"Oil prices continued to decline Wednesday, after a government report showed stronger-than-expected inventories and a Federal Reserve report showed a weakening economy.
Light, sweet crude for September delivery fell $3.98 to settle at $124.44 a barrel on the New York Mercantile Exchange.
Oil has tumbled nearly $23 since setting a record of $147.27 just eight trading days ago on July 11. Prices have not been this low since June 4.
The September futures contract became the so-called front-month contract as the August contract, which fell $3.09 to settle at $127.95 a barrel in the previous session, expired Tuesday. Oil settled down $3.51 from Tuesday’s front-month settle. Oil futures contracts typically expire with seven trading days left in the month." CNN Money
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What happened to all the babble on the 24/7 news about the end of western civilization as we knew it? What happened to the images of Ali Velshi (aka – "the bald headed prophet of doom") trudging across the Alberta tar sands, gloating over the pain?
Now, the financial news babes on CNBC, Fox Business, Bloomberg, etc. are looking cautious and pensive as they try to re-adjust their "pitch" to falling prices. Actually, they look pretty good compared to the collection of group thinkers who pass for experts on these shows. People ask how it is possible to listen to the chatter from these shows all day long. That is easy to answer. They are intensely amusing as further evidence of the herd mentality of humans and the instinct for individual survival manifested in rationalizations after the fact.
Perhaps we should look into hedge fund operations. Unfortunately, so many of them are now run by the mediocre and unimaginative that there will not be as many to study soon.
Oh, yes, the oil head game. Don’t fret, those of you who loved it. It will be back after the price gets down to some rational level.
Think for yourselves! PL
http://money.cnn.com/2008/07/23/news/economy/oil/?postversion=2008072314
Just in time for the presidential elections…
Could it be that some were beginning to recognize that oil over $150 barrel might just doom McCain well before November? Just a thought! Also note that subsidizing energy prices took a cut in a number of countries including China and India over last 90 days thus reducing demand. My intelligence is that China stockpiled like crazy before the Olympics (their version of the SPR) to make sure no shortages during the Olympics. Hey who knows but fun to speculate when you have already gone over to driving every OTHER day except in an emergency.
Congress Pursues $80 Oil With Trading Limits, Disclosure Rules
(Bloomberg) — Congress may outlaw elements of oil futures trading that lawmakers found distorted demand and contributed to the 69 percent surge in prices in the past year.
U.S. legislators are considering limits on the number of oil contracts an investor can hold and may increase disclosure requirements. Speculators such as Goldman Sachs Group Inc. use the practices to bet on price swings, which may drive up prices, though they have no intention of taking delivery of underlying goods, lawmakers say.
http://www.bloomberg.com/apps/news?pid=20601109&sid=aI3KfJ0v2akE&refer=home
heh. They should do like any other sensible country. Nationalized oil companies.
OIL company is a threat to national security. ALWAYS. All of them.
There is no such thing as “free market” in oil industry.
Charlottesville, Virginia
24 July 2008
Sir;
I don’t think I understand where you are headed with this. Is it your assertion that the rise in the price of oil over the past several years is not supported by the rise in consumption? As someone who has obsessively followed the price of energy in general and crude oil in particular, there is a distinct pattern of oil climbing in price, then backing down a bit, only to rally and find a new high, from which it descends again. This pattern has occurred pretty consistently over the past several years, certainly since I started paying attention to it in the summer of 2005. As other folks have pointed out, both on this site and others, we live in a world that uses oil in volumes we have not previously seen, and there is some serious concern about the ability of OPEC and others to maintain that output. Indeed, from what I have learned about ‘The Oil Situation,’ the only thing that will cause a significant and sustained drop in oil price would be a likewise decrease in demand, not just in the U.S. but around the world. And the only way I see that happening is with a global economic meltdown. Now, the way things have been going of late, this certainly could be in our future, but as long as demand continues to grow, especially in China and India, I think this decrease in oil price is a transient thing at best. As for the talking heads on CNBC and others, I stopped paying attention to anything they had to say a long time ago (right about the time we invaded Iraq). If I want to watch clowns perform, I’ll wait for the circus to come to town.
