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22 June 2008

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verc

This hate fest on "speculators" as of late is getting out of control.

Why are oil prices so high? Ask Bernanke. Oil is denominated in dollars, and in case no one has been looking, the dollar isn't doing so great.

People that blame speculators for the price of oil clearly don't understand markets.

If the speculators are all so wrong, and so evil, just take the other side of their trades.

Nicholas Weaver

Actually, you CAN have explanations, based on classic supply and demand, for the very fast runup in prices. [1]

When supply oustrips demand, the price is effectively the marginal price of production: hwo much does the last barrel cost.

But if demand ever exceeds supply, then the price rises to balance supply and demand: how much is a person willing to pay.

If demand is elastic, prices won't rise much (instead, usage will drop).

But demand for oil is VERY inelastic, which means you can get nasty pathologies when supply crunched, including, among other things, non colusive market manipulation (where some suppliers, acting independently, withhold production to increase prices still further, a'la Enron), massive price increases (especially when short term demand is REALLY inelastic, but long term demand is more elastic), etc.


It is of concern for the Saudis etc, however. A good drug dealer doesn't want to price the victims into sobriety and, if demand dropped enough to return to the demand-constrained mode (which could be as little as a few percent, supply is constrained but not by much), price would collapse.


Likewise, there is a lot of technology (solar, wind, nuclear) on the electricity side which has huge capital cost but very low per-watt production cost, so they don't want the competition to build up, because thees competing energy sources, once built, are cheap to keep running. The last thing the saudis want is GigaWatt solar projects in the California desert.


[1] I'm largely in the Krugman/CaluclatedRisk/etc "Speculation can't do (much) to a spot market without storage" camp.

b

The official U.S. standpoint:


US energy chief says 'speculators' not forcing up oil prices

JEDDAH, Saudi Arabia (AFP) - US Energy Secretary Samuel Bodman said on Saturday that speculators were not forcing up global oil prices, which nearly hit 140 dollars per barrel this week.

"There is no evidence that we can find that speculators are driving futures prices," Bodman told a press briefing ahead of Sunday's summit in Jeddah that will bring together consuming and producing nations to address the global energy crisis.

The U.S. is trying to make the world pay to for repairing the balance sheets of its banks.

Got A Watch

The so-called analysis you reference by Engdahl is clueless and misses the point entirely. In trying to prove everything is manipulated, he proves only the depth of his paranoia.

I suppose if you are a firm Marxist, then railing against those "evil speculators" is the easy road to take. If they were shorting oil and drove the price down to $20, would you then cheer them?

I noticed the silence was deafening during the years when the price of oil was falling or stable. It is only when the price rises that all of a sudden the "forces of evil" are to blame.

Either we are in a free market, or not. If it is OK for the price to fall some times, then it has to be OK for the price to rise as well. There is no "one-way" capitalism.

I think many here bring their innate prejudices to a discussion on what is a business transaction - every sale requires a willing buyer at that price.

There are a host of factors now combining in a "perfect storm" for energy and commodities, and it would take many pages to enumerate them all. Perhaps the greatest portion of "blame" should be assigned to incompetent Government in Washington. The policies of the FED in encouraging bubble-blowing, prime example.

The fact is that we passed Peak Oil in 2005, and are now on the back side of the slope. The price will only continue to rise, and supply will shrink. These are the underlying fundamentals.

In fact, everyone in the West is to blame, for building a civilization on cheap easy energy that could not last. Every SUV and Hummer driver. Every consumer who buys cheap plastic (oil) goods from China, or a salad that was trucked 1740 miles to your table. That guy in the mirror.

Simplistic "blame" just proves to me proper analysis was not done. Spend some time reading up on the actual state of the world energy supplies, and you will realize how deep the problem is.

I recommend 'The Oil Drum' as the best source of unbiased info from industry insiders. No superficial blame, just the unpalatable facts.

