A Sloppy 60 Minutes Segment on Oil Prices

I happened to catch this 60 Minutes segment last night on the subject of the role speculation played in oil prices over the last year and kept waiting for them to tell something other than the Michael Masters version of the story.

They never did.

In what was just an awful omission of critical elements of a major story (including the fact that their key "expert" has a major conflict of interest), this is just one more example of how the mainstream media has utterly failed to provide anything of real value in their reporting and why, increasingly, those seeking information are turning to alternate news sources.

At The Big Picture, a dismantling of the report has already been completed by the ever-alert Barry Ritholtz, in whose estimation, about 90 percent of the story remained untold.

Here's what was left out:

1. Oil is priced in US Dollars. Since 2001, the Dollar fell 40% (from 120 to 72); Oil rose nearly 5 fold over the same period. And Oil’s collapse occurred over a period when the dollar formed a short term bottom; it has certainly had its most significant rally in years (72 to 88).
2. Over the same period that Oil prices were rising, the US was fighting two major wars in the Middle East, Iraq and Afghanistan. These impact prices via psychology and risk of supply disruption — especially at a time when producers were running flat out.
3. Energy prices rose during an economic expansion (fueled by low rates and cheap money); Oil fell during a period of US recession and a global slowdown.
4. Since 2001, Commodities of all sorts rose significantly: Steel, aluminum, cement, foodstuffs, precious metals, etc. Were they all driven by speculation, or was something else going on?
5. Since the 1% Fed funds rate of 2003, inflation has had a dramatic impact on ALL prices — from medical costs to insurance to education to health care to housing to food and energy. That 60 Minutes failed to even mention inflation in a piece on Oil prices is a terrible oversight on their part.
6. Throughout the 1990s and 2000s, cars were increasingly replaced with SUVs and trucks. These got appreciably worse gas mileage, as the total US miles driven rose. Hence, increased US demand for energy accompanied increasing prices.
7. Since gas prices hit $4 a gallon and the recession began, total US miles driven fell significantly, by several billion miles. As expected the drop in driving was followed by a fall in prices.
8. 60 Minutes interviewed Mike Masters, a hedge fund manager who had testified before Congress that speculation was driving prices. They omitted to mention he was talking his book. His holdings in energy sensitive stocks — with large positions, the vast majority in call options, in AMR Corp (AMR), the parent of American Airlines, Delta Air Lines (DAL), General Motors (GM), UAL Corp (UAUA) and US Airways (LCC) — were responsible for his fund losing 35% of its value before the Fall 2008 market collapse.
9. China boomed, they also spent a ton of money building out the nation leading up to the Olympics. (India boomed too). China, like the US, also began filling its Strategic Petroleum Reserves.
10. The rise of extremist terrorist groups like al-Quaeda, the hostility of Iran towards the West, supply and political disruptions in places like Nigeria, and overt hostility to the US by oil producers like Venezuela President Hugo Chavez also contributed to drive prices up. The political factors were also omitted.

To this could be added the very real supply/demand picture of early-2008 in which, every day, world-wide inventories were being drawn down by two million barrels a day because the world was consuming more than it could produce.

The 60 Minutes segment kept saying that there was no "fundamental" reason for rising prices, but, until the wheels fell off the global economy, there was a major fundamental reason.

Steve Kroft might also have consulted with the International Energy Agency, the Paris-based energy watchdog group, that recently issued their 2008 World Energy Outlook in which they "sounded the alarm", characterizing current production trends as "unsustainable" and called for action in the form of an "energy revolution" to offset the expected declines in output.

The group predicted that the oil price will quickly "shoot back through $100" when the world economy returns to normal, going on to note that the "era of cheap oil" is over.

How could the 60 Minutes crew have missed all of these things?

Comments

[John Polomny:]

"How could the 60 Minutes crew have missed all of these things?"

Because they are part of the elites. Elites believe that anytime the price for oil goes up it is because of "greedy' speculators. Curious that the recent collapse in oil prices does not seem to be have been caused by greedy speculators who are shorting oil.

Jan 12 03:21 PM

[market ace:]

60 minutes is just "entertainment" like the rest of the main stream media. Facts and truth just detract from a great story like "the unknown, secretive mega speculators" are the cause of all the world's problems. The average Joe Six Pack wants to believe this simple explanation of high energy prices and not be told how he is part of the real problem.

Jan 12 03:42 PM

[prudentinve...:]

Tom, you are right.

