There seems to be a disturbing tendency in the progressive community to blame speculators for most, if not all, of the increase in oil prices. In its most extreme form, the implication seems to be that the supply of oil is virtually limitless, and that only financial manipulation is to blame. Ironically, this mirrors the views of many mainstream economists, who have what is sometimes called a cornucopian view of the world. Julian Simon was the ultimate spokesperson for the idea that technological innovation and unlimited resources would allow for virtually any level of population and consumption.
For instance, writing in Counterpunch, Mike Whitney, who has been one of the best researchers explaining what is really going on in the financial meltdown, declares:
There is no oil shortage, not yet at least. The reason oil has skyrocketed to nearly $140 per barrel is because of rampant speculation. The peak oil doom-sayers are simply confusing the issue. This is not about shortages or scarcity; it's about gaming the system to fatten the bottom line.
(The progressive talk show host Randi Rhodes has been making similar arguments).
Whitney quotes various ministers of oil who echo his argument; meanwhile, oil company spokespersons have been giving mixed messages, and Bush's Secretary of Energy blames supply and demand. Whom to listen to? None of them. Like a group of vultures circling the carcass of the global economy, they each have their own nefarious reasons for saying what they are saying. The next time you hear something about how the increase in the price of oil is caused by speculation, consider several counter-arguments:
First, up until now, every time there has been an oil spike in the past, the oil producers have turned on the spigot in an effort to push the price of oil down. Why would they want to do that, even though a higher price would increase their profits? Because they learned from the experiences of the 1970s when oil became scarce: People became serious about alternative energy and oil-free lifestyles. "Never again!" was their cry; like drug dealers keeping the price of their product low in order to make it easy for their clients to become addicted, the oil producers were careful to make everybody "happy." Thus we have the phenomenon of the SUV and the exurb. And now that the U.S. is completely addicted, a doubling and quadrupling of gas prices has led to only a few percentage points of lower gasoline consumption.
Second, as opposed to cornucopianism, in the real world there are limits to growth, as the title of the book put it. This is because we live in an ecosystem; the economy is embedded within several ecosystems. All ecosystems have limits on their resources. That's why the end of the era of cheap oil, or peak oil, is an ecological problem, just as much as pollution and global warming are ecological problems -- which oil obviously affects as well. Oil was a bad idea to begin with, and it's a bad idea now -- basing an economy on any nonrenewable resource is long-term folly.
Third, we simply don't know how much speculation has to do with the run-up in price. On the other hand, there is plenty of data that show that we have a severe supply problem -- check out the articles on The Oil Drum and Energy Bulletin, or the writings or videos of Matt Simmons or Richard Heinberg. The proponents of the speculation theory never explain why this behavior is happening now. The financial system is in the process of self-destructing as a result of the housing meltdown, so it's hard to see how they could be driving this problem. Many people in the peak oil community have had to explain, for years now, why their prediction of expensive oil was not coming true -- now that it finally is, maybe they should be given some credence.
Third, people should not be concentrating on the short-term reasons for the increase in oil; in the long-term, it is clear that we need to transform the society so that it is oil-free. A post-petroleum society is a positive progressive goal. Sure, it would help if American oil companies were nationalized, so that the country as a whole, like the other oil producing nations, would get back some of the expense of using oil; but in general oil has been used and is now used to prop up repressive regimes and avoid the hard task of industrializing a country, and our nonnationalized companies work hard to prevent sustainable environmental policies from being enacted.
Speculation and various factors such as war and disaster certainly have something to do with the rise in the price of oil. But the main reason, and the important one in the long-term, is that the world can no longer pump more and more oil out of the Earth. In order to save our economies and our climate, we need to pursue the long-term goal of a fossil-fuel free society.
Top 25 reasons to give a damn about climate change
Oil: enough energy to melt glaciers!
Cash for Clunkers brought us ... more clunkers!
Comments
View as Flat
gmobus Posted 3:43 am
26 Jun 2008
Of course, I suspect that the Saudis are blowing smoke.
George
George Mobus,
Associate Professor, Institute of Technology,
University of Washington Tacoma,
and Professional Student for Life
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gmobus Posted 3:48 am
26 Jun 2008
George
George Mobus,
Associate Professor, Institute of Technology,
University of Washington Tacoma,
and Professional Student for Life
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Jon Rynn Posted 3:51 am
26 Jun 2008
But yes, George, for many analysts they have a hammer and everything is a nail.
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hapa Posted 4:13 am
26 Jun 2008
also we ARE taking this harder than other places who didn't monkey with their money as a DIY refinancing scheme
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Sean Casten Posted 4:29 am
26 Jun 2008
Call me a contrarian, but I find myself looking at energy trends and being frustrated that no one notes the obvious. Historic fundamentals that used to predict energy prices no longer hold. Where they have broken down, the universal trend is towards higher prices.
Why isn't this a speculative bubble? It certainly was when dot coms were being traded based on multiples of revenue rather than earnings, since the latter were negative. It certainly was when housing prices got way out of whack with annual salaries. Why shouldn't it also hold when you can no longer predict natural gas prices from demand/reserve ratios, nor rely on the historic linkages between natural gas and #6 oil?
Don't get me wrong - I agree with the long-term fundamental drivers, and that we need to break our addiction. But the idea that markets suddenly awoke to peak oil in the last 5 years strikes me as wishful thinking. A far more coherent explanation (and one that people who ought to know better seem to miss - witness much of the recent writing on speculation in The Economist, of all places) is simply one of liquidity.