Nicholas

Engdahl calims that speulators and traders have moved the price of oil far above where it would be on fundamentals of supply and demand. The implication is that in bidding up oil traders are making huge profits.

Take a look at Morgan Stanley's most recent quarterly earnings. Were it not for a gain on the sale of a Spanish brokerage business and its interest in the Barra index business. They lost money on trading. If Morgan Stanley has not made much money taking oil from $60 to $135, why would they be manipulating the price of oil?

The reasons for high oil prices are a tight supply demand situation. a weak dollar, and fear that Iran will disrupt supply if it is attacked.

Curious

ok. so the big guy are start preparing for the big implosion. The Iran war talk start to get serious. (And this is truly dangerous since the global financial system can't take it.)

The minute pentagon gives Israel "friend or foe" electronic key. The entire shebang will collapse. (oil spike, dollar run, large financial house collapsing, major trading pattern change.)

http://www.leap2020.eu/GEAB-N-26-is-available%21-LEAP-E2020-Summer-2008-Alert-July-December-2008-The-world-plunges-into-the-heart-of-the-global_a1800.html

5. Latin America: Difficulties increase but growth remains steady in most parts of the region, Mexico and Argentina in crisis

6. Arab world: Pro-Western regimes go adrift / 60 percent risk of socio-political explosion on Egypt-Morocco axis

7. Iran: 70 percent probability of an attack by October 2008 confirmed

8. Banks/Speculative bubbles: When bubbles collide

Cold War Zoomie

Uncle 'S' on She-Who-Must-Be-Obeyed's side of the family retired from Lehman Brothers. He advised a few years ago that Wall Street is shorting everything to maximize their returns in this cruddy environment.

So, until long-term returns become attractive again, what will be the next bubble if they successfully pop this one?

It will be greatly appreciated if someone could let me know...I want to retire at 55 and those prospects have been dwindling the last 4-5 years!

zanzibar

I suppose Chidambaram is a socialist - I really don't have insight into Indian politics - but so will all the other oil and finance chiefs from the different countries if they agree to price controls. But Chidambaram has a good point - supply & demand have been evenly balanced for couple years.

Speculation I believe is a convenient whipping boy to explain high prices. No doubt it has a role to play but I think the situation is more complex. What role does the Fed and its policy of trashing the value of the USD have? What role does the US deficits have? What role does Cheney's Middle East bellicosity have? What role does perception of lack of swing capacity for light sweet crude have? What role does the perception of increased demand from China and India have? What role does large fuel subsidies in China, India, etc have?

If the cause is just speculation it should be relatively easy to knock prices down a bit - reduce fuel subsidies, increase margin requirements, reduce ME oil disruption perceptions by categorically stating no attacks through the end of this year, and of course, IMO, the big elephant, get the Fed out of the "crony capitalism" Wall Street bail out business and raise rates. Speculators will run for the hills!

Dana Jones

In the news today there is an article regarding this so-called summit with U.S. Energy Secretary Samuel Bodman stating that insufficient production, not speculation is the cause of high oil prices, and practically DEMANDING the Saudis increase production. He claims "There is no evidence that we can find that speculators are driving futures prices.." for oil.
I guess not when its OUR speculators running up the prices. Geesh, is he TRYING to piss off our so-called ally, the Saudis? Who sent this idiot over there anywa, oh, thats right, Georgie did, will we be hearing a "Nice job Sammie" when the SA's get ticked off and decide that it's the U.S. that needs to get its house in order, and not the producing nations increasing production to satisfy their "Most Spoiled Customer"?
God, I can't wait until we see the backs of these clowns.

Marcus

I'm mostly with verc on this issue. I appeal to the authorities that have studied these issues most of their lives, such as:

Michael T. Klare: Anatomy of a Price Surge http://www.theoildrum.com/node/4189

As far as opacity in the market place its my understanding that Saudi Arabia hasn't had outside analysis done on their reserves for quite some time. There are good reasons why such a large oil supplier, in this part of the world, would want people to believe they have move reserves than they actually do--power first comes to mind.

