Amen!
Posted on 05/22/2008 5:51:24 AM PDT by wildbill
Ready for the Oil Bubble? Source: http://www.star-telegram.com/104/story/651928.html
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One law is causing prices to go through the roof By Ed Wallace Special to the Star-Telegram
"There’s a few hedge fund managers out there who are masters at knowing how to exploit the peak [oil] theories and hot buttons of supply and demand and by making bold predictions of shocking price advancements to come, they only add more fuel to the bullish fire in a sort of self fulfilling prophecy." — National Gas Week, Sept. 5, 2005 as reprinted in the US Senate Permanent Subcommittee on Investigations’ report, "The Role of Market Speculation in Rising Oil and Gas Prices," June 27, 2006
Fiddling While We Burn
There it is in plain sight for everyone to see, exactly what I’ve been reporting for the past few years: Many individuals who are investing in oil and natural gas futures are going out in the media and trying to convince the American public that either we are out of oil or there is a serious supply shortage of crude against worldwide demand. The question is: Does it surprise you to discover that the US Senate investigated the rigging of the oil market by speculators in the summer of 2006 – and concluded that there was no supply and demand problem with oil? Did you know that their conclusion was that speculators were responsible for a 70 percent overcharge in the price of oil in the months leading up to the summer of 2006?
This from page 1 of the Executive Summary of that Senate investigation, there is this one troubling line: "Today, U.S. oil inventories are at an eight-year high, and OECD (Organization for Economic Co-operation and Development) oil inventories are at a 20-year high."
That’s odd because, in 2006, just like today, the media reporting covered the serious international shortage of oil and justified oil’s high price. Even more troubling is that the House of Representatives held a hearing this past December, ominously titled "Energy Speculation and Price Manipulation." How did it pass under the radar that both the Senate and the House studied the issue of price manipulation in our energy markets and both concluded that it was unregulated, massive trading in one futures market that was really driving up the price of oil and natural gas? And given that conclusion, why has Congress done nothing about it?
Investors Make the News, Literally
A week ago Goldman Sachs issued a new investor note, suggesting that somewhere between six months to two years, the price of oil could go into a "super spike" and prices jump as high as $200 per barrel. It became the major story of the night. Ignored in the reporting frenzy was that many legitimate and well-respected oil analysts dismissed Goldman Sachs’ prediction as groundless.
Get ready for the next shock to your system. In the past month we have added 11.9 million barrels of oil into our stock reserves, giving us 32.3 million more barrels of oil than we had on hand January 1. On May 5, we found out that for the second time in as many years, Iran was storing its excess crude oil on tankers in the Persian Gulf, because it had run out of storage space in the desert and was awaiting buyers for its heavy crude. That same day Saudi Arabia cut the discount price for its Arabian Heavy crude to $7.45, hoping to entice more buyers for immediate delivery. We didn’t hear that news, either.
While researching my third article for BusinessWeek online about the world’s oil situation in 2008, I asked for the most current report from Oil Movements. Because the oil industry is not transparent, Oil Movements tracks every tanker at sea, from both OPEC and non-OPEC oil countries, along with their cargoes’ final destinations. Anne O’Shea responded immediately to my request with their report dated May 8, 2008. Just so you will know, oil shipments are up from a year ago in almost every class, including Middle East oil in transit and Non-OPEC in Transit. The only class of oil shipment that has declined is covered on page 3 of that report. That chart is labeled, "4-Week Changes in Westbound Oil at Sea."
That’s right, shipments of oil headed west have shown serious declines during the month of April, down 800,000 barrels per day in the week before the publication of the report. Now, let me give you the first line from under the Westbound Oil shipments chart: "In the west, a big share of any [oil] stock building done this year has happened offshore, out of sight."
Could this be true? Oil Movements, the unimpeachable source for finding the real world situation on oil transits, is saying that oil is being hidden offshore, not declared in inventories? Yes, that is exactly what they are saying.
That same week our refineries cut their production runs back to 85 percent, down from 89 percent a year ago, to trim more gasoline out of our stock reserves, to increase their profits per gallon.
National Short-Term Memory Loss
It’s amazing how quickly we forget our recent history. Congressional hearings in 2001, blasting certain Wall Street executives for using the media to sell the public on stocks in order to bid up the price – so their firm could divest of its shares without taking a beating. Meanwhile, other trusted advisors pushed stocks that were fundamentally worthless, because their affiliated banks had large loan agreements with those companies.
The year before Enron had been caught manipulating the California energy market, even forcing rolling blackouts across the northern part of their state apparently just for effect – to support their claim that there just wasn’t enough electricity to go around. Again, we now know that claim was untrue. It was Enron shutting down certain power generation plants, while placing bets on their unregulated energy futures market. The net cost to California consumers was almost $8 billion.
It didn’t end there. Amaranth Advisors, a hedge fund, literally was cornering the market on natural gas futures, to make it appear that there was a shortage of natural gas, when the Commodities Futures Trading Commission told Amaranth to liquidate its position on the NYMEX because its bidding had already moved natural gas prices far beyond the reasonable limits of supply and demand. Now, remember this name: ICE, short for Intercontinental Exchange – the "dark futures lookalike market."
Once the CFTC told it to back off its natural gas futures contracts, Amaranth simply shifted gears, got out of the NYMEX, placed its massive bets outside of government regulation in ICE and managed to drive natural gas futures to $8.50 per MBtu.
As the Senate investigation into the manipulation of the energy markets showed, "Amaranth – the day before they failed, natural gas was about $8.50; the day after it failed, it went to $4.46 MBtu." That’s right, one major hedge fund managed to double the price of natural gas simply by loading up on futures contracts; when the government told them their bets were unwarranted, they simply moved their monies to a futures exchange that was unregulated. Only when Amaranth failed did natural gas prices fall back to what was considered normal for supply and demand.
