Oil supply run-up in 08 was due to speculation - 60 Minutes report

[JohnWxy]

www.democraticunderground.com/discuss/duboard.php?az=view_all&address=114x53839



"Approximately 60 to 70 percent of the oil contracts in the futures markets are now held by speculative entities. Not by companies that need oil, not by the airlines, not by the oil companies. But by investors that are looking to make money from their speculative positions," Gilligan explained.
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"From quarter four of '07 until the second quarter of '08 the EIA, the Energy Information Administration, said that supply went up, worldwide supply went up. And worldwide demand went down. So you have supply going up and demand going down, which generally means the price is going down," Masters told Kroft.
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more at link with link to 60 inutes transcript._JW

[Lasher]

1. Thank you Phil Gramm for the Enron Loophole.

That needs to be put back in the Pandora's box it came from.

[JohnWxy]

3. I think it would be hard to find any other piece of legislation which caused so much damage to

our country. Enron bilked Californians out of Billions of dollars - not a cent was recovered of course. Of course, thousands of employees lost their pensions as well as there jobs.

then, in addition to the Enron loop-hole, we get the Credit Default Swaps legalization and deregulation! This deregulation of energy markets also promoted the speculation in oil - which the 60 Minutes report talked about(what they also did not get into is that speculation by commodity index fund buyers ran up the price of many commodities including farm commodities: ie. grains - food). This run-up in the price of oil started the decline in the economy and the drop in sales of the auto makers, japanese as well as domestic - (though Senator Shelby would have you believe Detroit's sole reason for being in trouble is the UAW).

When the Wall Street banks started to fold because of inadequate reserves to back up their holdings in MOrtgage backed securities - (they held Credit Default Swaps on them so they thought they could hold inadequate reserves on their own balance sheet) - so when the CDSs started to fail this produced the tightening of credit and this then killed all credit based purchases - especially cars and houses. Combine this with a housing industry bubble caused by recklessly - expansionist monetary policy by the Fed meant to prop up an economy that was in weak in every other sector but housing and you have the makings of our current disaster.

but the lid was really blown off everything by the CFMA. Phil Gramm's CFMA and the DEREGULATION it accomplihed has done far more damage to our country than Bin Laden could!

DEREGULATION - REPUBLICANS SAID WE WOULD ALL GET RICH! RATHER THAN MAKING US ALL RICH SOME ARE GETTING RICH WHILE MOST ARE GETTING POOR. THIS IS REDISTRIBUTION OF THE WEALTH REPUBLICAN STYLE.

a View from the edge - http://www.geocities.com/jwalkerxy/Republican_Dystopia.htm">of the Republican Dystopia

[jpak]

4. but...but...but...it was BIOFUELS that ran up food commodity prices last year...

:evilgrin:

[JohnWxy]

7. so the World Bank would have you believe,

[Fledermaus]

21. A deliberate attempt to confuse and mislead the American public

who are still waiting for lower prices in the supermarket

[Lasher]

5. You seem an intelligent man.

I am often astonished at the number of people who fail to grasp the significance of derivitive trading deregulation. Gramm-Leach-Bliley was another blunder, but not of the magnitude of the CFMA.

[JohnWxy]

6. But you will never hear anyone on M$M breath a word about the CFMA. Yes, they will talk about the

greed on Wall Street, but greed has been around since humans stood upright and could grasp what they wanted with both hands. That's why we need regulation of investments and speculation (and limits on speculation). The CFMA set the circumstances for inevitable disaster. But you will never hear corporate media say this. Thus about 98% of the population has never heard of or even knows what the CFMA did.

This shows the power of the press (and televised news) - not only to inform but sadly to dis-inform too. (I will say that '60 Minutes' and 'Bill Moyer's Journal' have provided about the best covereage of this subject on M$M - although even here they won't identify the CFMA by name.)


This is why people are 'bailing' to the internet to get informed!


bill Moyer's Journal report on Credit Catastrophe http://www.pbs.org/moyers/journal/10242008/transcript2.html

60 Minutes report on CDSs: http://www.cbsnews.com/stories/2008/10/05/60minutes/main4502454.shtml

[Lasher]

8. Saying greed caused the financial crisis is like blaming water when someone drowns.

This pretty much sums up the whole thing for me:

"Those of us who have looked to the self-interest of lending institutions to protect shareholder’s equity (myself especially) are in a state of shocked disbelief." - Alan Greenspan during October 23, 2008 testimony before Congress

And there you have it, the conclusion of our disasterous national experiment with Invisible Hand economics.

