Posted on 05/18/2008 11:05:09 AM PDT by seowulf
As to ''no reputable person who actually has a professional background in these field(sic)...''
No offense, but you're quite wrong in this sentiment. I've 30+ years in crude and energy-related mkmts and businesses, and I say exactly that, exactly what Engdahl says -- the only question is ''how much has the price been driven out of whack by the big specs?''. I'd say, depending upon one's assumptions, anywhere between $40 and $70/bbl.
I suggest you consult with thackney, Eric in the Ozarks, Smokin' Joe, and our other FReeper colleagues who work daily in the ''awl bidness''. I believe you will find that they -- all of them, to a man -- also consider that one heck of a chunk of crude's current price is not due to ordinary physical S/D conditions. (And apologies, gents, if I've misspoken about any of your views!)
FReegards!
OK, 1st off the article states “60% of the price of oil is speculation...”
To which I said was “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.
Now to the point. You are going to argue that more then 50% of the price of oil is speculative and does NOT have anything to do with the fact that despite over 15 years of steadily increasing demand around the world which we have to then combined with a 50% decrease in US production since 1986, the issue is NOT supply driven? Where is all the extra supply coming from? OPEC has a production cap in place. We aren't producing it. Where is it coming from that all these nasty speculators are bidding up?
If you'll look at historical crude price charts, you'll see that -- hurricanes Katrina/Rita/Wilma aside, crude prices started exploding right around then, and did for the first half of 2006. Users of crude/products buying in advance of actual need? Not a chance. During that period, not less than half the contracts traded were new long purchases. And that's where the spec bubble began.
Ex-cap has since climbed back to 1.8 MMbbl/day, but this isn't high enough to cool out the mkt. Our colleague thackney is of the view that ex-cap may hit 3 MMbbl/day this autumn, and, if indeed we reach that figure, this will cool out the mkt: about $40.00/bbl worth, unless I miss my guess.
Markets are anticipatory discounting mechanisms for price, ok? Always have been, but this property is much more obvious today because information moves so much faster.
I can't do anything at all about Engdahl's use of anonymous sources, and there's no reason to try. All the sources required to make a successful argument that spec is an enormous chunk of current energy pricing are, effectively, public sources.
Open interest in NYMEX crude, for example, has trebled in 6 years' time, and all -- every damn bit -- of this driving of the OI has been from long-side specs. You can verify this any day you like by going to www.cftc.gov and inspecting the OI histories of energy mkts. Some of the charts are really quite instructive.
However, all this is not by any means the only reason for the spec bubble, not at all. Y'see, some genius created a new locus for market opacity, which is always a huge negative in a mkt.
We've a new boy added to the mix since 2002 (actually, since January 2006 regarding WTI crude): ICE, the Intercontinental Exchange, which is an arm of the IPE, International Petroleum Exchange, which is -- ta, daaa -- a UK corporation. Why do I care about ICE? Good question. Here's why. Unlike NYMEX, ICE is not regulated (well, not to speak of) by CFTC. How this little miracle was accomplished, I've no idea. Probably a waiver from State or Commerce, perhaps driven by the White House. In any case, unlike NYMEX, ICE does NOT report volume, open interest, concentration and so forth every Friday.
Net result: some huge number of long specs have gone to ICE **because** they're able to keep their positions unknown to the public (and, perhaps more to the point, unknown to the regulators). No one, bar ICE itself, can tell you how big the spec interest is on ICE...and ICE isn't talking.
It is, however, known from derivative accounting that the open longs are staggeringly huge, and they've been getting way larger in the past 4-5-6 months. Y'see, ICE is completely electronic. All someone needs to trade all the crude/products he wants are: 1) capital, and 2) an office, anywhere in the world.
You can quite clearly see, I'm sure, where this ease of access and thorough mkt opacity leads. Never mind the hundreds of articles in the past 5 years (a couple of which I've written myself) about commodities having become an ''asset class''. This is just business school twaddle writ large -- tell me how much of an ''asset'' physical coffee, or corn, or cocoa, or XYZ will be in, say, 10 years' time, unless VERY carefully (and expensively) stored, eh.
The unfortunate thing is that so many capital pools (read: funds) have bought into this silliness. The result here is that numerous banks have climbed into spec mkts WHILE considering them to be a necessary and desirable part of a ''balanced'' asset portfolio. Well, these chaps will take it in the shorts, all in good time, and it's gonna be damned ugly for them, I'll tell you right now. Expect the investment banks involved to go whining to Washington for some sort of bailout when the balloon pops.
Nonetheless, for right now, spec capital has unquestionably pushed energy prices some sizeable percentage above where supply/demand fundamentals would indicate prices should be.
This is easily fixed, and doesn't require anything draconian, or even legislative at all, from the Regress. However, the Regress have a vested interest in allowing the price of energies to go cuckoo; they derive more power from the public clamour to ''do something''.
The public are idiots. The last thing we require is for the bloody Regress to ''do something'' about energy prices. We've been there, done that. It's called ''The 1970's'', and the intelligence and efficacy of the Regress' actions regarding energy in that decade are zero and -infinity, respectively. Never have so few screwed up a group of mkts so badly for so many for so long...barring of course the Communist interregnum in Russia, 1917-1991.
OK, I am going to have to print your post out and go thru it paragraph by paragraph. Lots and lots of good info that post. If you are willing, I will get back to you with my questions on this.
My 1st question though. IS there a way to undercut the speculators? If I were to make you “King for a day” what would YOU do about the problem of high energy prices?
