Blame It on Oil Speculators

The article Oil Summit to Take on Speculators (subscription required) in Saturday's Wall Street Journal mentions that high powered officials are looking at the role of speculators.

 

Officials from around the world, including U.K. Prime Minister Gordon Brown and U.S. Energy Secretary Samuel Bodman, along with the chief executives of major oil companies, will meet Sunday to discuss oil prices, investment, and the role of speculators.

"From a global perspective, we definitely think it's time that financial markets and their regulators take a tough look at how transparent is this market and what needs to be done to improve it," a contributor to the working paper said Saturday, "and if there is a need for regulation, how that regulation should tackle the issues."

Seeking diversification and a hedge against inflation, institutional investors such as pension funds and endowments have invested some of their billions into financial contracts passively following indexes composed of a basket of commodity futures.

...

Governments must help stabilize the oil market, by taking action against speculators, Saudi Arabia's deputy oil minister Prince Abdel Aziz bin Salman was reported as saying, according to remarks re-published from Asharq Al-Awsat newspaper by the state-run Kuwaiti news agency Saturday.

 

The reality is that speculators are not to blame. Typically, when speculators push the price of a good beyond reasonable level, producers begin producing to capture excess profits. However, in this instance, producers are not producing. Moreover, producers are not showing their cards as to what they can or cannot produce. That is, Saudi Arabia does not allow independent assessments of its oil fields. Thus, investors and speculators can only guess.

 

If OPEC had the ability to open the spigots, I believe they would. They would do so to unsettle the backers and supporters of large scale mega projects, such as Alberta oil sands mega projects. If prices were to plummet dramatically for a year or two, investors would think long and hard before spending billions to develop these massive and capital intensive projects.

The oil summit on 22 June 2008 could prove counterproductive. After the jawboning by Saudi Arabia earlier to increase its production by a measly two hundred thousand barrels per day, and after many Asian countries have reduced their fuel subsidies, fuel prices remain stubbornly high. Should the summit produce some important pronouncements with no noticeable effects, then it will be that much more difficult to convince speculators and others that oil remains in plentiful supply and that speculators are to blame for the current mess.

Blaming speculators is easy. Fixing the root cause of high oil prices is not.

Comments

[User 210689:]

I find this whole issue quite intriguing but I know very few established facts. Someone suggested to me that America is it's own primary supplier, next Canada and then Mexico? This shocked me, is this true or just bad information?

2008 Jun 22 05:12 AM

[paa:]

True.

tonto.eia.doe.gov/dnav...

2008 Jun 22 05:59 AM

[John Cordes:]

This article reveals it's own contradiction in the closing sentence: "then it will be that much more difficult to convince speculators and others that oil remains in plentiful supply". To wit; the author is telling us, as many on MSNBC like to, that its not the speculators but a genuine supply issue. If the speculators are not driving the price, why do the "speculators" need convincing. The only thing they need to be convinced of is that their positions are going to go short and they will take the hit. Oil supply is not the driving force, its rumor, and at times even lies. Only then will it turn, and ironically the plunge will be speculative as well with little actual change in the reality of supplies. Perception, momentum, greed, then fear.

2008 Jun 22 08:34 AM

[Mr Bigfoot:]

Although oil appears to be a good hedge against inflation, the low dollar and a low oil supply, the truth is, our oil supply is becoming less of an issue with a surplus possible soon. Inflation is the reason for this. Right now, the main thing driving inflation is high oil prices. As inflation goes higher investors buy more oil driving inflation higher again. Some experts predict this will trigger the world recession. This will result in lower gas consumption and it will free up more gas supplies, perhaps even creating a surplus in my estimation. The US dollar is in a good position to rebound to the top of the heap. Why? Because the EU will drop in value. There's just too much turmoil in the European Union right now. Investors will see the US dollar as the only alternative. I am no expert but even I can see the writing on the wall. Investors are going to loose their shirts on oil just like the recent housing credit crunch. We may be looking at another ENRON only this time on a much bigger scale. Hedge funds that have invested mostly in oil will topple leaving old age pensioners with nothing. The government won't be able to bail them out this time because the cost would be far to great. The CFTC and FSA will probably be too slow to react to the cracks forming in commodities trading so the govenment will finaly step in. By this time of course it will probably be too late and the damage will already be done. You said it yourself Kevin: qoute: "Typically, when speculators push the price of a good beyond reasonable level, producers begin producing to capture excess profits" The reason they don't produce more is because wolrdwide demand is dropping. China just raised it's gas and deisel 18 percent so consumption is dropping right now and it makes no sense to produce more oil in an economic climate we are experiencing now. Do you honestly thiink by raising oil output a few hundred thousand barrels a day that this will have any affect on prices. It would be minimal price change and only phsycologicaI in nature if it did. Take part in our gas price poll at nbtv.ca