SubKommander Dred
CFTC Report on High Oil Prices – “Speculation My A$$”
All
The CFTC is just another Washington adjunct to the powers that be both in business and politics. Nothing you hear from Washington is ever disinterested. nothing.
Dred
There is a long term need to address the global energy inadequacy.
The short term inflation in prices that we have seen has been driven by investment in barrels of oil as though they were poker chips. pl
Curious wrote:
“They should do like any other sensible country. Nationalized oil companies. OIL company is a threat to national security. [sic].”
Ah yes, because the gov’t has done such a bang up job on so many things, such as with … national security and Vietnam and the handling of the Middle East, and with Fannie Mae and Freddie Mac, and with its handling of the budget, and with the looming tsunami of Medicaid and Medicare costs of the Baby Boom generation, and with ….
I guess Francois Furet was wrong and the illusion hasn’t entirely passed.
Cheers,
I’ve got to say Colonel, I’m constantly amazed at all the lambs who seem to be able to find any excuse in the world for not believing in wolves.
I read constantly of “experts” who produce 1,000 page tomes that seek to sweep under the rug and sanctify all that is rapacious and ill-serving.
I read the continuing reference to entities naively called “Hedge Funds” as if this would somehow render these folks “innocent and wholesome”.
After all, one might besmirch their character to call them what they really are; namely “Speculators”.
How interesting that these benign and freedom-loving “Hedge Funds” never seem to take delivery of what they buy.
How interesting that these ethical and upstanding corporate citizens always seem to “buy low and sell high”.
How interesting that these wondrous zealots of the “free market” always seem to be against investigation of their activities, against regulation of the markets they manipulate, against any light being focused on their double-dealings.
Yes, the world consists of nothing but fluffy, cute lil’ ol’ lambs who are just doing their part to keep our hedges well trimmed.
And I’ve got some oceanfront property in Phoenix to sell. Interested
sheepfolks can just email me their credit card numbers, PIN information for their bank accounts, their Social Security Numbers, and the deed to their homes.I’ll get right back to them with all the glorious details about enjoying their new oceanfront sunsets on the beaches of Phoenix.
A propos the government task force report you write: “The CFTC is just another Washington adjunct to the powers that be both in business and politics. Nothing you hear from Washington is ever disinterested. nothing.”
I believe you have pointed out that while it is wise to ‘consider the source’ the arguments and data from even the most suspect sources should be evaluated.
With that in mind, below is a pertinent excerpt from the report. I wonder if there are any specific assertions in this excerpt which should provoke skepticism?
… “The imbalance between scarce supply and growing demand, and expectations that this imbalance will persist in the future, have led to upward pressure on oil prices and greater market reactions to any actual or perceived disruptions in available supply. Under such tight market conditions, it is often the case that only large price increases can re-establish equilibrium between supply and demand. Consequently, large or rapid movements in oil prices are not inconsistent with the fundamentals of supply and demand; such price movements, by themselves, do not indicate that prices have become divorced from fundamentals. Moreover, if speculative positions, rather than fundamentals, were pushing prices upward, then inventories would be expected to rise. To date, there is no evidence of such an accumulation; in fact, known inventory levels actually have declined.
Analysis of Crude Oil Futures Markets
Activity in crude oil futures and options contracts has been increasing since 2004. During that period, the number of contracts outstanding (known as “open interest”) has more than tripled, and the number of traders has almost doubled. The fastest growth in open interest has been recorded among non-commercial traders – often called “speculators” – holding spread positions combining long positions in one month with short positions in another month. Thus, while the long positions of non-commercial traders have increased, the short positions of non-commercial traders also have increased. Additionally, although the net long positions of non-commercial traders have increased somewhat since 2004 – which some market observers have hypothesized has pushed prices up – the proportion of those positions has been relatively constant as a share of open interest over the last few years, undercutting that hypothesis.
Much of the attention related to participants in futures markets has focused on the role of commodity index investment funds and the commodity swap dealers that often act as their intermediaries. During the period studied, January 2003 through June 2008, pension funds and other investors have increasingly used index funds as vehicles to participate in commodity markets. Some observers have suggested that this rapid inflow of investments through index funds has been a cause of oil price increases. The CFTC has issued Special Calls for data about this activity, but only partial responses have been received as of the date of publication of this interim report. An analysis of the data from these Special Calls will be made available in September.