When the dot-com bubble popped, there was brief run up in fuel cell stocks, as all that liquidity was running out of pets.com and needed a place to land. Plug Power, Fuel Cell Energy, Ballard... all briefly became darlings of the investment community, out of all proportion to their intrinsic value. That settled down once liquidity found a more responsible home.
In the last 5 years, we've seen a basically flat Dow, a collapse in the mortgage-backed securities market and a booming market in commodities of all flavors, from soybeans to natural gas. Why shouldn't we assume that at least some the run of liquidity away from equities and CDOs has been towards these commodities, contributing to their inflation beyond fundamentally-justifiable levels?
Again, I'm not arguing that we diminish externalities, nor that a morally-righteous person might define "fundamental" in way that goes beyond reserve ratios. Indeed, I think the days of $3 gas, $20 oil and 6 cent electricity are all well behind us. But I find it very hard to believe that the current price spikes are not in part due to speculative considerations that will eventually come at least part way back to earth. Let's be careful not to ascribe too much of this to things we really want to be true (like peak oil or limits to growth), lest we discredit those ideas that do have core intellectual merit.
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sunflower Posted 4:46 am
26 Jun 2008
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hapa Posted 5:06 am
26 Jun 2008
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GreyFlcn Posted 5:41 am
26 Jun 2008
Due largely to Republican lead deficit budget spending, and the gigantic trade deficit.
And they aren't talking about it.
http://usinfo.state.gov/products/pubs/economy-in-brief/im ...
http://greyfalcon.net/canadadollar.png
_
Similarly they aren't taking the "The OffShore/ANWR drilling wouldn't help us in the long-term or short-term. That it would be a gimmick all around."
http://seekingalpha.com/article/72651-oil-would-be-65-if- ...
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Sean Casten Posted 5:47 am
26 Jun 2008
Does that prove my theory is right? Of course not. But it ought to at least give us pause before we start stipulating that the run up must be because of environmental issues, peak oil or anything else that comports with things we would like to be true.
To be fair, you could argue that I'm simply replacing one "if A then B" causality for another. But bear in mind that broadly speaking, all commodity markets are out of whack - not just oil, and indeed, not just energy. Copper, wheat... you name it, they are all through the roof. That broad definition of "B" as inclusive of a wide commodity run up is the one I'm looking at - and really not explained if this is only about peak oil, Iraq, limits to growth or some other purely energy-focused cause.
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Jon Rynn Posted 6:09 am
26 Jun 2008
Considering the stupidity of the speculation in dot com and housing bubbles, perhaps it would be naive to think that people investing in commodities would do any better, but there may be a certain amount of insight into at least some of the buying going on.
In particular, you might look at this from a different perspective -- maybe the commodity and oil prices have been undervalued for a long time, but everyone has been so busy sticking their heads in the sand that it went on for so long that the "catch-up" to a more rational pricing scheme has been rather fast. For a number of years, since I have been reading a lot of peak oil material, it has seemed that the oil traders were out of their minds to not think that there would be a huge price runup. Well, maybe they just finally caught hold of reality.
I also wonder how much liquidity there really is -- I thought that the entire financial system is having liquidity problems. Now, because of the lopsided nature of the global division of wealth, there is a stratum of people (and nations) who are so rich that they "don't know what to do with their money", and so they are pumping it into commodities. They have also been busy buying the US.
As Krugman keeps pointing out, if speculation was that big of a problem, people would be keeping the commodities off of the market, which they don't seem to be doing. As George pointed out above, financial types tend to look for financial explanations for everything. If we truly are in a period of tightening supply, then financial insight is not going to be very helpful. In fact, most economists won't be very helpful either, since they operate under the assumption, as Robert Solow once said, that "resources don't matter", because you can always substitute...something.
I would trust people like Lester Brown more than most economists, because for years he has tried to understand the material basis of the civilization, how much there is that can support how many people. That's more ecosystems thinking, it seems to me.
Now, should the Enron loophole be closed? absolutely. Should they reregulate oil trading? Fine. But I don't think that oil at $140 a barrel is off the mark. I don't know what the normal demand/supply models would say, but when you have rising demand and no rise in supply, I assume that you get all kinds of strange things going on, like out-of-control price volatility.
So, at the very least, if you've got the speculation theory in your head, it's important, I think, to have the limits to growth theory as a constant source of comparison.
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tidal Posted 6:19 am
26 Jun 2008
There is nothing to say that those historic linkages were ever a sound heuristic for valuing various commodities. We may be shifting to a regime where, say, we "value" resources relative to the "lifetime" scarcity of their "stocks", rather than the metrics that focus on the dynamics of their current "flows".
Something else to note. In most historic financial bubbles, part of the "solution" was bringing on more actual supply - railroads, houses, pets.com, etc., until the supply can actually sop up most demand, pricking the speculative aspect of the bubble and sending prices lower. In the case of certain exhaustible resources, we won't be able to get this type of response. Even in past commodity bubbles, we were able to do some of that (boost supply) in the interim - and always assumed that "limits" were well into the future. If the current reality is that any supply boosts are simply temporary "fixes" to an increasingly-recognized long-term supply crunch, then we may not see the same resolution to the price rises.
Of course, one should never over/underestimate the madness-of-crowds phenomenon, but I think this is going to be a little more tricky than pointing to "everything must be out of whack because historically whenever the XYZ indicator got to level Q, we've had a pullback in the price of commodity A." It might be that various indicators XYZ are now as relevant as the number of horses is to present-day US economic output.
