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.
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.
:-)
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.
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.
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.
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!
Independent for Obama '08
REAL Patriots for Obama '08
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.
I don't thinks so. Right now you seem to be rather miserable about it.
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
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 !!!!!!!!!!!
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
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.
They call them DARK POOLS!!!!
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..
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.
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.
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?
Tom Delay and Phil Gramm caused the ENRON loophole, which is directly responsible for the housing, banking and energy collapse.
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?
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.