Oil: Betting on the bubble
Here’s a way to get oil prices down, at least by a little: Take a regulatory whip to the speculators who’ve been bidding prices up.
The Commodity Futures Trading Commission — the somewhat toothless federal watchdog over oil markets — needs to tighten its rules on speculative trading, both in oil and agricultural products. If the CFTC won’t act, Congress should.
Oil prices have risen 39 percent so far this year. Indeed, on Friday alone, the price of a barrel of crude rose $11 to a record $139. Most of that is for a very basic reason: Demand is up around the world, especially in Asia, and supply isn’t keeping pace.
But as prices went up, a new crowd of players jumped into the oil markets. Pension fund managers, hedge fund operators and other big investors shifted money from the stock and bond markets —where they were losing their well-tailored shirts — into commodities.
Investment in commodities index funds grew from $13 billion to $260 billion in five years. Oil futures trading on the Intercontinental Exchange quintupled over two years to a paper value of $8 trillion in 2007, reports the British newsmagazine The Economist.
George Soros is an investor of legendary savvy who last year earned more than $200 million per month. Last Tuesday, he went before the Senate Commerce Committee to warn of a speculative bubble building in oil.
“The bubble is superimposed on an upward trend in oil prices that has a strong foundation in reality,” Mr. Soros said. “The rise in oil prices aggravates the prospects for a recession.”
Players in the commodities markets come in two basic types. Some actually plan to use the commodity. For instance, a refinery might buy a contract for oil to be delivered in the fall. Then there are those who buy futures contracts betting that the price will go up.
The speculators, Mr. Soros said, are misjudging the basic supply-demand equation, and pushing oil prices too high. Bubbles eventually burst, but Mr. Soros sees no sign that this one will burst soon.
How much of the price of a barrel of oil can be attributed to speculation? Mark Cooper, research director at the Consumer Federation of America, says it may be as much as $40 per barrel. Others, including Mr. Soros, think it’s considerably less. Some estimates say speculation adds just a few dollars to the price of each barrel.
Whatever the figure, it should be eliminated. High oil prices slow the economy and cost jobs. Should the bubble grow too large, a sudden pop could weaken workers’ pensions and cause more strain in our weakened credit system. Mr. Soros said the commodities market today reminds him of the stock market before the 1987 crash.
So where’s the CFTC watchdog in all this? It’s chasing the wrong rabbit. The commission recently revealed that for the last six months, it’s been investigating manipulation in the energy markets.
Manipulation is different from speculation. Manipulation means taking action intended to raise prices, rather than simply jumping aboard for the ride. It’s hard to imagine traders manipulating the world price of oil. A conspiracy would require too many conspirators.
The watchdog agency has taken a few steps in the right direction, sharing information with European regulators and requiring more transparency from American market players. But it should go further:
• Raise margin requirements to make it harder to speculate with borrowed money.
• Revise rule changes enacted in 2000 that made the market more speculator-friendly.
• Close loopholes that let speculators skirt trading limits.
• Impose greater limits on the ability of pension fund managers to speculate with money that workers will need when they retire.
Tighter rules in the United States could simply move trading overseas, but the United States is a big and influential player, to say nothing of it being the world’s biggest oil consumer. It should lead by example.
Ashish-
Fascinating stuff. Thanks for your comment. Extremely informative.
ashish—thank you so much for your insight and knowledge, not to mention your intelligent and polite way of delivering it—anyone notice how the right-wing nitwit blather (drill anwar! its the democrats fault! its the tree-huggers fault! the corporations aren’t wealthy enough yet! the liberal man is keeping us down!) disappears when someone w/ the facts and an intelligent way of presenting their argument pops the self-imposed, talking-point-reinforced bubble of ignorance surrounding these fools?—c’mon, fellas, where are you, huh?–anyone w/the nerve, or, even better, the credentials to EFFECTIVELY, CONVINCINGLY, without the usual ideologically driven insult, ridicule, and BS argue against ashish’s points?—this better be good—-again, thank you ashish, a breath of fresh air on this otherwise sludge-driven forum
Hello Everyone,
Comments from people reading this blog have been most encouraging.I have one final comment to add,and hopefully it does’nt cause an information overload!
I wanted to share Global consumption Patterns for Crude Oil and Pump prices.In Particular,How has consumption changed since August 2006 when US Consumption peaked.I am sure by now a lot of Americans would have noticed that they are driving a little less than they usually do,but its not having any difference on Prices at the Pump.
Below is the Table,the first five are major OPEC countries and the remaining are the major consumers of Crude.
America is the closest (in particular Southern states like Texas)to a market driven price of Petrol/Diesel you will get anywhere in the world.Basically,what that means is that if you were to Buy Crude from the open market, and then refine it,add normal refining margins,and then add in just the Transportation costs and sell them to consumers.
Everywhere else Gasoline and Diesel is Taxed or Subsidized.In particular if you observe Consumption Patterns all across the major OPEC producers they have risen by 30+% on average.
