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22 June 2008

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Clifford Kiracofe

Fairy tales (from so-called socialists and capitalists) about abstract "markets" and "economic models" notwithstanding:

Speculative activity involves financial transactions. Such transactions as undertaken by institutions such as hedge funds, banks, etc. can be observed and traced. People execute these transactions and they, and their places of business, can be traced and tracked. This is a matter of economic and financial intelligence collection and analysis.

We do this in counterterrorism and in counternarcotics work. Sophisticated high tech forensic capabilities are available to deal with "financial crimes."

Glance over the US Department of Treasury FinCen website for an orientation to this area:
http://www.fincen.gov/

Its mission: "FinCEN’s mission is to enhance U.S. national security, deter and detect criminal activity, and safeguard financial systems from abuse by promoting transparency in the U.S. and international financial systems."

There are national security issues here involving our national economic wellbeing. It is not just about networks of 20 and 30 something traders with grams of coke up their noses working for some "offshore" cosmopolitan gnomes and their allies and business partners in the US government.


News item from the conference:

``The transparency and regulation of
financial markets should be improved through measures to capture
more data on index fund activity and to examine cross-exchange
interactions in the crude market,'' the statement said, according
to AFP.

londanium

TomB

That is, indeed, a possibility - but it would require an accompanying accumulation of crude oil inventories to be substantive; at present, there's a good deal of crude oil inventory shedding going on if the EIA/IEA is to be believed.

Of course, it's also possible that Mr. Market is telling us, among other things, that if we want lower oil prices then the US will have to get off its high geopolitical horse and accept that it's no longer feasible to dictate preconditions before cher Condi will sit across the table from the Iranians.

Got A Watch

"Jeddah Summit fails to end oil price uncertainty"
http://www.ameinfo.com/161328.html

"The hastily-convened summit on the global oil price situation, held in Jeddah on Sunday, failed to lessen global markets' anxieties over the continuing increase in the price of oil. Despite being well attended the meeting left leading Opec member nations at odds over how to deal with the situation.

the two facets to the oil price debate. The US and the UK, among others, are desperate for Opec to raise output, hoping that this will calm market fears and allow prices to settle.

The major producers, on the other hand, place the blame for the soaring prices on speculators, saying that simply increasing output will have no effect - it is the markets which need to be controlled.

The meeting ended with no new announcement by delegates. The official Saudi confirmation of a 200,000 bpd increase was swallowed by the news that renewed attacks by Nigerian rebels had forced the closure of pipelines in the country's delta region.

As though to prove this, the price of crude oil rose above $136 a barrel, close to last week's high mark.

The increase was accentuated by Venezuela, Algeria, Iran and Qatar all saying that they would not raise production, on the grounds that the global supply was enough to meet market demands.

Libya went so far as to announce that it would consider reducing its own production in response to the Saudi increase.

With major oil companies forced to cut down Nigerian production, increased tensions between Israel and Iran, and no common agreement on what the next step for global economies in response to the crisis could be, the price of oil looks set to continue rising in the short and medium term.

When asked if he thought that prices looked likely to fall following the meeting, Opec President Chakib Khelil summed his feelings up with one succinct phrase: 'I don't think so.' "

Neither do I.

Spot Crude Oil, as at 10:32AM EDT Mon June 23 = $136.67 +1.31 +0.97%. One year forward price prediction = $177.67

http://www.oil-price.net/

TomB

In response to a post of mine essentially suggesting that we're not seeing ... "undue gouging" (for want of a better term because, after all, speculation goes on all the time with any number of commodities without gouging) but instead simply the market's collective judgment about the future supply of oil given the tensions in the ME, londanium wrote:

"That is, indeed, a possibility–but would require an accompanying accumulation of crude oil inventories [except that] there's a good deal of [] inventory shredding going on...."

