Posted on 06/25/2008 8:49:18 PM PDT by Anti-Bubba182
WASHINGTON — Almost all the economists studying today’s high oil prices think that financial speculators are helping drive up those prices, but hard data is lacking as to whether they’re a factor, and if so, how big.
Michael Greenberger said speculation is a major factor, and he knows a lot about the complex global oil market. He directed trading and markets for the Commodity Futures Trading Commission from 1997 to 1999. That body regulates the trading of contracts for future deliveries of commodities, including crude oil. The contracts, called futures, drive oil prices. Greenberger, a law professor at the University of Maryland, told McClatchy why he thinks financial speculation is driving up prices.
How do speculators drive up oil prices?
Speculators are able to drive up crude oil prices today because they’re allowed to trade in the U.S. in futures markets not overseen by U.S. regulators. Therefore, they are free to dominate these markets by taking huge positions within them. And there is an additional fear that, because of a lack of oversight, they may be engaging in manipulative practices — i.e., wash sales and false reporting that would be barred in a regulated environment.
What is a "wash sale" and how does it work?
That’s a prearranged trade between two or more parties in which there is no economic risk and the sole purpose of which is to give the appearance that the price of a commodity is going higher or lower in a way that does not reflect supply and demand.
Who are these speculators? [snip]
I really cannot answer that with certainty because these unregulated markets are soopaque. Many say that Goldman Sachs & Co. and Morgan Stanley are primary traders on the principal market outside of direct U.S. supervision, the Intercontinental Exchange, otherwise known as ICE....."
(Excerpt) Read more at star-telegram.com ...
OIL PRICES: ‘08′S DEFINING ISSUE
"..But when the stock market slowed down in 2000–2002, outside investors decided to speculate in oil futures.
The new players were institutional investors like corporate and government pension funds, sovereign wealth funds, university endowments and other investors, guided by brokerage firms like Morgan Stanley and Goldman Sachs.
To avoid the CFTC caps, these investors moved their operations to London, setting up the International Commodities Exchange. Now they can buy all the oil futures they want.
Michael W. Masters, of Masters Capital Management, told Congress that the volume of investment in commodities futures soared from $13 billion at the end of 2003 to $260 billion by March of 2008.
After a while, the CFTC rescinded its limits on how much speculators could buy as long as they went through special “swap” desks at the major brokerage houses.
You can buy oil futures for only 5 percent down on margin, a bargain considering the 50 percent margin requirement for stock market equity investments. Because the margin requirement on oil futures rises as the due date approaches, few investors actually end up buying the oil; they just roll over their investments.
So the willingness of sellers to unload their oil futures, and of buyers to acquire them, sets up its own market of supply and demand that has more to do with determining the actual price of oil than even the global demand and supply for the product itself..."
Both articles point to massive positions taken in Oil futures and I think they are driving prices to a degree.
Interesting. Gut feeling has been that it’s the speculators driving the price...this article presents that thought in a clear way.
Is this an old article. It should be.
George Soros?
"..GLENN: So here's the question. How do you see us getting out of -- I mean, did you see that oil was up at, like, $135 today?
STEIN: It was up and then it pulled back. Maybe it's just barely $133. It's got to be abominable. I want to tell you something. I was at dinner last night with a group of energy traders in Houston.
GLENN: Hmmm. You mean like Enron people?
STEIN: Well, there are several of them, not all of them, were ex-Enron guys and they were very smart, sharp guys and they denied they were purposely driving the price up for speculative profits which is like I say a waterfall denying that it flows down. But it's very clear to me that this is, in fact, a speculative bubble. They said to me, "Well, look," they said. We're doing this based -- the price is going up based on the new idea that nobody's ever had before that we're running out of oil. I said, we've been saying we're running out of oil for at least 40 years, maybe 100 years. So that's not a new idea. Maybe it's truer now or closer to true. No, what's new now is a wild speculative mania by the speculators. You're right: In the long run we're going to be in a terrible crisis.
