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21 June 2008

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rjj
Its significance lies in their stated intent to cripple the process of parasitic speculation in a vital commodity.

For those who have the patience ....

Naive question 1: how?

Naive question 2: would this be a cleansing of the stable or merely selectively eliminating certain "players" to advantage others?

J

Colonel,

i wonder if the saudis will be able to get more for their oil, as at last count they were getting just a little over $3/barrel at their well heads. a paltry sum for their natural resource wouldn't you say? the oil producing and consuming nations need to trash-can the london international petrol exchange which is at the crux of most of today's pricing and speculation problems (notwithstand the declining dollar not doing oil prices any favors).

J

Colonel,

the oil people are grabbing everything they can get their mitts on before the crooked and pliant bush and cheney have to exit stage left. they want the ability to offshore drill where and when they please, and with bush's help are sewing up all iraqi oil production with the usual bush approved no-bid leases. remember the bush motto 'no-bid' for bush cronies.

if halliburton needs say a few hundred billion in u.s. taxpayer money, pliant bush would demand it and the arse-kissing congress would bend over and give it to them, just like they have bent over for the crooks in the u.s. telecomm companies with a free pass on their illegal snooping.

sooooo who is really to blame for the high oil prices -- one major culprit is the london international petrol exchange and their speculators, followed by bush and cheney being also directly responsible. word is that sweet crude is now under $50 a barrel in saudi although the industry claims it isn't so.

sooo what is the 'solution' to the u.s. oil problem -- many are now calling for the solution would be to nationalize the oil industry and then prosecute the theives who have entirely on their own pushed gase to what will be $5 plus a gallon, which is no accident just in time for summer vacations, and then the price will drop $1 or so after the summer vacation season is over. but one's heating oil will shoot up just in time for the winter.

nationalize the u.s. oil industry and prosecute their corporate heads? would such action then see a very fast drop in gas prices? after all the corporate heads to them a fed jail cell is like a garland of garlic/cross to a vampire, which makes one wonder if they are not a hybrid of the old transylvanian vampire legends. hmmmmm.........

JD

You hit he nail on the head, pl. Wall Street has become the biggest casino in the world. And like any other casino, the house doesn't lose. If Wall Street's stake runs low, they need only call Uncle Ben and he will send over a truckload to replace their losses. Privatize the gains, socialize the losses. Why stop? How can you lose?

par4

Steny,Harry and Nancy will get right on those prosecutions after Impeachmant is completed.

JohnH

Sharia law prohibits hoarding. Anyone know what the penalty is? It might be enough to make speculators think twice...

Bobo

Sounds like the Saudi's were hedging their production and lost their shirt's.

It all comes back to Supply and Demand which is in a tight balance right now. Perception & Speculation are only part of what makes the price move. The Saudi increase is a welcome respite.

When China, India and the other Southeast Asian economies let their populace feel the full brunt of the price increase, that you and I are feeling, then demand will drop and we will get back to a reasonable price.

In the interim we had better start planning for where our energy will come from in the future years.

Duncan Kinder

Governments have a role in organising (oil) markets and structuring them in a way that prevents speculators behaving in a manner that has led oil prices to reach their current levels,"


As I previously predicted, there has been an uptick in attacks on Nigerian oil production in apparent response to the Saudi's efforts to boost their production.

As I previously noted, on Tuesday there was an attack on Shell's Nigerian offshore facility. This has been followed by a Thursday attack on a Chevron pipeline.

John Robb has posted extensively about how global guerrillas are attempting to manipulate global oil prices despite governmental efforts to control oil prices. His latest post about this is here.

To the extent that Robb is correct, we are witnessing a decline in the ability of governments to exercise control over their economies.

b

The speculative high oil prices are needed to repair U.S. bank balance sheets.

The banks lost a trillion or so in the credit markets. The Fed has given them nearly half a trillion in fresh money and has taken junk bonds as 'collateral'.

