Ray Welch

Incorrect Media Speculation About Those Oil Speculators

The IEA link: omrpublic.iea.org/inde...

Incorrect Media Speculation About Those Oil Speculators

I hear the frustration.

Enron manipulated specific, physical markets--pipelines and electric transmission lines--not a big, general, financial market like oil futures. They physically induced the supply-demand imbalances on which the financial markets piggybacked. But without the underlying physical constraints--artificia... in Enron's case--speculation has nothing to leverage. Actually, Enron's far larger manipulation was in their accounting. They created sham companies to hide bad debt. They weren't speculating--they were breaking the law outright. No one yet has identified any lawbreaking activity under the oil markets. Not to say it's not there or couldn't happen--there's just no evidence.

I take an Occam's razor approach. There's enought rationale for oil prices to go up and down dramatically without imputing conspiracies. On a common sense level, it seems very unlikely that the entire world is going to roll over and buy oil futures, in the absence of credible supply-demand data, just because Goldman Sachs says it's going up. What stopped that from happening before? What about the recent drop--is that speculative, too, led by big bank analysts who called the top? Is that also wrong? But there is physical supply-demand data, and plenty of it. Here's one link from the International Energy Agency (IEA) that projects year-end demand at 88 MM bbls but supply at 87. See the left-hand column.

(Incidently, that's what I meant by "perceived"-- not that it's made up or not real, but that it's in the future, and futures markets are by definition about, well, the future. Markets are anticipatory mechanisms. They're not about whether there's enough oil in storage tanks today, any more than Google at $500 a share is about Google making $100 billion this year.)

No one is entitled to low priced oil. It is finite, and goes to the highest bidder. (Maybe capitalism is a bad thing, but that's another discussion entirely.) As China, India, and Russia all demand more oil to expand industrialization, price pressures will persist. That's why we need to ramp up programs to move away from it as a fuel. It would be nice if we could just find and punish a scapegoat and set the world to rights. But is that the expectation of a mature, intelligent person in a growing, industrializing, and complex world full of competing interests? The reality of demand outstripping supply is, to me, far more disturbing. But it is something we can actually address, if we collectively decide to.

Read the article on the link in my previous post.

Incorrect Media Speculation About Those Oil Speculators

Here's one non-Republican who thinks that blaming speculators for increased commodity prices is like blaming old, warty women for the bubonic plague. U.S. oil prices are high for two reasons: (1) perceived world demand exceeds perceived supply and (2) the U.S. dollar is weak. Neither the Democrats nor the Republicans want to deal with those findamental facts. The speculation about speculation is a distraction, on a par with the chimerical price-reducing power of increased offshore drilling. Both ideas are voodoo. Check out some further thoughts in the August Edition of NG Market Notes at www.navigantconsulting.../ in the article Do Speculators Reflect in Mirrors?