The data currently at hand – which incorporates non-public surveillance information – includes positions held by commodity swap dealers. Commodity swap dealers offer institutional investors contracts whose returns are linked to a variety of commodity indices. Broadly speaking, after netting their index fund clients’ positions against the positions of their other clients, these dealers use futures contracts to hedge the risk remaining from this business. Thus, the activity of commodity index participants should become evident in the position changes of commodity swap dealers.
Non-public CFTC trading data shows that commodity swap dealers have held roughly balanced long and short positions in the crude oil markets over the last year and actually held a net short position over the first five months of 2008 – that is, swap dealers’ futures positions would have benefited more from price decreases than from price increases like the ones experienced in the last few months. Moreover, any upward price pressure exerted by the long positions of swap dealers’ commodity index clients has largely been offset by the short positions of the dealers’ other clients.
The Task Force’s preliminary analysis also suggests that changes in the positions of swap dealers and non-commercial traders most often followed price changes. This result does not support the hypothesis that the activity of these groups is driving prices higher. The Task Force has found that the activity of market participants often described as “speculators” has not resulted in systematic changes in price over the last five and a half years. On the contrary, most speculative traders typically alter their positions following price changes, suggesting that they are responding to new information – just as one would expect in an efficiently operating market. In particular, the positions of hedge funds appear to have moved inversely with the preceding price changes, suggesting instead that their positions might have provided a buffer against volatility-inducing shocks.
Would not oil sky rocket once again if an Israeli or Iranian politician makes a threatening statement?
Dear Mad Dogs,
I don’t think hedge funds or speculators are “innocent and wholesome” – in fact I tend to think of them as greed incarnate or worse.
Likewise I would be happy to label as “speculation” everything that takes place on futures markets (although for some purposes it is useful to distinguish some futures market activity as “hedging” as opposed to “speculating”).
There are a number of questions that remain. E.g. can activity on the futures market affect the price on the spot market and if so how and to what extent? In this respect, is oil different from e.g. gold, in that all that is bought on the spot market in a given month is consumed in (more or less) that same month or the next.
Ah yes, because the gov’t has done such a bang up job on so many things, such as with …
Posted by:TomB | 24 July 2008 at 01:16 PM
actually the main point will be “not doing a bang up job”. That the government will not optimize oil exploration for profit but to seek biggest political return if not national interest.
The so called oil company efficiency is actually pretty nasty. Yes they maybe good at extracting oil, but they also get to manipulate laws, bribing, putting their giant profit elsewhere but inside domestic investment, etc, etc. They create government inefficiency. They undermined policy. (notice how all oil rich states are at the bottom of ranking in all social indicators. Texas, mississippi, Louisiana.)
Where do you think exxon $40B annual profit goes? Not paying ‘Public Radio Opera’ and ‘Green children education fund’ that’s for sure. Majority is handled by investment bankers. China, housing, that sort of thing. And we know how efficient that money is being used.
Norway, China, Malaysia, Saudi, Russia are all government controlled oil companies. (they stop screwing around and destabilizing the country once they are under government control)
One of these days, an oil company is going to stage a coup supported by foreign power. Hell they already control all think-tank and owned all DC politicians.
A prior post asked how futures affect the commodity price.
Here’s two quick sources:
http://en.wikipedia.org/wiki/Futures_contract
The classic finance text:
Fundamentals of Financial Management
Edition: 11
Author(s): Brigham, Eugene F.
ISBN10: 0324319800
ISBN13: 9780324319804
Available online
Mr. House,
Thanks for the analysis. If the money flowing into oil index funds is actually hedged by long and short positions in the futures market, that should have little or no effect on the price of oil. All the traders are doing is trying to match the spot price–in which they can’t invest–by laying money over and under on the futures market. Their interest in laying such bets is convergence, not moving the price of oil.
I don’t think, however, gold is a good market to compare with oil, because it is possible to buy the yellow stuff and stash it away, unlike oil. Perhaps a market like iron, where there is no futures trading, is a better place to look. Iron prices have also dramatically risen over the last few years without the benefit of “speculators.”
Colonel,
http://money.cnn.com/2008/07/24/markets/cftc/index.htm?eref=rss_topstories
Government uncovers oil price manipulation
Mr. House,
How would one suspect?