GLENN: So how do we -- when does that bubble burst?
STEIN: Well, I don't know. You never know when bubbles burst. But the Internet bubble lasted about four years and everybody said it's a bubble, it's a bubble, it's a bubble. Then when people said, well, maybe it's not a bubble, that was when it burst. It's got to be a bubble. Nothing has happened to move it. It has moved 25% in 30 days. That's unheard of except for a bubble..."
I didn’t post it.
What is it about Americans they desperately must find some scapegoat to blame for this OTHER then the real culprits. Their Goverments own short sighted Energy Policy.
Speculators ride a trend line. They are an indicator of the problem in the market. The problem in the Market is high demand, flat supply. So the traders are betting that that trend will continue.
No evil wicked “big Business” out to get poor little old you, just the logical out come of 30 years of US Government “Conservation not Consumption” Energy policy.
Fix the supply and demand problem. Either massive increase supply or massive decrease demand. The rest of this reckless demagoguery by politicians about Speculators, Big Oil Price gouging etc etc etc is merely addressing the symptoms of, not the cause of, the problem.
"Show me just what Mohammed brought that was new, and there you will find things only evil and inhuman, such as his command to spread by the sword the faith he preached." - Manuel II Palelologus
What is it about Americans they desperately must find some scapegoat to blame for this OTHER then the real culprits. Their Goverment's own short sighted Energy Policy?
Speculators ride a trend line. They are an indicator of the problem in the market. The problem in the Oil Market is high demand, flat supply. So the traders are betting that that trend will continue.
No evil wicked “big Business” out to get poor little old you, just the logical out come of 30 years of US Government “Conservation not Consumption” Energy policy.
Fix the supply and demand problem. Either massive increase supply or massive decrease demand. The rest of this reckless demagoguery by politicians about Speculators, Big Oil Price gouging etc etc etc is merely addressing the symptoms of, not the cause of, the problem.
I don’t know.
I just don’t believe your theory. Huge demand has not risen in 30 days...yet 25% jump? No way.
There are billions of barrels of oil (according to preliminary seismics) off the Gulf of Guinea, waiting to be drilled. No shortage there.
I think that title deserves the “Most Obvious Statement Of The Day”... A great big DUH!!!!!
It just isn’t so. It’s just a nice conspiracy theory loved by the Rats, so they don’t have to drill!
http://mjperry.blogspot.com/2008/06/crude-oil-futures-volume-and.html
Oil is in tight supply because production has plateaued for several years now, and demand from China and India has been growing. The price has to go up until someone decides they can do without.
It ain’t rocket science folks. Just economics 101. Don’t take my word for it, as Dr. Tom Sowell and he’ll tell you the same thing.
It’s amazing how people want to deny any possibility of speculators causing problems.
Maybe they are one of the speculators themselves making hefty profits....
I don't buy that. The demagoguery is in the soak the oil companies talk. These speculators are not following a trend line, they are making one.
Just wait until the margin calls come in. It should be interesting.
If economics were required in high school, as it should be, we would save our country a lot of unnecessary grief due to public ignorance of obvious facts.
Please educate yourselves.
The columns of Dr. Thomas Sowell are a great place to start.
http://jewishworldreview.com/cols/sowell051308.php3
Sorry. Not only is that the position of the average uneducated democrat and their leaders, but it is wrong.
The trend is your friend.
And investors ride it. “Speculators”=investors in futures.
They play with their own money, not government revenue.
Both articles point to massive positions taken in Oil futures and I think they are driving prices to a degree...
You think? Based upon what?
In a time of rising commodity prices, especially oil prices, basic economic theory says you'd have an explosion of futures activity.
Futures markets in commodities, simply put, trade risk for certainty.
Southwest Airlines hedges up to 70% of their jet fuel usage. That's why they are the only airline that's consistently profitable. Those willing to take the other side of that trade are what you're calling speculators.
