Ridiculous Attack on Oil Speculators 25 comments
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With their article in yesterday's WSJ, Gordon Brown and Nicolas Sarkozy launched an effort by major governments to do away with volatile oil prices. They think a handful of smart government types "should take the lead in establishing a common long-term view on what price range would be consistent with the fundamentals." This is the ultimate in hubris: to think that a select few bureaucrats can know more about the oil market than the billions of people (aka "the market") who produce and consume the stuff.
One likely target along the way will be to limit the size of speculators' positions in oil futures. What these supposedly smart people ignore is the obvious fact that producers can be speculators too. If producers think prices are going up, they can simply shut down production and let the oil sit in the ground. Speculators are already limited in their ability to stockpile oil, because above-ground storage capacity can't come close to what is underground already. And of course if producers think prices are going down they can simply pump more, again overwhelming speculative activity in the futures markets.
Another thing that they ignore is the real cause of volatile oil prices: volatile monetary policy and volatile currencies. Governments should stick to their knitting and concentrate on giving us stable currencies. That would almost certainly reduce the volatility of not only oil prices but all prices.
If this lunacy—government meddling with markets—isn't arrested in its tracks, it will only end with government deciding to take over all production and exploration decisions by the world's oil producers. Heaven help us all if it comes to that.
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This article has 25 comments:
- I fail to see your logic in this. Economics 101 teaches supply increases as prices rise. I can understand it the other way round (a la OPEC), that by cutting production they can push prices up. But why would an oil company produce when prices are low and not when they're high...?!
Suggesting an oil producer would buy futures to push up prices which they receive for their physical sales when they are pricing and subsequently selling out of the futures might be a more reasonable argument for producers being speculators, but I think they would find out quite quickly that this doesn't fall within their "bona fide hedging activity".
We know from experience things can go horribly wrong when the price of oil is involved.
As for currency prices and oil, anyone fool can tell the current rise in the price of oil in US$ can 100% be attributed to the deterioration of the dollar's value.
On Jul 09 06:48 AM Moon Kil Woong wrote:
> As for currency prices and oil, anyone fool can tell the current
> rise in the price of oil in US$ can 100% be attributed to the deterioration
> of the dollar's value.
I also agree with RJM on your producer logic. If Producers expect prices to go up, obviously to your logic, means they expect the dollar to depreciate, they would have production at their maximum utilization. I'm assuming that you do believe that speculators can jack up the price since you assumed if they cut supply, they could artificially increase the price. I fail to understand why you talked about producers in that sense. What producers could do is play the futures game and speculate it up.
Also, I don't understand your overall stance. I think you do believe that speculators can affect prices, but you are just saying the government is over regulating.
The main sources of volatility and disruption in markets are governments.
It is not feasible for a producer to do this. They have bills to pay and can't just shut down production completely. Also, there are geological reasons they can't do this as well.
And they are:
Rebel attacks in Nigeria.
Unprecedented maintenance issues at the refineries.
Rough seas at the Mexican ports.
Fog at the Houston port.
Pipeline interruption’s ANYWHERE in the oil producing countries.
Problems getting the right summer mix in gasoline.
Rogue Traders
Demand is running ahead of supply.
This list just keep growing and growing.
The Department of Energy reported Wednesday that gasoline in storage grew by another 1.9 million barrels last week, the fifth straight week that stocks have grown.
And yet gas is still too high.
Last week, the U.S. and Europe reported the highest unemployment rates in decades.
Also, the largest volume in available apartments for rent in a decade.
> jack
Persons within the United States seeking to trade key US energy commodities – US crude oil, gasoline, and heating oil futures – are able to avoid all US market oversight or reporting requirements by routing their trades through the ICE Futures exchange in London instead of the NYMEX in New York.
For some good reading on this subject check out this site.
Global Research.
www.globalresearch.ca/...
Gordon Brown is completely and totally ignorant, and it was an enormous mistake to allow him to become boss of the labour party. Fortunately, that mistake will be rectified before or as a result of the next UK general election.
And as for Sarko, I expect a lot from him. Of course, I don't expect him to understand Econ 101 - or for that matter Econ 55 - but I don't worry about this shortcoming.
And if they want to crack down on speculators, why don't they crack down on stock speculators. There is more speculation in crap stocks like Apple or Google than there ever has been in oil.
>"If producers think prices are going up, they can simply shut down production and let the oil sit in the ground."
It takes 90 days to start or stop a well. Nor is it cost free. Most independents are in debt and have to produce. NOCs have social welfare and retail subsidy imperatives. Did someone mention Mexico? - steep irreversible production decline and rising domestic demand.
>"If this lunacy—government meddling with markets—isn't arrested in its tracks, it will only end with government deciding to take over all production and exploration decisions by the world's oil producers. Heaven help us all if it comes to that."
80% of global reserves are controlled by NOCs, 100% of E&P is controlled by governments.
On Jul 09 06:48 AM Moon Kil Woong wrote:
> As for currency prices and oil, anyone fool can tell the current
> rise in the price of oil in US$ can 100% be attributed to the deterioration
> of the dollar's value.
> Yes commodities generally track currencies, however this is not the
> only price determinant of commodities.
I certainly agree with you on that one.
