 pm

Paul

The dollar is part of the problem, but impact is relatively easy to quantify. If the increase in the price of oil was really just a weak dollar issue, the price of oil would be stable in terms of other currencies (Euros for example). This is not the case. July 1 of 2007 crude oil was trading at 71.40 dollars per barrel. The Euro was trading at 1.36 dollars per Euro, hence the price of oil was 52.50(71.40/1.36) Euros per barrel. Today crude oil is 142.50 dollars per barrel, and the Euro is trading at 1.59 dollars per Euro. This puts the current price of crude oil at 89.60 (142.5/1.59) Euros per barrel. The simple conclusion is that in the last year the price of oil has doubled in terms of dollars, and is up 70% in terms of Euros. Hence, 30% of the incease in the price of oil is due to the weak dollar. The rest is due to other market factors.

July 2, 2008 at 1:08 pm

Zoidy

Oh, I think I finally 'get' the message here. If I get it right, I agree - it's not speculation, but the dollar. And therefore, you're taking an anti-regulatory stance on futures. I disagree there if so. We have plenty of necessary regulation, CRA, HMDA - OFAC - ? I don't have a problem with regulation if it can prevent exploiting a community at a lesser expense to otherwise than not (yikes- did I just type that ? ugh! - 1/2 tempted to cap it with 'with not otherwise' which is a useless double negate). Point there is, hey, if it's the dollar - fueling futures exploits ? sure - I say - fix the dollar - and problem solved. BUT - since it's EASIER to fix futures exploits through regulation FIRST before being able to fix the dollar ? hey - no problem here. I think that sums it up. Now go get that free checking from WaMu - they need to raise capital before going under in Q4.

July 2, 2008 at 1:02 pm

Karnak ..

There is no shortage of oil.. there are just too few players controlling most of it.. The major oil producers are not going to rush into any new developments while they are making record profits at the present pace.. Why would they do anything to damage their own profit picture?? -- Congress has to allow domestic development, refining, and encourage new players into the game.. And, at the same time Congress should either penalize the major oil companies or start canceling and re-assigning their leases if they don't ramp up production..-- An oil expert stated publicly 3 days ago that oil and gas could be extracted in large quantities from the Gulf of Mexico within ONE YEAR if we start drilling now.. Congress is obviously being pampered($) by the oil companies to either slow down or not allow new development.. There is no other possible answer.. Why else would anyone allow their citizens to be strangled by the price of energy, and allow hundreds of billions of dollars to be shipped overseas where it can be used against us ??

July 2, 2008 at 12:57 pm

Zoidy

from article: "You have just witnessed an advanced case of severe rectal cranial inversion. " I'm not sure if that's Frank Zappa or Camille Paglia channeling through MacDonald here ! made me laugh though

July 2, 2008 at 12:55 pm

Donaldd

The dollar is down and our IOUs are up supply exceeds demand. The Republican Congress and Bush $5 trillion National debt increase has reduced the Dollars demand and lowered it's value. Every time Bush or Israel threaten Iran the Crude price jumps higher through speculation. China's largest oil company is investing in Iran's oil fields to increase supply of which China now buys 12% to be refined in it's Chinese plants and sold in their service stations in which Exxon Mobil owns a 25% share, Saudi National Oil Company Aramco owns a 25% share. American Oil Company exec's are demanding more off shore leases and drilling in ANWR reserve when they have 44 million acres of off shore leases they can't drill now because there is a shortage of drill ships and production platforms. It will be a minimum of 5 years before drilling rigs are available, possibly by 2011. American Refineries are producing finished products Diesel, gasoline, and propane for Mexico and other nations with our existing refining capacity instead of fuel for the American Market. Funny too is, you can buy those U.S. produced fuels for half the price if you cross the border into Mexico.

July 2, 2008 at 12:51 pm

Greedom

Comment by Dan from Navarre 2008-07-02 10:47:08 Many folks like to point at demand and tight supplies. It seems that everyone is getting their oil, stockpiles are up. Now the argurment of all the tensions in the world is bunk. Explain how when Nigerian rigs are attacked and 200,000 barrels are off line temporarily and price per barrel shoots up. Now the Saudis within recent months have raised their output by 500,000 and no effect on prices. Please, this mantra that speculators have no play in the prices is a load. Navarre- I'll place my Keno bet on greater part the US Dollar- and that fuels the abuse on speculation. er, I'll wager the weak dollar is an enabler (don't you just love when people go 'they're an enabler ?') to the rampant futures playouts for payouts (hmm, I kinda hit a Jesse Jackson there).

July 2, 2008 at 12:47 pm

Kenny

"NEXT UP: The regulatory blow torch aimed at oil speculators." There is nothing wrong with the regulations being discussed in Congress. Unless of course, you feel the need to leave the same loopholes open that allowed the likes of Enron and Amaranth to operate. If investors/speculators have nothing to hide than they don't need to operate in these unregulated, nontransparent loopholes. I find it funny that the media always sides with Wallstreet in these situations. I remember the media reporting that supply and demand was the problem in both the Enron and Amaranth incidents. All that did was put fuel on the fire and drive up the speculation even more. Why doesn't the media show the public how for the first time we have large invesment banks taking crude oil physically off the market and holding it in storage tanks? The same large investments that are up to their necks in oil futures. The same banks that are always predicting higher oil prices. The same large investment banks lobbying to keep the unregulated markets open.

July 2, 2008 at 12:30 pm

Karen

Thank you for your articles.....greatly appreciated...

July 2, 2008 at 12:12 pm

Carla, Ballwin, MO

Elizabeth - Please do an hour long interview with Muriel Seibert, she is awesome. Prior to your interview, I have only seen her on Charlie Rose. Thanks!

