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Behind Skyrocketing Oil Prices
Yesterday comes the news that the Commodity Futures Trading Commission (CFTC) is investigating potential manipulation of the oil trading market.
That's a good thing, though the CFTC is not exactly the most aggressive regulator around. (Says Judy Dugan of Consumer Watchdog: "On its face, the investigation smacks of the fox investigating a hen shortage in the chicken coop.")
Market manipulation may be contributing to the recent oil price spike -- though even in the worst case, it is only part of the story. The most important factor is supply and demand: supply is having trouble keeping up with unabated demand growth.
Are Wall Street firms and hedge funds in fact manipulating the oil market? Perhaps. There are certainly enough conflicts of interest, and unregulation, to make such activity plausible. These aren't exactly guys with an honorable track record.
Whether speculation is driving price up is a separate issue from manipulation. Investment dollars are pouring into oil futures, pretty clearly driving up price. This reflects supply and demand for oil futures as an investment tool, more than available supply and demand for actual crude oil. Some nontrivial portion of the recent run-up in price is almost certainly due to this speculative activity, which is fueled by leveraged buying (use of borrowed money).
At the end of 2007, with oil prices around $100 a barrel (a shocking height, just half a year ago), Jennifer Wedekind, my colleague at Multinational Monitor, interviewed roughly a dozen oil analysts about the price of oil. They were divided on the reasons for high oil prices of $100, with some agreeing that speculation -- but not manipulation -- played a role and others fiercely denying it.
Among those attributing some role to speculation was Linda Rafield, a senior oil analyst, with Platts: "We have seen money market funds and asset managers and portfolio managers definitely putting money to work in the commodities sector, and that certainly has bolstered prices, since most of those people notoriously will trade from the long side." Against speculation as a factor was Jeff Rubin, chief economist and chief strategist, CIBC World Markets. Asked what factors were driving the price spike, he said, "Certainly not Middle Eastern instability or speculation or so-called geopolitical factors."
Six months later, it seems like speculation has become increasingly important. It's just very hard to identify what has happened in the last half year to jump prices by a third.
A second key factor in rising prices is the decline in the value of the dollar. A barrel of oil today is worth a barrel of oil tomorrow. If the dollar is worth less tomorrow than today, then the dollar value of a barrel of oil will be higher tomorrow. Against a basket of currencies, the dollar has fallen by 25 percent since 2003, and considerably more since its peak in 2001.
But, whatever the allocation of blame for today's price, the most important factor in the big picture is supply and demand.
Global demand is growing at a steady clip, thanks to very rapidly rising oil use in China, India and the Middle East.
Global supply is stretched thin. Some argue this is because the world is at or near "peak oil production," a tipping point when half the world's oil has been extracted, and yields begin to decline, with very major price effects.
A different view is uncomfortable with the apocalyptic element of peak oil theory. From this vantage point, more oil -- or close substitutes, like tar sands or shale -- is available, but it is harder and more expensive to get. This is the preferred view of the oil industry analysts (many of whom note that much oil that is easily attained from a technological standpoint -- for example, in Iraq -- is hard to reach for political reasons).
Either way, the supply challenges combined with rapidly growing demand means the world is going to see steadily higher prices. Additionally, very tight supplies will inevitably lead to price spikes that appear irrational from a close-up view.
Says Charles Maxwell, senior energy analyst at Weeden & Co: "So long as capacity utilization in the world crude oil producing system is running at 98 percent, which it is today, and so long as perhaps one-and-a-half, 2 percent, that's excess, is in the form of Saudi heavy, sour crudes, which the typical American refinery can't use any more of -- they use some, but they can't use any more of because it has very serious effects in pitting the insides of these pipes and then requiring the refinery to shut down for a long time and the redoing of all the pipes -- we're going to have these periodic price rises of this sort."
Explains Maxwell: "Any system needs to have a little cushion between adversity that strikes -- weather factors or cut-offs for political purposes or political struggles from civil wars. We don't have in this system enough of a cushion. Normally, capacity utilization is considered ideal around 94 to 95 percent. So our 98 percent capacity utilization is well above that and we can't get it down, because it takes 5 to 7 years to create it and we aren't spending the money today that would create it 5 to 7 years out."
So, by all means, forward with a robust investigation of market manipulation, and yes to re-regulating oil markets that are now too financialized and removed from the buying and selling of real oil.
But the supply-demand challenges facing the world are much more serious than the speculative and other factors contributing to the present run-up in price.
It's hard to imagine why the United States -- or the world -- would need more incentive than responding to climate change to invest in renewables, mandate much tougher efficiency standards for cars and a switch away from the internal combustion engine, and massively scale up public transportation. But climate change doomsday scenarios have, so far, not proven enough. Perhaps the prospect of $200/barrel oil will.