> I also agree with RJM on your producer logic. If Producers expect
> prices to go up, obviously to your logic, means they expect the dollar
> to depreciate, they would have production at their maximum utilization.
I'm not sure if you're replying to Calafia Beach Pundit or Moon Kil Woong, but a falling dollar isn't the only reason for rising prices as you note earlier. But either way, I don't think rising prices necessarily means they would have production at maximum utilization. I think it could have more to do with their expectations of where prices are headed in the future. This is the case with all commodities I suspect. For instance, if I bought a new home and moved in expecting to sell my old one and prices started rising I might enjoy my good fortune and sell right ASAP if I thought it was currently overvalued or even accurately valued particularly if I expected prices to level off.. On the other hand, if I was expecting prices to continue rising by double digit amounts for the next few years I might be tempted to hold on to it, rent it out and sell it a few years hence for an even bigger profit. The same would be true for other assets such as gold, silver, copper etc. If prices are jumping in real dollar terms and are expected to continue doing so, producers aren't necessarily motivated to push for maximimum production right now.
When we had the massive jump in prices in 2008 the world leaders were pleading with Saudi Arabia to ramp up production. It's hard to tell from a distance, but it sure seemed as if they just couldn't do it. They called an emergency OPEC meeting and promised to push up the Saudi production by some 200,000 barrels per day, but that was a relative drop in the bucket as worldwide inventory was being drawn down significantly faster than that. It didn't have the desired effect.
About the same time the Saudis noted that they were holding one field out of production for their children or something like that. I don't remember the exact wording, but it was basically that they didn't want to exhaust all of their resources now. That seems like a reasonable stance to me even though I'd prefer they tap it soon.
> I'm assuming that you do believe that speculators can jack up the
> price since you assumed if they cut supply, they could artificially
> increase the price. I fail to understand why you talked about producers
> in that sense. What producers could do is play the futures game and
> speculate it up.
It seems to me that speculators can generally have a short term effect upon prices rather than a longer term one. The fundamentals of supply and demand are eventually going to overwhelm whatever bets speculators are making. If a hedge fund buys oil futures contracts for a few months from now, say October 2009 bidding the price up they are contractually obligated to take delivery of that oil on the settlement date or they need to sell the contract to someone who is willing to do so. If the market had been in equilibrium by bidding it up they would likely have lower demand at that price point and perhaps higher supplies as well. In other words they would be selling into a glut. That's what happened to the speculators at the tail end of 2008 & into 2009 and they lost their shirts. T Boone Pickens lost billions.
I don't see how entering that market would help the producers. Buying the futures contracts might boost the market price temporarily, but what are they going to do when the contract comes due and their tanker enters the Gulf? Would they then sell the oil to themselves and then to the refinery? What would be the point? What is the benefit to them?
> Also, I don't understand your overall stance. I think you do believe
> that speculators can affect prices, but you are just saying the government
> is over regulating.
Speculators may be able to affect prices, but that isn't an inherently bad situation. It all hinges upon whether or not the speculators were accurate in their predictions. If they were correct that prices would be jumping in a few months, whether the reason might be a recovery in demand or a shortfall in supply, they would in fact be doing the market a favor. It would even out the peaks and valleys in the roller coaster ride of oil/gas prices. Sure it would raise prices in the present, but that would help to dampen demand and increase supplies for the coming crunch that was predicted.
People purchasing new vehicles might take mpg into account a little more. Oil and alternative energy projects might be started or perhaps not canceled or postponed etc. The boom and bust cycles the oil industry are disruptive and inefficient for both the industry and the consumers. Accurate price projections by "speculators" could help smooth all that out and be beneficial for the consumers and the market as a whole.
When they are inaccurate, however, they make the price swings worse, as may have been the case this time. Prices were undoubtedly higher than they otherwise would have been up until now as much oil was put in storage waiting for the higher prices to get here but then may be dumped on the market with already declining prices if the expected recovery in demand never arrives.
I think Krugman was exactly right back in May, 2008 when he said that the big 2008 price spike was not the result of a speculative bubble: www.nytimes.com/2008/0... It was a matter of the fundamentals of supply and demand. An editorial in Energy Current www.energycurrent.com/... made the same point. There had been a leveling off of supply which basically plateaued in 2004 no longer responding to price increases. Worldwide demand continued to increase, however, causing prices to go up an average of about 25% year over year until 2008 at which point the supply shortfall became critical as the inventory drawdown could not be sustained indefinitely. That situation was ultimately resolved when the economy crashed, but speculation would seem to have had little to nothing to do with those major price jumps, consumer protestations to the contrary notwithstanding.
LOL sorry, I had to stop there...
whatever the rest was rendered irrelevant.
seekingalpha.com/artic...
seekingalpha.com/artic...
Such articles are better at laying out the fall of the dollar and gradual effects on oil prices than a short comment. Anyway, thanks for the clarification by other posters.
Price controls always back fire.
I do not think that Brazil, Iran, Mexico, Russia, Venezuela, etc., are ready to take their "marching orders" from former colonial masters.
PS
Why stop with just oil? Let us have a "world central-planning agency" to regulate all commodities. I don't think China, India, and Russia will buy it.
> It is so pleasant to live in Mexico where all gas stations charge the same price.<
Shit, if life in Mexico is so great, why do we have tens of millions illegal Mexicans flooding the USA?