357. SEN. LIEBERMAN: INDEX SPECULATORS IN THE CROSSHAIRS
In case you missed it, Sen. Joe Lieberman chaired a hearing last week looking into the role of passive, long-only index investors in pumping oil and other commodity prices. Details on the hearing are here: Financial Speculation in Commodity Markets: Are Institutional Investors and Hedge Funds Contributing to Food and Energy Price Inflation?
I watched the video and learned volumes. Highly recommended for those who want to know how index speculators are inflating commodity prices. If you want the short version with the cites, read Michael Masters' testimony here(pdf). No one disputed Masters' analysis, including the Chief Economist of the CFTC, and the Chairman of the Commodity Markets Council. Masters' authoritative testimony also sparked a broad response in the media and financial blogosphere, and this article is a good start if you want to follow the action.
Today the New York Times DealBook blog posted an update:
But the billions that institutional investors have poured into these index funds managed by Wall Street banks could disappear. Mr. Lieberman is in the “early early” stages of creating a bill that would bar institutional investors in investing in commodities, a person close to the senator told DealBook. The bill would seek to amend the ERISA Act, making investments by institutional investors in the commodities market taxable.It's very interesting how we've gone, in the space of a few short weeks, from "speculators have no effect" to "legislating against speculators is dangerous, it could crash the market". Commodity profiteer newsfeeds like Resource Investor are also getting very emotional about Lieberman's proposal -- a good sign that Joe is on the right track.
Pension funds like Calpers, the massive California public employees fund, have diverted increasingly more of their capital into the commodity space as other markets have done poorly amid the credit crunch. Calpers invested $450 million in commodities last year, its first foray into that space. In a board meeting in February, the pension fund agreed to invest .05 to 3 percent of its $240 billion fund in commodities by 2010.
If institutional investors, like Calpers, are forced to divest its commodity positions, the market could go into a tailspin, crushing the positions of many of the banks that hold long positions. One of the investment banks’ more profitable businesses these days could be turned on its head.
The bull run in commodities has been influenced by many factors, but Congress believes that Wall Street bears the blame for a large part of it. With gasoline prices on the rise and the election looming, they appear to have full power to not only close the oil casino, but burn it to the ground.
My view: Let's go full-steam-ahead with this legislation. Run the experiment, and see what happens. What's there to lose? The futures markets functioned fine for decades without index investors. Let's clear out the riff-raff, and return the futures markets to the people they were built to serve: bona-fide producers and commercial hedgers.
by JD
posted by JD @ 6:32 PM
39 comments
39 Comments:
As usual, please use the Name/URL option (you don't have to register, just enter a screen-name) or sign your anonymous post at the bottom. The conversation is better without multiple anons.
Thank you! JD
Thanks for the comment, anon.
It was a good comment, and I wanted to respond. Unfortunately you forgot to sign with a screen-name, so your comment got deleted.
See the comment above this one if you're still confused.
JD
It just says over and over that a lot of money is going into long positions on commodities. It never addresses the questions of whether speculators can change long term prices, or whether the speculators are correct that prices will continue to rise based on the fundamentals. My naive understanding is that the speculators are probably smoothing long term prices: much higher prices later are being mitigated now.
"In fact, Index Speculators have now stockpiled, via the futures market, the equivalent of 1.1 billion barrels of petroleum, effectively adding eight times as much oil to their own stockpile as the United States has added to the Strategic Petroleum Reserve over the last five years."
And this is clearly a bad thing? What's wrong with people locking in prices? As long as they're not taking delivery and burning it for shits and giggles I see no problem.
Another salvo in the ongoing crackdown:
Oil price profiteering to be curbed at ICE Futures Europe and Nymex
By James Quinn, Wall Street Correspondent
Last Updated: 10:52pm BST 30/05/2008
Two of the world's largest energy exchanges have forced traders to deposit significantly more money when investing to curb volatility in energy markets and drive out speculators.
The exchanges and related clearing houses have found themselves at the centre of the growing storm over claims that speculators have been behind the recent rise in oil prices to record levels.
The New York Mercantile Exchange (Nymex) and ICE Futures Europe in London, the former International Petroleum Exchange, have now tripled "margin calls" for some contracts.