Petrol(USD/USGallon) Diesel(USD/USGallon)Consumption(May’08)
Venezuela 0.14 0.18 1.1mbpd (+97%)
Saudi Arabia 0.70 0.25 2.75mbpd(+37.5%)
Iran 0.60 0.55 1.80mbpd(+12.3%)
Dubai 1.47 3.87 0.20mbpd(+97%)
UAE,excluding Dubai 1.31 1.94 0.50mbpd(+57%)
India 4.70 3.18 3.05mbpd(+19%)
China 3.25 2.92 8.80mbpd(+14%)
USA 4.10 4.30 18.8mbpd(-14.9%)
UK and Europe 9.10 8.95 16.5mbpd(-5.1%)
(Excluding russian federation)
Note:USA,China,UK+Europe,India prices vary up and down slightly across different regions but these are Average Prices.
Now all this mumbo-jumbo about consumption and Pump Prices will not make any difference to most Americans if Supply were able to keep pace with demand.Unfortunately in Simple Words ,IT CAN’T.Why? Because Decades of
UnderInvestment in Exploration we are not able to replenish Reserves of Oil that we have already used up.Also,Increasing amounts of resource Nationalization in OPEC countries has ensured that the best Companies do not have access to the best Reserves.(Remember what Chavez did to Exxon? and what,Putin is now doing to BP and Shell).Add to this the fact that for decreased Production OPEC members are now getting more returns and so they have no real incentive to increase production.Now if it were possible to force OPEC to cut subsidies on Petrol/Diesel then well we would all be fine,but how on earth do you bully Chavez,Putin or Ahmedinajad in todays climate?
So that leaves us hoping that the leading Consumers of India,China,USA and W.Europe will cut consumption.
India this month increased Prices at the Pump after which Petrol Prices there are amongst the Highest in the world.It was followed by mass protests,Strikes and some Violence.I thought it was extremely brave of the Government there to increase Prices although I also felt that they should have raised Prices on diesel higher than they did.
W.Europe already has the World’s Highest Prices on Petrol/Diesel and so asking them to increase Prices further to cut Consumption probably would’nt be fair and besides how many Hummers/Explorers do you see on the roads of Europe?Another lesser known fact is that Average Fleet Mileage in W.Europe is 44mpg.As Against 21.4mpg in America.
That leaves us with China and USA,exactly the countries that I believe can and should Cut Crude Consumption.China has not increased Prices at the Pump since August 2006.Since then Crude has doubled.But china holds more
than a Trillion Dollars in Reserves and they can afford to subsidize their Consumers atleast for the next year or so at current prices.What my contacts at CNOOC tell me is that they will increase Prices by 10-15% in September after the Beijing Olympics are over ,till then they will keep consuming Humungous quantities of Crude.
So it all comes down to America.We have a Fleet Mileage of 20.4mpg ,which can easily be doubled through Gas Guzzler Tax Hikes,55mph Speed Limits and increasing the Federal Gasoline Tax to 50cents/Gallon from the current 18Cents.
The Question is does anyone in America have the Political will to do this?My response is as Good as Yours.
Best Regards
Ashish.
Remarks:
1)As an afterthought,some people were raising thoughts about Imposing Windfall Taxes,etc on Exxon,Chevron and other American Traded Oil companies.What will that do?These Publicly traded companies do not exist for the benefit of the American Public,they exist only to “maximize” returns to their Shareholders.So if America Taxes them more
they will follow the lead of companies like Halliburton which moved their Head Office and Senior Execs to the Low tax regime of dubai.This is not an empty threat, most of these companies already have these kinds of contingency plans in place.Or else they might just go Private.Not just that,at the very moment when we need these Great American companies to produce more Oil on American Soil will we will push them Abroad and/or cut access to the neccesary funds that they need for Increased Oil and Gas Exploration.
2)How is Average Fleet mileage calculated?
Say a country ‘X’ has a fleet which consists of 100 Hummers H3(18mpg),100 Toyota Prius(45mpg),100 Ford Explorers(19mpg),100 Honda Civics (36 mpg) and 100 Toyota Camrys(31 mpg).I have assumed they are all 2008 Models and have used the Highway Mileage here.
Average Fleet Mileage for ‘X’ country =
[100x18+100X45+100x19+100X36+100X31]/ 500 = 29.8mpg
It is quite clear from this calculation that the more number of cars which have a better mileage,the better will be the country’s fleet Mileage.
anyone looking for more information should check out the Government’s Website.
http://www.fueleconomy.gov/feg
3)what will happen if America does not act to cut down on Consumption now? As OPEC,India and China show no sign of reducing their Consumption and Supplies don’t look like making up the Shortfall,By May 2010 we will be paying an Average of $6/Gallon at the Pumps.(currently its $4.10/Gallon).and all this money will land up into the pockets
of Chavez,Putin and Ahmedinajad instead of benefiting rank and file Americans in any way.So what I am proposing a ‘Social Security Tax’ of 32cents on every Gallon of Gasoline,would actually help safeguard America’s future and also increase the push for renewables,Efficent Cars and Alternative Sources of energy.