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hapa Posted 6:21 am
26 Jun 2008
My point is that in a world without peak oil, Iraq wars or climate policy but with a similar set of external financial circumstances - namely, the outrush of liquidity from other markets looking for a home - we would see something like the behavior we've seen today.
that's a tough scenario. without bubble-based financial policy, would we have driven ourselves to the brink? would our tippy-top people in charge have wanted war? was saddam's crime the non-existent weapons threat or the real euro-pricing threat?
how many times in the last months have i had to read some MBA-on-acid drooling about how economic growth will eliminate the cost of mitigating global warming by year X?
running all the needles into the red to get double-double-digit profits. trying to prove to people we were still the shiznit.
this is inseparable material.
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hapa Posted 6:27 am
26 Jun 2008
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Sean Casten Posted 6:32 am
26 Jun 2008
Eventually of course, these chickens come home to roost. The guy who buys a future contract on oil at $80/bbl and flips it a week later for $90 makes money. And if there is speculative pressure on oil, it will encourage more of those "greater fool" buys. This is exactly what happened in the dot com bubble, or in the recent property bubble. If you get in & get out early enough you make a lot of money. But if you hold past the peak, you lose.
Again, I'm not suggesting we should behave as if resources are constrained. I'm simply saying that we shouldn't draw too firm a linkage between long term drivers in energy supply and pricing driven by short-term trading.
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Sean Casten Posted 6:52 am
26 Jun 2008
An example: the natural gas pricing has historically indexed fairly closely to the demand/reserve ratio. If demand is low relative to reserves, price falls for simple supply/demand reasons. If it's high, the reverse. As you look back historically, that's been a very good predictor of gas price, for the simple reason that as soon as you deviate from those ratios, someone's got an economic incentive on the margin to sell or hold back to wait for higher prices. Without getting into any discussion of what the long-term supply of natural gas is, one has to wonder why someone sitting in Lousiana right now with excess supply in an underground salt dome wouldn't be sending it out to market if demand is high & the price is up. And when this happens, it tends to drive prices down. These are the fundamentals that are out of whack.
Lifetime issues, stock scarcity, etc. are all valid - but they don't explain why that dude in Louisiana isn't behaving in his narrow economic rational interests. Unless, that is, the clearing price is being bid up by a lot of future swaps before the gas ever comes to market.
I don't mean to be overly argumentative here, because I really don't have data to fully support my theory. But I don't have any to refute it either, and I get nervous whenever we start connecting dots on tenuous logical threads. As I've said many times, economics is a wonderful tool to explain what happened, and a lousy one to predict what will. When the dust settles on current commodity volatility, we'll figure out exactly what happened. But until then, let's not get too dogmatic about what we think to be true - especially when that dogma fits so comfortably into our personal worldviews. The human tendency towards confirmation bias is always tempting, and rarely useful.
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Sean Casten Posted 6:59 am
26 Jun 2008
(An aside: when a company goes public, the money they get is the number of shares times the initial share price. Any future movement in the price of the stock affects the future cost of equity, but doesn't create any more money for the founders. So when a stock goes out and the next day is trading much higher it implicitly means that the initial pricing put together by the bank was way out of kilter, giving money to bankers and traders that rightfully belonged to the founders who created that value.)
Back to my example: so Netscape was way underpriced. Within a week, it was through the roof. Suddenly, huge amounts of liquidity came into the market looking for the next Netscape, creating massive over-valuations from the madness of the crowd.
Was the dot-com bubble possible without Netscape's IPO? Maybe, maybe not. But the fundamental driver of the dotcom bubble is more appropriately laid at the doorstep of speculative frenzy, rather than Netscape's investment bankers.
That's my point about Iraq. Maybe the run up happens without it. But once a speculative frenzy starts, it takes on a life of it's own that is largely separated from the initial triggering event.
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gmobus Posted 7:05 am
26 Jun 2008
It would be a fun graduate student project to try to build a model that could filter the noise and tell us what the signal is for real.
George
George Mobus,
Associate Professor, Institute of Technology,
University of Washington Tacoma,
and Professional Student for Life
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amazingdrx Posted 7:30 am
26 Jun 2008
Oil is soaring because the really efficient, very free, and fair markets have accurately reflected the shortage of oil in the current price.
Many market experts and politicians who held commitee hearings think differently. they are starting to think that the price of oil is twice where it would be without market manipulation by ungegulated inside (as in those who own markets trading in them) trading.
Three good video clips on the debate.
Gina Sanchez, California Endowment
http://www.cnbc.com/id/15840232?video=779174815&play= ...
Senator Cantwell
http://www.cnbc.com/id/15840232?video=778278561&play= ...
Olbermann on the congressional hearings.
http://www.youtube.com/watch?v=AdRbuUQNcxw
Close the enron loophole, re-regulate trading, and push gas back to the three dollar range? Maybe get the economy back on track to address energy policy reform and healthcare. That's the path I would like to see us take.
Would three dollar gas bring back gas guzzling? I doubt it. The warning is taking effect in consumer habits.
http://amazngdrx.blogharbor.com/blog
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amazingdrx Posted 7:34 am
26 Jun 2008
And it is starving millions with soaring food prices.
http://amazngdrx.blogharbor.com/blog
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Bud Dingler Posted 7:54 am
26 Jun 2008
http://www.forbes.com/finance/2008/06/23/crude-biderman-m ...