Interesting, but I'm a little confused about what you're saying because if inventories are down doesn't that *support* the idea that traders are just that much more concerned about the future? (And that it's therefore even *more* likely that the current prices are indeed simply a reflection of their uneasy collective judgment about same?)

But then there's that "but" in your sentence, so I'm confused.

(And if you are indeed saying that there is a lot of undue gouging going on and it's not just the market, then where and how do you see it as not working/being subverted? Given that it's the producers in Jeddah trying to get the prices down (to their more usually desired, admittedly "artificial" cartelized price), it doesn't seem to be them, so how's this being done exactly? I see a lot of people just blaming "speculation" generally, but I sure ain't seeing any descriptions of just how exactly this is supposedly working—although of course that's not to say that it ain't. But without at least some explanation and evidence I don't see why it isn't just exactly what one would expect given especially the uncertainties that exist in the ME.)

Cheers,

Cieran

The laws of economics apply in the present case -- they just get a bit muddy because there are many factors in play simultaneously (break out the multivariable calculus!), and because several of these factors conspire to create a perfect storm for price hikes.

The main problem is the lack of alternatives to light sweet crude. McCain wants to build dozens of new nuclear power plants, but crude supplies and nuclear electricity supplies are almost completely uncoupled in the marketplace (the latter provides base load electrical generating capacity, the former provides liquid fuels for transportation, primarily for motor vehicles and for aircraft, including the military).

So until we start fueling everything from B-2 bombers to family SUV's with electricity, all the nuclear power in the world won't help reduce U.S. demand for crude oil.

The lack of accessible alternatives drives down the elasticity of demand for crude (think "monopoly" for the general idea), while the tight supply drives up the price. And since the relationship between demand and price is nearly vertical (i.e., small increases in demand produce very large increases in price), increasing aggregate demand at the global scale yields both high prices, and an obvious incentive to speculate.

The answer, as is always the case in such economic circumstances, lies in developing alternatives to increasing use of crude oil, including the ultimate fall-back alternative of demand destruction (which we're beginning to see now). A good passenger rail system, hybrid vehicles (especially plug-in versions), better land-use planning to encourage alternatives to driving, reining in the profligate use of fuels by the military.. all of these things will help greatly in removing the windfall profits from speculation, and in reducing demand to the point where we don't see people at the margins (both in the U.S. and abroad) being forced to choose between gasoline and food.

Solving the problem of world energy use is going to be really hard, but fixing what's wrong with the current mess isn't -- it doesn't require rocket science.

It just takes leadership, and not of the kind you get from oily men like Bush and Cheney.

Duncan Kinder

The Nigerian story remains open. Despite MEND's announcing a unilateral ceasefire, Nigerian oil workers now are going out on strike.

LAGOS (Reuters) — Nigeria’s senior oil workers’ union began strike action at the energy giant Chevron on Monday but said it had not yet shut down any production, pending further talks with the government.

The timing of all this is, of course, very interesting.


arbogast

Supply of oil will remain constant and then fall gradually.

Demand will plummet.

Prices will go down.

If you don't have a job, you can't buy much gasoline.

Sounds simplistic. Ask the thousands being laid off every day. They'll tell you exactly how simple it is.

m savoca

i agree fundamental are involved
but
just look at the ratio between consumption and oil futures contracts
this year, running at over 5 to 1

http://blogs.reuters.com/globalinvesting/2008/06/06/growth-in-oil-futures-outpaces-oil-consumption-2/

Jose

Just an interesting download from the NeoNutties which may explain why the markets are going crazy:

http://www.washingtoninstitute.org/templateC04.php?CID=292

David W.

Since we're talking about oil, can we revisit some previously held assumptions? I'm interested to hear reactions about the new Iraqi oil deal, especially from those (ahem, cough, PL) who have maintained the Iraq invasion wasn't really about oil:

http://www.nytimes.com/2008/06/19/world/middleeast/19iraq.html

http://www.tomdispatch.com/post/174947/finally_the_oil_

Tom hits on an interesting point, that these are 'no bid' contracts, which are in vogue with only one well-known political group; Is this really happenstance?

