Posted on 01/29/2009 8:56:46 PM PST by Tessared
The sudden crash in oil prices might be the smoking gun that shows speculation, rather than supply and demand, drove the huge run-up in oil futures last year.
Daniel Fine of the New Mexico Institute of Mining and Technology’s Center for Energy Policy told participants at a forum in Albuquerque Jan. 16 that massive, speculative trading by investment banks like Lehman Brothers, hedge funds and others is what drove oil above $140 per barrel.
(Excerpt) Read more at bizjournals.com ...
Daniel Fine of the New Mexico Institute of Mining and Technology’s Center for Energy Policy told participants at a forum in Albuquerque Jan. 16 that massive, speculative trading by investment banks like Lehman Brothers, hedge funds and others is what drove oil above $140 per barrel.
It created a “colossal energy price bubble,” said Fine, a former MIT research associate and contributing editor on natural resources for BusinessWeek.
“Like real estate, the energy bubble was based on excessive, open credit that allowed big investment firms to instantly arrange contracts without putting anything up,” Fine said. “No deposit or letter of credit was needed.”
After Lehman Brothers folded in September, investigators found it held 10,000 oil contracts of 1,000 barrels each, Fine said.
Once speculative borrowing ended, oil prices plummeted to below $35 per barrel, which Fine said can’t be explained by supply and demand.
“At this point, total world demand for crude has fallen just two percent,” Fine said. “U.S. demand since the peak is down less than five percent. I say it’s not supply or demand, it’s fall out of speculation and the relative absence of credit from the financial services industry.”
Bob Gallagher, president of the New Mexico Oil and Gas Association, agreed that speculation played a major role, but said current prices are too low.
“Nearly $150 per barrel was ridiculous, but so is $35 per barrel,” Gallagher said. “We’ve got to get the speculators out and find the fine line between supply and demand. I believe the real price would be between $75 and $80 per barrel.”
Forecasts vary, but Fine said most market analysts expect prices to slowly climb over the next two years to somewhere between $60 and $80 per barrel.
To minimize speculation, Fine called for tighter regulations, such as greater transparency on domestic and foreign commodity exchanges and higher margin requirements for contract deposits.
U.S. Sen. Jeff Bingaman, D-NM, supported such policies last year as chair of the Senate Committee on Energy and Natural Resources.
Bingaman spokesperson Jude McCartin said the senator will introduce new regulatory proposals this year.
“He will soon unveil energy legislation that includes measures to protect against speculation,” McCartin said.
krobinson-avila@bizjournals.com | 348-8302
duh!
that’s what the saudi’s said from the get go,
that u.s. speculators were driving up oil.
I thought everyone knew that, the wall street jerks stole American blind with their leverage markets and then tried to cover it up, with oil speculation and sunk the economy. Now people here want to reward the scum.
It was only when they were called on it that they turned to the bailout lead by Paulson.
It is long time past time to require commodities traders to pay up front, pay transportation and take delivery of their purchases.
So how exactly does trading in futures affect the spot price of oil for current delivery?
Were there any fools out there that didn’t believe the fat cat insiders weren’t intentionally driving up the price of oil/fuel?
“He will soon unveil energy legislation that includes measures to protect against speculation,”
no drilling = no speculation
(hope that’s not overly cynical)
Being the party of family values we need to protect the share holders, corporate masters, and Walll street robber barrons. Because putting the all mighty dollar above out fellow citizens is what makes you a true conservative.
Agree with me or else I’ll call you a socialist for not foreclosing on your fellow Christian brethren.
Did you forget the sarcasm tag?
Let's see; the Saudi’s are part of a Cartel (which would be illegal in most countries) that engages in price fixing (which would be illegal in most countries) by manipulating the production and colluding with other members of the Cartel.
Yeah. They are certainly believable. Not.
Speculators in the US didn't do it. Speculators in the rest of the world didn't do it. The big players were hedgers, not speculators. And the speculators were about equal; long and short.
So, what did it? Manipulated Supply and Demand, combined with a climate of fear.
OPEC’s greatest ally is the Democrat US Congress, which constantly prevents Americans from drilling new oil wells, in and around America.
The day that President Bush signed an Executive Order, removing the Administration's prohibition on new drilling, oil prices stopped rising and started falling. When Congress let their ban expire, oil prices kept falling. This happened prior to the economy tanking, so the economic slowdown was not a player.
Don't fall for the rhetoric about changing the rules for speculators, they provide a useful service to the hedgers, by adding liquidity and reducing bid/ask spreads.
The only people who want to change the rules are the ones who want the government to control the price to their advantage. Government is the problem, not the solution.