Look at this paragraph:
“Much of the attention related to participants in futures markets has focused on the role of commodity index investment funds and the commodity swap dealers that often act as their intermediaries. During the period studied, January 2003 through June 2008, pension funds and other investors have increasingly used index funds as vehicles to participate in commodity markets. Some observers have suggested that this rapid inflow of investments through index funds has been a cause of oil price increases. The CFTC has issued Special Calls for data about this activity, but only partial responses have been received as of the date of publication of this interim report. An analysis of the data from these Special Calls will be made available in September.”
It doesn’t answer the question. Pretended ingnorance or real, it should raise an eyebrow. It’s their job to know.
Fred,
I have not yet consulted the text book but I have re-read the Wikipedia article you cite. As I read it there is nothing to suggest that futures contracts affect the spot price, rather it is clear that spot price is what is central to the futures price.
All,
Would someone tell me what is wrong with the following analogy:
Consider the sports bet on the total number of points that will be scored in the Super Bowl. No mater how much “speculative capital” flows into the market for that wager – no matter how much money is bet – it does not affect the number of points that will be scored. (Excluding illegal stuff like point shaving.) In the same way, no matter how much is bet on the September 2008 price of WTI crude oil, it will not affect, at least not directly, the price of the September 2008 spot market. This is hardly surprising since the amount bet “long” on any given price is precisely equal to the amount bet “short”. Only by holding crude oil off the market – i.e. putting in reserve or “hoarding” – can one directly affect the supply of crude available to purchasers in September 2008.
Shepherd,
I agree completely with your comments about gold vs. oil. Would you agree with the following? Except for a small amount that is “consumed”, once mined gold is automatically put in a “reserve” or “hoarded” and available for the next spot market, and the next and the next. The oil produced each month is effectively 100% consumed and no longer available for the spot market. So unless there is a change in the amount actual oil (not future contracts) held in reserve, speculators in the future market are not affecting the spot price.
Mr. Logan,
The report does not appeal to ignorance of the relevant facts on most points. On the question of Special Calls, September does not seem to be too long to wait. Given the rest of what they detail, it does not push up my eyebrows.
Jonathan
mr. house,
‘speculators’ is nothing more than a pc term for a ‘bookie’. and you are correct in saying they are not a ‘wholesome creature’.
TomB:
The whole problem with Freddie and Fannie was that they were not nationalized, but were still guaranteed by the USG. If tax money and political capital is being spent on similarly protecting oil companies and their profits, then why not just socialize the benefits? Reducto ad absurdum, by demanding REAL socialism, it shatters the illusion that the market is in control. The oil speculation bubble is just another example of our current gamed system – not truly free market and not truly socialist – but just enough of each to benefit those that ‘get it’ (and are lucky enough to be in a position to exploit it). Which is, after all, not so different from the way that Soviet society functioned.
The following from the Financial Times seems relevant:
http://blogs.ft.com/maverecon/2008/07/time-for-comrade-paulson-the-pull-the-plug-on-the-fannie-and-freddie-charade/
So let’s call a spade a bloody shovel: nationalise Freddie Mac and Fannie Mae. They should never have been privatised in the first place. Cost the exercise. Increase taxes or cut other public spending to finance the exercise. But stop pretending. Stop lying about the financial viability of institutions designed to hand out subsidies to favoured constituencies. These GSEs were designed to make losses. They are expected to make losses. If they don’t make losses they are not serving their political purpose.
So I call on Secretary Paulson, Chairman Bernanke and Director Lockhart to drop the market-friendly fig-leaf. Be a socialist and proud of it. Come out of the red closet. The Soviet Union may have collapsed, but the cause of socialism is alive and well in the USA. Granted, the US version of socialism is imperfect thus far. The federal authorities have mainly intervened to socialise the losses in the financial sector while allowing the profits to continue to be drained off into selected private pockets. But that is bound to be an oversight. It surely cannot be the intention of such committed Marxists to target taxpayer-funded largesse solely at the very rich and at a few favoured, electorally sensitive constituencies. Fannie and Freddie are, or will be, safe in the hands of comrades Paulson, Bernanke and Lockhart.