10 Reasons Why Oil Price Speculation Requires a Change in the Rule of Law by Michael Levy
High oil prices that are governed by the commodity markets are in dire need of common sense law and order. When speculation and detrimental logic and reasoning take central command of human society, the results always turn out to be damaging to the majority, at the abundance of the few. The experts and speculators will argue we need free markets and any interference will take away free trade. Well, in many cases they are correct, however, when it comes to essential commodities of food and energy they are completely out of order. Here are a few reasons why essential commodity markets require new legislation.
1. There has been no shortage of gas at any filling station for the past 10 years yet prices are up 1200% because of futures trading going out more than eight years. Even the Saudi oil minister has recently stated the price of a barrel of oil should be no more than $70.00. Demand from China and India is still far less than that of the USA. The Chinese stock market is down 50% signifying a sharp slow down. This news still is not enough to stop the wild speculators hiking the oil prices.
2. When hurricanes hit Florida many gas stations are closed and there is a real shortage of gas for a few days. However, if a gas station increases its prices they will be prosecuted for price gauging. Therefore, if we take the experts argument that there is a shortage of oil then that still does not give anyone the right to profit from the shortage as this is deemed to be prices gauging. How can the USA governments have double standards and prosecute gas station owners who price gauge and not treat commodity markets in the same manner?
3. Oil is an essential commodity for every day living in the same way as water is an essential commodity. It makes no sense to trade water so why leave oil in the hands of anyone who wants to make a quick buck gambling on prices.
4. Pension and hedge fund managers have invested billions of dollars in oil futures. The futures markets are very volatile, thus, no place for pension funds to risk the money for people who trust them to build future wealth. The fiduciary duty of a pension fund manger is to find reasonable returns with low risk and the commodity markets is not that place.
5. If the price of oil was regulated between $40.00 - $80.00 a barrel, the price could go up and down on supply and demand. This would be fair to everyone, for even when supply was plentiful, the price would not drop below $40.00 which will still give a fair profit to most oil related industries. When oil is in short supply the price would be limited to a ceiling of $80.00 which is more acceptable to world economies.
6. There is a moral issue that greed cannot come before peoples basic needs … No right-minded, ethical, principled government can allow starvation and financial ruin because of a system of trading that is completely out of control.
7. The price of a barrel of oil effects transport, food supply, industrial production and every part of modern day living. If terrorists wanted to devise a plan to destroy the world. economies what better way than finding a method to allow oil to trade at $140.00 a barrel. Why play a game that makes terrorists and anarchists happy.
8. Goodwill to all people is the credo every democratic country is built upon.$140.00 a barrel oil delivers no goodwill. It only brings hardship and political uneasiness.
9. Noble deeds and fair dealing is the hallmark of success for every truly prosperous person. Since the world is made-up from people, where are the noble deeds and fair dealing in the commodity pits.
10. We are all put on earth to help each other succeed in the pursuit of freedom, liberty and happiness. There is no freedom when people are slaves to greed. There are only liberty takers when oil trades over $80.00 a barrel. And finally financial hardship brings misery and discontent.
The time for change in essential commodity trading is now. To quote a few voices from the past…
“Experience demands that man is the only animal which devours his own kind, for I can apply no milder term to the general prey of the rich on the poor”_Thomas Jefferson
“For greed all nature is too little.”_Seneca
“It is greed to do all the talking but not to want to listen at all” _ Democritus )
“He who is greedy is always in want.” _Horace
Michael Levy.
Author, Poet, Philosopher.
/
michael levy– i appreciate your post, and tend to agree w/ your point of view—however, i’m fairly sure that your inspirational quotes from the past won’t inspire our corrupt political and corporate so-called leaders, who are motivated only by greed and power–what is needed is tough, uncompromising, hard-balling political action by the citizens and voters of america—something akin to the action in the streets during the vietnam war era, to force congress to oversee, re-regulate and prosecute the traitorous thieves and thugs who currently run the show in the financial, commodities, and every other market, not to mention the treasonous war criminals of the current administration—anything short of this, and we will be looking back 10 yrs from now, wondering ‘duh, wha happened?–how did we get to be a third world country?’—-by the way, i admire your aspirations to poet, author, and philosopher; very worthy and noble–but i believe the word you were searching for in reason #2 of your soliloquy (manifesto, perhaps?) was GOUGE- G-O-U-G-E, as in “i may have to GOUGE your foogin eyes out if you continue to refuse to consult a spel-chek”–please, keep up the good work——P.S to ashanti–your complete grasp of this subject is near-devastating-you have my vote for president of the usa, or maybe king-of-the-world–also, your Creative Use of Piquant Punctuation more than Makes Up for my Near-Pathological Refusal of the use of IT–as you were, gentlemen