The president's proposals to limit speculation in the oil markets does hint at political rhetoric. There is an instant suspicion, and rightly so, when President Obama unveils measures to attack "high gas prices" and asks for congressional help he knows he's not going to get in an election year.
But political posturing aside, the president is not wrong: Oil speculation, in its many forms, has driven prices upwards and away from the true supply and demand fundamentals that exist.
What's maddening to me, even discounting the political calculus of an electioneering president, is how fast the "defenses" of speculation reemerge whenever any help of new regulations are proposed. While never thinking my book on the topic, "Oil's Endless Bid", would be the last word on the subject, I had thought that the conversation on the financial influences on oil would have progressed. It doesn't have seemed to.
Indeed, from editorials on Bloomberg extolling the "positives" of rampant speculative activity, to the very tired memes of real risk being reflected in price proffered by the Chicago Mercantile Exchange, home to oil futures trading, we continue to argue the same stuff, over and over. From my perspective, it is a continual effort to rage against the machine: No matter how hard or often I tell the real truth of how oil prices are arrived at, there appear an army of protectors of Wall Street profit machines ready to fight. So, again, I will quickly explain why the common arguments that are most often made against speculative influences in oil are inherently wrong.
1 -- High oil prices are reflecting real future supply risks.
Leave for the moment that the market is more than adequately supplied presently, we are in fact swimming in oil, borne out by recent statements by the Saudi oil minister Al-Naimi and our own domestic export of finished products. But if in fact there are very real supply risks in the future, shouldn't the prices in the future be higher than today? In a futures market, we can actually see what prices are expected to do in the future, unlike most other asset markets. And in oil? We are in backwardation -- meaning that as time goes on, prices goes DOWN. A lot.
2 -- Speculation isn't to blame, it's the easy money Fed, devaluing dollars in which oil is priced.
This one has some truth to it, but it is greatly overrated. We saw a $147 peak oil price, for example, in 2008, before the world ever heard of QE, never mind Operation Twist and LTRO's and in a not particularly weak dollar environment. Historically, some of the strongest years in oil inflation were in years of a RISING dollar, particularly 2005. In short, the dollar matters, but not nearly as much as the money chasing the oil trade.
3 -- Speculators help smooth out volatility and crushing them would make oil prices less reliable.
This one's too silly to even challenge. Before the explosion of "liquidity" from high-frequency algorithms, hedge fund programs, investment bank trade and institutional and retail investment, volatility was a fraction of where it is today. Believe me, I've been trading oil for 25 years -- no one EVER complained of a lack of liquidity before 2005, and everyone with a legitimate interest in real oil hedging managed to get whatever they needed to do done. And oil never moved two dollars a day, which it does regularly now.
4 -- Attacking speculators is an attack of floor traders, just regular joes trying to make a living.
Please, the game has moved so far past us now -- we've got nothing to do with what oil trade is about anymore and haven't had any influence (if we ever did), since about 2003. The oil game is overrun with IB desks, hedge funders, long/short punters, algos, HFT's and private trade houses like Vitol, Trafigura and Glencore. And yes, Virginia -- fraud can happen: We've forgotten too quickly about such stellar examples as Enron and Amaranth.
These are not the guys that anyone should look to protect. They absolutely jack up the prices of oil that you and I are forced to pay at the pumps. But they are the beneficiaries of the continued defense of the broken oil markets as they are today. We haven't made much progress.
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Speculation does have something to do with the price of oil and gas. That is not debatable at all.
Daniel's argument about speculation being the only cause relies on his assumption that the effects of the "peak" are still 15 years away.
That assumption is wrong. I don't blame Daniel for his lack of understanding. It is a complicated question best left to the biophysical economists and systems scientists. As he said in his book, "It would be impossible for me to begin to take an educated side one way or the other."
Daniel's distrust of his ability to identify the peak/plateau and its effects were spot on.
Gas prices began the uptrend in late 2003...
http://advisorperspectives.com/dshort/charts/inflation/gasoline-since-2000.gif
...just after the OPEC Spare Capacity hit an extreme low...
http://energypolicyinfo.com/wp-content/uploads/2012/04/spare-capacity.jpg
You can see that spikes in the price of gas are highly correlated with dips in spare capacity.
Below, you can see the plateau in crude production.
http://www.paulchefurka.ca/UndulatingPlateau.png
The world economy is used to and expects a constantly increasing supply of cheap energy. That supply stopped increasing in 2005. This led to increased fuel prices and an economic recession in 2008.
Get over it.
The very first statement in response to (1) above is flat out wrong. Yeah we've heard politicians claim that we're swimming in oil or that the world is "awash" with oil but that is all it is, Politics. It is interesting that the author completely ignores any and all actual data regarding production.
