PERHAPS 60% OF TODAY'S OIL PRICE IS PURE SPECULATION

Financial Sense Editorials ^ | May 2, 2008 | F. William Engdahl

[proxy_user]

Rather than answer myself, I call upon the honorable Thomas Sowell:

Some people think that the reason the public misunderstands so many issues is that these issues are too “complex” for most voters. But is that really so?

With all the commotion in the media and in politics about the high price of gasoline, is there really some terribly complex explanation?

It is clear that many people prefer to blame President Bush. Others prefer to blame the oil companies, who have long been the favorite villains of the left.

Politicians understand that. Numerous times they have summoned the heads of oil companies before Congressional committees to be denounced on nationwide television for “greed,” with the politicians calling for a federal investigation to “get to the bottom of this!”

Now that is emotionally satisfying, which is the whole point. By the time yet another federal investigation is completed— and turns up nothing to substantiate the villainy that is supposed to be the reason for high gasoline prices— most people’s attention will have turned to something else.

Newspapers that carried the original inflammatory charges with banner headlines on page 1 will carry the story of the completed investigation that turned up nothing as a small item deep inside the paper.

This has happened at least a dozen times over the past few decades and it will probably happen again.

What about those “obscene” oil company profits we hear so much about?

An economist might ask, “Obscene compared to what?” Compared to the investments made? Compared to the new investments required to find, extract and process additional oil supplies?

Asking questions like these are among the many reasons why economists have never been very popular. They frustrate people’s desires for emotionally satisfying explanations.

Is there anything complex about the fact that with two countries— India and China— having rapid economic growth, and with combined populations 8 times that of the United States, they are creating an increased demand for the world’s oil supply?

The problem is not that supply and demand is such a complex explanation. The problem is that supply and demand is not an emotionally satisfying explanation. For that, you need melodrama, heroes and villains.

[Brian S. Fitzgerald]

Is raking in real money speculation?

[RightWhale]

Pick a number. Doesn’t matter. 60%? Sure. $20? Sure. The article is speculation about speculation.

[xkaydet65]

May be true, but that's capitalism. We have to take the good with the bad. Otherwise we turn it over to the government. Our own gov't now, but some amorphous world gov't if the haloed one is elected.

As Ike said on June 5th when confonted with going in poor weather or postponing Overlord for a month, "I don't like it, but there it is."

[gost2]

Force the speculators to cover their paper with real money and speculation will stop.

But then the powers that be will find another way to force us out of our big cars and trucks.

Its a done deal. Adapt.

[MNJohnnie]

Totally 100% BS. A completely ignorant response driven by the authors political agenda that has no base in any factual reality. There is not one statement of fact in this whole article. The author merely states his emotion based opinions as if they were fact. Notice all his sources are anonymous? That is because no reputable person who actually has a professional background in these field would say such such ignorant crap.

It a simple issue of supply and demand. When you constrict supply at the same time demand is growing you get a price spike

No evil capitalists out to get you, just simple Economics that could be solved by the USA producing more of it own energy instead of buying on the International Market

[SeeSharp]

This stupidity never dies. It's all the fault of the evil "speculator". Never mind the fact that every consumer is also a speculator.

If Congress starts to take this kind of thinking seriously again as they did in the 70's then we'll have gas lines again. Back then they set wholesale price caps on gasoline supposedly to prevent excess profits and speculation. The lines appeared overnight. For someone who lived through that it's amazing to see these discredited arguments come back to life again.

Higher prices are natures way of allocating scarce resources to the most efficient consumers. Shortages are natures way of punishing us for price fixing.

This is a really really bad time to have a democrat congress.

[MNJohnnie]

85% of Internet articles written about Oil Prices are pure BS based more on the author's personal political dogmas then any understanding on their part of the real issues

[raygunfan]

lovely

[Mike Darancette]

By purchasing large numbers of futures contracts, and thereby pushing up futures prices to even higher levels than current prices, speculators have provided a financial incentive for oil companies to buy even more oil and place it in storage. A refiner will purchase extra oil today, even if it costs $115 per barrel, if the futures price is even higher.

As a result, over the past two years crude oil inventories have been steadily growing, resulting in US crude oil inventories that are now higher than at any time in the previous eight years. The large influx of speculative investment into oil futures has led to a situation where we have both high supplies of crude oil and high crude oil prices.