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Jon Rynn Posted 7:59 am
26 Jun 2008
Perhaps the Chinese finally started lifting subsidies on oil because they realize that their demand is a big part of the problem -- but definitely not the long-run problem, which is supply (so no, I do not blame the Chinese for everything, just as I don't blame the Arabs for everything -- there's another article on Counterpunch which is actually more nuanced than Whitney's, but blames the rise in oil price partly on racism).
And we're also not addressing another issue -- is $140/barrel really so high? Considering how long oil was cheap -- considering how the dollar should be tanking -- considering that world production of oil has basically been flat for about three years, and exports are peaking. Remember, it's not the total world production of oil that's important, it's the total exports that are sold on world markets that's important. The price may really be reasonable. In fact, I think if I had extra money (I don't) I'd consider a contract for $140 for a few years from now to be a bargain. So it's even possible that oil right now is too cheap.
Now as Amazin' points out, this is clobbering most people, and maybe that's why I wanted to specifically target progressives in this post (McCain and company also blame speculation, by the way). Because progressives need to step up, be straight that oil is never going to be cheap again, and push hard for trains, EV's, what have you, walkable communities, etc. Don't get stuck on the speculation. Sure, try to find out how to increase margin requiremtnets, etc. but keep your eyes on the prize -- an oil-free society.
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Jon Rynn Posted 8:10 am
26 Jun 2008
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Sean Casten Posted 8:17 am
26 Jun 2008
First the question:
Oil is going up quickly. How much would you pay to lock in the current price? If I offered you a contract that provided you with all your oil needs for the next 10 years at $120/bbl, would you take it?
That at core is the speculator's dilemma - not whether or not I can buy a barrel today and sell it for more tomorrow, but whether I'm willing to bet on a longer-term price horizon. This may sound awfully financially sophisticated, but it shows up in simpler ways as well: suppose I wanted to sell you a more efficient water heater, but wanted to get paid based on the MMBtu savings under a long-term contract locked into todays $13/MMBtu rates. Would you take that?
From where I sit, the answer to both questions is no, because I find it hard to believe that the current prices will stay this high. And I don't think I'm exceptional (at least in that regard!) So are industrials yet going to make long-term capital bets based on the energy savings of today's fuel prices? I'm not sure - but it's not a slam dunk by any means.
Now the example:
Let's say I buy a barrel of oil on a futures market today for October delivery. I don't have the oil - I just have a contract for October delivery. For the sake of argument, let's say I've paid $100 for that barrel. That looks pretty valuable, no? After all, oil prices keep going up, north of $140, and I'm sitting on a contract for $100. So I go back to the futures market and sell it to someone else for $145. She thinks she got a great deal because she thinks that given today's prices and the price trajectory, that's going to be cheaper than the value of oil come October. Meanwhile, I made $45. But we've also incrementally put additional upward pressure on the price of oil by adding a $145 price that averaged into yesterday's $140 number.
Add a couple more cycles on that path and you've got a bubble that is fully disconnected from any actual stocks or delivery - but whoever ends up holding that contract come October now will take delivery at whatever the price is at that time. And the person who wants to own that contract in October is likely to be someone who actually uses oil, rather than someone who's simply trying to flip a contract. The upshot being that they are paying a price that has been bid up for reasons that are largely divorced from fundamentals.
To be sure, this can go the other way as well, and I don't mean to suggest that speculation = rampant price rises. Indeed, this trading of futures contracts generally helps damp out volatility - but it can periodically get out of hand.
Hopefully this answers your question?
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amazingdrx Posted 8:28 am
26 Jun 2008
Gina Sanchez states the the demand created by speculation is almost equal to the demand created by China. The idea with futures trading is that it serves as insurance against price shocks.
It allows entities like hedge funds to take on risk, thus hedging the risk to society as a whole, and make a fair profit for assuming that risk.
What would be a fair price for consumers top pay in extra gas and other commodity prices, in return for this "insurance"? 10%? certainly not double the price of the underlying commodities.
Re-regulation and moderation of this thievery must take place. let's getr these markets back in line, honest, fair, and fairly free again. This insider manipulation has gone way too far.
http://amazngdrx.blogharbor.com/blog
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Sean Casten Posted 8:30 am
26 Jun 2008
Consider: Suppose the US was going to take delivery on January 1 for $1 trillion worth of oil provided they can buy at $100/bbl. Now suppose that on 12/31 there is a single transaction for 1 barrel at $105/bbl. We wake up the next morning and all of a sudden find that our price is up by 5%, costing us $50 billion based on one lousy $105 deal.
This is a silly, and far too simplified example. But the point is that the price is a function of trading volumes that include both physical deliveries and paper trades, the latter of which can see price swings even at modest volumes.
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Sean Casten Posted 8:36 am
26 Jun 2008
In other words, if this is being driven by speculation, it's not a call for regulatory oversight - some speculator is going end losing a massive amount of money. They always do.
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amazingdrx Posted 8:47 am
26 Jun 2008
Sen Cantwell, gina Sanchez, the market experts who testified in fron of the congressional commitee, and many other market observors are a hard group to beat back with explanations of idealized free market trading.
What they are claiming is that these markets are being manipulated by the entities that own and control them. Traders who have total information of what everyone in the market is doing are trading.