In response to a post of mine Curious wrote:
“actually the main point will be ‘not doing a bang up job.’ That the government will not optimize oil exploration for profit but to seek biggest political return if not national interest.”
Exactly right; “to seek the biggest political return.” So they’ll end up exploring not where it’s most likely they’ll find oil, but instead in this or that ridiculous area to create some jobs, or not in this or that great area because of protests, or to buy off some Senator’s vote, or to put their dough not into the likeliest new technologies for oil extraction but instead into this or that one to satisfy this or that political fad of the day, or to pump dough into this or that tech center in this or that Senator’s state, and on and on and on.
Here’s government: One of the first guys we sent to Iraq to rebuild its health-care/public health system after we invaded was a guy named James Haveman. And you know what this U.S. government guy thought was the most important thing to start with was? In this country with a typhus epidemic starting and with little or no electricity and therefore little or no running water or refrigeration in nice steamy Baghdad? An anti-smoking campaign….
That’s government.
So without competition (given that what you are calling for is all the oil companies to be nationalized), and then without even the profit motive anymore that comes from shareholders demanding profitability, the government will do things *more* efficiently?
It’s an illusion, Curious. Even if the politicians and bureaucrats were angels it’d still be an illusion. And they aren’t. After all, look at the books they’re *already* keeping in the way of the federal budget: Every dime of this Iraq thing, for instance, “off” budget merely so they can pretend things aren’t as bad as they are. Social security, utterly fraudulently sold as a “trust fund” or “lockbox,” with the receipts it’s receiving now and that it will desperately need in the future when the Baby Boomers start to retire being spent like water right now … on bridges to nowhere and Lawrence Welk museums. Fannie and Freddie, allowed to either put the entire economy in the risk of a meltdown or to add some $500 trillion to the federal debt….
Why do you think that when it comes to running an oil business suddenly they’d suddenly become ethical virgins again?
And as to those profits of Exxon and etc., you bet I think they are being more efficiently spent than the gov’t would. They’re being reinvested in new technologies and oil field acquisitions, and going into private people’s pockets, where it’s reinvested and saved and spent by its owners far more smartly than the gov’t spends the taxpayer’s money.
Plus, even if the gov’t were comprised of angels, there’s just too many decisions to be made for any centralized system to even try to make. Where to drill, what technologies to pursue, where to explore, how to even *price* their product given that they have no competition….
Let the self-interested greedy wolves devote themselves to it in the hope of striking it big. Let ’em swarm those problems like hungry rats. And just like we’re seeing now with this oil bubble collapsing apparently, some are gonna turn out to lose their shirts and some are gonna win. And so are we from the fruits of their competition unless you wanna just cut off our noses to spite the winners’ faces.
It’s an illusion, Curious. A very appealing one that seems to make sense on its face. So appealing it captivated about half of mankind for over 100 years. But it’s an illusion.
Cheers
Colonel,
I would be extremely cautious about reading the tea leaves of this price drop and inferring the price was pure fevered speculation.
For the Olympics, China has mandated that half of the three million cars in Beijing remain off the road each day, and is mandating that hundreds of factories shut down. All this so that the air be “free” and clear of its choking pollution as the Olympic guests arrive.
It remains to be seen if Beijing mandates more factory shut downs from cities ‘upwind’.
Too, tight Olympic security measures have restricted transportation around Beijing of late, slowing what remains of Greater Beijing’s production capacity.
My point is, I see the current oil price drop coinciding with the “virtual shut down” of Greater Metropolitan Beijing with it’s cars and factories. China’s oil demand has decreased in the short term.
But what will happen after the Olympics, and the Chinese factory juggernaut comes back on line?
On top of this, we have the contraction of the American economy due to high energy and commodity prices. Our own demand for oil has decreased.
We must wait and see.
After the Olympics, let us once again peer into the bottom of the cup.
Mr. House,
You wrote: “Would you agree with the following? Except for a small amount that is “consumed”, once mined gold is automatically put in a “reserve” or “hoarded” and available for the next spot market, and the next and the next. The oil produced each month is effectively 100% consumed and no longer available for the spot market. So unless there is a change in the amount actual oil (not future contracts) held in reserve, speculators in the future market are not affecting the spot price.”