Clifford Kiracofe

Anent speculators and perpetrators of fraud and assorted financial crimes:

Current FBI investigation into mortgage scams.
"Some of the leading investment banks on Wall Street and their senior executives are now thought to be in the frame over the collapse in the market for mortgage-backed securities which has left them with hundreds of billions of dollars in losses."
http://news.bbc.co.uk/2/hi/business/7470381.stm

Remember the salad oil swindle?
http://en.wikipedia.org/wiki/Salad_oil_scandal

How about Mike Milken and the junk bonds?
http://en.wikipedia.org/wiki/Michael_Milken

And Tiny Tim tiptoeing through the tulips?
http://www.tinytim.org/

DanaJ

"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." JohnH
But the NeoKlowns don't realize that the current prices will just be the 'base' from which prices will rise if there is a strike against Iran. Can you say $300/bbl oil? Can you say $9.00/gl gas? Can you say Economic Train wreck? The economy will hit the wall real hard.
"So until we start fueling everything from B-2 bombers to family SUV's with electricity, all the nuclear power in the world won't help reduce U.S. demand for crude oil." Cieran: Nuke power would help, but not in the short term because it will take about 10 years to build the plants. The reason is because we have many oil & LNG fired power plants in this country (I don't have the exact figures at hand, sorry), altho I think that if they were all replaced with nukes it would only make a slight difference in
our oil consumption, which is mainly for transportation. Conserving is really the only option, but "Not MY gas guzzler!"

whynot

Here is a a basic summary about speculators and what they are not doing from the Institute For Energy Research:

http://www.instituteforenergyresearch.org/wp-content/uploads/2008/06/oil_speculators.pdf

jamzo

i was checking wikipedia as part of background reading in trying to understand yesterday's doubling of the price of iron ore and i encountered this paragraph

"Iron ore reserves at present seem quite vast, but some are starting to suggest that the maths of continual exponential increase in consumption can even make this resource seem quite finite. For instance, Lester Brown of the Worldwatch Institute has suggested iron ore could run out within 64 years based on an extremely conservative extrapolation of 2% growth per year.[3]"

i think lester brown's phrase "maths of continual exponential increase in consumption can even make this resource seem quite finite" may well be the "phrase of an emerging era"

the current and fantasized chinese economy is a behemoth

this change in the world order encourages the use of "maths of continual exponential increase in consumption can even make this resource seem quite finite.."


londanium

TomB

If you cast your mind back a couple of weeks, you may dimly recall that Friday when Shaul Mofaz helped move the market by $10 simply by moving his lips ( I hope his friends in Teheran - he's of Iranian extraction - or Russia, placed a nice gratuity in a Swiss bank account ).

If I'm not mistaken, this past Friday we had the "revelations" of Israeli attack planning, and a $5 bump. Two points make a line, but a third would suggest a pattern - I wonder what we'll see this Friday, when market sentiment is generally skittish about going into the weekend short? It wouldn't surprise me if the Bush administration spent the past two weekends fielding irate calls from some of their business buddies demanding that they at least tell the Israelis to STFU.

I'm not in the undue gouging/speculative excess camp, but markets do, quite legitimately, price in forward risk, and the fear premium is currently on a rising trend. The markets are posing a complex geopolitical question about the willingness of the US political class to do the necessary ( ie talk ) with Teheran - in return they're offering a softening of prices as the fear premium deflates.

That said, commercial users are shedding inventory, not out of choice, but for financial reasons - at prevailing price levels their finance and insurance costs are skyrocketing, their working capital is under pressure ( and that's during a credit crunch as well ), and there is the generalised dread of holding excess stock that can fall in value quite rapidly, so they have to run as leanly as possible, which means that any excess inventory is being worked out of the system.