It was like enron traders shuttibng down a power plant and causing a brownout to boost electricy prices 1000%, then take advantage of that event. If one can cause an event that raises or lowers prices and know that before hand, would that be a fair or a free market? no way.
that is what the enron loophole created in electronic markets. And now every commodity trades that way. inflation is the result. Economy killing inflation.
What I'm saying is God bless free and fair markets. So let's re-regulate and get those markets back.
http://amazngdrx.blogharbor.com/blog
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Jon Rynn Posted 9:01 am
26 Jun 2008
In other words, the only people that have been predicting the current price are the peak-oilers. That doesn't mean they are right, but they do have a very good, simple explanation: supply is plateauing, soon to go down.
So, Sean, I don't know why you would think that oil should go down significantly -- not that it wouldn't, noone seems to know. I'm a little shocked, although not too surprised, that speculation is taking such a huge amount of attention, among certain segments of the political spectrum, left and right. I'm not naive enough to think that a price rise would have everyone talking about the ghawar and canterell oil fields and Hubbert's logistic equations, but it would have been nice if -- along with speculation and other "above ground" factors, even including demand -- there was some discussion of supply problems.
I'll quote from Krugman:I think that conservative belief that the market is always right is colliding with another, even more deeply held belief -- that there are no limits, except for those imposed by tree-huggers.The idea that oil might really be getting hard to find, in spite of the magic of capitalism, is just unacceptable; so they insist that it's all craziness in the futures markets.
I appreciate the lessons on futures, at one point I even knew the difference between a call and a put, but there is another scary possibility, and I don't know what this would do to the speculation problem: What if it becomes clear, as the supply goes down, that oil will always be increasing in price, forever? What kind of speculative orgy will that feed? And is that what's happening now, to some extent? The perfect speculative storm: the price can't go down. Ouch! Now, it could still go up too much; but it may be that part of what we are seeing is the realization, among some subset of the investor classes, that we actually have a situation like this.
And that would certainly make it worse, but it would still not show that anywhere near half of the price is speculation. I think the markets are too large perhaps even for the financial system, and too much of it is locked in with nation-to-nation contracts, which is another reason that what's left over will be picked over in a frenzy. The whole thing is fubar, if you ask me -- but it's fubar now because the supply of oil is peaking.
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hapa Posted 9:10 am
26 Jun 2008
keeping in mind that chinese "sovereign wealth" aka "dollar reserves" aka "the balance of trade with the USA" is a participant in the speculation. so "demand created by china" is in both realms of energy and ROI.
@sean:
In other words, if this is being driven by speculation, it's not a call for regulatory oversight - some speculator is going end losing a massive amount of money. They always do.
always comes to this, right? always presenting markets as level fields for all participants, when the people with good information get bailed out with tax money and so take the risk anyway, and the small investors with limited info and no safety net get arthur andersen's and moody's solemn vow that these are good, solid investments, kick the tires for yourself if you don't believe me, think about what you'll be missing if you don't buy now, hallelujah.
and nobody ever leverages anything. it's always cash on the barrel.
real people, real businesses, are getting smoked on this. i'm pleased that the airlines are having trouble -- karma for lobbying fast rail to death -- but for the rest, i lost money -- not betting money, ordinary money -- to enron. my mother lost money to the S&Ls: savings. not a bet. several friends are "under water."
you walk into a bank that's secretly engaged in junk trading and what the hell responsibility do you hold for that, as a customer? we're all speculators now, though. just some of us have tougher bankruptcy outcomes.
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amazingdrx Posted 9:31 am
26 Jun 2008
Anyway, yeah I saw the Krugster on Olbermann last night. I usually agree with him, but I wonder if he even saw or read about the congressional testimony on the effect of the enron loophole? I doubt it.
Olbermann did not broach the topic with him, he however volunteered the explanation that (manipulated) markets weren't to blame.
Implying, as I have seen other environmentalists contend, that futures trading is accy=urately reflecting the reality of supply and demand, in oil, and by extension all other soaring, inflation driving commodity prices.
http://amazngdrx.blogharbor.com/blog
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Sean Casten Posted 10:07 am
26 Jun 2008
Don't make too much of Senate testimony. Trust me - I've testified before Congress myself. The decision is made before the testimony. The testimony is just the theater. Are there interesting things that come up there? Yeah, sometimes - but they're of the theatrical variety. Not a place to study economic theory necessarily.
What, praytell are these events that market actors are creating to drive up oil prices?
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Wolverine Posted 10:29 am
26 Jun 2008
Peak oil, which we're either in or quickly approaching, does NOT mean lack of oil. It means that the oil that now exists is getting harder to find and extract, so it costs more money to do so. Because oil is traded on markets, even the perception that we're in a peak oil situation is enough to raise prices. Whether one identifies speculation or peak oil as the cause of the increased price is a function of one's point of view.
The main reason for increased oil prices in the U.S. is that oil is priced in Euros and the U.S. dollar has been in severe decline. Gasoline and diesel prices in Europe have increased, but nowhere near as much as in the U.S. Furthermore, the dollar has been declining because of the immoral and illegal Iraq War, to which the OPEC countries are opposed and which they will not subsidize.
Dr. Michael Hudson, President of The Institute for the Study of Long-Term Economic Trends (ISLET), a Wall Street Financial Analyst, Distinguished Research Professor of Economics at the University of Missouri, Kansas City and author, has a good take on all this. See his website at http://www.michael-hudson.com if you're interested in more. Dr. Hudson was the oil industry specialist in balance of payments for Chase Manhattan and worked for Continental Oil.