Look at other large suppliers that are post peak, the US, Mexico, Britain, for example and you realize these fields are finite. They may vary by 20-50% in their productive life but not 200-500%.

Oil isn't running out but "easy" clean oil doesn't seem to be keeping pace with demand. This though will change, the big story in three months will be demand destruction, and the price will follow.

Yohan

"If the speculators are all so wrong, and so evil, just take the other side of their trades."

Great idea, I'll just take the billions of dollars at my disposal and do just that, rather than joining the speculators to make a quick buck.

David W.

verc's rant is the ugly Janus head of the investment community that only occasionally shows itself--publicly, people are wooed with shiny brochures, ads and promises galore; privately, they are stupid marks who deserve to have their money taken. Anybody who disagrees with this assertion would likely have you believe that Enron was an isolated incident, a few bad apples, etc.--uh huh.

The shiny utopia of Wall Street bears little resemblance to its reality; free markets are supposed to run on information, transparency and accountability, yet unregulated ICE trading, hedge funds and Fed bailouts tell a much different story.

verc's elitist insider advice is the kicker; cabdrivers, truckers, and the middle and lower classes who are suffering needlessly due to unregulated speculation by insider leeches simply need to call their broker and short oil futures--brilliant!

JohnH

What if all this speculation is totally justified? The question becomes: what are speculators speculating about? What if "those in the know" have been led to believe that Bush will bomb Iran? That event would certainly trigger a dramatic price rise, which could be factored into today's futures pricing.

I have yet to see this explanation explored anywhere, but from where I sit, it looks totally reasonable.

One of the major "unknowns" for the Bush administration is determining how high the price of oil might go in the event of an attack and then, how much damage it might do. If the current speculation addresses both issues to the satisfaction of the Bushies, they might well determine that the damage might not be so bad after all.

In fact, the more dire scenario--from the view of Bush's cronies--would be to not attack Iran, which would lead to the bubble bursting, leaving these beloved cronies holding the bag.

If this scenario is correct, you still have to wonder how well the markets can really price in an attack on Iran, and how much further oil prices might rise, and how much additional damage might be incurred by industrial economies.

J

the label 'speculators' is nothing more than a pc term for 'bookies'.

john in the boro

Oil speculation seems largely a bet on U.S. foreign and economic policies. And the smart money indicates low expectations in both departments. This is especially so in the waning days of the Bush administration.

VietnamVet

Colonel,

The Oil Bubble grabs our attention when filling up. But other unexpected price shocks strike daily when shopping. Your home is worthless when no one will buy it. Flying is an ordeal, Failing Airlines, Failing Government. One can relive a never ending neo-colonial war, all over again.

The unifying theme is the failure of the American Federal Government. The instant the USA has a national transportation policy, establishes a 10 year program of Energy Independence, withdraws from the Middle East and balances the budget; the price of petroleum will plummet.

zanzibar

Worth a read.

Why is oil so high? Pick a View.

Cloned_Poster

Wait a sec, the "ten dolla me luv u long time" is in the gutter v the Euro, why am I paying $8.50 over here for a gallon?

PS: PL, I tried to tip the host via credit card, didn't work, I'll try later.

cletracsteve

I agree with Vietnam Vet.
U.S. economists, U.S. Federal politicians, U.S. Federal Government, U.S. media, U.S. industry and U.S. consumers all operate on the premise that both world resources and American power are infinite. To argue otherwise is to be labelled Un-American, lefty and tree-hugger. I do not care whether the price of oil is manipulated since eventually the manipulation falls apart. What I care about is the strength and resilience of our U.S. society where our fiscal, environmental and societal/social/legal resources are shared and responsibly husbanded.
The majority of Europe is dealing almost aggressively with peak-oil, global-warming, resource contention while all we are interested in is resource exhaustion. (Europe is sharing in our growing xenophobia, though.)
So, instead of all this finger-pointing, instead of listening to these fleeting grandstanders in the Treasury Dept, in POTUS, in the house of Saud,... none of whom have any one's interest at heart other than their own, cannot we not find a leader who will turn this country from one of rampant consumption into one of sustainable production for 'we the people.'
Summary: If it is a 'bubble', it will burst. If it is peak-consumption, then WE need to adapt. I believe we need to start adapting now. We are trailing the world.