But the largest holder of oil reserves is the US Government. Bush should sell off some of the SPR at a reduced rate thus causing a glut and making the refineries' reserves worth less (way less) and breaking the back of the speculators.

Selling 4 million barrels/day (to American refineries immediate delivery) for the period of Memorial Day to Labor Day at $60/bbl. There is so much reserve oil that to take advantage of the cheap oil they will have to refine their reserve.

[seowulf]

I’ll have to say I agree with you all for the most part. Make your money where you can, when you can.

Conspiracies about speculation aside, the oil market does have some feel of a bubble to it if only because there are artificial government restrictions on domestic production. Governments change and so can policies rather quickly. As the world economy slows and world inflation rockets, that demand for oil can evaporate quickly just about the same time extra production hits the market. If you are heavily invested in the oil production sector as I am, that nagging feeling of a bubble is in the back of your mind.

When (or if) it really is a bubble and it finally bursts, it will be the second large hit to the world wide economy shortly after real estate and it won’t be pretty.

On the other hand everything might come up roses...no worries, right?

[sobieski]

Check out gold, or other commodity prices. They are all up, while the $ is down. It’s the Fed, not speculators, who are trashing the value of our money.

[Amendment10]

Noting that regardless that Congress has had since the 1973 oil embargo to address oil independence and oil pricing, history is repeating itself. So I'm keeping an eye on domestic energy alternatives.

First, although I don't use this product, since people are starting to use bicycles more, people might be interested in this autoshifting bicycle.

Autoshifting bicycle

Also, I'm keeping an eye on developments in bio-fuel production.

First, the bad news about ethanol. Ethanol fires are evidently harder to control than gasoline fires.

Ethanol fires hard to control 1
Ethanol fires hard to control 2

Hopefully, ways will be developed to make controlling ethanol fires easier.

On the brighter side concerning ethanol, there's now evidence that people might get as much, or more, bang per buck for their gas dollars with gas / ethanol mixtures.

Gas-competitive gas / ethanol mixtures

Also, I was surprised by the introduction of a machine (popularly known as a still) for making home-made ethanol.

EFuel100

In stark contrast to the 1700 gallons of water required to make one gallon of corn-based ethanol as indicated by the OP, the EFuel100 uses only 170 gallons of water to produce 35 gallons of ethanol In other words, the EFuel100 uses less than 1% (about 0.2%) as much water as corn ethanol, under five gallons, to produce one gallon of ethanol.

But also note that the water used in the EFuel100 process does not take into account the water needed to grow the sugar that is used for this process.

And watch out for fines for violating biofuel regulations.

Fines for violating biofuel regulations

Also, progress is being made in the development of other non-corn ethanol production technologies as well.

Non-corn ethanol

Finally, I've also been hearing good things about biodiesel production but need to find some links.

[Toskrin]

This is not the first I have heard that ICE and OTC oil trading is manipulated. There is an enormous difference between speculation and manipulation. Underlying all contracts is the rule of law, and the rule of law is pretty flimsy with these instruments.

We can rail on government regulation in every walk of life, but one good aspect of regulated markets is that they limit manipulation.

For those that think that Joe Kennedy made his money in bootlegging, that is totally false. He made it in stock market manipulation in the days prior to regulation. Of course, he then we on to be the chairman of the newly-formed SEC.

[devere]

This article is nonsense.

[seowulf]

Check out gold, or other commodity prices. They are all up, while the $ is down. It’s the Fed, not speculators, who are trashing the value of our money.

It's a little of both. Speculators (including the Fed) are short dollars and long commodities. I think it's only a matter of time before they think they've milked that one enough and the dollar goes up, commodities down. That's why a sold a good portion of my physical gold a couple of weeks ago.

I'm looking a floating rate funds now.

[seowulf]

This article is nonsense.

Probably, but you're never disappointed if your a cynic.

[SeeSharp]

It’s all the Fed. Speculators do not drive prices. They only discover them. Money is itself a commodity and obeys the laws of supply and demand just like any other commodity. When the Fed stops expanding the money supply commodity prices come down.

[Attention Surplus Disorder]

Great. How much of the recent real estate bubble was “speculation”?

Article = unfounded BS