And Dr. Hudson has more bad news for those of you who don't like high gasoline prices: he says that the equilibrium price for gasoline in the U.S. (whatever that means, any economists out there?) is $16/gallon, which will be reached in three years if the dollar continues to decline and the U.S. attacks Iran as it has been threatening. This almost makes me support these wars! I said "almost."
3. This is a little off topic, but for all of you who've been advocating offshore drilling, even with reservations and caveats, you've been had. More oil production will have ABSOLUTELY NO EFFECT on oil prices. Every oil refinery is currently operating at capacity and there is no more shipping capacity. In fact, shipping rates are rapidly rising due to more demand and a shortage of ships.
OK, this is my only post on this. None of this has anything to do with the natural environment, so I'm only marginally interested.
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Sean Casten Posted 11:13 am
26 Jun 2008
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Des Emery Posted 11:44 am
26 Jun 2008
Another point -- remember, when we're talking about "oil" we're not just talking "gasoline" but every bit of plastic in our lives, an invaluable, cheap (heretofore) base product in almost everything, including vehicles like cars, trucks, and SUVs.
I respect Sean Casten's opinions. Except his seeming defense of the status quo in relation to the stock market. A simple regulation that mandates any purchaser to retain "ownership" of purchased stock, current or future, for a set period of time, three months (the usual 'quarter' term for reportage) or six months, or whatever, as a minimum, would result in a slowdown of the volatility of the marketplace, a volatility that is the basis for the gambling that is the hallmark of the practice now. And it would re-assert the supremacy of the individual over the cold rule of the Marketplace.
Des Emery
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amazingdrx Posted 2:28 pm
26 Jun 2008
Martha Stewart ring any bells? Hmm, maybe not.
http://amazngdrx.blogharbor.com/blog
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amazingdrx Posted 2:39 pm
26 Jun 2008
The Hunt brother's attempt to corner the world silver market. Sound familiar?
http://amazngdrx.blogharbor.com/blog
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JMG Posted 3:35 am
27 Jun 2008
People can be in denial all they want, but the bottom line is that Russia (#1 producer) has peaked, that the Saudis (#2 producer) are pumping flat out and they keep dangling some magical extra barrels in front of economists' eyes to persuade people that they have extra barrels a while longer, because they lose a big chunk of power the instant the world realizes that, like the Texas RR Commission before them, they no longer have the ability to drown a competitor (and thus they no longer can set the price of oil). The US (#3 producer) peaked long ago and it only served to make us more addicted. Mexico is crashing, Canada has peaked and is shifting onto tar sands, Indonesia had to leave OPEC because it wasn't an oil exporter any more, etc. etc. The big speculation going on right now is all the people speculating about speculating.
There's 336 pints of oil in a barrel. We use 1000 barrels a second now, and China and India are still building millions of brand new first cars a year (as is the US). Presumably those aren't museum pieces; people will want to drive those vehicles. I don't care how good the mileage, when someone goes from using public transit/bikes/
walking to personal motor transport, their oil consumption goes up. Oil is priced a lot closer to its intrinsic value (as a doer-of-work) at $1 a pint ($336/bbl) than it is at the $0.1 per pint ($36/bbl) that some people seem to think is the "right price."
The 5% Project
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Jon Rynn Posted 3:45 am
27 Jun 2008
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amazingdrx Posted 4:00 am
27 Jun 2008
The information will persist on the rim, long after this whole rotten hedge fund corruption has been flushed. Hehey.
History is repeating itself, trading corruption crisis after crisis. Those who learn from history are doomed to watch others repeat it.
We are getting tired of this broken record.
http://amazngdrx.blogharbor.com/blog John Schneider, Northern Wisconsin
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Jon Rynn Posted 4:05 am
27 Jun 2008
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JMG Posted 4:18 am
27 Jun 2008
http://www.theoildrum.com/node/4179
P.S. Wouldn't a small Tobin tax on speculative trading (whether in currency or commodities) be smarter? We could probably fund huge solar installations with a tiny 0.25% tax on all speculative trading (i.e., all currency trading and all commodity trading where the buyer does not take physical delivery).
The 5% Project
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Jon Rynn Posted 4:44 am
27 Jun 2008
Notice how even Krugman (and certainly Kunstler), and others, use theoildrum.com as their source of data? Amazing example of the power of the web.
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Biodiversivist Posted 6:13 am
27 Jun 2008
In the end, it all comes down to biodiversity. Poison Darts--Protecting the biodiversity of our world
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amazingdrx Posted 2:35 pm
27 Jun 2008
A hedge fund manager says to a prospective client, "I have made 1000% on oil futures in the last 2 months."
The client invests with the fund. He tells his friends. He makes money. His friends invest too.
The hedge fund buys futures, along with 100 other hedge funds. A buuble is created. Commercial traders who didn't see the bubble coming get burned.
Hedge funds take over the market as other traders get out. Investment funds put money into hedge funds to protect themselves from the effect of rising oil prices. The hedge funds use that money to further inflate the bubble. Small coordinated deflations of the bubble along the way, using market manipulation through insider information enhance the profits.
As hedge funds corner the oil market everyone in the know jumps onboard. Politicians, dentists, their cousins and so forth.
No one wants to kill the goose that is laying golden eggs.
The economy begins to tank, finally someone sees the scam for what it is. politicians are forced to make noises about regulation, but only give lipservice to real re-regulation, namjely closing the enron loophole.
