Something I never see mentioned:
The President and CEO of Marathon Oil recently said, “$100 oil isn’t justified by the physical demand in the market. It has to be speculation on the futures market that is fueling this.” Mr. Fadel Gheit, oil analyst for Oppenheimer and Company describes the oil market as “a farce.” “The speculators have seized control and it’s basically a free-for-all, a global gambling hall, and it won’t shut down unless and until responsible governments step in.” In January of this year, as oil hit $100 barrel, Mr. Tim Evans, oil analyst for Citigroup, wrote “the larger supply and demand fundamentals do not support a further rise and are, in fact, more consistent with lower price levels.” At the joint hearing on the effects of speculation we held last December, Dr. Edward Krapels, a financial market analyst, testified, “Of course financial trading, speculation affects the price of oil because it affects the price of everything we trade. . . It would be amazing if oil somehow escaped this effect.” Dr. Krapels added that as a result of this speculation, “There is a bubble in oil prices.” – Carl Levin
I think the rest of the Open Letter to the President is fairly unsurprising (and I think the conceit of writing a 3 page letter that the president wouldn’t bother to read even if he read anything at all is dumb), but this is interesting to me. I’ve not heard this particular explanation for oil prices.
I heard this, on NPR the other day. Their idea is that as the housing market as crashed, speculators there moved to oil.
You need to start reading Fark headlines more often.
“Oil prices expected to rise to $200/barrel on speculation that it might rise to $200/barrel”
warning: boring financial jargon ahoy
I agree wholeheartedly, and have been saying so for a while now. Unfortunately for everyone who is caught between a rock and a hard place vis-a-vis oil prices, I would take this one step further and argue that it isn’t just speculators who are driving this commodity bubble (as well as similar bubbles in food commodities such as wheat, which is starting to look worse than the dotcom stocks in 1998), it’s actually “sober-headed” investors as well. The reason for this is because derivatives such as oil futures depend as heavily as they do upon leverage to accomplish their purposes, and more and more major institutions such as insurance companies, pension funds and municipal governments (for which the average investor depends on his livelihood and sense of financial stability) depend in turn on these institutions to continue to make money in the market SOMEhow and pass those gains along.
In a down market — one where the fundamentals of companies are sufficiently weak as to not justify high stock prices — there are only three ways to make money. The safest is to invest in high-risk, high-yield bonds, and trust that the amount of excess yield paid out by the debtor/bond issuer is enough to raise the cash you need.
The intermediate-risk approach is to short stocks, essentially buying them with loaned money at a fixed price in the anticipation that they’ll go down, at which point you liquidate them to satisfy the loan, buy back at the lower price and pocket the difference. This approach (as well as other arbitrage methods) are well understood and only work if you can find a long-holder of the stock to deliver the borrowed funds.
However, in a market as bad as today’s is, institutional investors and mutual and hedge funds can’t make enough money with their bond and short-stock portfolios to satisfy investor demand. Therefore, they wade hip-deep into the riskiest and most volatile markets of all — the commodity futures and foreign exchange trades. These people and funds buy up futures in huge institutional block trades on things like gold or oil, essentially betting that the price of that selfsame asset will rise. (Remember — when you hold an oil FUTURE, you have no rights whatsoever in the underlying asset; in this case a barrel of oil. All you have is a right to get paid if the barrel hits the price target which is set forth in your futures contract.)
With this many big players holding this much money in this many derivatives, it basically becomes one huge honking pyramid scheme whereby the only way the house of cards can continue to support itself (and thus pay out profits to the futures holders who in turn pay them to insurance company investment portfolios who in turn use them to finance regular payments on annuities or life insurance claims which are paid to Grandma and Grandpa and relied on by them to pay their mortgage and food bills) is if the prices of these commodities grimly march ever upward in lock-step with the futures contract price levels. So you have people in the commodities markets who have no CHOICE but to bid up the price of oil all out of whack with the typical supply-demand curve, because to do otherwise would cause their entire financial houses to collapse in a spectacular manner.
Classic definition of a bubble. And, like all bubbles, it will burst eventually and there will be lots of ugly fallout amplified at all levels, just like what happened with the housing market. However, those with cash on the sidelines will just take their money and go in search of the NEXT potential bubble — stocks in emerging markets, perhaps, or tech (again). Who knows. Either way, the little guy prospers for a little while, but gets burned by the price of ever-more necessary commodities like food and fuel. Nasty stuff.
Re: warning: boring financial jargon ahoy
Man, that sounds like the most boring apocalypse ever. Nothing even blows up. Well, except for a bunch of made up numbers.
Re: warning: boring financial jargon ahoy
ARMAGEDDON, starring Alan Greenspan as Bruce Willis.
This is all very interesting, and my little heart just skips a beat at the thought of the bubble bursting. However, as much as I hate to admit it, and as much as my wallet hates me for it, I’ve joined the high-oil-prices-are-good-for-us camp. Oil WILL run out, regardless of whether the prices drop or not, and we need to figure out an alternative, sustainable solution, well before this happens. The prices and the resulting “crisis” will hopefully begin to drive a more intensive search for alternatives.
It’s not even the environment I’m worried about – although I am worried about the trees and the polar bears, sure. But when oil goes, if we don’t have a solution, our way of life will go with it, and it will go violently. When precious commodities become scarce, people fight for them. It won’t be pretty, and I don’t want it in my lifetime. So I’ll pay $5 a gallon if it motivates the government to pour some money into something that I can maybe pay $2 a gallon for in the future.
i have a bad feeling that this is one of those situations in which, until the bad actually happens and our hand is forced (ie. it becomes real), NOTHING will actually be done.
and i’m sure the oil companies will be like, “oh look, we “found” another oil source. it’s in the rainforest/arctic/protected national forest” or “oh look, we just happened to remember that we have 1000 barrels of reserve, how does $10 a gallon sound? great, here you go!”.
/sorry, i’m full of the sarcasm this morning. :)
I’m not sure I’d call them “speculators.” The softer parts of the market are in freefall so they bought commodities. it’s rather conservative reactive investment, really.