That half trillion is now used to profit as much as possible in the commodities markets. The profits are needed or the banks will go belly up. Oil isn't the one that has gone up the most, foodstuff has increased even more. It is a commodity bubble.

So the U.S. will do all it can to keep this bubble going. Otherwise the financial system Wall Street lives off will come down like a gigantic jenga tower.

The U.S. will not stop the speculation - increase the future-margins a bit maybe, but that doesn't help much.

The Saudis want to break this? If they offer more oil, fine, but the future markets have now little to do with demand and supply. The money sloshing daily around these markets is a multiple of what the value of these commodities are.

Wall Street needs to be saved. The Saudis want to press for more regulated markets. They will not get these.

Michael

Really, pl? Given what you know about markets, speculation, and global scale in general, do you think the reality of today's oil prices really comes from the scene you describe? Doesn't it sound a little pat? When you think about uncertainty in general, and risk management in general, and what some governments do about risk management; when you think about algorithmic trading; when you think about the market moving actions of the government of China, particularly in light of their U.S. Dollar and Treasury Bill actions, how they use those actions to affect the relative price of the renminbi, and what their hedging options are against the falling dollar; do you really think that the impression that some nattily dressed ruthless traders give each other is a significant factor, in 2008, of the price of oil? Do you think that might be a gross oversimplification, the utility of which is primarily political? Are you really as confident about your impression here, of the way that derivatives pricing works, as you are about the other things I've been taking your word about on this blog?

And what about this lesson the world needs about market prices and perception and hysteria? Who do you imagine needs this lesson? How did you learn this lesson? When you think about the world in general and your peers in it, just how many do you imagine think that markets are *not* strongly influenced by, or even primarily driven by, perception vs reality and a form of mass hysteria? Do the powerful elites need to learn this lesson, or the general populace? Do you think that Western politicians, who generally achieve office through elections, would be more or less aware of this phenomenon? Do you think that large institutional investors are the ones who don't get that markets are irrational? How about the general public -- in your experience, is a random guy off the street less, or more, likely to share your characterization of stock markets as casinos?

I don't know, maybe you'll attack these questions and call me a tool, but I think you got carried away on this one. I think you haven't met your own standards for analysis here; usually you are arguing *against* the fantasy of reducing an extraordinarily complex global phenomenon into a problem caused by a handful of rich bad guys who just need to be stopped by government.

patrick lang

Michael

I can perceive how much you rely on my judgments and will always try to do well by you.

You are right of course. I am just conceited enough to believe that I understand something a lot of supposedly bright, well educated and powerful people may have missed or are too gutless to accept as the truth.

I notice a tendency lately for there to be a few comments by people who suggest that I am aself obsessed egocentric loser who should not be listened to.

That's a good line. Is that in the talking points memo? pl

William R. Cumming

Saudi's cost is $.40 to lift each barrel. They sell at around $3/barrel. But actually they can easily control speculation. All oil transactions to be based on a mixed bag of currencies or Euro and perhaps leave dollar speculators in lurch by voiding ab initio all contracts as of a date certain in the past. Interesting that warning shots of this strategy appeared out of Iran in February 2006 and was ignored by a US Treasury Dept and Fed Reserve that still fail to understand that capitalism, market economies, and NOCs are inconsistent. Basically immune from suit or US leverage, OPEC can then continue to use what supply is available to determine its revenue streams for its NOC's. Interesting that US is now firmly on side of those without production capability domestically adequate to meet even 50% of their daily demand. Expect Wall Street to pull out crying towel but this time will not be provided since FED Reserve long ago shot its wad and crying towel is located in London and Riydia and will not be furnished. Possible dollar collapse but unlikely since major dollar holders will be made whole by US oil as fungible commodity. US consumers will take huge hit however. Hey, just call me NOSTRODAMUS!

Cieran

Re: Michael's questions:

Given what you know about markets, speculation, and global scale in general, do you think the reality of today's oil prices really comes from the scene you describe?