[LiberalFighter]

2. How long were the contracts for? Maybe we can create a loophole...

that would require them to sell the contracts back now.

[Idealism]

9. The answer of how to get rid of these speculators is quite easy

make them receive shipment of the goods they are buying the contracts for. That would keep farmers in the market for future contracts, but keep the assholes in Morgan Stanley largely out of the picture.

Simple, no?

[Indenturedebtor]

10. Simple yes... but I would suggest one change

Make them "eventually" recieve shipment. Locking in prices in advance can be a great thing to smooth out the impacts of temporary price hikes and dips.

[Idealism]

13. Eventually is too much of a loaded term

Legal manipulation can get around that, and we are back to square one. Locking in prices in advance are what farmers, people who need winter home heating oil, etc can do and they do take delivery, so there is really no problem in making that a condition.

[Indenturedebtor]

18. Eventually could be defined by industry though. Say 6mo's for airlines etc n/t

[Idealism]

23. I rather put my foot down, lest they lobby for their cause and change the outcome too greatly

They will, after all, follow their economic self-interest, at the expense once more of us.

[tom_paine]

11. Translation: The Bushies were setting up their customary pre-election gas retail price drop.

And we get the usual shrugging confusion from the Toaady M$M, who wouldn't DARE investigate Bushies in such a way, as their jobs would be forfeit from the moment they strayed off the corporate set path.

But give them a little credit over at CBS. At least they sort of were allowed to get into the ballpark with the Official Explanation.

"Speculators."

:rofl:

Yeah, just those bad old anonymous speculators...

:rofl:

[wordpix]

12. and did these speculators get some of the first $350 billion TARP bailout funds?

:shrug: I have no doubt they're getting it - just look at how BushCo-Paulsen are hiding the facts about where it went.

[poopfuel]

14. although, see analysis below

http://www.ritholtz.com/blog/2009/01/oil-speculation/

. Oil is priced in US Dollars. Since 2001, the Dollar fell 40% (from 120 to 72); Oil rise nearly 5 fold over the same period. And Oil’s collapse occurred over a period when the dollar formed a short term bottom; it has certainly had its most significant rally in years (72 to 88).

2. Over the same period that Oil prices were rising, the US was fighting two major wars in the Middle East, Iraq and Afghanistan. These impact prices via psychology and risk of supply disruption — especially at a time when producers were running flat out.

3. Energy prices rose during a global economic expansion (fueled by low rates and cheap money); Oil fell during a period that marked the beginning of the US recession and the start of a global slowdown.

4. Since 2001, Commodities of all sorts rose significantly: Steel, aluminum, cement, cotton, soy, livestocks, foodstuffs, precious metals, etc. Were they all driven by speculation, or was something else going on?


Snipped

[Nederland]

15. Yup, and I lost a Peak Oil bet because of it...

Damn speculators :)

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=266&topic_id=1535&mesg_id=1535

[phantom power]

16. But you were a mensch.

[Nederland]

17. Why thank you

I never knew you liked me.

[phantom power]

22. But of course.

I have decided to put some effort into disagreeing with people, without being disagreeable. That means witholding my gift of sarcasm, which I'm probably going to fail at. But that's my plan.

Plus, you graciously admitted you were wrong. On the Internet. In a peak oil forum. Even though you might not have been completely wrong. It makes you a role model, and possibly a candidate for a nobel peace prize.

[happyslug]

19. But it meant the speculators were NOT into it till the last quarter of 2007

And at that time, the price was way above your bet. The recent drop is as much a product of that gain from the fall of 2007 to the summer of 2008. The basic oil production problem still exist. The Speculators just ran with it. Krugman said in the Summer, that the numbers did NOT fit a speculation bubble pattern, for there was NO increase in inventories (Always a sign of market manipulation of price). You only started to see an increase in oil inventory in August, as the bubble burst. Thus the price was going up, speculators were getting into the market (Which is typical of any tight market, the money goes where it can make the most money) but it was NOT till the summer that people STOP driving to the extent that US oil usage dropped over 5% for the year. That drop in usage was what caused the bubble to drop, for less people wanted oil come august and when you have people out of market demand is less, and thus the drop in price.