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AS the Boston Globe article makes clear, the Senate hearings, and most other oil people know that there is NO oil shortage and that the price rise is all speculation driven. It is only Obama, Bush, Cheney and other people who want high oil prices for their own reasons who wish to propogandize that we can do nothing about the price rise. This article gets it wrong as to what kind of oil most US refineries can handle. Over 75% of our refineries can take sour crude not the small fraction the article says. In all refinery processes, we use corrosion inhibitors which minimize the problem. The crude stills rarely have to come down for turnaround and at the refinery where I worked for many years, the crude stills came down once every six years on average. That was not for corrosion reasons, but simply other maintenance issues such as bubble cap replacement, exchanger cleaning, inspection, etc..
It is a bad sign that some people will continue to push the Bush/Obama party line that we can do nothing for political reasons rather than rational ones. For Obama supporters, I would say that you should be wary about being on the same side of an issue with Bush. You say that Bush lied about Iraq, yet find him credible on the price rise. Given all the evidence to the contrary, I think it is time to abandon that ship now before the election.
I love this. Somebody says there are 15 tankers full of oil off Iran's coats and everyone runs with it. Somebody says specualtors are driving up prices, as if some of the money at the pump goes into their pockets. Well there are still people that believe David Carradine knew Kung Fu. What are you gonna do.? Karate chop them over the head.
WHAAAAT???? David Carradine was not raised by Monks in a Shaolin temple? You gotta be kidding!
:-)
I thought about that tanker thing... and was wondering... could it be that we have too many oil tankers? Did they overbuild the fleet for supply that has never materialized?
So, if they did, and these things are unused at the moment, what would they do with the tanks? Keep them empty or fill them with oil to prevent rusting?
I am just speculating. Maybe somebody who is in the oil tanker business can fill us in.
Oil tankers have increasingly been refitted to serve as offshore holding facilities; I do not know what the critieria is for conversion, but would speculate that it has much to do with the cost of reworking the powertrains and navagations systems on older vessels--it's probably more economically sound to use them as holding facilities than to spend the money to update them. I doubt there was an overbuild, but a 20 to 30 year old tanker with outdated nav and drive systems and a structurally sound hull/tank compartments would be a perfect candidate for a semi-stationary holding facility.
I know of one such facility off the coast of Nigeria [near Calabar and the border with Cameroon] where the stern of the tanker has been attached to a four-leg platform via a huge pivot-ball mechanism that allows the tanker to absorb the shock of high winds and seas and still remain essentially stationary. Very long transfer hoses are utilized to transfer oil from the stationary tanker facility to fully functional tankers, which allows those vessels to circumvent the inland navigation / tugboat / landlocked pumping station issues.
If the cureent price of oil is just a speculative bubble - then it will eventually collapse.
And that is actually a bigger problem than having the price of gasoline at a painful level.
If gasoline prices stay too high, we will all eventually buy more efficient cars and build mass transit - and this would be in our best interest for a peaceful future.
If gasoline goes back to $2/gale the US will go to sleep on this issue and someday we have a much bigger problem.
Oil will never go back to $2 a barrel. The huge demand from China and India are racking up prices. We could have avoided this but for the greedyb******s in corporate America and other countries. Bush and Clinton are in bed with the Shieks in Saudi. You won't see a true donor list to the Clinton Library cause they are on it.
Totally off course here. China's consumption this year has dropped by 3.5 %. Did it
affect our oil prices, heck no. Has nothing to do with it. Iran and Saudis have their
oil now stored on tankers in the ocean and those are not even being counted in the
oil inventories. The future's market is the blame, it is UNREGULATED! Now finally
someone exposed it and congress is looking into it. Only now the investors, who lost their shorts last year on oil, are now jumping to other commodities driving up the prices like food. We all need food!
When Jimmy Carter was president, we had lengthy gas lines. We were going to go off gasoline driven cars in the immediate future. However, Exxon, Mobil, etc made sure this would not happen as did the Detroit big 3 and Reagan was very pro business as you know, but so was Clinton, Bush, etc. Need I say more? This did not have to happen. Brazil is totally independent of all oil. Corporataracy is running the world. We have to begin to change thing asap.
Independent for Obama '08
REAL Patriots for Obama '08
Oh, those Brazilians! Oh, those pesky Brazilians! How can they be independent of oil imports? Let me show you how:
http://www.nationmaster.com/graph/ene_oil_con_percap-energy-oil-consumption-per-capita
US (2004): 70.593 bbl/day per 1,000 people
Brazil (2005) : 11.266 bbl/day per 1,000 peopl
Once US citizens use SIX times less oil per capita, the US, too, will enter the league of net oil exporting nations.
Beware of comparing apples and oranges. You might just draw a lemon.