Before you see fit to pronounce judgment upon an activity, you should at least know more about it than you learn by reading an article...written by a reporter whose last beat was South America, don't you think?
Is it any wonder that we have so many ignrant politicians, when we have so many freakin' ignorant voters???
It's supply and demand!!!
So Ben Stein was lying in post in the quote in post 5.
I hope Soros has put his fortune behind it. If so he is trapped.
Elections have consequences!
Although I like Ben, and contrary to the opinion of many, he is not some infallible God.
He also believes that the taxes need to be raised on the quote: “rich” because “they can afford it more than others.”
Thats pretty close to “taking from each what they can afford... blah, blah.”
No but I will take what he said as a true recollection of what he heard the speculators said.
“So Ben Stein was lying in post in the quote in post 5.”
Ben Stein was mistaken.
It’s hard to have a bubble in a commodity like oil, because you have to put the oil somewhere. Once the storage tanks are all full, if no one wants that extra barrel of oil that is offered for sale, the price will start to fall.
Once again, oil trading has NOT been surging as the price has been rising. Oil has been rising because of basic supply and demand, and also war risk, which is causing oil users to want to fill up those storage tanks just in case Israel and Iran go to war. Once those storage tanks are full, the price can’t go up any more, and has to fall. Personally I think we are almost there. But unfortunately I don’t have the nerves of a speculator, so I don’t plan to get rich by shorting oil.
I’ll let the one who is more educated speak:
“Michael Greenberger said speculation is a major factor, and he knows a lot about the complex global oil market. He directed trading and markets for the Commodity Futures Trading Commission”
True, but the U.S. has about eight times more automobiles than both those countries have combined, yet the oil price had been pretty stable for years.
So, I have a hard time believing that the demand from a place that has 1/8 the number of autos that we do can double the price of oil in a year's time, particularly when the U.S. demand for oil has been dropping.
This nonsense of blaming speculators for high oil prices betrays a total misunderstanding of economics.
Futures pricing is an *effect*, not a cause. Prices are *caused* by -duh- the intersection of supply and demand. Futures markets are bets based on guesses at future supply and demand.
Its like blaming the Mariner’s crappy season on all the people that have been betting against them.
Its precisely backward.
“can double the price of oil in a year’s time,”
The economic concept you might wish to study is demand elasticity. In short, sometimes it takes a surprisingly large rise in price to convince anyone to do without something they want.
I believe the Socialist Leftists Democrats in Congress have spent their ‘blame the oil companies capital’, thus are now tapping their reserve account to advance their ‘any other excuse to blame upon’ capital. The “Speculators” are just another excuse to divert attention away from themselves.
The reason we have high fuel prices is because we have allowed the usual Marxist suspects access to our Government leadership in Congress. They are the responsible party.
Drill HERE, drill more, add refining capability, make a one size fits all gasoline product, keep the fuel products here in the U.S.A selling the excess only if we have such. Build a Nuclear Electrical infrastructure and return to electrified rail and bus systems as we had back in the early 20th Century.
“So the willingness of sellers to unload their oil futures, and of buyers to acquire them, sets up its own market of supply and demand that has more to do with determining the actual price of oil than even the global demand and supply for the product itself...”
Hasn’t this issue been beaten to death by now?
No.
Speculators may be making a bit of change but they are not the culprits.
The real cluprit is the weak dollar.
This is driven by congressional spending and the FED printing money faster than any wife can spend it. The federal government has not done any thing to strengthen the dollar. This is economic manipulation done by our own government.
Speculators ride a trend line. They are an indicator of the problem in the market. The problem in the Oil Market is high demand, flat supply. So the traders are betting that that trend will continue.
You're PARTIALLY right, ESPECIALLY about the role of the government — but also way off about how TODAY'S price of oil is determined.