2008 Jun 22 09:13 AM

[Michael Levy:]

10 Reasons Why Oil Price Speculation Requires a Change in the Rule of Law by Michael Levy

High oil prices that are governed by the commodity markets are in dire need of common sense law and order. When speculation and detrimental logic and reasoning take central command of human society, the results always turn out to be damaging to the majority, at the abundance of the few. The experts and speculators will argue we need free markets and any interference will take away free trade. Well, in many cases they are correct, however, when it comes to essential commodities of food and energy they are completely out of order. Here are a few reasons why essential commodity markets require new legislation.

1. There has been no shortage of gas at any filling station for the past 10 years yet prices are up 1200% because of futures trading going out more than eight years. Even the Saudi oil minister has recently stated the price of a barrel of oil should be no more than $70.00. Demand from China and India is still far less than that of the USA. The Chinese stock market is down 50% signifying a sharp slow down. This news still is not enough to stop the wild speculators hiking the oil prices.

2. When hurricanes hit Florida many gas stations are closed and there is a real shortage of gas for a few days. However, if a gas station increases its prices they will be prosecuted for price gauging. Therefore, if we take the experts argument that there is a shortage of oil then that still does not give anyone the right to profit from the shortage as this is deemed to be prices gauging. How can the USA governments have double standards and prosecute gas station owners who price gauge and not treat commodity markets in the same manner?

3. Oil is an essential commodity for every day living in the same way as water is an essential commodity. It makes no sense to trade water so why leave oil in the hands of anyone who wants to make a quick buck gambling on prices.

4. Pension and hedge fund managers have invested billions of dollars in oil futures. The futures markets are very volatile, thus, no place for pension funds to risk the money for people who trust them to build future wealth. The fiduciary duty of a pension fund manger is to find reasonable returns with low risk and the commodity markets is not that place.

5. If the price of oil was regulated between $40.00 - $80.00 a barrel, the price could go up and down on supply and demand. This would be fair to everyone, for even when supply was plentiful, the price would not drop below $40.00 which will still give a fair profit to most oil related industries. When oil is in short supply the price would be limited to a ceiling of $80.00 which is more acceptable to world economies.

6. There is a moral issue that greed cannot come before peoples basic needs ... No right-minded, ethical, principled government can allow starvation and financial ruin because of a system of trading that is completely out of control.

7. The price of a barrel of oil effects transport, food supply, industrial production and every part of modern day living. If terrorists wanted to devise a plan to destroy the world. economies what better way than finding a method to allow oil to trade at $140.00 a barrel. Why play a game that makes terrorists and anarchists happy.

8. Goodwill to all people is the credo every democratic country is built upon.$140.00 a barrel oil delivers no goodwill. It only brings hardship and political uneasiness.


9. Noble deeds and fair dealing is the hallmark of success for every truly prosperous person. Since the world is made-up from people, where are the noble deeds and fair dealing in the commodity pits.

10. We are all put on earth to help each other succeed in the pursuit of freedom, liberty and happiness. There is no freedom when people are slaves to greed. There are only liberty takers when oil trades over $80.00 a barrel. And finally financial hardship brings misery and discontent.

The time for change in essential commodity trading is now. To quote a few voices from the past...