Link
Pension funds? Involved in speculation? In commodities? That doesn't sound right.
The basic problem, however, isn't the speculators, who can be regulated. It's the speculations, which cannot. Along with human nature. Hence, whatever regulations are in place, there will always be bubbles.
Meanwhile (hopefully not too off topic), if the peak oil Cassandras don't sink us, the climate change wolf-criers just may.
The Warner-Lieberman bill, aimed at reducing so-called greenhouse gasses, will arrive at the Senate next week. The The Wall Street Journal says that it, "would impose the most extensive government reorganization of the American economy since the 1930s."
Not to mention the extensive new government regulation. Sheesh.
Re Warner-Lieberman bill: The Hill has an article that says it may raise gas prices. May?
I fail to understand how someone can get so excited about rumours.
I do think it would be nice to see the legislation in order to see exactly how much effect it would have on the market. But i doubt we'll see that anytime soon.
PS JD : Who claimed speculators had no effect and were they the same people who later said legislation changes could lead to unwanted consequences? If not, then you're just making straw man arguments again as usual.
Well, JD is firmly behind the witch hunt, and he's not letting go. It's a vote winner for politicians, but a distraction. We need high oil prices to wean people off oil.
Funny, even the article JD links to debunks the speculator idea.
The stupid thing is that the markets are doing what they are supposed to: ration scarce resources. Politicians interfering with this screw it up. It would be OK if they introduce some other method of allocation, e.g. rationing. Instead they subsidize brain damaged policies like ethanol production.
The market may often make a mess of things, but if you really want to screw things, get the politicians involved.
Let's lay it all out here. the Fed and the Congress overspend and create money for decades and decades and we end up with high inflation. pensions, whose mortal enemy is inflation, move into inflation hedges to preserve their money and CONGRESS is investigating?
hey Congress, your reckless spending and the central bank YOU CREATED are causing the inflation that makes pension fund "speculators." YOU ARE THE PROBLEM. investigate yourself.
The Fed on the other hand created a stock market bubble and bailed it out with a giant housing and credit bubble. now the Fed is bailing out the bailout and the dollar is falling and commodities are rising. is that the fault of speculators or the Fed and Congress?
the only people with money right now are the oil barons and they're putting money to work to shore up wall street banks.
let's face it, commodities are an asset class just like any others including stocks, bonds, real estate, hedge funds and currencies.
I do not resent paying $4+ for gasoline if in the long run it slows down and redirects our energy usage to something more sustainable. I do however have a problem with paying $4+ for gasoline because someone who earns 15 times more than I do can still afford to gobble it up in their Hummer or Ski Boat. Pass legislation to make non-commercial vehicles under
20mpg or over 4500 pounds un-insurable and non street legal.
and loosen regulations on motor driven/assisted bicycles, golf cars and the like.
Will this mean that I'm unable to invest in oil futures in the future? Goddamn.
Interesting articles presenting another view about the speculation business :
Bloomberg
May 31 (Bloomberg) -- Hedge-fund managers and other large speculators have reduced bets on higher oil prices by 80 percent in the past 10 months, a time when crude futures rose to records, government data show.
Speculative net long positions in crude, derived by subtracting shorts, or bets on falling prices, from bets on higher prices, fell to 25,867 in the week ended May 27 from a record 127,491 on July 31, a U.S. Commodity Futures Trading Commission report yesterday showed.
The report came a day after the commission said it was investigating whether the doubling of oil prices over the past year was the result of market manipulation. Commission Chairman Walter Lukken said May 7 the agency had a "high degree of confidence" that energy markets weren't being manipulated.
"There is good reason why prices are high, and it's driven by fundamentals," said Paul Tossetti, director of oil market analysis at PFC Energy in Dallas. "When you look at the number of players, the number of open positions, I don't know how anybody can manipulate anything."
Speculative long positions in New York futures totaled 215,999 the week ended May 27, down 18 percent from a record 264,395 on July 31.
Global oil demand, forecast to increase 1.2 percent this year, may outpace the growth in supplies amid higher energy demand in countries including China and India, the International Energy Agency said in a May 13 report.
Oil's surge, also the subject of congressional hearings, caused some analysts and producers to say the market is driven by speculation. Abdalla el-Badri, secretary general of the Organization of Petroleum Exporting Countries, said May 22 that speculators are playing an "important role" in oil prices.