Oil behaves like all other commodities. Price is a combination of supply/demand, future expectations of supply/demand, future expectations of inflation/deflation, and all that amplified by the momentum buying and selling that increasingly dominate financial markets.

However, conspiracy theory makes better TV.

Jan 12 03:55 PM

[dw57:]

the trouble is that up until 2006 (just about the time demand started to crumble) prices of oil weren't in con tango. while China and India continued to creep up on use, the rest of the world was going the other way. And to top it off, oil kept moving wildly with no real reason. one day it moved 20%. unless some body blew up an oil field in SA, there was no reason for that. and the stratosphere prices didn't start till 07. right around the time the current recession started . and we have been adding oil to reserves every month every time. nobody was ever refused oil based on it not being available. the difference between demand and supply did change, it was about the same size buffer for those years. the only difference was the amount of money in the market. and that the market was dark (as admitted in senate testimony by the market managers them selves. under oath!). then there is all that oil in tankers. that has no place to go.

Jan 12 03:59 PM

[Guitanguran:]

May I suggest another resource? Google Ed Wallace at Businessweek and read up. Until then, might I ask, what percentage of oil futures contracts during the upswing actually wound up being delivered?

Jan 12 04:04 PM

[KSengineer:]

It would be nice if it were just "sloppy" reporting as there'd be some hope for a correction.

"Propaganda is the deliberate, systematic attempt to shape perceptions, manipulate cognitions, and direct behavior to achieve a response that furthers the desired intent of the propagandist."

This is now the undeniable purpose of mainstream media, 60 Minutes being just one tool.

Jan 12 04:10 PM

[dw57:]

not sure we can really complain about sloppy reporting for a story that ran all of 15 minutes. and was on network TV , which means it had little in the way of research. but 60 minutes does better than the normal network news. and probably better than some of the cable news folks. plus the newspapers and magazines who were the real heavy hitters in this are basically not doing much any deep reporting any more. seems it costs to much!

Jan 12 04:33 PM

[Basic Finance:]

Seems the point of the 60 minute piece was that supply and demand was not the most significant driving force behind the price swings of the last few years. The evidence presented...that supply was increasing at the time demand was decreasing while prices were going up seemed to be a pretty convincing argument and nothing I have seen here contradicts it:

1) Oil is priced in US Dollars.......OK so the stats should have been priced in some mixed basket currency. This might smooth out the swings, but it certainly doesn't EXPLAIN them.

2)Over the same period that Oil prices were rising, the US was fighting two major wars in the Middle East, Iraq and Afghanistan......Hmmm do the prices actually move with any war related stats? Death toll? Oil fields blown up? NO. Did we stop fighting these wars at some point in the last year? Not sure how that situation could lead to skyrocketing prices and then also lead to the recent price collapse.

3) Energy prices rose during an economic expansion (fueled by low rates and cheap money)....And now that we have lower rates and cheaper money...??? Prices fall?? Not sure I get that. If what you are arguing is that PERCEPTION of future growth drives prices, then you are actually agreeing with 60 minutes. If speculation isn't driven by the expectation of future oil prices, I'm not sure what the word means.


4) Since 2001, Commodities of all sorts rose significantly: Steel, aluminum, cement, foodstuffs, precious metals, etc. Were they all driven by speculation, or was something else going on?

.....I'm pretty sure 60 minutes was arguing that all commodities were being inflated due to speculation and that oil was the most obvious example...so Yes...they were all being driven by speculation.


5) Since the 1% Fed funds rate of 2003, inflation has had a dramatic impact on ALL prices — from medical costs to insurance to education to health care to housing to food and energy. That 60 Minutes failed to even mention inflation in a piece on Oil prices is a terrible oversight on their part........Oh so inflation increased prices 3x during the bubble? Aren't you putting the cart in front of the horse? Wasn't a lot of the actual price inflation DUE to the increase in oil prices? Do oil prices track well with any measure of monetary policy? Didn't think so.

6) Throughout the 1990s and 2000s, cars were increasingly replaced with SUVs and trucks. These got appreciably worse gas mileage, as the total US miles driven rose. Hence, increased US demand for energy accompanied increasing prices....... 60 minutes cited DEMAND. If you disagree with the stats, fine, give us another source, but it doesn't really matter what people do in cars since the measure of overall demand would already account for whatever people are doing with their cars. PLEASE. 60 minutes is wrong because they didn't specifically note the Bobby Joe bought an SUV! I'ts already in the stats for God's sake.

I'm sure the last few points were equally petty...I just don't have time to go over them.

