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.