The CFTC has been investigating the transportation, storage and trading of crude oil in the U.S. since December. The probe includes oil futures contracts.
Speculators "are playing the commodities without question, and they are taking bets on where it's going to go, but they are betting on the fundamentals," said Joseph Stanislaw, chief executive officer at JAStanislaw Group LLC. "Demand is growing at a faster rate than production capacity."
Times Online
Phil Flynn, a trader with Alaron Trading in Chicago, said: “When the CFTC spoke to Congress a few weeks ago they said there wasn’t any manipulation in the market and that market dynamics were driving the price. Two weeks later, after pressure from Washington, they have changed their minds. I am concerned that politicians are under such pressure that they will come up with some damaging regulation to try to heal a problem that does not exist.”
One senior UK oil executive said: “Washington are blaming ‘speculation’ for the high oil price. But speculation is how a proper, legal, financial market works. People trade discrepancies in the market.” He noted that pension funds had been buying oil shares to offset the effect of the weakening dollar on the value of their portfolios. “Buying oil to hedge against the dollar is not an illegal practice. How do these people think we can manipulate a market of this size?”
Both the FSA and the CFTC could demand to see more details of trading positions, more often. Market manipulation is difficult to prove. A regulator would either have to find that a trader was deliberately trying to move the closing price, for example, at the end of a day’s trading, or have to discover on tapped telephone lines that a trader was spreading false rumours.
Mr Flynn said: “There are plenty of other places in the world that would love to have this trade, like Dubai.”
Just pasting these here to show that there really isn't such a consensus about this as I believe JD here is trying to present.
What would be needed in this debate would be for someone blaming the speculators saying exactly what kind of speculation is unwanted.
After all, aren't futures basically about speculation?
While we are debunking peak oil and blaming speculators, the small economies already started to see the consequences:
http://www.energyshortage.org/
Blocking oil from free market will just raise its price even more, and other countries will open their markets to globally trade oil. The only solution is recognize that peak oil is already here and move to another source of energy. But if we do not recognize it, we can not enter the second stage, the dependence removal.
"Blocking oil from free markets will just raise it's price more"...?
heh. 80% of the worlds oil is owned by governments already, mate.... and what's your plan on freeing that?
The major problem with the "it's only supply and demand" story of oil is that we're seeing massive inflation in all storable commodities simultaneously. That strongly suggests a financial effect.
Furthermore, there have been very serious dislocations in the agricultural futures markets due to excessive speculation: failure of futures to converge with the cash market, inability of farmers to market their physicals at the futures price, and inability of farmers and grain elevators to meet surging margin calls due to their limited access to credit. This has gotten so bad that the CFTC had to call a hearing to address the complaints of irate farmers in April.
Here's Roger K. Haldenby, a vice president for operations at Plains Cotton Growers Inc. in Lubbock, Texas:
"Over the last couple of months, farmers, merchants and shippers have been unable to conduct business as they have for the last 150 years because of the inability to properly hedge their positions."Link
Here's Billy Dunavant, head of cotton merchant Dunavant Enterprises:
"The market is broken, it's out of whack—someone has to step in and give some relief."Link
Here's Tom Buis, president of the National Farmers Union:
"There's something wrong. I have doubts whether the CFTC is the place to rectify the problem - it may warrant congressional intervention. When regulators say a problem doesn't exist, despite the fact farmers cannot market their commodities that sounds an alarm." Link
The futures market exists to benefit real economy actors (farmers, producers, physical traders, processors, airlines etc.) -- to help them reduce risk and facilitate planning. It doesn't exist as a playground for institutions and individuals to "invest" in commodities. When the farmers are up in arms because speculators have invaded their futures markets, and those markets are not serving their interests anymore, we need to pay attention. Facile market-fundamentalism is a load of B.S. in this situation. Dismissing the concerns of farmers as "silly rhetoric" -- telling them to shut up and go home because everything is hunky-dory and it's "all just supply and demand" is dangerous, irresponsible and wrong. This isn't just about oil -- it's also about food. And the position that "high prices are good because they'll drive the transition" isn't going to cut it. We aren't going to transition away from food.
