Energy pundit: "So, to be clear, I was wrong."

[Robbien]

Back in June, I wrote a piece for The American in which I argued that oil prices were being driven higher by the immutable law of supply and demand. Today, with prices plunging to near $40 instead of the $145 level seen in mid-July, it’s abundantly obvious that speculators were a key driver, probably the main driver, of the surge in oil prices that occurred between late 2007 and July.

So, to be clear, I was wrong. . . Of course, it’s not politically correct to give OPEC credit for anything. But last summer, the leaders of OPEC were united in their pronouncements that there was no reason for oil prices to be as high as they were. Their claims were met with widespread scoffing. The response from the International Energy Agency, as well as some of the biggest oil companies in the world – BP, Repsol, and Shell among them – was that the high prices were being caused by supply and demand.

The next day, during a press conference, Chalib Khelil, the president of OPEC, was asked the same question. Without hesitating, he replied “Most of the price pressure comes from speculation.” Khelil explained that the producers were not short of oil and that they had cargoes ready to ship to any willing buyer.

Oil prices have fallen to less than one-third the levels seen in July and the world has shifted away from worries about peak oil and shortages to concerns about oil surpluses that could last for years. That makes what I wrote back in June -- “the easiest explanation for higher prices may be as simple as this: there are too many buyers in a market that has insufficient spare production capacity” – look, rather, well, dumb.

http://www.energytribune.com/articles.cfm?aid=1081

Of course back when the supply and demand theory was being pushed, like minded pundits were a much sought after guest on every news show. Now that this guy is finally admitting that his rantings were dumb, the article get printed in an industry news mag.

[Ikonoklast]

1. We all knew speculation drove the commodity markets

Show me one time in the last eighteen months that there was an actual shortage due to lack of crude oil in the supply chain.

Hedge fund speculators need to be regulated before they destroy capital markets.

[On the Road]

5. Who's "We"?

You and I did, but that seemed to be a minority opinion. Despite the stock market and real estate bubbles, no one seemed to think bubbles could happen in commodities. I got accused of believing in rainbows and ponies for thinking gas would go back under $3/gallon.
:)

[Ikonoklast]

8. It was inevitable that after the 'up-tick' rule was canned

commodity speculation could, and did in fact, run wild. Those that predicted such an outcome were pooh-poohed as fear-mongers by the 'smart money men'.


And by 'we', I meant those of us that paid attention.

[Terran]

2. Yeah but...

I don't see why the current economic mess would stop speculation in its tracks, causing the plunge in prices. Why is one connected to the other? I don't believe that supply and demand has nothing to do with it. It's not that supply is short (yet), but demand *was* very high, and now it's not. That's got to have some affect on prices.

It also seems obvious to me that what *might* stop rampant speculation is a drop in demand; falling demand causes lower prices, and falling prices leaves no room for speculation. Seems to me they have the cart before the horse. But what do I know, I'm an English major.

[Robbien]

3. The current mess won't stop speculation. The article outlines what caused this plunge

One of the key speculators responsible for this summer’s price rise was Tulsa-based SemGroup, a midstream company that began to trade big positions in the crude market. Recall that oil futures prices peaked on July 14 at $145.16 per barrel. On July 15, SemGroup was forced to liquidate a huge number of oil futures contracts at an enormous loss. On July 22, SemGroup filed for bankruptcy. And prices for both oil and natural gas have been on a steady decline ever since.

By the way, SemGroup is owned by Carlyle Group.

SemGroup is under Fed investigation. On one day SemGroup flooded the market with over $2.1 billion in futures it had to liquidate.

Reinstating the up-tick rule, especially for commodity trades, would really help stop the wild speculation.

[Terran]

6. Don't know anything about how futures work now or in

the past, but I do think the entire concept of a futures market is absolutely the dumbest idea ever. Betting on stock prices is bad enough, but betting on whether they go up or down in price? Why don't they just make off-track betting and bookmaking legal too?

[anigbrowl]

9. Well, maybe you should learn

Simple example, suppose you run an airline and you think the price of oil is going to go way up. That'll mean the price of your flights and thus tickets will go up too. If you could control your fuel costs, you could keep your ticket prices steady and thus your income and balance sheet. So you buy an option on oil at a certain price. It doesn't cost much. If the price stays the same, well so does your fuel expenditure. If it goes through the roof, you exercise your option and are able to buy oil at the price you planned for. Result: happiness.

This is exactly what SouthWest airlines did, and why they didn't incur any severe hardship during the price spike, unlike a lot of other airlines. An option is just a contract to buy or sell something at a specific price, and it's really quite a useful thing. They smooth out volatility in the economy.

[Robbien]

10. Speculation by people who aren't interested in the commodity

is what caused this mess. Airlines buying futures for the gas it uses it a normal business practice.

Carlyle group buying futures on energy commodities for which it has no practical purpose nor does it own the stock, is just casino gambling. Gambling which manipulates the price for which the end user ultimately pays. The end user not only pays for the energy, but it pays Carlyle Group for its speculation.

So no, an option these days does not smooth out anything. Buying a future these days in this unregulated market is just gambling, stock price manipulation.

[anigbrowl]

12. Speculators provide liquidity to a market

Without which, it wouldn't work. Think of it as the grease on the wheels of commerce, which is pretty much what it is. Without speculators markets would be either siezed or impossibly volatile, because of seasonal differences between industries. This is not to say that all speculation is good, but to refute your suggestion that all speculation is bad. Zero speculation means buyers and sellers often can't make deals because nobody is willing to carry the risk over a time period.

[Robbien]

15. Regulated speculation is good. The unregulatedfree for all greed going on these days is bad

The options trade in commodities worked nicely for decades up until the up-tick rule got thrown out last year and the hedge funders piled into the market. The actual trade of farm goods virtually froze in their tracks because the fundamentals of the market were broken by hedge fund greed.

Regulated speculation is good. Unregulated speculation is just the smoky back room in Las Vegas where the whales and the casino rules.

[razors edge]

11. But that runs in other directions as well.

If a market is forced to supply at a lower cost than the present market price, won't the supplier raise the price on everyone else without a short to make up the difference?

And considering that I am still paying fuel surcharges on freight even after the fall in fuel prices, what is to stop a short protected company from pointing at the higher prices they aren't even paying as a reason to raise prices anyway?

It is simply corporate gambling, with the consumer paying off all the losses.

[anigbrowl]

13. Well, remember options can go long as well

Raising prices after benefiting from a short on your inputs may yield more profitability, but that has to be balanced against loss of competitive advantage. It's not a perfect system, as as we've seen it can lead to speculative bubbles, but on the whole it seems to work better than price fixing.

[razors edge]

14. I'm not suggesting

I know what the hell to do, it has all gotten so convoluted that it resembles a train wreak to me.

One thing is for sure, we can't work our way out of this without jobs that pay the bills.

Can't build a sound house without a solid foundation.

[aquart]

4. Uh huh. We told you that.

[Warpy]

7. I'm actually surprised by how far pump prices have fallen

because I know long term contract oil costs reflect the deflated worth of the dollar.

That the spot market prices have gone through the basement is no surprise. I can only guess that what we're seeing at the pump is a reliance on deflated price spot market oil and that contract oil is being stored.

[MiniMe]

16. If those prices lasted much longer, people would get used to alternate

transportation and demand would drop permanently. That wouldn't be a bad thing, but it was bankrupting the country. There are still some people who are hurting because of that period of time.