“Experience demands that man is the only animal which devours his own kind, for I can apply no milder term to the general prey of the rich on the poor”_Thomas Jefferson

“For greed all nature is too little.”_Seneca

“It is greed to do all the talking but not to want to listen at all” _ Democritus

“He who is greedy is always in want.” _Horace

2008 Jun 22 09:25 AM

[logicalthought:]

One would hope that the kind of anti-Semitic remark posted by "Mad American" would have been removed faster than it was, but as long as it wasn't, I thought I'd cut and paste the names of NYMEX's Board of Directors... So, Mad American (just in case you know how to read), of these 15 guys (names), how many do you think are Jewish? Three?

Richard Schaeffer, Thomas Gordon, James Newsome, Stephen Ardizzone, A. George Gero, Neil Citrone, Frank Siciliano, William Ford, William Maxwell, John McNamara, Howard Gabler, Daniel Rappaport, Dennis Suskind, Melvyn Falis, Robert Steele

2008 Jun 22 09:30 AM

[russ:]

"New york Jews" ??? It seems that the Middle East Oil Ministers have much more impact on price than anyone else. I also assume this lets any New York Gentiles off the blame hook. 'Mad American' (above) is the sad downside of free speech, it lets us hear the willd ravings of idiots.

2008 Jun 22 09:48 AM

[SW Richmond:]

"Should the summit produce some important pronouncements with no noticeable effects, then it will be that much more difficult to convince speculators and others that oil remains in plentiful supply and that speculators are to blame for the current mess."

Best words I've read on SA in quite some time. Efforts to talk down markets will be revealed as sham when the rubber fails to meet the road. Just like Bernanke's laughable threat to hike interest rates.


Michael Levy,

So if $80.00 oil is good, why not set the price at $40.00? I bet people would really like $20.00! Isn't that "fair"? Next we can talk about doctors' salaries and set them somewhere that is "fair", since we all have a right to be healthy, right?

Thanks for the lesson is Socialism. It failed in Russia, remember? Post your mailing address and I'll send you a copy of "Atlas Shrugged".

Maybe we should get the damned government out of the economy entirely, since the facist banking monopoly / military industrial complex obviously isn't working either.

2008 Jun 22 10:30 AM

[Ronmac:]

Michael Levy,

The last thing we need is a reduction in oil prices. We need to conserve, and have needed to for 50 years. High prices are their own cure.

Socialism is just a fancy word for stealing. I know some people in the oil industry who are drilling in the Bakken shale in North Dakota. If through your "wisdom" they were only getting $40-$80 per barrel, they would be losing money. Or are you going to regulate the price of drill pipe, leases, royalties, acidizing services, roughnecks, drilling rigs?
When you take away the incentive of profit to find and produce these oil supplies, you will be walking, not driving.

Watch Venezuela and your friend with similar politics, Hugo Chavez. You are going to see (and are seeing) shortages and massive mis-allocations of resources.

2008 Jun 22 12:50 PM

[Alphameister:]

I say it's time to prosecute the farmers for price gouging and seize all their excess profits!!

2008 Jun 22 07:54 PM

[Phil Anthropy:]

Ask yourselves who benefits from running up oil prices. It is the Fed. Why is that? Because otherwise, interest rates would go up, and that would lower profits for the banks. As long as all our excess dollars are being soaked up in oil and recycled back into our treasury bonds, interest rates remain low and the economy doesn't react to the inflated money supply driven by our surging deficit. Note that the Fed has been strangely reticent on oil prices, but doesn't hesitate to bemoan the credit crunch which the Fed itself caused through a decade of easy money policies. If this country wants laissez-faire capitalism with no regulation, our current situation is one of the consequences, so don't complain about $140/bbl oil.

2008 Jun 23 06:42 AM

[tonykarmen:]

king abdullah of saudi arabia blames SPECULATORS===world bank,imf,geo seros and billion buddies they HATE PRES BUSH and the REPUBLICAN party{highly educated people and well polished}so much that the DUM<DUM citizens blame the PRESIDENT .boycot exxon,luke,citgo,gulf.... public transportation . charge the middle east 150.00 per bush they can afford it .india and china are drilling 50 some miles off key west. some one should tell gore and his dem.dum,dums. anwar has 200 yrs of OIL

2008 Jun 23 07:22 AM