I’d definitely agree. I think there’s a layman’s notion that if you pour dumb money into a market, it must go up. True enough in some markets. A good example of this is the increase in P/E ratios on the S&P 500 since the explosion in popularity of index funds. But if we’re talking futures markets…well, that’s just not the same thing.
What I’m missing in this discussion is a “how.” Everyone seems to be assuming that the market is being manipulated, and speculators are making a killing, but what I’d like to know is the mechanism by which they’re doing it. I can explain to you how mortgage securities were manipulated, I can explain how Lehman’s stock has come under pressure, I can explain how Enron drove up the price of electricity in California. What I don’t understand is how speculators are influencing the price of oil through futures markets. Perhaps there is a way this can be done, but I don’t know what it is.
Exactly right; “to seek the biggest political return.” So they’ll end up exploring not where it’s most likely they’ll find oil, but instead in this or that ridiculous area to create some jobs, or not in this or that great area because of protests, or to buy off some Senator’s vote, or to put their dough not into the likeliest new technologies for oil extraction but instead into this or that one to satisfy this or that political fad of the day, or to pump dough into this or that tech center in this or that Senator’s state, and on and on and on.
Posted by: TomB | 25 July 2008 at 02:00 AM
Right so what’s the problem? Maybe slightly less efficient, but they still have to find oil unless they want a fuel riot right?
Also note: our so called efficient oil industry/market economy is giving us extremely unstable and high oil price. And this situation will happen again now that everybody know how the system at large can be manipulated. Russia, China, europe, midle east all know what button to push to put out of control US policy in check.
“Let the self-interested greedy wolves devote themselves to it in the hope of striking it big.”
actually, all the big guys ends up gobbling each other then only less than 3 players left and they all form market monopoly. That’s how free market work. Every single one of market class. That’s the mathematical model say if there is free market.
Everything will end up a monopoly in truly “free market”. (so you observe, train, airplane, shipping, car manufacturer, airplane industry, etc etc)
and they all own congress. But oil industry is a different class of monopoly.
And that my friend is what you have in so called “free market” that you are thinking.
But don’t believe me. wait until a single giant oil company finally doing a coup. (I’ll be around to say ‘I told you so’)
It happens EVERYWHERE. That’s why all oil rich states are so screwed up and have stunted development. Efficient investment is what corrupt politics is about. It’s cheaper and far more profitable to bribe and change the law than real investment in human resource development.
Curious wrote:
“Also note: our so called efficient oil industry/market economy is giving us extremely unstable and high oil price.”
Oh my goodness, Curious, you think it’s high? First of all it seems to me clear that the instability of the prices you complain about derives not from the oil companies or the fundamentals of supply and demand but due to the actions of the very political bodies (i.e. countries) that you want to take over the oil business completely. Yesterday they’re at war over this, today over that, tommorow over something else….
And secondly think about the cost of a bloody gallon of milk in comparison. Or even a bag of sand. Geez. That oil in your tank is coming from some godforsaken place in the arctic, or in Saudi Arabia or Asia, or from deep beneath the North Sea. Take away the taxes on oil and then figure it first had to be located, and then tapped, and then transported (at what … 8 lbs. per gallon?), and then refined, and then transported to your local gas station, and you think it’s *high*?
Indeed, it’s been the *low* price of oil that’s really the fundamental stick in the craw of the enviros, isn’t it? It’s too cheap and so we rely on it too much. I mean … given all that’s involved in getting isn’t it amazing that it’s *still* a helluva lot cheaper to burn it for energy than tapping the freaking sunlight?
“That’s why all oil rich states are so screwed up and have stunted development….”
Well first of all I note how this is a 180-degree change from your previous exhortation for us to *emulate* all these others. So now you appear to be on board with me in observing that in good part it’s precisely *because* these folks have so nationalized things that they are so screwed up.
It ain’t that capitalism and competition is perfect, it’s just the ugly fact that life is a matter of choosing amongst less than perfect alternatives.
Cheers,
Mr. Sheperd,
The “how” is an interesting story. There were six hours of testimony given to Congress on June 23rd. I recommend at least
part 1 (of 4) for the gist.
http://www.c-spanarchives.org/library/index.php?main_page=product_video_info&products_id=206134-1&highlight=
Finally something I agree with the Colonel on, “think for yourselves”.