Regarding Phil Flynn...
Phil Flynn, a trader with Alaron Trading in Chicago, said: “When the CFTC spoke to Congress a few weeks ago they said there wasn't any manipulation in the market and that market dynamics were driving the price.
This is because the CFTC classification scheme is completely bogus. Sorry Phil, but the cat's out of the bag. Pension funds, endowments, sovereign wealth funds, and other players "investing" in commodities through indices like the GSCI operate through swap dealers (i.e. investment banks). This allows them to
remain hidden from regulators, dodge position limits, and still be classified by the CFTC as commercial traders! Which is a complete load of crap.
"But in his letter to Lukken, [Senator] Bingaman questioned the CFTC's data and methodology in reviewing the role of speculation. 'I remain concerned that the Commission's assertions to date - discounting the potential role of speculation in driving up oil prices - have been based on a glaringly incomplete data set,' he said. Increased trading, he pointed out, was taking place on foreign boards of trade such as the IntercontinentalExchange (ICE) and in over-the-counter markets - trading that occurs off exchanges - where the CFTC has limited data and oversight authority.
Bingaman said the CFTC's classification system - which lumps investment banks with commercial traders such as airlines and refiners - calls into question the agency's assertion that speculators were following rather than leading price movements." Link
He noted that pension funds had been buying oil shares to offset the effect of the weakening dollar on the value of their portfolios.
So what? Yes, the pension funds are making a quick buck by driving up prices for everybody else. That hardly justifies the practice. The purpose of the futures market is risk management by commercial players, not enrichment of pension funds.
"Buying oil to hedge against the dollar is not an illegal practice.
If things go well, that will be changing in the near future.
How do these people think we can manipulate a market of this size?"
It really is amazing how stupid Phil thinks the public is. The reality is that commodities markets, including the NYMEX oil contract, are incredibly small and ill-adapted to large inflows of hot money.
Furthermore, the issue isn't a question of manipulation. No specific player is manipulating the market. The problem is that massive inflow of long-only money is causing *distortion* of the market -- not manipulation.
Mr Flynn said: “There are plenty of other places in the world that would love to have this trade, like Dubai.”
And of course, the obligatory.. . "We'll just move to Dubai". I'll tell you what Phil, that sounds like a great idea. Why don't you get yourself a fucking burqa, change your citizenship, and move over there permanently. Cause if you want to trade over there, and stay in the U.S., we still got you by the balls.
JD, the big problem I see with this proposal is that the government would then be closing off one of the last places that people could invest to protect their wealth from confiscation by government policy. Through both overt taxation and covert taxation (inflation), the government is constantly working to erode the value of stored wealth. Yet record numbers of people need to store up wealth to live on in their retirement. The government has driven interest rates on bonds to below the rate of inflation, and if you own them in a taxable account, you lose even more. The stock market (as measured by the S&P) has done nothing for 10 years, and real estate is tanking. Are people supposed to just bend over and take it? (No wonder the savings rate is below zero.) If the government wants people to save money, and to move it out of commodities, it should offer a positive after-tax real return on savings, and have economic policies that encourage productivity to get the stock market moving again.
I'm wondering if anyone can chime in on the Economist's take on oil prices - http://www.economist.com/finance/displaystory.cfm?story_id=11453090
My questions -
1. The economist insists (in several other articles as well) that futures markets have nothing to do with this because "they don't own physical oil." Can someone clarify why this matters, and if they think that is a logical argument?
2. While arguing against the speculators theory, and in favor of supply-demand, the economist doesn't see that as a major problem. They see it as an elementary imbalance that will be corrected once supply increases, which they predict. Thoughts?
1. The economist insists (in several other articles as well) that futures markets have nothing to do with this because "they don't own physical oil." Can someone clarify why this matters, and if they think that is a logical argument?
It's like betting on a horse race. If I make a bet on the outcome, that does not affect the outcome. However, if I was the owner, trainer or jockey of a horse, tampering with the horse would make a material difference to the outcome. A bent owner/trainer/jockey, can simultaneously bet on the race and affect the outcome. This practice is against the rules, if not illegal.
Such practice in financial markets (trading while manipulating the supply) would definitely be illegal, or should be, and if it goes on should be cracked down upon.