If that data were included you would see that global supplies have been on a plateau since 2005. It is interesting that the author mentions that year multiple times in the article but can't put two and two together. It is probably because the facts of resource depletion would put a crimp in his book's message which does nothing good for book sales.
The world produced a lot of oil in 2000.
The world produced more oil in 2001.
The world produced even more oil in 2002.
The world produced more oil than that in 2003.
The world produced even more oil than that in 2004.
The world produced even more oil still in 2005.
Since 2005? Demand has skyrocketed globally and production has flatlined.
What happens when demand goes crazy while supply fails to make up for the increase?
Even without speculators today oil prices would still be high. The CME increased margins on oil and other products by about 10% about a year ago. Those hikes did some good but look, oil is back over $100.
"Psychological barriers account for the suppression of irrefutable facts and lead to an almost instinctive rejection of in-depth discussion of this difficult issue."
Bundeswehr report on Peak Oil, p. 91. Once you break down those psychological barriers, a lot of stuff over the past decade begins to come together.
OPEC gets richer.
Why have we not declared war on OPEC?
What they are doing in their quest for money is an attack on the American people.
That means he is saying a few things, like the CHANGE CANDIDATE did to awaken his base.
It's all BS Obama and has no chance of ever seeing the light of day.
Demanding he do something about it is setting him up to fail.
Politicians can do NOTHING about the price of oil given the fact that supplies have plateaued since 2005.
If that data were included you would see that global supplies have been on a plateau since 2005. It is interesting that the author mentions that year multiple times in the article but can't put two and two together. It is probably because the facts of resource depletion would put a crimp in his book's message which does nothing good for book sales.
The world produced a lot of oil in 2000.
The world produced more oil in 2001.
The world produced even more oil in 2002.
The world produced more oil than that in 2003.
The world produced even more oil than that in 2004.
The world produced even more oil still in 2005.
Since 2005? Demand has skyrocketed globally and production has flatlined.
What happens when demand goes crazy while supply fails to make up for the increase?
Even without speculators today oil prices would still be high. The CME increased margins on oil and other products by about 10% about a year ago. Those hikes did some good but look, oil is back over $100.
This shows that 2009 was the same as 2005 GLOBALLY, and we have NOTHING BUT DECLINE since 2009.
Where is your supply-demand paradigm coming from.
In the US we are consuming the least amount of gasoline for a dozen years.
Shut down some more refineries to keep the inventory from overflowing.
Jeezum.
If you had looked at it you could see that the consumption leveled off in 2005 at the same time as production. This makes sense because the world can't consume more oil than it produces.
If you had looked at the chart you'd see that your capitalized statement was completely false. Global consumption in 2010 was up a few thousand barrels a day.
Global consumption of crude oil is following the same pattern as global production.
Global demand for crude oil is increasing, despite the plateau in production.
This is obviously the reason for the price increase.
If the world demands 100 oranges and only 80 can be produced, the price of each will go up. How is that difficult to understand?
http://ourfiniteworld.com/2012/04/16/the-myth-that-the-us-will-soon-become-an-oil-exporter/
http://ourfiniteworld.com/2012/02/26/why-oil-prices-are-so-high-production-shortfall-iran-concerns-and-low-interest-rates/
And yeah the US is using much less gasoline due to, among other things, Vehicle Miles Driven falling off a cliff which is in turn due to the recession.
http://www.oftwominds.com/blogfeb12/gasoline-tanking02-12.html
Why are so many people too partisan to think clearly?
Obviously well-informed.
The only rub I have with the whole thing is on the question of whether the President of the United States, using all the muscle that an effective administration can bring to bear on a problem of national socio-economic import, let alone his personal political stake, really NEEDS anyone else to help him to get this thing done.
So the failure, to me, lies in the INABILITY of the President to command an EFFECTIVE administration to do exactly the right thing when it so sorely needs doing.
It's nobody's fault but his own.
The rhetoric against oil-price speculation is of political import.
Yadda yadda, says Obama.
Effective governmental action falls somewhere behind that of closing the medical marihuana clinics.
Thanks, O.
He called the press conference and announced a multi-agency task force.
Why can't he just DO what he said he was going to do?
Come up with a well-documented report on what is needed to END the speculation that has nothing to do with OIL, but rather with trading in pieces of paper.
It's a con.
And we're paying for it.
Thanks.
So the most effective way to deal with the problem is for the non-energy producing states to do what Vermont is doing:
http://www.huffingtonpost.com/rep-bernie-sanders/vermont-is-helping-to-lea_b_1435672.html?ref=green
And in particular the issuing of PACE bonds:
www.pacenow.org
And of course the creation of state banks funded using pension funds, which would give Wall Street less money to speculate with, would help.
This is a physical limit we're bumping into, not an economic or political one.
I don't care how many politicians you get together in agreement. They can't put more oil in the ground or make it come out faster.
This is a physical boundary we're bumping up against. Not a political one.