Let’s see, the value of our currency has has dropped 40%, the rise of the consumption of oil each and every year outstrips all new production all the while the biggest fields we’ve relied upon (Cantarell and Gawahr amongst others) show massive rates of depletion. Yes, it’s the speculators causing the problem.
Please people, think for yourselves. Stop letting the government and those who seek to blame others for the circumstances we’re in think for you. This crisis will only grow, and demanding gov’t action of a demand/supply problem is no solution at all. It wreaks of weakness and immaturity and is no better than the way we are bailing out the financial institutions.
And as I and a few others have mentioned, oil has played the forward and back game over and over again since 2002. Be smart, and take advantage of any the price break. The government can’t save the oil price. What’ll it be, global depression or an ‘expensive’ oil price? You get one or the other, but not both. It’s the world that Greenspan built, we’re just living in it.
I am really pleased to read that “the heard mentality” seems to run amok in the US of A.
Thank God we are Canadians, unfortunately, our Canadian George Bush, also seems to want us to think the same way…..
Note that once Norway and Britain’s oil fields are depleted (2015?) the number of nation’s with privatized oil companies will be less than a dozen. I would argue that lobbying fees alone, but also add in tax expenditures through depletion allowances and write-offs and leasing from federal land make this industry like FNMA and FHLMC an industry with privatized benefits but socialized costs. Arguably except for ethnic cleansing, the corporate statism represented by fascism in the 20’s 30’s and 40’s, is very very close to what we have here. One difference, reasonably free elections held every other year, but without federal voting standards and low voter turnout almost always guarantees incumbency and no real oversight by the public. This year might be different.
“Is the price of oil today too high given the fundamentals? Could be. Is it too low? Could be. But one thing I’m sure that’s too high is the confidence on the part of those who insist they know the answer.
James Hamilton at the Econbrowser cautions those who claim to “know” that the price of oil is either too high or too low.
Not to deny that the oil markets may have long way to go on the downside, there are credible people who think that speculators play a valuable roll in helping to lay off risk. Here is one who thinks oil could go up due to curbs on speculation.
For those to whom this may apply
We are now down about $23/barrel from the high. Let me know when your search for “credible” opinion begins to splinter under the pressure of reality. pl
Ah Colonel, you’ve constructed an unscrewable pooch of an argument: The price goes up and “it’s speculators!” The price goes down and … “it’s speculators!”
That said I think I understand what you mean by “speculators” now and while I am of the school that in the main they help spread risk and don’t have bad consequences, I’d fully agree they’re a greedy bunch of bastards. So even though we disagree we can both be happy that a good number who went long on this bubble are now taking it in the shorts but good.
Cheers,
Tomb
Of course the discussion is of Obama’s character. You don’t actually believe campaign policy statements, do you?
In re my “uscrewable pooch” of an argument. Yes. you get it. Investors made the short term price go up. Nothing illegitimate about that, just bad for the rest of us. Now their flight and fear are taking the short term price down – down – down – down. pl
The long term upward move of oil will continue unabated. Markets move forward, get too crowded, they pull back and the process starts again. Look at gold, oil, and commodities in general over the past 6 years. Oil has retraced, and has more room to retrace to the downside before moving forward again. And as much as anything, it’s our currency. Why people don’t grasp this concept bewilders me. The cost of oil has not risen 4 fold for other nations b/c there currencies haven’t dropped in value as has ours. It’s a pretty simple concept and one the readers of this forum should understand.
Until there is a viable alternative to oil or there is a huge economic dislocation, you can count on the price of oil (and everything you need for that matter) to continue to rise. You can’t pump money into a financial system as the Fed has done, and not expect inflationary damage to run rampant. If you must blame somebody because you haven’t been able to either take advantage of the situation yourself, nor figured out how to live your life not overly dependent on oil blame Fed policies. But please stop crying ‘speculators’ b/c all it shows is that markets are something you don’t understand. More gov’t regulation will simply allow the biggest players even more control while shutting down the mechanisms which allow a fair price. Be careful what you wish for when it comes to ‘controlling the speculators’. All you’ll get is even higher prices.