Trying to prevent people investing in commodities is really tilting at windmills.
It's like betting on a horse race. If I make a bet on the outcome, that does not affect the outcome.
bc, you're not even interested in this topic, let alone an authority.
justin: The reality is that most crude oil is traded based on long-term contracts, and the prices in those contracts are set by adding a premium to, or substracting a discount from, the prices of certain benchmark crudes, namely: WTI (NYMEX), Brent (IPE) and Dubai-Oman. The benchmark prices are in turn set by futures traders, in a process called "price discovery". This is the mechanism by which futures prices directly affect physical prices throughout the world. For some genuine information on the structure of oil pricing -- as opposed to the facile, ideological bullshit that bc and The Economist are farting out -- see here.
Here is another good reference describing the history and current status of the oil pricing system:
OPEC Pricing Power The Need for a New Perspective (pdf)
"The major problem with the "it's only supply and demand" story of oil is that we're seeing massive inflation in all storable commodities simultaneously. That strongly suggests a financial effect."
You also have to account the effect of Asia economic growth, particularly China, for this. If you exclude oil, China is the world largest consumer of commodities. For example, nearly half the world production of cement is used there; 3 times as much steel as the US; similar numbers for copper, aluminum, etc. Odds are Chinese demand for most commodities is growing in tandem with their economy.
Speculators would never have invested into commodities if these were not becoming hot to start with.
And I disagree that 'all' storable commodities experience inflation.
One good example is lumber. The prices are quite depressed now, and many sawmills shut down production; and yet it is a 'storable commodity'. But there is less demand for it, partly because of the housing bust in US.
'The major problem with the "it's only supply and demand" story of oil is that we're seeing massive inflation in all storable commodities simultaneously. That strongly suggests a financial effect.'
Precisely, which is why I'm fascinated by people parroting "but don't forget about Asia and the Middle East!" What, Asia's consumption of all commodities doubled world demand this year?
And the arguments, at least on websites like MarketWatch, have degenerated into FUD. Oh, if the price went down, then OPEC will just depeg from the dollar and leave America in ruins! Yeah...and considering what turmoil this would cause worldwide, why would they do that at this juncture? Oh, if the government starts regulating commodities, all these fools screaming for regulation (I saw those words on MW) deserve to lose their retirement funds! Well...financial ruin either way...okay, let's go for more honest business practices. Regulation will run businesses off to places like Dubai! Um...yeah, I can really see the UAE putting up with the rampant corruption, I really can...not.
Yes, their use is going up. Production is also going up. On top of that, there are MANY alt energy programs in the works around the world; unfortunately, since many countries are planning on moving their eggs from one basket to another (gasoline to CNG) expect the price of natural gas to go up...at least, until someone figures out that methane is a renewable resource. ;-)
I forgot this on the last comment:
I'm with you, JD, and I'm further amazed how it's all gone from "it's all fundamentals" (like the falling dollar) to "it's all supply-and-demand" to "peak oil is past, repent for the end is near" to, regulation-scare "oh, this will ruin the financial markets!"
Amazing how every time the wind changes direction, the doom culture changes the reasons.
Amazing how every time the wind changes direction, the doom culture changes the reasons.
Ah - you have some special link with a unified entity called "the doom culture" and it tells you how it changes its mind?
People who are into peak oil generally have quite differing views. And if you're rererring to the doomer crowd in particular, then what you say is just false - i bet most of them aren't even interested about price.
Masters spoke about the increasing investment coming from index funds (was it 16bn -> 260 bn or sth). What would be interesting would be to know the total amount on investment being made in the market today to put that into perspective.
I was very critical of the speculator argument before but now I think it sounds like the most sound theory for the recent price rises.
Babun,
The Bloomberg article is based on the CFTC's Commitment of Traders reports which do not break index traders out as a seperate category. Looking only at the basic COT categories, commercials and non-commercials (mostly hedge funds), fails to capture index funds' large and imbalanced positions hence provides a false picture. Month or two ago, I posted links to articles about this flaw as well as the relation between index funds and swaps dealers..
On this line, the CFTC has finally admitted that it is geared towards discovering manipulations rather than the consequences of what has been a progressively greater multi-year inflow.