... do you really think that the impression that some nattily dressed ruthless traders give each other is a significant factor, in 2008, of the price of oil?

No need to think... we can let history and thus precedent be our guide...

Replace the last word "oil" with "electricity" or "natural gas" and the answer is "yes", at least according to the evidence gathered in the Enron collapse, which was implicated in the last great self-inflicted energy bubble in this unfortunate sequence: the great California energy crisis of 2000/2001.

In each case, the recipe for gaming the so-called free market is the same:

(1) begin with a commodity with a tight supply and a very inelastic demand,

(2) drive an apparent "deregulation" political initiative through relevant governing bodies with appropriate loopholes to facilitate concentration of trade into markets that can be suitably distorted, e.g., in CA's case, by restraining trade through artificial supply constraints such as grid transmission capacity.

(the same political loopholes that benefitted Enron in 2000 are still on the books today, and are indeed implicated in the current energy speculation mess)

(3) choreograph swings in prices that can be used in options-market manipulation, e.g., taking capacity off the market to reduce spot supply, which forces prices up on cue, thus forming the arbitrage equivalent of "shooting fish in a barrel".

(4) make money in vast amounts, while in the process driving less-fortunate entities into bankruptcy (in the CA case, the various utilities, as well as myriad small businesses, etc.)... since no real wealth is being created, the money for the speculative takings must come from somewhere!

(5) move on to the next highly-inelastic-demand/short-supply market, e.g., oil today, food and water tomorrow.

And in the court proceedings that led to the state of California gaining judgments against the speculators, plenty of the kinds of meetings that the Colonel describes were found in evidence, and that should come as no surprise, because since the whole point of the exercise was to render free-market economic principles as meaningless, suitable resource-allocation surrogates needed to be found to replace those principles, and the usual suspects arrived to fill the bill, e.g., avarice, hypocrisy, sociopathology, etc.

Some of the meetings occurred in person (e.g., Perot's infamous Powerpoint presentation of how to short the market), others occurred over the phone, but I don't believe those details are what is important in the Colonel's assertion here.

zanzibar

The speculation in the oil markets is miniscule compared to the speculation in the currency and credit markets.

They got a few guys in the mortgage biz and did the perp walk. But while the credit markets were going nuts it was aided and abetted by Alan Greenscam. The Maestro. Ayn Rand disciple. Free market icon. But by actions a socialist - losses go to little people's account - obscene profits go to the country club boys. Now the banks are happily changing their own definitions of what loans are considered delinquent and what assets are Level 2 or Level 3. And of course the Fed and SEC are nowhere to be found. And Paulson wants to provide even more powers to the Fed that caused the mess in the first place. Its so amazing that we have devolved where the "leaders" that cause the mess are the ones we venerate.

When it comes to the little people we have to follow the law and there's the perp walk. Get busted for having some weed and you can spend a few years in the slammer BUT you can shred the constitution, torture detainees, lie and take a country to war, spy on citizens without any warrant and break the law - no problemo. For our corporate and political elite there's always retroactive immunity. Break the law no big deal just change the law after the fact and voila its no longer illegal. Oh! And our bought and paid for House of Representatives has passed legislation that promulgates the Nixon maxim - if the President does it or says so its legal. Nice!

This charade of the rule of law and who is allowed to speculate, who gets bailed out and who gets prosecuted and who gets pardoned is just getting tiring. Let's just get back to the Medieval era scene and we peasants can bow and scrape.

Taters

Thank you for an excellent and thoughtful post, Col.
I don't believe the Michael Douglas character of "Wall Street" Gordon Gekko was originally intended to be seen a role model - it seems that somehow that became the case.

"It's not a question of enough, pal. It's a zero sum game, somebody wins, somebody loses. Money itself isn't lost or made, it's simply transferred from one perception to another."

