Revisiting The Effects Of Cheaper Crude

Includes: OIL, USO
by: Gustavo Gonzalez


This article illustrates how OPEC monopolizes the oil industry.

Gives examples of other forms of price fixing.

Examines the affect of low oil prices.

Anyone who follows global economic news, knows how the price of oil has been steadily declining since 2014. Now oil is a well-known commodity, and is traded in the global financial markets. Many individuals and large corporate entities have been affected by the sharp declines in the price of oil, both negatively and positively. For example the number of working oil rigs in North Dakota fell 13 percent in the months of the declining oil prices in 2014. Not only are the drilling companies suffering financial blows, but so are the states governments whom depend greatly on tax revenue from the drilling companies. This affects the state's overall economy because of the decrease in tax revenue they may face budget deficits and might not have enough capital to pay for schools, roads, and other essential public services. Now the North American oil producers are relatively new to the production of oil, meaning that they have more at risk if the price of the commodity they produce declines significantly in price. What about the infamous oil producers of the Middle East, i.e. Saudi Arabia.

The prices of the world's traded commodities rely on all natural changes in supply and demand, just like everything else in the economy. Now, the question many people are asking is, what role is, OPEC playing with the price of oil, as they continue to increase the supply of oil even though the price continues to decline. As the world's leading and most powerful producer of oil they have a significant influence in the price of oil. According to Investopedia, The Organization of Petroleum Exporting Countries (OPEC) was founded in 1960 to coordinate the petroleum policies of its members, and to provide member states with technical and economic aid. OPEC is a cartel that aims to manage the supply of oil in an effort to set the price of oil on the world market, in order to avoid fluctuations that might affect the economies of both producing and purchasing countries. The cartel (OPEC) has been operating as an open cartel for many years, and the U.S. has let them do so. This could be because how essential crude oil is for the U.S. and the overall economy. Therefore we have seen very little action from the U.S. to make and charges against OPEC, and their clear violation of antitrust laws and the European Union's Competition laws. None of these governmental entities have taken initiative to reduce OPEC's control of the oil industry. OPEC and its members have what is called a natural monopoly.

Essentially OPEC is price fixing. They are aware that they can make it through a price decline in oil but are hoping that their North American competitors would survive the economic hardships they are currently facing. This video does a great job of explaining how the sharp decline in oil prices have affected the people in the U.S. We can see how the consumer benefits by paying less at the gas pump. Here we can see the multiplier effect. Since consumers have a couple more dollars in their pocket after saving money at the gas station they are more inclined to go out to dinner more often, shop and take road trips. Which in turn has a positive economic effect on other industries. The video also discusses the industries and people who are experiencing negative economic affects because of the price of oil. We see in Texas how oil producers have seen diminished profits. The video introduces us to a producer of West Texas Intermediate, which is considered "sweet oil." WTI is a commodity that is traded on the New York Mercantile Exchange. The video also shows how the companies who supply the drilling companies with equipment are being hurt as well. Essentially here we see how much of a negative affect monopolies can have on global economics.

Another example of large corporations involved in price manipulation of commodity prices are; HSBC Bank and J.P Morgan Chase & Co. Girard Gibbs LLP, a law firm representing investors against the bulge bracket banks, states that allegedly the banks had violated federal antitrust laws by manipulating the prices of silver futures and option contracts. Beginning in early 2008, HSBC and J.P Morgan reportedly built up extremely large short positions in silver futures and options on the Commodity Exchange Inc. with J.P. Morgan increasing its silver derivative holdings by over $6 billion dollars or 220 million ounces.

The manipulation of silver prices by the two banks is very similar to the way OPEC manipulates the prices of oil. The three entities are major players in their given industry and use their financial power, immense market share, and abundance of resources to significantly increase monetary gains by controlling the prices of commodities. The actions that the two banks were taking had been prevalent since 2008 and have been under investigation by the CTFC, who are tasked with protecting investors from anti-competitive behavior in the commodity trading industry.

How does the manipulation of silver or any commodity for that matter hurt other people? Well first banks are not concerned with the financial losses that investors' commodities will face, especially smaller and individual investors. An article from discusses the negative effects the manipulation of silver had on an individual investor in Connecticut; according to the other lawsuit filed by Brian Beatty, who also traded silver contracts, says he was hurt by J.P. Morgan's alleged anticompetitive acts and market manipulation. Specifically, the suit said Beatty, a Connecticut resident, bought and sold silver contracts on Aug. 14 and Aug. 15, 2008, when the price of silver suffered an 18% drop from $14.86 to $12.23.

The difference with the two cases above is that only the silver price manipulators were punished. J.P Morgan, HSBC, and a couple of other banks have agreed to settlements totaling almost $3.4 billion. On the other hand OPEC will not cut the amount of oil they supply because they know that the North American producers will not be able to continue producing oil at the current prices. Thus severely crippling its smaller competitors in the oil industry.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.