“So how exactly does trading in futures affect the spot price of oil for current delivery?”
It doesn’t. Of course.
In the past, there were a good number of the 'free market is never wrong' types who denied speculators were the cause. Haven't seen any make an appearance recently.
Look further and you will see that this speculation fueled the defaults on credit and mortgages. People who could barely afford their mortgages found themselves with no money for gas, electric bills, food, etc. They had to buy gas to get to work, and their financial situation went into meltdown. Banks knowingly lent to these people. They were making big money as people defaulted on houses. That is, they were making big money until the gas prices got out of control and vast numbers of Americans were no longer able to buy that bigger house with the bigger mortgage.
*PING*
yeah, that’s true.
Ping!
There about as rare as a phone booth nowadays.
Yep, and the timing sure was suspect.
The connection between the two was the easy credit that made money available to speculators was also money available to the actual purchasers oil.
Oil was purchased with borrowed money.
Credit dried up and so there was much less money available for oil just as there was less money for speculation.
Now speculators betting on rising prices effectively take money from producers -- they pocket the difference between the spot price and contract price. And the spot price is set by competition among consumers to buy oil and competition between sellers to sell oil.
There's no room for speculators to drive up the spot price since they can't take delivery of the oil.
They have transformed into the pro-bailout and “Socialism for Wall St.” crowd here on FR.
Their motto now is, “Support multi-billion dollar bonuses for Wall St. Robber Barons or else....”
No doubt, there was speculation in real estate.
Yeah, it's been amazing to see all those true believers lose their faith in the free market in such a short period of time, just when the free market was about to reduce their sorry asses to financial ruin.
but...but...but....PEAK OIL!!!!1!!
There was speculation is all sorts of things and it was made possible by easy credit.
The problem with blaming oil speculators for price increases, though, is that they profit or lose money based on the spot price of oil. But they have now power to set that price.
The spot price is set by the actual sellers and the actual consumers of oil. Speculators pocket (if they're lucky/smart) the difference between the spot price and the contract price.
But keep in mind that the easy credit available to all meant that consumers and oil products could buy that oil with borrowed money. No more credit means no more money for the purchasing of oil.
You're exaggerating and you know it.
I notice little blame is placed on the Liberal media, the “green technology” investors and the envirowackos. They were all complicit in the scheme.
And, of course, T. Boonedoggle Pickens.
>> duh!
double duh!
BREAKING NEWS: I’m going to see what’s on TV.
The sport price has speculators also. The spot was over 120. And the contango today is the highest of all time. Higher than last summer.
When the dems reinstate the drilling bans, an do who knows what else to limit or stop drilling, the speculators will see opportunity. If gas prices start going through the roof again with the economy in a spiral, we care all in deep kimchee. Stagflation. Change we can believe in.
As much as he'd like to, introducing legislation to regulate oil more will, IMHO, simply move much of the trading to another country. With a sane fiscal policy, the oil bubble wouldn't have happened.
Here is something I thought you might be interested in.. A video. The Energy Non Crisis
A friend told me about it a week or so ago. The lecture last a little over an hour, but I think it is worth listening to. He adds some politics into the lecture, some of which I don’t agree with, but you can draw your own conclusions.. Its very interesting.
http://video.google.com/videoplay?docid=3340274697167011147
Wish I could remember the names of the FR posters who claimed it wasn’t speculators; I’d ping them to this thread.
There is a vast difference between 'speculation' and 'manipulation'. What the investment banks did -- with, btw, full cooperation from the Regress and such ''dignified'' institutions such as Harvard and Yale, as well as what are rather chucklingly-called ''pension funds'' (not hedge funds, for once) -- was a very deliberate manipulation of price in crude and numerous other commodities.
The Commodity Modernization Act of 2000 gave them permission, the collapse of the tech bubble from March 2000 through 2001 gave them impetus, Jim Rogers' philosophy becoming accepted by 2002 gave them the raison d'etre, and native greed took care of the rest.
The mindless speculator-bashers here, though, simply refuse to acknowledge the vital difference between what specs do (I know this; I **am** a spec) and manipulation. Until such time as they figure out the difference, they're really not worth the time to attempt to inform. As you know perfectly well from our correspondence here, I've disclosed the investment banks' activities at length...yet, somehow, the hardcore basher crowd doesn't seem either to acknowledge the difference, or even care about it.
A very odd attitude, because most of them will be severely affected in future by yet more manipulation...which they will, unwashed mob that they are, doubtless blame again on 'speculation'.