It appears now to have bottomed out. We are now while below many of the marginal players cost of producing oil. Thus supply will dry up and with the drop in price demand will go up and then will price. The big question is going to be how far and how long will it take? I would not be surprise if we see another slow raise in price like we had from 2002-2007. First do to increase demand, then do to reduced supply. Any one who has studied oil (and Coal) industry is that unless someone is controlling the price (And in most of oil history, price has been controlled 1865-1912 by Standard Oil itself, c1930 till 1969 by the Texas Railroad Commission do to its control of Texas oil production, from c1975 till c2000 by Saudi Arabia do to its low price of production and massive Reserves). The question over the last 8 years has been how much can Saudi Arabia actually increase in production? The House of Saud says yes it can but do NOT reveal the records from the fields that would support that claim, while other who are familiar with those fields do NOT think it can be increased by much.

When no one controls the price of Energy, that price goes up slowly then crashes. It does this over and over again, as people buy more energy do to its low price, that pushed up the price, this increase demand permits people with higher cost of production to come on line, this satisfy the demand for a time, then speculators look into the raise in price and enter the market and proceed to push the price as high as they can, then it crashes as demand drops and can no longer support the high price (And speculators stay in the market, this time to speculate on how low it will go, dropping it below the price it should be, and then the whole procedure starts all over again).

I will NOT go into all the details on Peak Oil, and how it will figures into the above, except to say, it is the driving force for the slow increase in price over the last 8 years and will be again in the years ahead. We are NOT producing all the oil the world demands when the economy is running at 100% (The present Recession will affect the price of oil do to the drop in demand given the world wide drop in demand to transport goods all over the world).

As to the comment about the Enron rule, it seems to protect the Speculators but its affect on the price of oil was probably marginal. Most the Speculators did not really care if anyone knew if they were buying and then selling, as long as they were making a profit. The problem was NOT the Enron Rule but the fact no one was willing to take charge of the price of Oil. Enron had used a similar run up of the price of Electricity doing the California Electrical crisis, but again had Bush or someone else in the Federal Government had stepped in and Regulated the price it would have been stopped while before it did. Let us be honest, it is the failure of the Bush Administration to regulate ANYTHING.

[JohnWxy]

24. Speculation in Commodities really began growing in 2002 - Michael Masters testimony to congress is

very informative on this issue (Masters is a hedge fund manager so he knows this subject very well). Michael Masters testimony to the Committee on Homeland Security and Governmental Affairs, United States Senate - May 20, 2008


"Today, Index Speculators are pouring billions of dollars into the commodities futures markets, speculating that commodity prices will increase. Chart One shows Assets allocated to commodity index trading strategies have risen from $13 billion at the end of 2003 to $260 billion as of March 2008,5 and the prices of the 25 commodities that compose these indices have risen by an average of 183% in those five years!" (that is the investment in commodities index funds has gone up 20 times over those 5 yaeears._JW)
~~
"In the popular press the explanation given most often for rising oil prices is the increased demand for oil from China. According to the DOE, annual Chinese demand for petroleum has increased over the last five years from 1.88 billion barrels to 2.8 billion barrels, an increase of 920 million barrels.8 Over the same five-year period, Index Speculatorsʼ demand for petroleum futures has increased by 848 million barrels.9 The increase in demand from Index Speculators is almost equal to the increase in demand from China!"

~~
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(and note this quote._JW)

"The CFTC has granted Wall Street banks an exemption from speculative position limits when these banks hedge over-the-counter swaps transactions.21 This has effectively opened a loophole for unlimited speculation.When Index Speculators enter into commodity index swaps, which 85-90% of them do, they face no speculative position limits."

Masters message is that Commodities INDEX specualtion has grown dramatically and it is unregulated.



REgarding a build up of inventory - during the time of the major price run-up tankers were being held offshore to keep the oil they carried from being included in the calculation of crude oil inventory._JW


article from Washington Post April, 2008 by David Cho:
A Few Speculators Dominate Vast Market for Oil Trading

and william Engdahl's "PERHAPS 60% OF TODAY'S OIL PRICE IS PURE SPECULATION" http://www.engdahl.oilgeopolitics.net/Financial_Tsunami/Oil_Speculation/oil_speculation.htm



Obviously, this does not mean fundamentals are not part of the equation. Specualtors try to anticipate supply and demand and risk of oil supply disruption is important. Speculation has exaggerated the movements dramatically. But certainly we are pushing the limits of oil producers ability to supply oil. Demand anticipation is important too. The speculators started to recognize in June-July of 2008 that the U.S. economy was headed for trouble (credit markets were starting to come apart) and that would reduce demand for oil. So they started getting out with a resulting crash in oil (and virtually all commodity) prices.

todays price for oil is $34.95 a barrel - down 5%.

[NickB79]

20. So the real price of oil should have been "only" $80-$90/barrel

Admittedly, that is a lot better than $140/barrel, but it's still a hard pill to swallow.