Sound familiar? Substitute Ponzi. Does that help?
http://amazngdrx.blogharbor.com/blog John Schneider, Northern Wisconsin
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amazingdrx Posted 2:50 pm
27 Jun 2008
Establish free and fair markets through not only national regulation, but international treaty. If gas is sold for 25 cents per gallon in a country and that gives them a trade advantage, find a way to account for that in terms of international markets.
Negotiate trade agreements that foster free and fair markets where people buy and sell their resources, products, and labor in return for a decent standard of living.
Do business without war.
Regulate markets so that insiders cannot manipulate them to their own advantage at the expense of the people who actually own everything that is being traded. Then if the price doesn't come down, fine. Maybe it will stabilize.
Now repeat this across all markets. Free and fair markets, it's a good start to a much better world.
http://amazngdrx.blogharbor.com/blog John Schneider, Northern Wisconsin
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JackEllis Posted 1:06 am
28 Jun 2008
At the moment, oil production capability is roughly balanced with oil consumption. Production from easily exploitable fields is declining, perhaps at a faster rate than production is increasing from new fields that are more difficult and more expensive to exploit. The lack of spare production capability has much more to do with the current price of oil than speculation.
Regarding the Enron loophole, US regulators can do whatever they wish but oil is a worldwide commodity that's traded on multiple exchanges and in several over-the-counter markets. Even if we could shut down oil trading at NYMEX and the Intercontinental Exchange (US venues), oil trades in London on what used to be the International Petroleum Exchange as well as on an exchange in Singapore. Those markets would be pleased to see the US government shut down their US-based competition. Moreover, speculators eventually have to either take delivery of oil or liquidate their positions. If there really is a bubble, we'll see a price crash.
There are some reasonable ways to curb speculation if, in fact, it's the problem. One is to raise margin requirements. Another is to raise interest rates, which will happen soon enough. Both increase the cost of buying and holding futures contracts. An outright curb on speculation, however, would be a disaster that would harm many industrial users. For example, to the extent an airline lays on hedges to protect itself from swings in the price of oil, a speculator is probably on the other side of the deal hoping prices will drop rather than rise.
Conspiracy theorists who think there are parallels between attempts to corner the market in silver, the current oil price runup, and California's electricity crisis are missing some essential differences. The Hunts took delivery of silver and it was practical for them to store relatively large quantities. The same cannot be said with oil. Worldwide consumption is around 30 billion barrels. Worldwide storage capacity is no more than perhaps 2 billion barrels. The US working stockpile of around 300 million barrels (excluding the SPR) is about a 15 day supply. In California, the energy crisis had many causes, including exceptionally low hydro runoff that limited the supply of imported electricity upon which California is heavily dependent, poor policymaking (no long-term contracts), and new limits on NOx pollution that drove up the prices for emissions credits.
Finally, whoever noted that Senator Cantwell is a "market expert" is apparently mistaken. I could find nothing in her work history or academic background to support this assertion. However, she did serve as vice president of marketing for RealNetworks for a time. I submit that expertise in marketing does not translate into expertise in markets, and in fact, Senator Cantwell appears to have an anti-market bias.
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amazingdrx Posted 1:48 am
28 Jun 2008
That's clear. In fact re-regulating US trading will actually push oil and other commodity prices up further as totally unregulated trading offshore takes over the markets. The US, the largest consumer of commodities like oil, has no power to effect world markets. The NYMEX will close if re-regulation is attempted.
Hedge funds weren't responsible for the mortgage crisis and since electricity markets in California were re-regulated California has had more frequent blackouts and electricity is 50 cents per kwh. Their economy was destroyed by re-regulation. Mobs of enraged consumers roam the streets.
And of course, unless one takes physical ownership of a commodity there is no way to corner futures markets in that commodity.
Great analysis, you really know a lot more about this than the Senator and the traders who testified at that congressional hearing. We are all certainly willing to take your expert opinion on this matter, and let unregulated insider market manipulation continue as usual.
Thanks for this clarificatiopn, that sets my mind at ease. Wheeew.
http://amazngdrx.blogharbor.com/blog John Schneider, Northern Wisconsin
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Jon Rynn Posted 3:28 am
28 Jun 2008
Jack, thanks for the info, however, I have to disagree with you about shale and even the tar sands. Both have very low Energy Returned on Energy Invested, which means you're using so much natural gas, or even coal, to get the oil out that it's basically a wash, energy-wise. On top of which, the carbon emissions are near double for shale, tar sands, and coal to liquids. Tar sands are alleged to have 100's of billions of barrels, but that's like saying the I have a cup of coffee even though I just dumped it into the sand. Even if the respective environments of Canada and the Western US were destroyed to get the stuff -- and considering the amount of water needed for both processes, in a time of worries about water, the technical feasability of getting the oil is not clear -- the resulting gasoline would be much more expensive than it is now. I suggest perusing theoildrum.com for articles on these subjects.
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amazingdrx Posted 3:46 am
28 Jun 2008
When all that capital soaked up by futures trading is returned to investment in renewable/conservation manufacturing and installation, I want to sell my shares to those frenzied with greed. Just before the bubble bursts. Hehey.
Re-regulation in some form is inevitable, but will it be serious and seriously enforced, and negotiated in global markets?
