I was confident that high oil prices last year were related to supply vs demand and not speculation. I'm certainly no expert, but I heard more than a few experts say it wasn't because of speculation - and that they could tell because nobody was seen to be hoarding oil (which they would have to in order to manipulate the price). But last night I saw this on 60 Minutes: Did Speculation Fuel Oil Price Swings?, 60 Minutes: Speculation Affected Oil Price Swings More Than Supply And Demand - CBS News They make a pretty convincing case that speculation was a big part of it. So I just had one of my beliefs bubbles ruptured. Damn.
I like to think that we Prius drivers were a large part of keeping that kinda manipulation from being tenable any longer. Eventually the options come due, and if there is not that much demand the scoundrels have to flee, or loose their shirts. Very interesting report. I think the only way to protect against such actions by unscrupulous speculators is to be able to unexpectedly reduce demand. This is what happened this past year with gasoline. People started using mass transit, hypermiling, buying Prius', parking SUV's and carpooling. And in the end we drove them out of their position. Hell, we almost bankrupted AIG it sounds like. Now when these guys were at Enron they did the same thing California electricity consumers. So, does that say anything about compac flourescent lights, solar panels, roof top wind energy and ground sourced heat pump A/C ? I think so. I think it would also be a good idea to have a modified Pickens plan to get Natural gas to the North East for the same reason now. One comment on that report "but who buys allot of zinc" in response to a comment that similar things were done with copper, zinc and lead. Well, zinc is a large constituent of white-metal casting, and die casting. Buy a large TV and there is probably some zinc die casting in it. Same with cars. Same with computer hard drives. Same with cell phones. Same with cell phone infrastructure!! So we all use allot of zinc. What should have been an alarm call is the price of lead. During a period when the second largest usage of lead was disappearing (Cathode Ray Tube Televisions and Computer Monitors), lead costs were increasing.
Actually, what made that speculation possible was the fact to trade in oil futures the minimum margin requirement (the precentage of the price of the commodity you had to pay in cash to trade the asset) was a ridiculously low five percent! Small wonder why there were a lot of speculators that drove up the price of oil to US$148 per barrel in no time flat. However, at that price oil become an economically elastic (price sensitive to consumers) commodity and caused a massive demand drop, causing the price of oil to plummet to the current US$37.62 per barrel (as of today). Watch for the SEC to raise the minimum margin requirements for trading in crude oil, strategic metals and foodstuffs to as high as 25-30%, which will drive out the "make a fast buck" speculators and result in a lot more price stability.
Here's a big question for you... if oil at $148 per barrel results in gasoline at $3.50 per gallon, why does oil at $37.62 only get us $1.75 for a gallon of gas?
They weren't hoarding physical oil because the terms of the futures contract don't actually require delivery of the physical product. They can be cashed out at the end of the month, or 'rolled' to a future delivery month. What was happening was that they stockpiled 'paper oil' - futures contracts. See: http://hsgac.senate.gov/public/_files/052008Masters.pdf http://hsgac.senate.gov/public/_files/062408Masters.pdf http://energy.senate.gov/public/_files/MichaelMastersTestimony091608.pdf The Accidental Hunt Brothers
Looks like the media is finally coming clean on gas prices. Anyone who watched the congressional hearings on c-span about oil futures a few months ago knows it was all about speculation--I have had a few posts on this. The culprit is--once again--government regulation. Or lack of it. The Republicans don't believe in government regulation. And it is the lack of it in oil futures (deregulated in 2000) and in the finance industry (Greenspan) that has caused a lot of our problems. Greedy financial types were allowed to go out of control--creating investment schemes pushing up oil prices without having to buy oil. Enron was right in the middle of all this. This goes to the heart of the Bush/Republican legacy dating back to 2000. Never again should the public trust a Republican calling for "small government." They really mean deregulation. Nothing more. Nothing less.
It certainly isn't! Prices hit 120 pence per litre in mid-July, they are now back down to 85.9p/litre (I actually paid 84.9p last fill and the day before, it was 83.9p). We have very high fuel duty, which is a fixed rate (50.35p per litre for ultra-low-sulphur unleaded petrol and diesel), so a high percentage change in the crude oil price leads to a smaller percentage change in the pump price. In addition, fuel attracts VAT at the full rate, which is now 15% (reduced from 17.5% in November). Fuel tax - PetrolPrices.com Currency fluctuations do factor into it: crude is priced in dollars, and the pound has slumped substantially against the dollar. I do note that at the July peak, WTI was about $5 more expensive than Brent crude ($147 vs $142, 3.5%) while Brent is now nearly $8 more than WTI ($44.40 vs $36.56 at the instant I type this, 21.4%). The Brent contract is deliverable (if it actually is delivered) in Europe while WTI is delivered in the US.
On Friday at 5pm, the price of the Brent and WTI contracts suddenly rocketed by 5%. Any idea why? My theory is release of the second tranche of TARP funds. It certainly wasn't due to increased demand - in the US, the Federal Highways Authority posted November's Traffic Volume Trends data this week (22 January). Down by 5.3% compared to November 2007.
Partly it's refining costs and profit taking and of course state and federal taxes. Remember, you're comparing the costs of two different products (well, one is a derivative) so the scaling isn't going to be so direct.
The other side of speculation is the current situation (or back in the late 90's). Nobody whinges when speculators drive the price down. Remember when OPEC voted to cut production by 2.4 mbbl/day? The price of oil fell. It fell again when long term economic outlook projections were not favourable. That was all the result of speculation. I'm not a big fan of it, but there are two sides to it.
If anyone here has read up on the 1929 stock market crash, the GIGANTIC problem was that there were just too many speculators that were buying stocks on very low minimum margin requirements (I believe it was under 5% at the time). That's why I favor increasing the minimum margin requirement to trade critical commodities such as oil, certain foodstuffs such as wheat, corn and rice, and certain strategic metals such as aluminum, copper, iron, nickel, tin and titanium to at least 20%. That will drive out the "make a fast buck" speculators and result in a lot more price stability and a lot less economic shocks along the way.
Sounds good. But the entire trading process needs to be regulated. Turn back the Enron legislation. The Enron thieves who manipulated the Ca electricity market ,manipulated the world oil market. The thievery was enabled by Bush deregulation. How many $ trillions were stolen.
What concerns me is why don't we see an arrests of the wall street wizards. A small handful of them have caused more harm than a million petty criminals.
