Friday, February 24, 2012

Here we go again...are speculators driving up the price of oil?



I thought we cleared this up back in 2009, when independent reports concluded that speculation was largely to blame for high oil prices and again last year when a Congressional investigation concluded the same thing. Even Fox News reported that speculation was to blame. I remember, because I was there on Neil Cavuto's show when he did the story on it.

The controversy (and I don't know why it should still be controversial) was reignited yesterday by Nancy Pelosi, when she blamed speculators for the rise in oil and gas prices.

First, the facts: oil production is up and demand for crude and gasoline is down, but prices keep rising. This goes against the most basic law of economics.

Second: According to the CFTC, large specs (funds and swap dealers) are long NYMEX WTI and ICE to the tune of nearly half a billion barrels! And that's only in one type of crude. That's about 50 days worth of global consumption. In other words, take 50 days worth of oil off the market and see if the price doesn't go up. Are you kidding???

Let's be honest; the debate about speculation cuts right through party lines--Republican and Democrat. Repubs claim it has nothing to do with speculators (even though the GOP admitted that speculation was part of the reason) while Dems claim it's mostly about specs.

I'll be arguing on the case for speculation (causing it) on Fox News, tomorrow at 10:00am ET. Bulls & Bears.


11 comments:

Matt Franko said...

Mike,

Get ready for the "but with futures for every buyer there is a seller" argument.

Based on that logic, prices for anything could never go up or down because "for every buyer there is a seller"....

Good Luck!!!

Mike Norman said...

Thanks. I'll remember to use that!

Leverage said...

Speculators drive prices up because they have money to do so. Who is the culprit, the speculator or the one who created too much money.

If someone is to blame is the banks for creating so much money (credit) and the FED for facilitating it. In addition you have massive deficits which can't grow the economy strong enough for J6P to beat inflation but strong enough to funnel money to the top 1% so they can gamble on asset prices.

Tax the hell out of financiers, speculator, etc. and destroy that money and then deficit spend yourself to the little guy until we have full capacity utilization and can see how bad is real inflation (which IMO it will probably very bad because the dependency on fuels for modern societies is too high and peak oil already happened, but let's see it for real).

Clonal said...

Mike,

The key to why speculators are able to drive the price of oil is the capacity of the long haul tanker fleet. Tankers charge for transport on a per day basis. From the point of view of keeping an economy running, this additional cost has to be low. However, speculators can use this low price to their advantage.

The total long haul tanker capacity is around 1b bbl ~ 10 days of world consumption.

However, if I am a speculator, and "invest" $50M in oil, and "store" it in a long distance tanker for a month, my storage cost is low. However, I just reduced the annual available supply of oil. It does not matter how much oil can be pumped out of the ground, if I cannot get it to the user.

Thus, the price of oil will sky rocket. It is almost as bad as a terrorist blowing up a major pipeline!

TomatoBasil said...

What ever happened to Picken's plan for natural gas trucks?
It would have cratered the demand for oil and reduced transportation costs for goods.

Chewitup said...

Correct me if I'm wrong, but don't the Saudi's just sit back and watch the show and adjust the price accordingly?

Bob said...

Who do these traders that are running it up work for?
Realize Exxon will lose 500 million in the crude futures markets to make 2 billion in gasoline sales over the year. The US government is in on the cartel agreement , as they get more sales tax the higher the price.

When looking at market abborations such as euro going up against logic and gasoline spiking on a bullshit media sell con job, look for the real story who is gonna win? by manipulation, are you listening CFTC. By the way if Obama gets the Syrian government to collapse, shortly after will go Iran, and if Iran governmental change occurs, oil spike than a 2 trillion dollar tax break for the US public, and even Romeny would vote for Obama if that happened.

SchittReport said...

you mean it's not because of the FED ????!!!! could have fooled me!

http://www.youtube.com/watch?v=1s7jQteh--c

http://www.youtube.com/watch?v=RHWglRp3ChI

Matt Franko said...

TB,

I believe the PP for NG is going forward but it so far is a very tiny amount (fleets).

Meaningful/large tax credits for petro alternatives would help.

I have a friend who sells Chevys. I went over a Volt deal with him. It is even with the tax credit like you are paying $40k for a $20k Camry. At first they sold them out, but now they have 2 on the lot and my friend is driving one as a demo.

So a $20k tax credit to buy a Volt would help here, but of course our morons think 'we cant afford it'.

Most of their previous customers are reporting they get over 1000 miles between fill-ups.

Resp,

Clonal said...
This comment has been removed by the author.
Clonal said...

Also, in my note about speculators, the speculators play in the futures market. That means that they are leveraging typically in a ratio of 50:1 - so the $50M magnifies to an oil holding of $2.5B - in other words somebody has to hold over 25 million barrels of oil ready to move - Thus tying up that much tanker fleet capacity. This slows down the movement of oil from the producer to the ultimate consumer.

The $50M "investment" ties up 2.5% of the world's long haul tanker fleet

As I said this is equivalent to a terrorist blowing up a major pipeline!