I AM a retired futures...made my living at it for 30 years.
There are so many misconceptions about how the speculators REALLY do move the market...especially oil.
First — The most active Oil futures contracts (THE one that controls the actual price for oil TODAY) are NOT bought anticipating the price of oil years in the future — they are bought/sold mostly for the contract that expires in **30 days OR LESS**. Every oil contract is only good for the MONTH it expires.
The one that expires NEXT — within the next 30 days — is called the “front month” and is used to set the price of the spot market all over the world.
So Speculators (for the most part), NOT the oil producers and oil users, set TODAY'S price of oil!!!!!
The fundamental battle between supply and demand - and the value of the US Dollar — today and as expected in the near future, is part of the price In quiet times IS almost all of what determines the price.
However, there is a premium OFTEN created over and above that fundamental supply and demand, currency value, price — and taken advantage of — by the futures traders based on fear and greed (and HEAVY speculative money) that comes into the market.
Second — People are mixing up the TYPE of traders and how they were regulated before Clinton took off the collars on ALL classification of traders. Before, those that actually produce and use OIL (actually deliver or take delivery of the oil) and buy/sell contracts to hedge — to eliminate risk — had no limit on the contracts they could buy/sell...most of the time these hedgers came pretty close (within 10%) of balancing out both the long and short sides the market.
However, when Clinton took off the limits on SPECULATORS, that brought in BIG hedge funds, INVESTMENT BANKS, and *most recently* pension and Commodity Mutual funds — and others — who could move the market — with HUGE CAPITAL — enabling they to apply extreme buying or selling pressure to move the market where they wanted...and usually in the contract that only is good for 30 DAYS — the month that expires within 30 days or the next one out.
One last thought about why it got to be this way...FOLLOW THE MONEY!!
Who in Clinton administration benefited from Clinton taking off the collars on amounts of futures contracts SPECULATORS could trade...like hedge funds and INVESTMENT BANKS? (start with Clinton's Secy. of Treasury) Robert Rubin and Rubin's employers before and after he was in the Clinton Administration (Goldman Sachs and Citi Group) . Why did this move by Clinton take place JUST a couple weeks before Rubin resigned????
(shrug)
“So Ben Stein was lying in post in the quote in post 5.”
No. Ben Stein had dinner with some oil specs and didn’t believe what they said. No more, no less. Ben Stein is no annointed expert on the markets, he just has the ability and forum to be seen in a column he writes. No more, no less. Commodity markets have not been in this type of shortage except for some very unusual situations over the past few decades. When those markets got very tight, prices went berserk. AND THAT IS BOTH DIRECTIONS. Palladium went well over $1000 sometime in the nineties due to a severe shortage based (IIRC) in the USSR. When gold was $260 in 2000, that was a price that was actually below the price of production. Same with $4 silver. You could not then and you can not now dig the rock, crush the rock, process the ore, smelt out the metal, heat up the metal, assay the metal, and then coin or ingotize the metal for those prices. Those prices were below the sum of the actual inputs to make the final product....just like a bologna sandwich for 3 cents.
Oil happens to be one of the largest markets and thus is capable of absorbing tremendous infusion of funds. Oil is also acting as a “truth teller” with regard to the near out-of-control inflation happening in the US...thatbond rates are certainly lying about. AND there are supply demand issues. AND there are speculators. And there is China and India. So there isn’t just one cause.
And WHY do we NEVER EVER HEAR about the very simple and (to me) perfectly obvious notion that Saudi Arabia could well be a large participant in the oil futures market? In fact, I’d be surprised if they were not. Wouldn’t that be in their interest? AREN’T THEY OUR ENEMY? Doesn’t the world send them a $trillion or so year in oil sales? If world oil consumption is 88 MM bbls/day, 88 MM * 135 = 11,880,000,000 = $12 billion daily and are we to think that’s a big wad of money for the Saudis? Pfffft. At 10% of world oil production, that’s a day and half of production. I think our towelhead so-called friends could swing something like that, don’t you?