Michael,
Are you as gracious here as you are as a dinner guest?

Charles I

Per Duncan Kinder: "To the extent that Robb is correct, we are witnessing a decline in the ability of governments to exercise control over their economies."

As well as the ability of governments to control themselves, their operations, infrastructure, maintenance and security.

Think of the coming alternative energy bubble and the looming round of new nuclear power plant construction around the globe. Of the ever screamed of thin divide between "civilian" and "military" nuclear technology.

Now think of Enron-like corporations administering the global nuclear energy industrial complex with Blackwater as their foreign ops sub-contractor. Hoovering trillions of classified, unaccountable - in multiple senses of that word - of dollars - all borrowed, no services left, all taxation solely to pay that nut. All sold on the premise that the only way to keep the lights and American Idol on is to cede every sovereignty to corporations - including the military/national security state apparatus requisite with "securing" such booty.

Jose

I hope some with better Internet skills than me can find this information but I will post it anyways based on my memory.

During the Asian Flu Crisis (currency runs made by speculators), the central Banks of Germany, Japan and the USA coordinated over a a period of time (can't remember the exact period) to force currency speculators to lose hundreds of billions of dollars by buying and selling against the interest of "short Sellers" and Hedge funds.

China also joined in after the speculators attempted to make a run on the currency of Hong Kong.

Perhaps the Saudis are planning something similar coordinated with major buyers against the speculators by all means available possible (legal actions, investigations of manipulation, etc).

frank durkee

Zanzibar. Or find a way to rise up and change it.

mlaw230

I don't think an Enron type conspiracy is even necessary. Gas is gas, it is fungible within the United States, "upstream" the major oil companies have virtually merged. Consequently there need be no secret meetings, and there is absolutely no motive to "compete" domestically i.e. at the pump. The profit per gallon, per barrel however you figure it, is drawn off before it gets to the states. So, although this is afar more complicated market than California Electricity it is still a small fraternity.

Also, the Saudi's may make only $3 per bbl at the head, but what percentage do they get at the terminal, and who gets the rest? My guess is that it is largely Big Oil.

Everyone I know in the industry reports that the "rational" price should be between 90-100 per barrel (USD)but as noted by everyone above that is only part of the equation.

Fitz

Here's an explanation that might interest you.

http://krugman.blogs.nytimes.com/2008/05/13/more-on-oil-and-speculation/

And another:

http://europe.theoildrum.com/node/4007

Fitz

In short:

"Speculation

Financial speculation in oil futures is being offered increasingly as the reason for high oil prices. True, speculation is rife. However, the futures market is a zero sum game. For every long position there is a short position and the price is ultimately struck by the individual who takes delivery of the oil - which is then refined and purchased by a consumer. For so long as consumers keep demanding oil at ever higher prices, the price will continue to rise.

The only way speculation could impact the oil price is under accumulation. Inventories of crude oil and refined products have been falling for a year"

From the oil drum

Clifford Kiracofe

Some information and background on the conference at:
http://www.saudi-us-relations.org/articles/2008/special-reports/080621-oil-conference.html

Economic history, IMO, provides more realistic context than ivory tower economic
"theory" (pick any one of them). Seems to me a state of economic warfare is the norm. Transnational and cosmopolitan high finance as well as industrial interests under their thrall seek to erode and nullify state sovereignty. Supporters of so-called "globalization" favor this and decry governmental "regulation" in the interest of their citizens (or subjects).

The comment on the thread per privatization of profits and socialization of losses is on target.

Jean Colbert, Friedrich List, Hamilton and other Founding Fathers, and Henry Charles Carey were most certainly realists.

Mad Dogs

Michael wrote: "Really, pl? Given what you know about markets, speculation, and global scale in general, do you think the reality of today's oil prices really comes from the scene you describe?...