Is divestment of holdings in oil futures trading hedge funds already underway in anticipation of re-regulation? That would be an indicator that insiders are getting the word from friends in DC. We'll see.
http://amazngdrx.blogharbor.com/blog John Schneider, Northern Wisconsin
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JMG Posted 11:12 am
28 Jun 2008
The 5% Project
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amazingdrx Posted 4:28 pm
28 Jun 2008
That may be, but the blurrinness is in the eye of the beholder.
I am able to separate the images. Oil, along with other fossil fuels, is helping to kill our climate.
It isn't speculation that is spiking commodity prices like oil, corn, fertilizer, and so forth. It is manipulated markets, using trading tricks like the enron loophole. Speculation, futures trading, stock shorting, options trading are all fine, if markets are properly regulated.
the only blurriness here is equating speculative trading with market manipulation. One is good, the other very bad. Insider manipulation negates the protective "hedging" effect of futures trading in commodities. It hands outsize profits to inside players and robs from consumers and honest traders alike.
Retore free and fair speculation, re-regulate national and international markets. Close the enron loophole, that would be a good start.
http://amazngdrx.blogharbor.com/blog John Schneider, Northern Wisconsin
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Colin Wright Posted 4:32 pm
28 Jun 2008
But I wonder how many doubters will be swayed? I suppose the point of the piece wasn't to persuade people that peak oil is real, and perhaps it may encourage a few do to the independent research necessary to satisfy curiosity. But it is healthy to be skeptical of broad sweeping claims and the article didn't provide much in the way of data and evidence.
Another point. The author makes much of how words like "oil speculation" define a "frame". Rightly so. But what kind of frame does the author offer for a response to peak oil? One of "collapse" (see last sentence above, for instance). That could happen. But the system could respond in unforeseen ways. Peak oil could be a blessing in many ways, both socially and ecologically. Maybe we can come up with healthier ways of living for ourselves and the planet? Or maybe I'm just an optimist? Faced with the prospect of a descent into barbarism, people could respond with an increase in civilized behavior. We just don't know, which is why I'm wary of the catastrophe framing of peak oil
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Jon Rynn Posted 4:34 pm
28 Jun 2008
However, I must say that I (nor anyone else, I don't think) didn't think that speculation would be the first line of defense against confronting the awful truth, and we don't know what the next psychological barrier will be.
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Jon Rynn Posted 4:40 pm
28 Jun 2008
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amazingdrx Posted 5:12 pm
28 Jun 2008
Market manipulation. Speculative trading. Fighting GHG climate change. Separate things.
Market manipulation that creates soaring commodity prices, is not a necessary and sufficent condition for energy revolution.
In fact the inflation that results is robbing us of the capirtal and economic vigor to address climate change effectively.
Would you buy a new, high mileage car if your job was at risk? or keep your old car?
Would you invest in solar panels, knowing you migfht have to sell your house and move to get another job if yours dissapears?
Will banks lend money for solar and geo heat exchange in a recession?
And if voters think we are applauding high oil prices for eco reasons to such an extent that we ignore market corruption, will that win their votes? No, it will be seen as part of that "eco-gloating" phenomenon.
http://amazngdrx.blogharbor.com/blog John Schneider, Northern Wisconsin
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amazingdrx Posted 5:16 pm
28 Jun 2008
Resist the tendency to celebrate the pain at the pump.
http://amazngdrx.blogharbor.com/blog John Schneider, Northern Wisconsin
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Jon Rynn Posted 2:31 am
29 Jun 2008
As for the problem of getting capital, exactly. It's even worse in a way, because the dollar is actually much higher than it would be if oil was not traded for dollars, and if the Chinese, etc. were not propping it up in a bizarre attempt to maintain the status quo. then our dollars wouldn't buy the machinery we need from abroad to rebuild the economy, unless, of course, god forbid, we actually built it ourselves, although our capacity to do that has been steadily declining for decades.
So if we need capital, we should 1) shift from cars, planes and trucks as fast as possible, 2) get capital out of the military budget, 3) out of higher corporate taxes, 4) out of higher marginal tax rates (pre-Reagan) and 5) cut subsidies. Then I think we'd have plenty of capital.
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amazingdrx Posted 2:59 am
29 Jun 2008
Sending capital offshore to buy oil is a dead end.
I just saw that the average gas price has risen $1.10 in the past year. Nearly 10 cents per month. How long can this keep going before the economy grinds to a halt, or near halt, depression?
Inflation is deadly, stagflation is even worse. Especially with the fed foolishly lowering to 2% to bail out investment "banks". They have no where to go but back up. The emergency economic insurance policy of fed lowering is exhausted.
We have no where to go except into renewable/conservation energy policy. I think we can scare up the capital to do it. Literally scare it up.
10 cents per month gas price rise, going exponential? Electricity, natural gas, fertilizer, food all following along into exponential price rise because of underlying energy inflation? Very frightening. For every economic entity from the family unit to the pension fund.
Can we beat this disaster back? Yes we can! We need Obama now, like we needed Teddy Roosevelt (who regulated oil monopolies) and FDR (who kept spirits up during the great depression).
The science will convince him of the right course. We finally have studies that expose fuel farming, clean coal, and nuclear power as dead ends.
The "disinformation voters" (foxnews, limboob fans), along with the low information voters, haven't realized what is happening to us or why it is happening yet. They must be won over to energy/ag policy reform with gentle reason. Elite lecturing will drive them back to the no-nothing McBush strategery.
http://amazngdrx.blogharbor.com/blog John Schneider, Northern Wisconsin
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