I think that there are a multiplicity of factors in play at present, and that the markets are simply reflecting an increasing degree of chaos.

Arun

For W.R. Cumming:
http://www.livemint.com/2008/03/13010555/Net-cost-of-India8217s-petr.html

"In rupees, the share of petroleum crude and products in total exports has risen to 17.64% during April-October 2007-08, from 16.16% over the same period in 2006-07. Growth in exports as measured in rupees, in the same period rose 17.54% to Rs61,809 crore.
“India has excess refining capacity and our oil exports would go up by 2012. This would enhance India’s position as a global refining hub,” said Vijaya Katti, professor and chairperson, Indian Institute of Foreign Trade.
India will add 2.14 million barrels per day (bpd) to its existing 2.98 million bpd capacity by 2012."

You can draw the inference.

Arun

As noted in a previous thread, petrol in India costs $5.77 a gallon.

From Jan 2008:

http://www.theagni.com/2008/01/are-petrol-prices-in-india-cheap.html

"Thursday, January 10, 2008
Are petrol prices in India cheap??

($1 = Rs.39, approximately)

Recently, I had been going through a number of articles in Indian media, claiming that oil companies are losing Rs.9/liter of petrol due to global oil price rise. The reports seem to convey the message that Indian motorists are somehow paying very low than what they should. Reality is otherwise, as I noted in one of the earlier articles here.

Indian motorists pay around Rs.52/liter ($1.3/liter or around $4.93/gallon). Do you think this is subsidized and cheap?? See what India's peers in far more wealtheir nations with greater purchasing power pay in CNN.com. I think the petrol subsidy debate is misguided, because of the absence of discussion of taxes. Are Indians paying less for Petrol than we living in the US? I fill my tank at $3.2/gallon (before getting 5% cashback with my credicard) because my state of washington has one of the highest sales taxes, but it is still equivalent approximately Rs.30/liter which is half what an Indian motorist pays in India. Does it mean 76, Chevron and other places where I fill gasoline from are making losses?? Looking at their stock prices doesn't make me think so. US oil companies are having windfall profits."

Sidney O. Smith III

Thank you very much for this info.

If a person is lucky, every so often he’ll come across a work that opens his eyes to new vistas. The work of F. William Engdahl does just that. Absolutely fascinating. I don’t yet know if he reflects an Austrian economic view but, in another one of his essays, his description of the Anglo-American banking system in the 1920’s is riveting, as it casts history in a different light.

Also, for what it is worth, J. Nadler at Kitco today echoed very much the same theme raised in the Engdahl essay referenced in this thread. Here’s the Nadler commentary titled, “2 dollar gas in a month.”

http://www.kitco.com/ind/nadler/nadlerjun242008.html

The Global research website looks cutting edge. I hope to spend some time to try to determine its view on globalization. Again, thanks.

robt willmann

I have been out for a few days in a major city for the oil business -- Houston, Texas -- where ironically the price of gasoline is higher than in the smaller, non-oil city of San Antonio.

The Number One Clue that something rotten is going on is that people talk in terms of one price for oil for the whole world.

None of our brain-dead (or complicit) politicians and "news reporters" seem to be talking about why that is.

Like sex, drilling for oil (sorry, bad play on words), getting it out of the ground when you strike it, transporting it to refineries and other processors, transporting gasoline to filling stations, and who pays who (or whom) and how, all along the way, are physical acts invented by human beings. This means that the system is not complicated; rather, it consists of lots of little detailed acts that can be traced through. There are no mysterious processes, like the moment of conception.

Part of the mechanical process that results in some prices for petroleum is another man-made system euphemistically called "commodity exchanges". The ones that matter are located in New York City and London, England. The big problem is that at the "exchanges", nothing is exchanged, except paper, or usually today, entries on a computer hard drive displayed on a screen. I have heard that you only have to put down about six percent of the face amount to be paid under the "contract", and can "borrow" the rest "on the margin".