It a simple issue of supply and demand. When you constrict supply at the same time demand is growing you get a price spike
Except that inventories are up and demand is down.
"In the U.S. alone, stockpiles of oil climbed by 11.9 million barrels in the month preceding the Energy Information Agency's (EIA) May 7 inventory report [an 8-year high]; they were up by nearly 33 million barrels since Jan. 1. At the same time, MasterCard's (MA) May 7 gasoline report showed that gas demand has fallen by 5.8%, while the government suggested that gasoline consumption might have fallen by slightly over 6%."
2) Enforce position limits on ALL players in the energy mkts. Limit violations should be treated as felonies, not just slapped with a piddly fine, but with real live time served at the Greybar Hotel.
3) Change exchange practices on daily trading limits. This has been done before w/o any goobermint input at all, and there is AMPLE precedent for it. The mechanics of this are a bit technical, and I'll spare you the details until/unless you ask for them.
4) Suspend Section 1056 of the IRS code for large specs, banks, and funds regarding any energy market or markets. Again, this is technical; you can have the details if you like.
5) Pick ONE recalcitrant big player (G-S would be my preference), and conduct an unannounced audit raid on their positions, and doings generally, in the energy mkts.
6) Drill. Nukes. Coal.
The first 4 will cool out the mkts, not a doubt in the world of it, and can be accomplished in any 30 given days.
The fifth is to set an example for the next group of would-be runaway specs: this will happen to you, next time.
The sixth is to prevent this sort of nonsense from occurring again for the foreseeable future.
I haven’t seen any filling stations hurting for customers at $3.75. I haven’t seen them closing down because nobody will pay them.
It appears that for a lot of years, the oil companies were vastly under-pricing the value of what consumers were willing to pay.
And if people are willing to pay $3.75 a barrel for gas, and companies are willing to pay 126 a barrel for the raw oil, that must be what the price should be.
I think if the oil market were closed to speculators tomorrow, there would only be a $10-20 drop in the price, initially, no way it would drop 60%. Wishful thinking on someone's part, anticapitalist nonsense at worst.
Others here could give a better idea what the results of closing the futures market would ultimately be, however, as spot price scrambles for refinery feedstocks would cause wild fluctuations in the price of crude and refined products, especially in a high-demand market.
Ultimately, the consumer would likely suffer far more.
If someone thinks specualtors are making that much, they are free to invest in such a way that they can take advantage of those profits, too.
bookmark
Thank you SAJ for the rational and succinct explanation of this current oil “crisis”. One thing that I have learned in my middle-aged life is this: If you do not understand what is happening in our economy and our government - then try to follow the money. This will usually explain many things.
There is no doubt that as soon as these speculators like GS have extracted their pound of flesh, they will turn around and short oil and the price will drop as if by magic. They will push the price right up to the amount of extreme pain on the public. It’s pathetic that GS continues to publish their $200/barrel estimate all in order to keep the price going up.
I wonder if you have heard that the Saudi’s are sending quite a few billions of oil to us in June? Somewhere I saw a reference to that. Also that Iran is sitting on billions of barrels that they can’t sell due to lack of heavy sour crude refining capacity?
Thanks.
The notion, however, that anyone with a pile of capital can jump in and distort a mkt, or several mkts, for months and/or years simply because they have more capital than is usual for said mkts (and physical mkts are ALWAYS of a finite size, of course), with no fear of immediate retribution, is simply abhorrent to me.
Oh, many of them will indeed pay the piper, in future. Always happens; mkts simply do not rise this quickly and STAY at these levels. In the meantime, though, these 'traders' -- and what they really are is manipulators -- will wreak considerable pain on the citizenry and the economy.
The fact that goobermint hasn't reined them in already, by which means I outlined in the post to which you replied, is -- unfortunately -- very telling.
Call me an idealist, but, in the meantime, FReegards to you!
The reason is simple: it was his malevolent trading of currencies that destroyed the British pound in 1994 and triggered off the Asian financial crisis of the late 1990's. Because Soros is heavily into hedge-fund trading, it would not take much to figure out that a way to ensure a Democrat becomes President is to malevolently bump up the price of oil through hedge-fund trading, closely supported by other billionaires with Leftist tendencies like Warren Buffett and by quietly providing financial incentives for certain governments in the Middle East and Venezuela.
What are your thoughts on the algae and turkey offal?
It seems that advancements in tapping energy resources are being made everywhere.
Widescale Biodiesel Production from Algae
Oil from Turkey Offal
Yes, but what is the hold up? Everything says that at a price of oil at $60/barrel, these other methods are profitable so what is the holdup, waiting for the bubble to bust?
This guy is not blaming the Bush administration or the oil companies, but speculators that are taking advantage of loop holes in the regulation of derivatives.
If you are a free market supporter then you should support the concept of a free flow of information. The author's contention is that information is not being allowed to flow freely and this is allowing speculators in-the-know to profit at the expense of those in-the-dark. And not because the speculators build a better mousetrap or because they provide better service, but merely because they are the ones running the Ponzi scheme.
When you constrict supply a bit and increase demand a bit then you git a bit of a price spike. If you get a large price spike then someone is taking advantage of the "free market" system.
I suppose you still think that 25-50% yearly increases in home prices from 2000 - 2005 was justified because population was increasing slightly and houses were a bit more difficult to build with slightly more regulations.
Personally, if this was the first time that we’ve been burned as a consequence of our dependence on foreign oil then I’d trust Congress to do something about it. But Congress has essentially proved itself useless in resolving the situation since the 1973 oil embargo. So I’m planning to use my wallet to “vote” on energy options.
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