William R. Cumming

India's energy policies are even worse than the U.S. Even now Naxalite (sic) party strength grows in over 1/3 of India. India subsidizes energy but fails to understand where that leads. Possible that open challenges to India's government will be led over energy issues, demands for even more subsidies even though destructive in short and long run for India. Just as US politicians don't want to or can't adopt toughminded energy policies even worse for Indian politicians.

isl

For various reasons, insiders I know put the floor at $80 bbl for reserve replacement with costs going up due to a lack of infra structure (guess how many petroleum geologist graduated last year? A few hundred, but thousands are set to retire.) lack of boats, other exploration platforms, etc. If growth slows down in China and India, then supply could catch up in five to ten years. Maybe.

Tim

Looking,looking for a greater fool. Until!

TomB

I have to say I find it a bit odd that while a good number of people here will write with their hair on fire about how Bush and/or the Israelis are intending on attacking Iran, we then also see so much of the sentiment here that no, the fundamentals of the oil business don't account for the current prices.

In essence, isn't this a bit like saying "oh yeah believe me the apocalypse is coming, but damn those who not only agree with me but also then actually act on same"?

Put it this way: Not long ago a few nasty remarks appear to have been all it took to send Pelosi scuttling to pull a pending resolution saying that Bush needs Cong. authorization before he attacks Iran. And then Olmert comes to town just a week or so ago and talks embargo on Iran, which of course is an act of war. And, seemingly obligingly, no less than 90-some Republicans and 70-some Dems in the U.S. House of Representatives promptly co-sponsor H. Con. Res. 362 (a sense of the House resolution that could come up for a vote as early as next week some say), that essentially calls on Bush to organize and institute an embargo and makes no mention even of first getting a U.N. resolution supporting same.

So if your livelihood were on the line just how sanguine would you be about the prospects of calm future sailing over there?

Seems to me you can't have it both ways saying aha, Bush is responsible for introducing extreme uncertainty in the Middle East of a possible conflagration, but then at the same time saying no, those evil oil people really got nothing to be scared about in the future (when their oil contracts are to be filled) and are just simply gouging.

If anything, the current price might give pause to those (like moi) who don't think there will be any attack on Iran by the U.S. or Israel in the near future. Certainly the market seems to think something's in the air.

Cheers

whynot

Good god please let these silly summit's take a nice chunk out of the oil market. I've got cash to put to work and if these fools want to pretend they can make a difference all the better.

Pick one: The price of oil stays high and keeps rising, or the global economy crashes. That's what will lower the price. Not jawboning.

Duncan Kinder

The Nigerian guerrilla group MEND, which has been conducting attacks on Nigerian oil facilities, has declared a unilateral ceasefire.

According to CNN:

A Nigerian rebel movement blamed for an number of recent attacks on the African country's oil industry announced a unilateral truce Sunday after an appeal for negotiations by tribal leaders. Rebels said they attacked the offshore Bonga oil field.

Rebels said they attacked the offshore Bonga oil field.

"Effective 12 midnight on Tuesday, June 24, 2008, the Movement for the Emancipation of the Niger Delta will be observing a unilateral cease-fire in the Niger Delta region of Nigeria until further notice," the rebels said in a statement attributed to Jomo Gbomo, their leader's nom de guerre.

"We are respecting an appeal by the Niger Delta elders to give peace and dialogue another chance."

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