What Really Caused Oil to Boom?

A few months ago, I criticized the absurd 60 Minutes story which blamed speculators for the rise in oil prices. I said the story was "wretched, incoherent and it engages in the worst form of scapegoating."

As is often the case, conspiracy theories sell. If you have a high tolerance for imbeciles, check out some of the comments when Seeking Alpha posted my piece.

Now James Hamilton has looked into the behavior of the oil boom and bust and he comes to the conclusion that oil was impacted by...are you ready...supply and demand.

But while the question of the possible contribution of speculators and the Fed is a very interesting one, it should not distract us from the broader fact: some degree of significant oil price appreciation during 2007-08 was an inevitable consequence of booming demand and stagnant production.

(Via: Kedrosky.)

Comments

[kawatan:]

Speculators yes
But with a much deeper level than the trading desk
No complaints
Just short the hype

Apr 03 06:58 AM

[doubleguns:]

Production is even more stagnant now with OPEC having come off higher production levels. I would hope they dont take to long to ramp back up as demand increases or we will blow right through the last highs so fast it will take your head off.

Apr 03 08:33 AM

[Itsallgood:]

No way it's all supply and demand. There is a lot of emotion too; it's obvious. The price has risen or fluctuated 30 percent in recent weeks. Has OPEC changed production or has demand changed 30 percent? NO! The mere thought of OPEC or any economic news raises or lowers crude oil prices sharply. There needs to be some kind of regulation to dampen the rate of changing oil prices. Like image stabilize in a camera; smooth and easy.

Apr 03 08:59 AM

[toobad41:]

Since we are so good at printing money; why not offer to buy all of Aramco's oil for 54 Trillion dollars (at $54 a barrel). We could have all the oil we want at a set cost for the rest of our lives.

Apr 03 09:13 AM

[guymar:]

Please be careful with what you state. Let's not forget the oil bubble started after physical de-coupling in the Futures markets in 2001. And it stopped extremely abruptly... when credit and leverage ran out, and not only for oil, but all commodities. With the IMF stating that worldwide listed derivatives now totaling 542 trillion and OTC derivatives totaling 863 trillion ignoring that the bubble was largely driven by speculators is well ... just as naive as thinking it was driven by a "worldwide conspiracy mwouhahahaaaa".

Apr 03 09:24 AM

[Ferdinand E...:]

Interesting. Every time I looked at the statistics, I saw demand outrunning supply. Now let's see: suppose OPEC's managers had retired, and the leading academic energy economist in the world had been appointed to manage OPEC's portion of the supply side of the world oil market. What I...I mean that gentleman would have done was to keep demand outrunning supply, and when President Bush came to visit the king of Saudi Arabia with his hat in his hand, His Majesty would have informed the prez that he was not...NOT investing in new capacity. Those things by themselves mean a much higher oil price.

I published an article in this forum saying that speculation was not responsible for the escalation in the oil price, but of late I have come to the conclusion that it was actually responsible for a small amount

Apr 03 10:07 AM

[BrotherMaynard:]

Please be careful with what you state. Let's not forget the oil bubble started after physical de-coupling in the Futures markets in 2001. And it stopped extremely abruptly... when credit and leverage ran out, and not only for oil, but all commodities. With the IMF stating that worldwide listed derivatives now totaling 542 trillion and OTC derivatives totaling 863 trillion ignoring that the bubble was largely driven by speculators is well ... just as naive as thinking it was driven by a "worldwide conspiracy mwouhahahaaaa".

excellent points. oil price volatility has not gone away despite the fact that every exchange member and commodity dealer said it would (back in june/july 08) when markets became more loose...well, here we are, 18-year high levels of US storage and boarding on record opec spare capacity...yet oil moves 8-10% a day. take a look before 2000 and you will see this type of volatility was the exception, rather than the rule that it seems to be today.

Apr 03 12:24 PM

[Scott Benson:]

The steep drop in the oil price from $147 last summer to $30 six months later can only be explained by speculation (too much borrowed money by hedge fund tennagers looking for the "investment of a generation") and the weaker dollar (which coincidentally hit $1.6 per euro and strengthed once everyone started to flee for cover to the U.S. dollar to $1.25 per Euro), and not by supply and demand (which is cooming). Today's incredible oversupply of oil and natural gas today only confirms that explanation.

