G8 and Energy Prices: Speculators R Us 7 comments
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By Simon Johnson
The G8 summit was obviously disappointing, even for those with low expectations. Usually, the substance is lacking but the public relations are well managed. This year even the messaging was messed up - they said some new things on climate change but not what we were told they could say, the food aid/development package was lamer than advertised, etc. So the whole thing looks like an expensive flop.
But actually it was much worse.
I’ve written elsewhere this week about the G8’s broad decline in legitimacy and appeal relative to the G20 , and the specific pressing issue of cross-border resolution authority for failed banks – which is a matter of pressing urgency, yet not something taken up in or around this summit.
Think now about the macro/financial angle. Writing in the WSJ on Wednesday, Gordon Brown and Nicolas Sarkozy argued that speculation in financial markets lies behind the fluctuations in oil prices. The G8 went along with this message.
On any given Friday, I’m perfectly willing to believe that there are either specific manipulations or broader structural issues with regard to trading in oil futures. I welcome the CFTC’s moves to (finally) regulate markets more effectively.
But, more generally, the G8 – and its members this week – are disingenuous when they speak about energy prices, in three ways.
1) They are trying hard to talk up the market, with regard to global growth. At the same time, the hard data continue to disappoint. Naturally, this causes volatility in oil prices.
2) They claim to see no link between their failure to converge on climate change/environmental policies and what happens to energy prices. The extent to which industrialized countries effectively control carbon emissions will have a big impact on the longer-run demand for oil. Flip-flopping on this issue discourages investment in the energy sector (regular and alternative), and thus directly and indirectly contributes to oil price volatility.
3) The very cheap money policies of leading central banks, including the Fed, the Bank of England and arguably also the European Central Bank, lower the funding costs for big players who want to take large positions in commodities markets. Essentially, we are providing the credit that makes big speculative positions possible. Add to this mix a “too big to fail” attitude and a “yes we can, recapitalize through trading profits” deal with policymakers, and you see why major financial firms are likely to place huge commodity bets in the months ahead.
The G8, separately and jointly, destabilizes energy prices and refuses to even talk about this reality – taking the view that being more candid would just upset consumer, business, and investor confidence. They gamble, on energy and more broadly, that the road to recovery runs parallel with pretending there are no problems.
The true speculators here are your elected representatives.
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It is also of interest that the IEA in their recent report indicated that in order to run the world economy with approximately the same level of oil as at present, several new Saudi Arabia's worth of oil will have to be found and developed over the next few years at huge cost.
Recently they have indicated that due to low oil prices that investment is just not happening, and that given a recovery a price spike and shortages are both inevitable by 2014, or if the recovery is as anemic as seems probable, a couple of years later.
IOW oil price rises and shortages are wired in, and likely to hit any recovery hard.
1)the cheap credit the fed is giving out is flowing into the markets, not to the consumer. cheap credit distorts the supply demand curve and causes people to fund projects that do not have a sufficient ROA,and when credit gets a bit more expensive collpase.
2) Our government, held hostage by wall street, seems determined to do this once again. Wall street pay is determined by ROE and the extent of leverage, not ROA. hence you get our policy
3) it isn't just oil manipulation that is an issue, it is an issue for the NYSE too. If leverage can distort oil prices why can't it distort stock prices and where does this leave those without the access to unlimited cheap federal funds for investment purposes and the ability to move markets
4)Time to see through the BS. Our govenrmet policy has decided the issue is liquidity, false, because of wall street influence. the consumer can't use the liquidity because they are broke, the liquidity is distorting the market place creating instablity, and will ultimately cause more harm than good.
5) I can see number four as clear as day, why can't policy makers? it is such easy common sense. When something is so clear and easy yet is not done the reasons have to be questioned because they are not rational. It is the extensive irrational nature of our governments policies during this crisis, in addition to your atlantic article, that have let me to conclude our government works for wall street not thise who have elected them.
6) when policies are irrational based upon the accepted problem the best thing is to go back look at the policies and then decide what the goal actually is. If you do this exercise things become very clear. You will realize the role Goldman played in this crisis, and you will realize that our government has been highjacked.
Never, ever, ever, look at what these people say. In fact as an exercise ignore it when you do your analysis. Your will realize that more often than not the words are lies, and then you will get to a point where everything said is taken with more than a gain of salt.
It is a miserable place, and I wish it on nobody, but it is the only way to get around to what is really going on.
this is the summation statement of your article. Astute. For those of you out there who do not understand, there is no difference between the polcies of our governments, and the desired polices of wall street. they own our govenment and the distinction is minimal. Wake up america write your senator, congressman, the white house, etc and keep up some pressure. Only if these people think they can loose in the ballot box will they make the changes we need to restore a productive economy. Support the audit the fed efforts, and make sure those in elected office know you are angry and aren't going to take it anymore!!!!
Our democratic system is in danger of being lost to special interests for ever is we can't use this crisis to get back our ownership of our government!!!
A total Campaign contributions from the oil and gas industry in 2008:
$23,500,000.00 to Democrats
$45,035,398.00 to Republicans
Check it out.
opensecrets.com
If so, why would anyone have positive expectations from their meeting this week? Fear, maybe, from their next fiasco but even low expectations are far too optimistic.