It seems to me that since oil is nearly "essential" to our way of life, that to manipulate it's value by future's trading should be regulated, taxed heavily, or in some way discouraged. For those who ACTUALLY use it in the course of doing business, they should be the "players" in this "game". The American consumer has cut consumption by some 7%, oil is available to all gas-providers yet the price soars. It is the combination of the "perception" of strained production, threats to said production, and money looking to "grow" that is wreaking havoc on the consumers that have little alternatives to car-use and the need to put coslier food on the table. It is a recipe for a contuing decline in our way-of-life!
Why is using two to many times as much oil as almost everyone else essential to your life? Do you gain anything from wasting more than you need? Does it make you feel better in any way, shape or form?
I don't thinks so. Right now you seem to be rather miserable about it.
Supply and demand, speculation, peak oil ... all of them contribute, but the bottom line is manipulation of supply by a deliberate constriction of the flow by vertically integrated oil companies.
Vertically integrated oil companies like Pemex, Aramco, PDVSA etc.?
Sure, why not. As long as enough people believe it, it must be so. But once you are done believing and you want to read up on reality, I would start here and then follow the links...
http://en.wikipedia.org/wiki/National_Oil_Company
Here you go guys!!!
The reason for sky high Oil Prices --- outside of demand it is manipulation.
the story
http://www.boston.com/news/globe/editorial_opinion/oped/articles/2007/07/17/how_traders_gamble_with_your_energy_dollars/
then here is the documentation!!!
http://www.rsi-ireland.com/documents/DarkPoolsVol2.pdf
NOW GET MAD AS HELL !!!!!!!!!!!
Feeding the dogs, again?
If you go to my Stumble Upon site the article video on top is from C-span this week..
It's Michael Greenberger the former Director of the Commodities and Futures Trading Commission..
He explains that this huge rise in Oil prices has nothing to do with supply and demand but strictly market manipulation and criminal speculation by the very traders who brought us the Enron scandal due to the Enron loophole slipped through Congress at Midnight by one Senator Phil Gramm of Texas Texistan I call it..
Phil Gramm is a swindler of the first order and John McCain's chief economic adviser which is like making Willie Sutton the Treasurer of the United States..
60% of these prices may be due to speculation and criminal manipulation by the traders of Enron who were themselves then hot commodities and who are running up the oil prices in what Greenberger refers to as "Dark Markets"
It's at the top of page one C-span Michael Greenberger this is one of the biggest swindles in American history, and McCain is aligned with these swindlers who are actually engaged in asymmetrical economic warfare with America and the American people and our western allies..
http://tjtele.stumbleupon.com
You hid it well, but you said it: the dollar has fallen 25%.
Furthermore... the US is a belligerent nation, itching to start World War III and to profit handsomely thereby. How does one stop such a nation without firing a shot, and perhaps avoid war? This is a very good strategy.
You are dead wrong. Supply and Demand have nothing to do with the run up of oil from $60 to $135 a barrel. The Supply Demand curve is quite different and a lot steadier and slower in its rise. The real price of oil is about $67 a barrel and the rest is ersatz. It's called speculator frenzy and greed. To put it in a nutshell it is the commodity game. Haven't you ever played Monopoly?
They are tryng to Privatize the Worlds Futures Markets!!!!!
They call them DARK POOLS!!!!
I call it asymmetrical economic warfare against the American economy and the American people and our western industrialized allies...
If a foreign power were found to be behind this we would declare war immediately..!
Well the enemy is largely centered in the rouge state of Texas but there are strongholds in and or around Wall street as well it is our own so called Capitalists who are working to destroy the fortress of democracy..
Capitalism has morphed to become fascist and anti democratic..
Phil Gramm is just a part of it but he is a fascist capitalist not democratic capitalist..and McCain has gone over to the dark side..
Go and try to buy a barrel for "the real price" of oil.
I don't get it - still! It is not their fear mongering like peak oil, hurricanes, attacks in Nigeria, etc.
It never did influence the situation with oil at all. Under Clinton no hurricane, etc. had an impact on the
99 cents gasoline. However, who authorized this "future's market" trading???? Now there lies the
problem. And the sooner we recognize this the quicker we get to recovery. Write your congressmen
and let them know you are fed up and to reverse the Commodities Futures Modernization Act.
Let us do business the way we used to do it - supply and demand with real deliveries. Now they are
just pushing paper and the oil never gets delivered. Also Iran and Saudi are storing their excess oil
now on tankers in the ocean that is how much oil they have and that oil is not even counted.
We should be raging mad for what congress does to us and the whole world.
You are afraid of this stuff? Really? That's too bad now. Fear is a poor adviser. A better adviser would be a look at oil discovery statistics. We have been finding less for decades now than we have been using in every given year. So that means we are running out of reserves. Which, incidentally means, that we are slowly but surely running out of oil to produce. Any child that knows to drink lemonade with a straw understands the concept of a glass being half empty.