This "paper" is usually called a "futures contract". The theory, which is not the practice, of a commodity exchange is that a business person can get some predictability into his or her operation by entering into a contract to buy a needed commodity at a particular price at a particular time or over a time period. That way, the costs of your business can be managed better.

If you and I build a factory to make cars, and even if we are going to manufacture the parts in-house, we will still need to buy things like steel, glass, wire, plastic, rubber, and so forth. So we will go to businesses that have these things to sell and try to make contracts to buy the commodities at specific prices over time, in order to predict our costs and be able to price the cars we build to sell to the public. We expect to take delivery of the commodities so that our factories can turn them into car parts and then into the cars themselves.

Do you see one big fat difference between a real business process of commodity buying and what goes on at the so-called "commodity exchanges"?

Two words.

"Take delivery".

The U.S. Congress has proposed dealing with the problem of the commodity exchanges by ways as effective as a one-legged man in a pants kicking contest.

The U.S. Constitution gives Congress the power to regulate interstate commerce in Article I, section 8.

The transactions on the New York commodity exchange, we can safely say, are interstate in nature.

Congress can pass a short and simple law. If you enter into a contract at the commodities exchange for a commodity, you, and no one else, will take delivery of it.

Like their cousin the stock market casino, the commodities exchanges produce nothing and are not markets; they are cleverly designed organizations that play reverse musical chairs with money. But they are much more harmful to the economy and to real people than the public stock market, because they play a role in setting prices that have a real effect on many real people, as in gas prices as opposed to the "price" of Ford Motor Company stock.

The commodities exchanges are part of the pricing racket in the oil and gas realm. The other part lies in the relationship between the countries with large petroleum reserves, especially in the Middle East, and a few large oil companies, and how that relationship is physically implemented.

I will again seek to promote a book by Stephen Pelletiere, entitled "Iraq and the International Oil System", with ISBN number 027-5945-626 (original hardcover), and 094-4624-456 (paperback, 2nd edition). The book describes much history of oil and gas production in the Middle East. It includes a description of a trip to Iran by representatives from the U.S. and (I think) Britain to Iranian Prime Minister Mosaddeq who was planning to nationalize Iran's oil. They tried to explain to Mosaddeq the intriguing fact that "there is no market price for oil". Mosaddeq went ahead and nationalized Iran's oil, and the U.S. and Britain (and others?) plotted a coup against him that was successful. He was overthrown in 1953. This was reversed in the 1979 Iranian revolution, and the rest is not history, but the present.

Curious

Thanks neocon. I like my $6/gal gas.

http://news.yahoo.com/s/nm/20080626/bs_nm/markets_oil_dc_7

Oil hits record over $140 as Libya mulls cuts

verc

SINGAPORE (AP) -- Oil prices climbed to a record above $141 a barrel in Asian trading Friday as the dollar's protracted slump prompted investors to flock to oil as a hedge against inflation.

Speculators?

Clifford Kiracofe

More anent oil:

"Oil has set new highs the last three days as money managers bought futures, shunning stocks as global equity indexes fell for a fifth week. Crude may rise further next week, according to analysts surveyed by Bloomberg.

``Investment demand has been driving prices higher,'' Eugen Weinberg, an analyst at Commerzbank AG in Frankfurt, said in a television interview. ``Longer-term pension funds, investment funds, but also banks and insurance companies are pouring their money out of the equity market, out of the U.S. dollar and into commodity markets and especially oil.''

"The fewest Americans in three years will travel over the July 4th weekend as record gasoline prices and a slowing economy force consumers to curtail spending, according to AAA, the largest U .S. motoring group. U.S. gasoline demand, which typically rises at this time of year, fell a 10th time in the week to June 27, according to data from MasterCard Inc.

http://www.bloomberg.com/apps/news?pid=20601082&sid=abV_6aXyXQ.s&refer=canada


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