...I don't know, maybe you'll attack these questions and call me a tool, but I think you got carried away on this one. I think you haven't met your own standards for analysis here; usually you are arguing *against* the fantasy of reducing an extraordinarily complex global phenomenon into a problem caused by a handful of rich bad guys who just need to be stopped by government."

One word is sufficient to demolish all of your arguments:

Enron!

And Off Topic (OT) Pat, have you read this wee article from ABC News:

Hezbollah Poised to Strike?

Intelligence agencies in the United States and Canada are warning of mounting signs that Hezbollah, backed by Iran, is poised to mount a terror attack against "Jewish targets" somewhere outside the Middle East.

Intelligence officials tell ABC News the group has activated suspected "sleeper cells" in Canada and key operatives have been tracked moving outside the group's Lebanon base to Canada, Europe and Africa.

Officials say Hezbollah is seeking revenge for the February assassination of Hezbollah's military commander, Imad Mugniyah, killed by a car bomb in Damascus, Syria.

The group's leaders blamed Israel, an allegation denied by Israeli officials...

And one wonders how that comports with the reports like this "Most ministers back Hezbollah prisoner swap" of a deal between Hezbollah and Israel on a prisoner swap.

Sometimes the world defies our understanding...and sometimes it doesn't.

David W.

Economics is not a science, but it plays one on TV--the whole 'high priest' aura was constructed around Greenspan for a well-stated purpose; to 'build confidence' in the system, and the wise men supposedly running it. Apparently, somewhere along the line, the foxes came to running the henhouse completely. None of this is particularly new--the dangers that finance and corporations presented have swung through periods of regulation both high and low, but today, the stakes are much higher, and the controls appear to be much less, especially in the more 'exotic' investment instruments. Many of the proffered benefits of Wall Street appear to be diminishing, in the face of all out greed.

I do have a friend who is an economist at a highly respected academic institution who has spent time in Washington under Bernanke--while he has generally good things to say about Bernanke, his characterization of the policy process and outcomes is somewhere around 'insane.'

While we've been focused here on oil, the big killer to me is the incredible devaluation of the dollar--which, per PL's earlier point, is something that is easily perceived by an outsider with basic economic understandings; pump too many dollars onto the market, and they deflate in value; this fundamental truth has been killed by lobbying, apathy and stupidity--either they don't know, or they don't care (my money is on the latter).

Internationally, trading in dollars signifies a buy-in to the US banking system--the 'secret of our success' internationally can be rightly attributed to the extra vig that accrues to the house when it deals the game. Unfortunately for the US, it has been wantonly violating another seemingly simple rule, that if the house rules get too strict, the players start to look for new games. If the house wants to keep them, it offers better rules, or else makes threats to keep the players at the table; the key difference here is that both the house and the players are playing with others' money--mother's milk money, if you will.

The theory of Economics fails in real life because it cannot account for corruption--one of the Big Lies we've all been subjected to is that the markets are the great leveler; they are to an extent, but we've all just witnessed the Fed violate this principle, but that's only the most visible recent example.

The inmates are clearly running the asylum in Washington via Wall Street--ever think there was something more to Elliot Spitzer's downfall that a simple morality tale?


Arun

Bobo wrote:

When China, India and the other Southeast Asian economies let their populace feel the full brunt of the price increase, that you and I are feeling, then demand will drop and we will get back to a reasonable price.

The price of gasoline (petrol) in India works out to $5.77 per gallon.

http://www.kshitij.com/research/petrol.shtml

---

As to our host's point -
http://www.business-standard.com/common/storypage_c_online.php?leftnm=10&bKeyFlag=IN&autono=40504

""On ariving here yesterday evening, we met Saudi Oil Minister Ali al-Naimi who too believes that the world has enough oil and it was speculation and paper trading that is to be blamed for the escalation in prices," Petroleum Secretary M S Srinivasan told PTI from Jeddah.

An estimated 60 dollars per barrel is the "speculative premium" in the current oil prices, he said. "Speculative trading amounts to few trillion dollars currently." "

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