Shepherd
The reason you can’t figure it out, is b/c there is nothing to figure out. The markets are too large for somebody to manipulate. Having lived the other side, where people are sure the gov’t tries to keep the price of gold down, dealing with those who think there are market conspiracies is maddening. That’s an awful lot of people who can keep secret.
whynot wrote:
“The long term upward move of oil will continue unabated. Markets move forward, get too crowded, they pull back and the process starts again….”
I don’t know what the long-term move of oil will be, but to the extent this is saying that a rise will be ineluctable because of the way markets supposedly work I think it’s wrong. The way I read some quickly looked at data from before 1950 until the OPEC business started in 1972 not only did the inflation-adjusted price of oil decline slightly, but so did the actual nominal price.
From ’72 to ’79 it was then of course kept real high (reaching an inflation-adjusted peak of about $100 per barrel), and then declined precipitously and bottomed out in about ’84, Until about ’90 then there was a slight rise, a sharp spike in about 1990, and then again all the way until ’98 a gradual decline.
In short, there’s seems to be real long periods of fairly stable if in fact not declining oil prices, punctuated by what seem to be … politically caused spikes for want of a better term. And if I recall the nominal price of oil right before 9/11 and the Iraq war was at only about $25 a barrel, which was damn close to what we were paying in that only-once-interrupted and thus fairly stable 1984-’98 period, if not below it in inflation-adjusted terms.
Maybe they’re right, but those who are so confident that oil is now only going to be in the (relative) stratosphere sound an awful lot like a lot of people back after ’72 who now look so foolish. Seems to me an argument can be made that if you just leave the market alone, it’s done real fine.
“But please stop crying ‘speculators’ b/c all it shows is that markets are something you don’t understand.”
Oh, there have been instances where speculators have indeed caused all kinds of problems and phenomenon in different markets. The Hunt brothers trying to corner silver if I recall correctly, and of course George Soros has been accused of doing so with currency trading.
I don’t think that’s the case with oil, but I don’t think you can paint people who believe otherwise as economic illiterates either.
Cheers
If ever we need the SEC to investigate something pronto its John Thain and Merrill Lynch’s new capital raising and CDO write off.
On July 18th – that’s just a week ago – Merrill released its earnings report. No where did they discuss the CDO write-off or the capital raising that would substantially dilute existing shareholders. Now, a week later they take existing shareholders to the cleaners. These statements over the past months by Thain are misleading public investors. This is what Chris Cox should be investigating rather than blaming short-sellers for causing the tailspin in banks. No short-seller forced Merrill, Citi, Bear Stearns and Lehman to commit their shareholder capital to the ponzi scheme of leveraged mortgage speculation.
If this is correct, it answers the question I posed about mechanism.
http://energycommerce.house.gov/cmte_mtgs/110-oi-hrg.062308.Masters-testimony.pdf
The brief summary is that futures prices directly affect spot market prices because spot markets take their marching orders from futures market in oil and a number of other commodities…not the other way around.
from the document:
Because commodities are bulky and costly to transport, spot markets for commodities are geographically dispersed. Many decades ago, local markets relied almost exclusively on local supply and demand to determine prices, with the result being that there were sometimes great differences between prices in various regional spot markets.
This began to change in the 1980s, when spot market participants in the agricultural and energy markets moved to embrace centralized futures markets as the best indicator of overall supply and demand conditions across all spot markets.12 Because of the benefits of price discovery and risk hedging that the futures markets provide to physical commodity producers and consumers, today those participants have agreed to price nearly all spot market transactions at the futures price plus or minus a “local basis” or “differential.”
The CFTC describes it this way: “In many physical commodities (especially agricultural commodities), cash market participants base spot and forward prices on the futures prices that are “discovered” in the competitive, open auction market of a futures exchange.”Platts, which is the leading pricing service for the energy industry, describes it this way: “In the spot market, therefore, negotiations for physical oils will typically use NYMEX as a reference point, with bids/offers and deals expressed as a differential to the futures price. Using these differentials, Platts makes daily and in some cases intra-day assessments of the price for various physical grades of crude oil, which may be referenced in other spot, term or derivatives deals.”
In other words, these futures markets do not operate in a disassociated way from spot markets, which is what many people on this board, including myself, have assumed. They are, in fact, the market.