Congress has been aware of the problems for at least two years -- testimony on the natural gas price spike, for example, was informative, but nothing was done.
Deregulation of commodity markets has been a failure, and a predictable one.
Just as are the consequences of the already begun ending to become unaffordable fuel price subsidies and their stimulative effects.
Justin,
The Economist either fails to understand or pretends to not understand that the price for benchmark crude oils is made in futures markets. Or, knowing that magazine's ideological slant, perhaps more likey it does understand but imagines that financial markets are necessarily efficient, a 'the market is always right' type of orthodoxy that cannot capture, even connect to, real world but demand the world conform to _its_ theory. The world does not, cannot.
JD,
Have you visited www.econbrowser.com? In that blog, economist James Hamilton concedes that the last run up on oil prices is due to speculation but the long trend is caused by plain supply and demand. Check it out is very informative.
Fernando,
Yes, Hamilton's recent paper is reasonable but might have been better had (unsustainable) consumption subsidies been taken into account.
As I believe Morgan Stanley has pointed out, such subsidies are not minor nor without consequence and, as they are generally stimulative, have not assisted in controlling inflation rates.
For those of you not keeping score, with absolutely no news to move oil markets, the price of a Nymex Crude Future shot up from around 121.00/barrel on Thursday morning to near 137.00/barrel on Friday afternoon (a little over 24 hours) for a net price per barrel increase of around $16.00.
Remember, that happened on NO FUNDAMENTAL MOVEMENT IN OIL MARKETS AT ALL.
If you were still hanging on to the idea that somehow supply and demand fundamentals are moving markets since oil passed $70.00/barrel they should have been dashed to bits over the last 30 or so hours.
Exactly. This fresh surge should enlighten those who do not have any common sense. Oil actually went down by $11 because of suppply and demand. This should say something. It shot back up Thursday because some guy opened his mouth about raising interest rates...blah blah blah. Then Friday came the jobs report down 5.5 percent and most of these jobs were jobs that teenagers hold working at you local supermarket. This sends Oil yet even higher WTF! Then there is that comment from Israel about possibly invading Iran. Oil goes higher, what does this tell me? It tells me "raising demand from countries such as China and India are sending prices north" is a scapegoat for the greedy. In fact new reports have been showing that India and other countries in Asia are cutting back on demand as well as in the U.S. Once again pointing to what? Market Speculation. Of course there will be those who will deny this and say that peak oil is here now. I beg to differ.
Colin Campbell and the rest of them just revised there charts and Peak isn't to happen until 2010 at 91 mbd.
So what gives. The bulls running the oil markets are twats.
I like the the bill pass it, stamp it. Lets give this market back to the producers and the people and fuck the greedy.
I like the the bill pass it, stamp it. Lets give this market back to the producers and the people and fuck the greedy.
Great comment jake. Welcome to POD.
I want to put in the disclaimer that I don't claim to have any expertise in such things, but I've been doing a lot of reading into why I'm expected to pay $4/gallon for gasoline, as well as loads more for basic staples at the grocery store. Having done some research, I tend to disagree with the sage theories bandied about on websites like MarketWatch and CNNfn. I could be wrong, but I don't think I am.
Aram, you're absolutely correct. I'd rather pay attention to what the long-term commodities traders have been saying, which is that things are off-kilter, and an $11 increase in two days, after Israel rattled its saber at Iran, and the chairman of the committee investigating speculative trading pointed out there were no U.S. laws to deal with said speculation. Amazing. And the supply-and-demanders and devaluated-dollar folks still say it's all fundamentals...except they're getting shriller now. Gee, I wonder why.
Other people I've been talking to and/or reading will point out that a finished barrel of crude's real cost is somewhere around $50 even after the value of the dollar has decreased, and that the more expensive sources such as North Dakota and Colorado will be around $70/bl. Taken at face value, that would mean that oil futures are just about double what they ought to be. Now, I understand that China's demand has been growing and that the rest of Asia and the Middle East's demand has been growing, but does that put the price at double the real cost? Let's see what the demand will be when more countries have to drop their subsidies, shall we? And let's see what happens when those countries' alt-fuel programs get going.