Apr 03 12:50 PM

[Shareholder...:]

According to the IEA, who did a detailed field by field study, there is an energy crunch coming because existing fields decline 6.7% on average and the trillion dollar of investment a year needed to replace just that (let alone what is needed when demand starts increasing again) is just not forthcoming.

Interesting natural gas play to profit:
seekingalpha.com/artic...
shareholdersunite.com/.../

Apr 03 03:39 PM

[Thomas J. G...:]

I am a free market person. When oil was soaring I read a lot of stuff that said all oil only sits in specific known locations and speculators cant buy it and store it. I read stuff that said the excess money supply was funneling very specifically into oil which I find perplexing. Everyone said a new middle class in China and India was starting to use oil like the Europe/US consumers. Why aren't those China/Indian middle classers driving the price up now? For oil to go from$147 to where it is now I can only say "bubble". And "bubble"'s are caused by overzelous speculators. So even though I'm a free market person I think oil was driven up to an irrational high by speculators.

Apr 03 05:56 PM

[Ed O in PA:]

Speculation or supply and demand is secondary to the fact that the average American still has to deal with the bubble. However likely we will see a return to $4 per gallon gas, will consumers be better prepared next time around?

Apr 03 09:11 PM

[Jonathan Ch...:]

I think you are all right: Declining Oil supply, increasing Demand, Decline of use in some areas (USA) increasing in other areas (India and China). Small amounts of excess capacity lead to large marginal changes with small changes in demand. Speculators with easy money available (at first) and running out of money very fast as the market turned, dumping positions. It was a bubble, and now prices have dropped to far. When the tankers sitting with surplus oil become empty, prices will begin to jump again. have fun.

Apr 03 11:03 PM

[blu:]

Ahhhh Semantics.....
Whatever you call it... markets or speculation... it is one and the same thing. If it is going to be traded, then there is a market and there is speculation.
We have now seen peak oil. The extreme volatility of price is a function of the passing of peak oil.

Traders and investors hate change because they can't use their their tried and true methods of evaluation. So there is frustration when they can't make price behavior fit into their strategies.

Since crude is traded in a market place, the market determines what a barrel is worth. It is only logical that the market is seeing the continuing depletion of a finite resource. As a result the market is pricing in the inevitable shortages now. It is a part of supply and demand.... it is just now beginning to be projected ahead in time.
Real time supply and demand remains a predominant factor, but future supply and demand can not be ignored.

For those frustrated with the continued climb in prices when there appears to be excess supply (currently)... I would say the markets are speaking volumes about what is forthcoming.

Good luck to all...!!!!!

Apr 04 12:53 PM

[Fighting Yoda:]

It was all speculation - the amount of money that was poured in into oil contracts was astounding-pensions funds to everyone else. Just because price has fallen now does not mean there was no speculation earlier.

Most of the recent price fall is due to decrease in speculation, once again less contracts, pension funds etc have moved out of oil after burning their hands.
To speculate you need money and a story to tell. There is far less money now, credit crunch, fund redemptions, the peak oil, bubble theory is debunked.

Apr 05 04:20 AM

[chistletoe:]

There is going to be hell to pay for this ...
the majority of americans have bought into the "speculator" theory
lock, stock and barrel ...
witness the fact that, in the worst economic downturn for almost a century, with many millions of unemployed, gasoline use is still rising ...
the financial crisis has exacerbated the derth of exploration and development of new supply ...
this supposed "recovery" is going to hit the wall against intractable supply in a very short time, prices have started climbing already and that is going to accelerate (with all the funny money coming out of the Fed, sloshing around ...)

and thank the devil for the second amendment, too ...

and the net result will be one very, very pissed off american public ... look for all kinds of suicide bombers, people going postal, mothers killing babies, strikes, riots, people blowing up gas stations, etc etc, starting as soon as the weather gets a little warm ...

Apr 03 05:45 AM