Jan 12 04:50 PM

[jarco:]

Don't forget, this is CBS. Of the three former "big" networks, they're the least accurate of the principal socialists camp.

Jan 12 05:30 PM

[dixie:]

TV news and the daily newspaper have a commonality which has resulted in a loss of viewers and readers.

They contain little of substance, depth or thought.

Jan 12 05:32 PM

[jarco:]

The "something else" was runaway construction. By the time my Florida home was finished, simple metal 2 x 4 's had doubled in price. Sheet rock up 60%, cement nearly unavailable at any price, and the list goes on. The majority of cement for Florida consumption is imported, mostly from Thailand and the surrounds. Quoted labor skyrocketed


On Jan 12 04:50 PM Basic Finance wrote:
4) Since 2001, Commodities of all sorts rose significantly: Steel,
> aluminum, cement, foodstuffs, precious metals, etc. Were they all
> driven by speculation, or was something else going on?
>
> .....I'm pretty sure 60 minutes was arguing that all commodities
> were being inflated due to speculation and that oil was the most
> obvious example...so Yes...they were all being driven by speculation.
>

Jan 12 05:39 PM

[scotty1560:]

Tim...thanks for your articles...I enjoy them...at this point whatever the causes
it's all in the history books...we move on..

in the meantime it looks like oil is headed lower for another month or two....
might test $28.....holding my USO for a couple year hold....
eventually the dollar weakens and oil use increases....firmly in the
peak oil camp so oil will again rise at some point until technology catches up..
I don't see electric cars as the answer...only usable as a second commuter
car...batteries will take years to perfect...think hybrids are more viable..

Jan 12 06:17 PM

[Alex Filonov:]

Sorry, didn't watch the program. I don't think speculation was the main driving force. I think speculation was the ONLY driving force in the beginning of this year. As far as I know (correct me if I'm wrong) contracts for actual delivery we only about 2% of total volume from Ferbuary to July. That means that supply and demand for actual product didn't matter, only supply and demand of future contracts. I can agree that some other factors played in oil price growth from 60 to 90. But from 90 to 147 it was pure speculation. Parabolic chart confirms that and end result (market crash) confirms that as well.

Jan 12 06:33 PM

[Tradnnut:]

You don't have to be a Phd in economics to see just like the real estate market and most other commidities we had plenty of speculation in the system. This market is broke! It has been broken for awhile now. We need to fix it before we recover economical. I love this country and capitalisim but let's be truthful and wipe the green film from our eyes. Greed is just or more powerful than crack cocaine it's time for us to go into treatment.

On Jan 12 06:33 PM Alex Filonov wrote:

> Sorry, didn't watch the program. I don't think speculation was the
> main driving force. I think speculation was the ONLY driving force
> in the beginning of this year. As far as I know (correct me if I'm
> wrong) contracts for actual delivery we only about 2% of total volume
> from Ferbuary to July. That means that supply and demand for actual
> product didn't matter, only supply and demand of future contracts.
> I can agree that some other factors played in oil price growth from
> 60 to 90. But from 90 to 147 it was pure speculation. Parabolic chart
> confirms that and end result (market crash) confirms that as well.

Jan 12 07:56 PM

[K T Cat:]

60 Minutes is intellectual cotton candy. You think you're eating something and it tastes good, but it is completely insubstantial and bad for your intellectual health.

Jan 12 08:13 PM

[the ilster:]

Nice response, but you fail to cover the open interest in futures contracts that they discussed. That ultimately dictates price. In addition anytime you have a bubble in anything there are ALWAYS speculators. To what degree is the question. All these markets are manipulated anyway. The fed is most likely buying s&p futures to prop up equities. The Plunge Protection Team. Its all a bunch BS. I'm short IYR and long USO at these levels.

Jan 12 09:41 PM

[Dwane:]

I watched the show and was thinking the same coulld have been said of GOLD in the early 80's. It took 25+ years for gold to break new highs. I suspect the same will be for oil. Although I do believe oil is somewhat undervalued at the moment it will likwly never see these prices ($147) for sometime. I think the "green revolution" will bring us out of the current problems and when we run short of oil to lubricate turbines then the price of oil will again spike. The program did however magnify only one aspect of the price spike and it only exploits the flaws of capitalism. I think we can all agree that Capitalism is not the "answer" but it is the best we have until something that works better comes along.

Jan 12 09:43 PM

[Burt Met:]

Lets apply a heavy tax to the profits of speculators who do not take delivery of contracts-the goverment could use the income an its only fair that they share the wealth,they would claim a loss.

