If you think $135 oil is a speculative bubble, that the only basis for current prices is want of a pin, here's a plan. If you're right, there's a market failure. Those with access to physical oil are accommodating the bubble for some reason, when they could, should in theory, sell forward in quantity and insist upon delivery, forcing speculators who cannot accept physical oil to close their positions at desperation prices. Note you don't have to overwhelm all the specs. Prices are set at the margin. You just have to sell with intent to deliver contracts representing somewhat more than demand for actual delivery to force oil off a cliff and crush the specs like bugs. If private arbitrageurs won't do this — perhaps those who can, don't, because they benefit more from high headline oil prices than they lose from foregoing a one-time arb — then perhaps government should step in.
The US Strategic Petroleum Reserve could sell $135 oil forward in very large quantities, and refuse to close its contracts prior to delivery.
If you are right, and oil is an ordinary speculative bubble, then prices will fall sharply, and the petroleum reserve will be able to recover all the oil it sold cheaply, turning a profit for taxpayers.
But, if you are wrong, and oil prices are due to either current fundamentals or informed speculation on future supply and demand, then players interested in consuming or storing the product will step in as prices begin to fall and start buying. Prices would fall a little, but the drop would be transient, and the petroleum reserve would take a loss when it eventually repurchases to replenish.
It'd be a gamble. But if you think this is a bubble, a quick Federal pricking would be far less damaging public policy than curtailing unleveraged speculation. If you're not so sure it's a bubble, if you think it's possible that current or future supply and demand justify current prices, then you should definitely not be banning speculators, who are doing the good work dissuading us from squandering what is precious. If you think current prices are a monetary phenomenon, that selling oil forward trades a valuable commodity for depreciating paper, then you don't think this is a bubble at all, and limiting speculation is just a way of preventing would-be speculators from evading an inflation tax and spreading disquieting news.
I don't know whether current oil prices is a speculative bubble or not. Maybe, maybe not. Maybe the best way to find out is with the help of a nice long pin.
This article has 14 comments:
Goldman has ruled that this WILL be a short term spike. Goldman wants this to spike with their long position, then to plummet with their future short position.
Volatility should be great for Goldman.
Paulson and the FED should give them more money...
author: ok so let's say it is a bubble, the spr releases oil, but oil hoarders know that the spr has to restock soon for which it will buy a lot of WTI type oil, because that's what's mostly in the spr (not the heavy stuff for which discounts have just been increased as demand for the lesser grades is subdued). oil hoarders will hold out and sell when the spr purchases push the price up again, possibly to new peaks.
Why not make speculation next to impossible. Just make delivery mandatory. Nobody buys unless they can take delivery. Nobody sells unless they can supply (excape clause for Force majeure )
Would that not defeat the risk sharing aspects of commodity trading, you bet, but if this is just a bubble, than the risk management aspects are now way out of control, and the phenomena is destine to again occur
Additionally, kick out the Democrats in Congress, this November, and elect Republicans who are determined to "Drill now, Drill here!" and watch oil start to tumble, quickly. If the Repubs are smart (unlikely but nice to think that an elected official has intelligence and vision), they will declare a national emergency in energy and pursue hydrogen power. With the Purdue U. process of hydrogen from water on demand and the advancements in fuel cell tech, we could be free of all fossil fuels, nuclear, wind, and solar within 3 to 5 years. That's, at least, twice as fast as “Drill here, Drill now” can deliver. This is achievable if the politicians can cure themselves of their lust for bribes from Big Oil. Right!
Hydrogen is not a source of energy, it is only a vector and not a very good one. Hydrogen is extremely dangerous. Its only advantage is that fuel cells can convert it to electricity without polluting. Hydrogen is a dopy distraction from the real solutions which are conservation, wind, solar, nuclear, waves and geothermal.
The oil under US soil is just the next tier of the SPR. I suggest we leave it there until we really need it.
Transocean RIG more than $50,000,000 insider shares sold. $0 buy.
Schlumberger SLB more than $45,000,000 insider shares sold. $0 buy.
Exxon XOM more than $40,000,000 insider shares sold. $0 buy.
Halliburton HAL more than $22,000,000 insider shares sold. $0 buy.
Occidental OXY more than $20,000,000 insider shares sold. $0 buy.
Conoco Phillips COP more than $14,000,000 insider shares sold. $0 buy.
Apache APA more than $13,000,000 insider shares sold. $0 buy.
XTO Energy XTO more than $1,000,000 insider shares sold. $0 buy.
BZP more than $700,000 insider shares sold. $0 buy.
What gives? Don’t these CEO’s and VP’s want to make money like the rest of us?
;-)
RCC
I don't know if it is that way all of the US, but something seems to be fishy here ......
1. Do not allow anyone to buy any commodities futures contract on margin.
2. Mandate that anyone buying a commodities futures contract must take delivery and if you sell a commodities futures contract you must own the commodity.
It would stop speculators from cheating the public by driving up commodity prices. Only the users and producers would be involved and us consumers would benefit.
Congress could do this...and Michael Greenberger at the Univ. of Md. school of law also has some good ideas to stop the speculation going on.