Collusion of Speculators to Blame for the Oil Crisis
Well, despite all the "drill baby drill" hysteria of the RNC, crude oil prices have been falling steadily for the last few weeks. Currently, prices are down to $96 a barrel from historic highs of nearly $150 a barrel in July. Might I add that there has been very little change in market conditions... prices may be higher in the short term due to supply disruptions by Hurricane Ike, but fundamentally the market is just as well supplied now as it was at much lower prices.
No drilling of the Arctic Nation Wildlife Refuge. No opening public waters to offshore drilling. It turns out that just a handful of speculators in the futures markets drove the prices up to artificial highs. Firms like Vitol that bought huge contracts (enough to fuel the US for 3 days at a time) with no intention of ever delivering the oil to the market. They were simply middlemen, operating in markets without proper regulatory oversight, which allowed prices to reach their illogical extremes.
At one time, Vitol alone controlled 11 percent of all the oil futures traded on the NY Mercantile Exchange (NYMEX). The article states that up to 81 percent of all contracts were controlled by financial firms speculating "for themselves or their clients", meaning that the market was controlled by short term speculators attempting to create false demand and drive prices up, not deliver the oil to the market.
Quoted from the linked piece:
"It is now evident that speculators in the energy futures markets play a much larger role than previously thought, and it is now even harder to accept the agency's laughable assertion that excessive speculation has not contributed to rising energy prices," said Rep. John Dingell (D-MI)
and later
"When the CFTC granted the 1991 hedging exemption to J. Aron (a division of Goldman Sachs), it signaled a major shift that has since allowed investors to accumulate enormous positions for purely speculative purposes," said Rep. Bart Stupak (D-Mich.) Now, he added, "legitimate businesses that hedge and take physical delivery of oil are being trampled by the speculators who are in the market purely to make profit."
No drilling of the Arctic Nation Wildlife Refuge. No opening public waters to offshore drilling. It turns out that just a handful of speculators in the futures markets drove the prices up to artificial highs. Firms like Vitol that bought huge contracts (enough to fuel the US for 3 days at a time) with no intention of ever delivering the oil to the market. They were simply middlemen, operating in markets without proper regulatory oversight, which allowed prices to reach their illogical extremes.
At one time, Vitol alone controlled 11 percent of all the oil futures traded on the NY Mercantile Exchange (NYMEX). The article states that up to 81 percent of all contracts were controlled by financial firms speculating "for themselves or their clients", meaning that the market was controlled by short term speculators attempting to create false demand and drive prices up, not deliver the oil to the market.
Quoted from the linked piece:
"It is now evident that speculators in the energy futures markets play a much larger role than previously thought, and it is now even harder to accept the agency's laughable assertion that excessive speculation has not contributed to rising energy prices," said Rep. John Dingell (D-MI)
and later
"When the CFTC granted the 1991 hedging exemption to J. Aron (a division of Goldman Sachs), it signaled a major shift that has since allowed investors to accumulate enormous positions for purely speculative purposes," said Rep. Bart Stupak (D-Mich.) Now, he added, "legitimate businesses that hedge and take physical delivery of oil are being trampled by the speculators who are in the market purely to make profit."
The recent fall in oil might be attributable to demand destruction and a false hope that the dollar is king once again. However, once the Fed really gets the printing presses rolling with entitlement programs (keep in mind that few people actually have cash and it's bad political PR to have people literally starving in the streets), we're going to see a scenario that will make the failed New Deal experiment in the 30's look like laissez-faire capitalism. A run on the dollar, and contrary to popular belief an increase in global demand as the rest of the world is going to keep truckin' along ahead of us economically will mark a 2nd and even greater commodities and PM bull market. Possibly a gold grab by the government as in 1933 and a crackdown on hoarding of PMs. Fun times ahead :-(
Posted by John on September 15, 2008 at 01:30 PM EDT #
You are right that lowering domestic demand has part to do with the slide of oil prices, as well as the belief in a strengthening dollar. As an owner of an electric vehicle, gas prices haven't really affected me much at all, I still only pay a couple hundred dollars a year at the pump for gasoline, mostly for road trips, not commuting. I would estimate I commute to school, work and most grocery shopping for less than $40 a year. I guess I am more of a demand side reduction advocate than a supply side expansion advocate.
I can't really decry the moral hazard of entitlement programs until the administration seeks to fix elective spending on bailouts, agricultural and corporate subsidies and wars first. Without supplemental assistance programs,many people wouldn't be able to live even while working full time, so that would probably remove the incentive to work as well.
I can't speak on currency trading and whatnot, but now that the speculators have been shaken out of the housing and commodities market, my next
guess is they will continue to load into food commodities as a hedge (corn, soybeans, etc) continuing to drive up world food prices. People always need to eat, and it seems the next logical target after housing and energy.
Posted by Stephen Kleinschmit on September 15, 2008 at 02:02 PM EDT #
To add to the above post... speculation has added to the market volatility and price increases. Oil prices would have increased incrementally, but there was nothing fundamental to support a doubling of crude prices within such a short time, just as there is no reason why housing prices should have doubled. Speculation was a (major) contributing factor to the run up, in concert with geopolitical concerns and increasing world demand buoyed by a growing consumption in India and China.
Posted by Steve K on September 15, 2008 at 02:43 PM EDT #