What is the effect of foreign markets outside US regulation? According to the Morris article in post 1 there has been a huge increase in the volume of investment in commodities futures. There is a lot of money to be followed and a question as to whether it can be followed.
“It’s amazing how people want to deny any possibility of speculators causing problems.”
Because doing so, they feel, knocks capitalism.
But Energy is in no way traded freely.
It’s traded in a very artificial and centrally regulated environment, one that Karl Marx would be proud of.
Competing energy sources, supplies and kinds have been stymied and even stopped.
The other big exchange is ICE, in Europe. ICE was created to be just that — create an mostly NON regulated and nontransparent exchange, where the SAME contract specifications are traded as in the US.
There they do their own trading. HOWEVER, if ICE and the NYMEX get out of balance (one “cheaper” than the other) — then the “arbitrageurs” (those who buy in one market (exchange) and sell at the exact same time in another market (exchange) come in until the price equalizes, making a profit on the spread.
They will trade — (to make it simple) — buying at a $1.00 and selling for $1.02 — getting a small (but sure and instant profit) — They are set up to do this with a click of a mouse and will come in when the spread between 2 markets gets beyond their (very small) trading costs...they will do repeatedly through out the day when ever an imbalance is created. BTW, the US markets are NOT that well regulated!!!!
Thanks for your reply.
I pointed this out six months ago and was told I was full of crap. About time some people wake up—it’s economic rape. Note it was Bubba who eased regulations and margin requirements long time ago. The Clinton Legacy goes on...and on...and on.
One can only hope they lose their asses.
I wonder if Communist China is undergoing a massive decrease in their oil consumption?
...Of course there has been no manipulation of any kind in the market to send prices soaring. Santa Claus, the Easter Bunny and the tooth fairy also want you to have happy dreams tonight too. I also heard that where 90% of the investors were trading futures long over the past 6 months, there now is a majority of short sellers by a 2:1 margin. This should be pushing a sell off with prices dropping....but what? Prices stay at the same level or increase. Something smells rotten in Denmark...but don't worry, Santa Claus and the Easter Bunny love you.
There is no evidence out there whatsoever that will contradict my statement. This is what people aren't aware of and the government, nor the media is not touching the subject as to the realities and the specifics.
I keep ready every day about tankers sitting in the Gulf of Arabia full of oil...heavy sour stuff which creates a shortage of transport to the West.
It's very interesting too the amount of BS red tape involved in the US and our Congress that stymies reopening capped wells that are marginal, but still can produce oil and natural gas. I think I read the number to be an estimated 240,000 wells.
Add to that the crap our own government gives Big Oil when it comes to increasing refining capacity and closing areas for exploration and resource development.
There is much much much more at play here and people are quickly catching on.
There are thousands of acres of land old refineries sit on that can be modernized and produce other petroleum products for US consumption other than gasoline or diesel, however, they are not being utilized.
A new oil refinery has not been built in the United States since 1976. During that time, our gasoline use has increased over 25%. The nation's 149 existing refineries have been running at maximum capacity trying to meet record demand and, as a result, not only do we import oil, we actually have to import 10% of our daily gasoline from refineries overseas.
For the wealthiest, most powerful nation in the world this is a ridiculous situation that will only get worse as our insatiable demand for gasoline keeps growing and refinery capacity falls further behind in the coming years. Just a few new refineries would alleviate the problem and help keep our gas prices lower and steadier.
But getting an oil refinery built is next to impossible, hence the 30-year construction drought. There will always be environmental activists who fight any new proposed refinery, regardless of where it might be located and how environmentally safe it is. And our environmental rules give them the upper hand.
It's about maximizing returns for the feds and the 'investors', not about the environment. The greenies are just being pimped unknowingly for others to gouge the consumer and Congress and politicians are in bed with it all.
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