Sadly, like oil today, when this was happening we were being told that natural gas supplies were tight worldwide. That statement simply wasn’t true.
Dark Future
Likewise, British Petroleum was busted for manipulating the propane market in the winter of 2004 and fined $373 million. Of course, in Texas, under deregulation of our public utilities, our electric rates can be set using the futures market for natural gas, so the manipulation of the natural gas market spelled trouble for us. Consider this, by 2006, according to www.powertochoose.org, electricity rates for us had climbed to 15 cents a kilowatt-hour due to the high cost of natural gas. But, that was the exact same time period that Amaranth was proven to be manipulating the market and sending natural gas futures through the roof. Two months later the hedge fund collapsed and natural gas prices fell. Therefore, most Texans paid higher electric bills for Amaranth’s manipulation of the natural gas market.
Professor Michael Greenberger of the University of Maryland, a former board member of the Commodities Futures Trading Commission, testified in front of the House Committee on Energy and Commerce on December 14 of last year. Under discussion that day was the manipulation of the energy markets and prices, but Professor Greenberger added these comments: "Three, four months from now, you’re going to have a hearing on the subprime meltdown, and you’re going to find that the very same legislation [deregulating energy] deregulated something called collateralized debt obligations, CDOs." That legislation, friends, directly ties the mortgage meltdown to the high price of energy today.
It was called H.R. 5660, the Commodities Futures Modernization Act of 2000. At first this bill went nowhere in the House, not even up for debate. Then, a few months later, late one night a 242-page bill written by Wall Street lawyers, with the exact same name as the former House bill, was quietly added to an 11,000-page appropriations bill, and the Enron loophole was created. The power behind that bill was one Texas Senator, one Texas Congressman and their wives.
Next week: How the unregulated futures market pushes the price of oil, natural gas and gasoline far beyond those commodities’ market value, thanks to the creation of the Intercontinental Exchange. Worse, Congress knows this, but does nothing.
And bet your life, when this bubble pops -- which it will --, the big specs will get short, short, short.
And prices will collapse, just as they always do after parabolic bull mkts.
Unless, of course, the Regress do something sufficiently stupid to damage yet further the ability of the US to produce energy.
How do you figure?
Every middleman takes a cut that get passed on.
And prices will collapse, just as they always do after parabolic bull mkts.
Unless, of course, the Regress do something sufficiently stupid to damage yet further the ability of the US to produce energy.
I agree with both statements.
Futures traders are not middlemen. That was easy. Try again?
Amen!
I am not a green thumb, but we recently bought a book on square foot gardening and will give that a try this summer.
Our next step is to figure out the best alternative to our oil fuled furnace - which is only 7 yrs. old.
Are you interested in the essentials and basics of life and being able to live well and as a family and with God on these? This is the big question because we have been a consumerist society and at our worst we have an obsession with frivolous items that give transitory happiness that end up in the landfill next year. The bad economy is forcing many to move way from the $100 items that will soon will be in the landfill to the necessities. We have cut back greatly on junk food and eat more dried beans (not canned)
Futures traders are not middlemen. That was easy. Try again?
Maybe. They are buying and selling oil. They might not be ever taking possesion but they are gaining profits that are passed on to the customers without adding to the oil’s value.
I am pretty confident our indulgence in luxury items are pretty low.
We are raising 7 children, so spreading one paycheck among so many people has forced us to concentrate on necessities -not luxuries.
We never buy new cars. We bought a modest home and remodeled it.
We only have junk food in the house when there is a party -a sleepover.
Occasionally we may splurge, but a “splurge” item in our minds usually doesn’t qualify as “splurging” to some of our wealthier friends (sports equipment, dinner at a nice restaurant, etc...)
Often they are buying and selling to each other.
They might not be ever taking possesion but they are gaining profits
Futures traders always make a profit? How does that work?
I would grow a big garden and put your children to work in it. Laying hens too if your zoning permits
Futures traders always make a profit? How does that work?
Futures traders never make a profit? Why do they bother?
Some do, some don't. You know that for every dollar made on a futures contract, a dollar is lost on the other side?
Some do, some don’t. You know that for every dollar made on a futures contract, a dollar is lost on the other side?
Yes, I do. Maybe you’re right that most of the time, speculating doesn’t drive up prices. The exception would be during a bubble when there is a glut of money flowing into the market going long due to irrational exuberance. Of course when the bubble bursts, the market will go farther the other way possibly making it a wash.
Then how could you claim they add costs to the consumer?
The exception would be during a bubble when there is a glut of money flowing into the market going long due to irrational exuberance.
For every long contract, there has to be a short contract.
I remember reading somewhere that the U.S. government subsidizes every megawatt of electricity produced by wind power to the tune of $43.00 per megawatt....where as oil and natural gas depletion allowance only amounts to about $20 per megawatt equivalant.
As you say, Boone didn't just fall off the turnip truck yesterday.
I think you’re on the right track. It mirrors some of my strategy. I know several have traded in their big trucks to go to small cars - I’m sure their macho image was dented but that was a smart move on their part. Square foot gardening has been with me for a good while. Also composting. It doesn’t take much effort/area to have a compost pile working either. I know nothing about oil furnaces. Can they burn used motor oil, vegetable frying oil or substitute?
Works just about like the Real Estate market worked for those lenders that bet long by selling sub-prime loans, and buyers that bought way more house than they could afford.
Essentially they were futures traders betting long.....way way too long!
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