Oh, well. Such is life. Call me an evil speculator -- I really don't care. Trading is about making a profit; everything else is just a sideshow.
FReegards, m'friend!
Your suggestion will remove much liquidity from the commodities market. The commodities market exists to provide stability to buyers and producers. Speculators help provide stability under normal situations. I think the commodity trading rules can be reformed but your proposal would eliminate the entire role of speculators.
Blaming speculators is just a search for a scapegoat. The underlying problem is government policies that restrict energy development. As long as governments continue to restrict energy development, there will be opportunities for commodity speculation.
See my previous post on this thread -- or, if you prefer, see any of several hundred of mine over the past couple of years regarding the run-up in crude and other commodity prices.
That's just what one banking institution was holding on one day when they went belly up.
It's just a sample of what was being held by banks and hedge funds around the globe.
“Let’s see; the Saudi’s are part of a Cartel (which would be illegal in most countries) that engages in price fixing (which would be illegal in most countries) by manipulating the production and colluding with other members of the Cartel.”
The Saudi leaders are doing what’s best for their people, the same as we expect our leaders to do. In their case, they are trying to get the maximum price/profit from a finite resource. If I were a Saudi citizen, I would expect no less.
Of course, if WE actually HAD leaders, ours would also be trying to maximize the value of our resources.
Further, we've attempted to demonstrate to this bunch the critical role that specs play in a futures market, and why they, too, must be offered considerable leverage in order to persuade them to perform their market function.
To no avail, sadly. They don't get it. Sorry to say, but they don't.
However, perhaps you can explain matters so that they actually comprehend how markets work in the real world. I wish you very good luck in this endeavour.
FReegards!
Speaking of Lehman Bros. & oil:
Lehman Brothers: Obama’s Rezko-Auchi conflict of interest
Canadian Free Press ^ | September 17, 2008 | Andrew Walden
http://www.freerepublic.com/focus/f-news/2102875/posts
Wait, I thought it was Dick Cheney!
I don't have the Bloomberg link right now, but here's the Soros whine in FT the other day:
Brilliant summary. The high gas prices really hurt last year.
Soros is NOT happy about Lehman Brother’s bubble popping.
http://www.freerepublic.com/focus/f-news/2174035/posts
“In the past, whenever the financial system came close to a breakdown, the authorities rode to the rescue and prevented it from going over the brink. That is what I expected in 2008 but that is not what happened. On Monday September 15, Lehman Brothers, the US investment bank, was allowed to go into bankruptcy without proper preparation. It was a game-changing event with catastrophic consequences.....”
Weren’t the Saudi’s saying a good target price for oil was 34 bucks a barrel just before the price took off? Now they say 75.
Uh...10,000,000 barrels is , like, 12 hrs of US consumption.
“U.S. demand since the peak is down less than five percent."
That's huge.
This poorly written article tells us nothing except this guy's unsupported opinion.
I'm one. And it still wasn't speculators.
It also wasn't a free market. Yes, the free market is never wrong, by definition. But oil is a manipulated market. OPEC engages in price fixing by controlling production as a cartel. The Democrats in the US Congress also manipulate supply by prohibiting new drilling in and around the US.
It is not a coincidence that on the day President Bush signed an executive order, removing the administration's prohibition on drilling, oil prices stopped rising and started falling. When Congress let their prohibition expire, oil prices kept falling. This happened before the economy tanked, so the economic slowdown wasn't a player in bringing the price down.
The Speculator Boogie Man is nonsense. The big players in the oil market are hedgers, not speculators. It has been documented that during the price spike, the speculative positions were about even; longs and shorts. It was the hedgers who drove the price up. The price spike was due to a manipulated market, combined with fear.
The only people pushing the “Speculators Are Evil” nonsense are the Democrats, who don't want to take credit for the damage they do. And those who want the government to control the oil price for their own gain.
After Lehman Brothers folded in September, investigators found it held 10,000 oil contracts of 1,000 barrels each, Fine said.
Okay, Lehman Brothers held contracts for 10 million barrels of oil. Each barrel was worth around $140 at one point. Ten times 140 = 1400. Lehman Brothers was on the hook for $1.4 billion dollars to cover these contracts. And those contract were dropping like a rock.
My guess is this didn't help their financial situation.
BTW: Were are all those guys that sought to trash me for saying the run up in oil had to be speculation? I was told time and again, speculation doesn't drive the price of oil up. I have the crow right here if anyone wants to step forward.
I’m not a Democrat and you’re full of s—t.
So what do you propose we do? You obviously don’t like the free market, so should we have the government ration it?
FYI...... Stay safe !
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