July 2, 2008 at 12:09 pm

mike

The numbers speak for themselves. Demand up by about 1.7%, and astronomical prices. Math is math, and no matter how you cut it, prices are way out of line. One reason I am watching Fox less is the simplistic crud about opening ANWR, and offshore drilling. Even if we drill every single available barrel on and offshore, we will still be importing from our "friends" such as Saudia Arabia. And oh by the way, next time some nut in the middle east wants to invade or topple the kingdom of Saudi Arabia, I am for it. I voted for Bush twice, and I get repaid by economic rape. Won't get fooled anymore.

July 2, 2008 at 12:03 pm

Karen

thank you for the great articles. very best regards, Karen

July 2, 2008 at 11:45 am

Sorros

I agree with her main point she "can feel [her] brains running out of [her] ears." Obviously she has no brains left. There is only one cause for the dramatic rise in oil price beyond that caused by increased world demand. 1. The devaluation of the dollar due to the WAR. 2. The instability of the oil producing region due to the WAR. 3. The cashed strapped American tax payer due to the WAR. The only people working 2 hours to pay for a gallon of gas are illegal immigrants they want to kick out of the country. Oh my gosh a over paid pundit at Fox feels our pain! Oh my.

July 2, 2008 at 11:38 am

ThePunisher

This article is a joke!

July 2, 2008 at 11:37 am

Josh

This article is incorrect concerning US demand. The US demand is actually declining for the first time in 8 years.

July 2, 2008 at 11:30 am

Eduardo Nogoy

I think the biggest culprit in soaring oil prices is the weak US Dollar. We have wars going on with Iraq and Afghanistan and we spend a lot of money to support and finance both. Where did the US government get the money ? I don't remember and federal tax increase to support and pay for this wars. If we printed more currency to pay for them, then there you have it, the main source of U.S. currency inflation. So investors and businesses that consume oil have the right to hedge for a weakening U.S. currency as well as protect itself to a certain extent for future oil price hikes. I'm mot worried about the speculators because remember the old adage, pigs get slaughtered.

July 2, 2008 at 11:27 am

Dan from Navarre

Many folks like to point at demand and tight supplies. It seems that everyone is getting their oil, stockpiles are up. Now the argurment of all the tensions in the world is bunk. Explain how when Nigerian rigs are attacked and 200,000 barrels are off line temporarily and price per barrel shoots up. Now the Saudis within recent months have raised their output by 500,000 and no effect on prices. Please, this mantra that speculators have no play in the prices is a load.

July 2, 2008 at 10:47 am

Greedom

The game here is this: throw a dart at stats pasted to a barn door, with the game’s rules saying you get 1,546,789 tosses to hit the stat you like to suit your argument. This article effectively paralyzed me at first to realize the is no simple answer. I think I side on the 'bored' part, although I am never bored, rarely. But I find myself going in circles as I react to different data. I can't discount that my food, and so many other aspects in my lifestyle cost more dollars, where I don't make more dollars, and the volume of the product is either staying the same, OR going down. One thing I CAN discount though I suppose is taking any theory for granted. I mean, there IS/ARE real causal factors behind this 2x increase in oil, tracking it/them down can lead to remedy. Whether it's blow torching the leaks in the commodity trading reality vs fantasy, or perhaps this author meant blow torching commodity regulation where it's overkill ! One thing for sure, whatever is behind the 2x increase in oil, it's killing consumerism, and crippling people financially that make 30, 40k a year. DOE says expect $4 a gallon until end of 2009. Sheesh, some people work 2 hours a day to pay for gas. Our species can do better ! ?

July 2, 2008 at 10:45 am

Greedom

A very fun read - and trying... I'm not sure one of those words in there is something I expected to see ! To quote John Abbigail in Catch Me If You Can "I Concur" on the finishing end notes. My intuition tells me the dollar is at root, as I witness everything inflate in price, when the goods volume doesn't change - in the case of food ? if I observe often the oz.'s go down from 15 to 12.9 etc. by example on some packages. Cheeze Doodles might be just one of these products the volume goes down AND price also is going up. Perhaps Cheeze Doodles is a fair marker for oil, I'll have to compare these, one never knows. This was not the authors intent here, but to add humor, short of the shape of the dollar influencing oil, one might toss in the cheese, or as some call it lately the doodle factor ! in speculating on whether the speculators are not speculating that it's the speculators speculating. Just gaining understanding that the US Dollar plays so hard into oil, and other futures, AND stocks no doubt - even auto stocks as fallout from people saying 'I can't afford gas, how can I buy a new car ? ' I am still left with near zero in understanding why the dollar is failing so badly. Seems just understanding the problem is only a tiny part of the solution here, but certainly critical. I've felt bad before, thought - wait, I'm not going to my doctor, it will be throwing darts - and that last spout with 6 neurologists, that was worse than DARTS. Hmm. An Econologist ?

July 2, 2008 at 10:27 am

Greedom

from article: "I find the oil witch hunters a tedious, self-serving, unreflective and rather boring crowd. They are habitually self deceiving, and listening to their orgy of self-righteousness, I can feel my brains running out of my ears." What imagery ! I have to pause here and get my software working, I can't wait for the rest of the article! ha ha ha on the brains out of the ears. I usually recoil to frustration of wanting mass review and accountability wen someone is promoting some righteous line that is out of check with community.

July 2, 2008 at 9:52 am

about this blog

  • Elizabeth MacDonald is the stocks editor for Fox Business Network. She is recognized as one of the top prize-winning business journalists in the country, and has received 14 awards, including the top prize in business journalism, the Gerald Loeb Award for Distinguished Business Journalism, and the Newswomen's Club of New York Front Page Award for Excellence in Investigative Journalism.

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