Jan 12 09:54 PM

[FETZ:]

I think the market needs to develop an oil or energy VIX because the volatility is ridiculous. It is impossible for businesses, individuals, governments to plan properly when oil prices are so crazy. My opinion is there was institutional investor demand (pensions, endowments, etc.) investing in commodities after studies were published about the diversification benefits. This caused a long term bull market that ended in a parabolic move in 2008. This last move was purely a speculative bubble like all other parabolic moves. Prove me wrong.

Jan 12 10:06 PM

[Allen Phatimer:]

That was really weak argument on your part, and I am a bit surprised that so many share your sentiment but not surprised that not a one of you can or do deal with the facts as you make the case that speculation wasn't a key factor in oil going parabolic, and crashing. The facts are so clear that this shouldn't be a controversial issue. You do a serious dis-service to folks that don't know any better and come here to gain a little insight. Hopefully, people don't take your word for it (or mine for that matter) and go see the segment themselves. I just submitted an article meant to gently pants you and your friends and hopefully help to shed a ray of light on the truth. Somebody had to do it.

Jan 13 12:36 AM

[Mark Anthony:]

You are absolutely right. Medias that mislead people should be denounced. We need to scrutinize every piece of information being told as there are just too many lies flying around. This is one of them being debunked:
stockology.blogspot.co...

Jan 13 04:07 AM

[H.J. Huneycutt:]

Great piece. You're right-on about all of this.

The American mainstream television is a joke any more. I'm to the point that I dread even discussing the news with most people because there's a good chance they get their "news" from the regurgitated tabloid sensationalism that calls itself news reporting on the major networks these days.

Americans have a distorted one-sided view of world affairs; a distorted view on economic fundamentals; a polarized view of politics (pro- or anti-, with no complexities); and an extremely flawed view on the most pressing issues facing the country.

It's sad and this 60 Minutes piece is yet another example of how bad it's gotten.

Jan 13 05:29 AM

[john s. gordon:]

burt met - excellent suggestion. would not have been possible under the emperor george dubya regime.

we know at the time that speculation was occurring in all commodities, steel, cement, timber, etc., not just oil.
> jack

Jan 13 08:44 AM

[Ferdinand E...:]

Tim, you are right and the people who say that you are wrong don't know what they are talking about. Incidentally, what has gone wrong with the US Congress that they call on someone like Michael Masters to give them a song and dance about speculation. They should have called on you, and I wish that it was possible for you to pass this article to everybody who is interested in this subject.

The greatest line in the Great American Songbook is "Foos will be fooled", from 'The man that got away'. That applies to energy economics as well as boy-girl soap operas.

Jan 13 09:16 AM

[misolarman:]

This is why the upcoming movie, 'Media Malpractice' has to be a blockbuster. We need something that will once again give us a non biased media. Currently because of their socialist agenda true journalism is dead in America.

Jan 13 10:53 AM

[SivBum:]

Assume that 60 minutes was all wet...how do you explain oil prices crashing to less than $40 from $147 (or $175-$200 forecasted by Goldman and Morgan?) The currency, supply/demand, inflation and over-shooting cannot justify the fall within 6 months.

Also, 60' did reported that Goldman and Morgan refused to defend themselves on the program.

Jan 13 11:15 AM

[notsosmart:]

it wasnt that long ago i paid $1.09 a gal.this was less than bottled water.there is much emotion in oil.just look at the spread in predictions among the so called experts.right now people are paying more than they should for heating oil because they were scared into signing high price contracts because the experts & anal sts predicted $200 brl.nobody knows anything.the saudis just opened 2 new fields.how long will they hold back? they are building a huge solar plant.good luck on predicting.

Jan 13 12:34 PM

[bruc2y:]

100% of futures contracts result in delivery. Look it up in Wikipedia, en.wikipedia.org/wiki/..., or at the market that trades them - NYMEX I think.

So who was that guy trying to mislead us? There is good hard data showing supply/demand rules the markets.

But, the scapegoat must be created and then squelched, by Congress if need be (so someone can take advantage of it, of course). By the time the mistake is noticed, someone will have made off with the bucks. As usual. There is nothing new under the sun.


On Jan 12 04:04 PM Guitanguran wrote:

> May I suggest another resource? Google Ed Wallace at Businessweek
> and read up. Until then, might I ask, what percentage of oil futures
> contracts during the upswing actually wound up being delivered?

Jan 13 05:42 PM

[Rachel Kinker:]

Nice Article.

Rachel Kinker
foreclosure auctions

Jul 07 05:53 AM