And I've been seeing people say that the moves in oil over the past few years have been due to the value of the dollar dropping. I've been doing my own research, and, well, the thing I've noticed is that there is a correlation, yeah, but over the past few months the value of the dollar drops every time oil rises, not the other way around. They seem to have it backwards.
And the people who say it's just trying to catch up to 1960s prices, inflation-adjusted...maybe, but oh puhleeze, yeah, oil production was peaking back then. Production costs were rising. Now, that could be happening now, but I don't think so.
I'd rather blame the psychological effect of the housing market collapse, the threat of a global food shortage (hey, how about instead of sending money, we send people with expertise on storing food so that the 3rd world doesn't waste half their food, eh?) and that funds and endowments are putting their bets on oil prices rising.
And investigate that T. Boone Pickens. I don't care if he's investing in wind. If he's declaring the current investigations around the world a "waste of time" then I'd think it's anything but a waste...
All I know is that, having defended the case for cheaper oil, I still want my friggin' electric car and efficient public transportation system.
I'm having trouble following Masters argument, and I don't think I'm stupid, nor less well versed in high finance than your average congressman.
He says "index speculators" (a term he made up) never sell their positions, they roll them forward. He says that index speculators never sell, but the definition of a calendar spread is that you are constantly selling the closest month and buying up a further out month to keep your position balanced. So to say you "never sell" with such a position is at best vague, at worst actively confusing.
He also says things like "how can demand be increasing when prices have also increased?" and "supply is ample, there are no lines at the pump". Well it's no secret that most of Asia subsidises oil heavily. China in particular doesn't respond to price changes on the spot market at all, because the government covers the difference. So it's quite possible for prices to rise and demand to go down in the west, whilst aggregate demand still goes up. It's also obviously wrong that if there are no lines at the pump, supply must be "ample". This is pretty basic stuff and makes me question how reliable the rest of his viewpoint is.
I'm not saying he's wrong, just that given a first read, I need to go back and consider his arguments and data a lot more carefully.
Two quick points:
1. Nobody knows how much of this oil price rise is supply and demand and how much of it is Goldman Sachs/Matt Simmons/Boone Pickens tooting their horns. It could be none of it, it could be 50-75% of it. I find it more than ironic that the same people that argue that we need clarity in the oil market are the same ones who threaten to move to Dubai if the US tries to regulate the trade. However, they could be right too. I don't know.
As any business school market professor would tell you, price can at times function independently of supply and demand. At a minimum, we need to at least have more disclosure in the market so that we can at least analyze the effectiveness of the price discovery mechanism we have in place.
2. The US needs to stop acting like idiots and do something about the dollar. Oil, to a large degree, has turned into a proxy currency. Once again, is it responsible for all of the large price increase? I don't know. But nobody can really deny that the weak dollar is a factor.
babun, by "doom culture" I'm actually putting one big umbrella over a wide swath of gloom and doomers, mostly the ones calling for an end to "American empire." The Peak Oilers have jumped all over it, of course, as America as it is now is vastly over-dependent on oil and other petrochemicals. But I'm also talking about the Ron Paulites, the people who're likely talking doom for doom's sake, depressed old men who, sadly, are watching their retirement evaporate, and so on. Sorry to not be clear...in hindsight, it was disingenuous to put everyone under "doom culture."
Couple of links I saw recently that piqued my interest: "Saudi Arabia seeks oil price curb" http://tinyurl.com/5sxb8x My guess is that they're not happy to see the demand destruction? ;-)
"The Oil Scam Driving Crude Over $80": http://tinyurl.com/2vu3m6 I'm not sure I totally buy it, but even if it's a little bit true, people should be mad. For bonus points, a Peak Oil proponent declared collusion a symptom of Peak Oil.
JD -- All a commodity futures contract is, is an agreement to buy a product at a certain price. Ultimately, someone has to take delivery. Are oil storage levels worldwide going up or down? (Forget EIA numbers, as those only report U.S. storage, IIRC.) High storage levels would indicate there are speculators trying to corner the market. AFAIK, no such circumstance exists.
Masters conflates futures with actual oil production, which is the first tipoff that something is very wrong here. It occurs to me that Masters is actually being a remarkably creepy self-dealing agent, who is hoping for some help in chasing out his competitors in a lucrative market. That his competition consists of pensioners apparently doesn't tickle his scruples one whit.
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