Yes, write to your Congressmen and see them throw your letters into the bin. What should they answer in return? That new laws will make new oil in the stones of the desert? Some laws that would be.
Saudi Arabia is storing excess oil in tankers? Really? Well, I guess some are storing excess tap water in buckets, then. Because that is what one does with excess tap water, isn't it?
Vippy, you are such a funny troll. And so inventive.
This trading is just like the sub prime mortgage scam that they leveraged 30 times for each contract!
There was a 1 % increase in demand for oil in 2007 worldwide. Not a 100% increase, like the price has risen.
This was a result of the deregulation of trading, just like Enron and the energy trading scam. It was WHY they deregulated.
Bush's govt has bankrupted this nation and our Congress was applauding and voting yea to all his demands. How many of them can we replace, how many of them should we just flat re-call?
Exactly. The Commodities Future's Modernization Act introduced by Richard Lugar and
Tom Delay and Phil Gramm caused the ENRON loophole, which is directly responsible for the housing, banking and energy collapse.
A futures contract exists as insurance. Let's say an oil company wants to drill somewhere, but it's expensive. If the price drops he'll lose his shirt. So he buys long positions in the commodities market to ensure that at a certain date in the future, he can get a certain price. If the price remains the same, the contracts expire worthless, but he makes his profit from his well. Whoever believed the price of oil would drop is on the other end of that contract, and he loses too since the contract expiered worthless. The only person who made any money on those contracts was the broker who put them together. The general public thinks that there are long contracts as far as the eye can see, but the fact is everyone making money in futures is balanced by someone losing thier shirt. They have to balance out. If they don't prices move until they do. So know what you are talking about before you cry wolf. If you think prices are too high, short the oil market. Otherwise SHUT UP!!!!!!!!
Unregulated Future's Market! It is now being investigated since it was
exposed finally.
There is nothing "apocalyptic" about peak oil. Peak oil does not predict the end of civilization as we know it. It simply tells you that no matter how hard you suck on your lemonade straw, there comes a time, roughly when the glass is half empty, when the sucking gets harder and there is less and less lemonade flowing through the straw. Everybody who ever had a drink with a straw knows this. So what do you do when the drink is almost finished and you are still thirsty? You order another drink! You pay, yes you have to pay for it (!), and then you have your second drink. That second drink are renewable energy sources. And yes, they are more expensive. But we are far from broke and we are honest people, so we are going to pay for it.
I hope you are right.
I usually am. That's why I am driving a Prius and ride the bus to work.
"Against speculation as a factor was Jeff Rubin, chief economist and chief strategist, CIBC World Markets. Asked what factors were driving the price spike, he said, "Certainly not Middle Eastern instability or speculation or so-called geopolitical factors.""
Isn't that exactly what you would say to the press if you were in on a coordinated effort by the international financial elite to hide food and energy price manipulation (aka depopulation of the developing world) behind unregulated commodity futures markets?
I'm just saying, as conspiracy theories go, this one is quite plausible. There's trillions of dollars pouring into these markets, and the laws carefully protect the anonymity of the investors. The price of oil could shoot up to $200 overnight and we'd have no way of identifying or prosecuting the robber barons that are bringing the global economy to its knees.
Is this what the market fundamentalists call the Invisible Hand?
$200/barrel oil is still cheap for what that barrel can do. But nothing stops you from using less of it. President Carter had a very sensible approach to fuel efficiency. It was squarely rejected by the American people. Until today we have absolutely no common sense approach of the general public to energy use. We are at least one generation, if not two, behind the kind of insight that exists in Europe. Is this a tough lesson? Yes. But it is a necessary one because Americans do not listen to reason easily. Reason is a lot easier to reject than a sign that says $6.49/gallon. Those signs will probably pop up at gas stations around 2009. And then people will learn.
No, the invisible finger.
I take issue with the consensus against "manipulation".
First and foremost, organized or encouraged speculation... all the "experts" agreeing that investment in oil futures is a sure bet... is not unlike the housing bubble. Bullish interpretation of the various factors that coincidentally enrich those making those interpretations should be seen as legal manipulation.
Second, with Wall St. and the oil companies involved in the political decisions made that took Iraqi oil off the market in the first place thus eliminating a supply "cushion", and with the Fed purposefully encouraging a declining dollar (again with the support of politicians and Wall St.), delinking those factors is in and of itself a manipulation of the facts.
Third, ongoing sabre rattling that raises the "risk premium" is also a policy decision made by politicians... and to say those politicians aren't aware of the ramifications is pure manipulation. Throw in policies affecting Nigeria and Venezuela, increases in US and Chinese strategic reserves, and policies limiting imports of ethanol from Brazil, etc. and the idea that market forces are at play is another manipulation.
Little about the rise in oil prices is actually based on market supply and demand when top-down decisions affect the market far more.
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Posted May 30, 2008 | 01:58 PM (EST)