NewEnergyNews: HOW OIL SPECULATORS DRIVE OIL PRICES UP, AND WHY

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  • The Plunging Cost of Renewables and Boulder's Energy Future (April 19, 2011)
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  • ---------------
  • Monday, June 30, 2008

    HOW OIL SPECULATORS DRIVE OIL PRICES UP, AND WHY

    At a June 17 Congressional hearing about how oil prices are affected by oil market speculators, the assembled panel of experts unanimously agreed speculation is responsible for driving oil prices 50% higher than they would otherwise be.

    Congressman Joe Barton (R-Tex), an oil and gas industry advocate, argued high oil prices are purely the result of supply/demand forces and called for increased domestic drilling. The experts listened respectfully and otherwise ignored him.

    As a result of the hearings, the House of Representatives on June 26 voted 402-to-19 to direct the Commodity Futures Trading Commission (CFTC) to use all its authority, including the agency's emergency powers, to "curb immediately" the role of excessive speculation in energy futures markets. The House bill requires the CFTC to act against "sudden or unreasonable fluctuations" in energy futures prices and other trading activities that "prevent the market from accurately reflecting the forces of supply and demand for energy commodities." The CFTC has already ordered more energy trading transparency and is investigating possible oil market price manipulations.

    The astute Hazel Henderson
    (see HAZEL HENDERSON: DOING WELL AND DOING GOOD IN NEW ENERGY) was ahead of the curve on this issue with an op-ed piece written in early June. Here’s Hazel’s take on the hearings:

    “These witnesses estimate that if the Commodities Future Trading Commission (CFTC) were to implement 50% margin requirements, full disclosure of hedge funds and the volume of "paper barrels" versus real barrels of oil and the huge institutional investor positions in the oil and commodities futures markets and other recommendations, then the price of oil would drop to somewhere between $70-100 per barrel within 30 days. They expect that US gasoline prices would drop in a similar time period by roughly the same percentage. They agree that curbing speculation is urgent, whereas drilling in the US for more supply would produce a small fraction of the reduction that could be achieved by curbing speculation.”

    In a sentence, get a handle on the people who are buying oil as a paper investment so the people who are trading oil as an actual commodity, a vital and precious and dwindling source of transport energy, can work within the very real and profound forces of marketplace supply and demand.


    Something's happening here...(click to enlarge)

    Hazel’s larger, now quarter-century-long campaign has been to make economic policy socially responsible by redefining the very concept of Gross Domestic Product (GDP) to include otherwise unaccounted-for externalities. (Ex: Gas is cheap because it doesn’t include the cost of healthcare for people who develop lung disease from breathing air polluted by auto emissions. But the truth is much worse: All the medical care that goes into treating that lung disease patient ADDS to the GDP, making the U.S. statistically richer for creating illness with its transportation system.)

    Henderson was moved to write her op-ed piece because she sees in this historical moment the power to generate change: “…[H]uge, mounting costs…from pollution to global climate change, ignored for decades by financiers, accountants and most official statistics, now feed the suspicions of millions that global finance is indeed a casino with rules rigged by the insiders.”

    In her think-piece, Henderson describes in great detail the economic forces now at work, what can be done to turn them into change and what might happen if those forces continue to run rampant.

    Hazel has been an advocate of New Energy and the New Energy economy since before Ronald Reagan took Jimmy Carter’s solar panels off the White House.


    click for more on Ethical Markets.

    Changing Games in the Global Casino
    Hazel Henderson, June 17, 2008 (Ethical Markets)
    and
    U.S. House votes to curb energy market speculators
    Tom Doggett (w/Russell Blinch and Marguerita Choy), June 26, 2008 (Reuters)

    WHO
    Hazel Henderson, Economist/Author/Producer, Ethical Markets; Poor hungry people; traders, speculators and managers of hedge funds, private equity funds, pension funds, charitable foundation funds and university portfolios; Commodity Futures Trading Commission (CFTC)

    WHAT
    Henderson describes what she calls “the Global Casino” in which money and asset mangers gamble with everybody else’s money. She says there is a broad need for a new more ethical way of counting wealth and a new more ethical way of using wealth. Focusing on the phenomenon of high oil prices and the associated high gas pump prices, Henderson describes how those are mere indications of the power of the players in the Global Casino.

    WHEN
    - Market fundamentalism took over in the 1980s following broad deregulation under the leadership of U.S. President Reagan and UK Prime Minister Margaret Thatcher.
    - The failures of deregulation are now revealing themselves in full flower. It is a moment pregnant with potential ruin and potential opportunity for change.

    Click for the CFTC website and more on its surveillance programs.

    WHERE
    - The $10 billion dollars to alleviate the stresses of world hunger produced by high fuel and food prices called for at last month’s United Nations Food and Agriculture Organization summit in Rome will only go, according to Henderson, to the players in the Global Casino.
    - Sovereign wealth funds from Norway (the oldest and most responsibly managed) to Singapore, China, Kuwait and the United Arab Emirates are buying up more and more of the world’s assets.
    - CFTC Market Surveillance Program

    WHY
    - World food and fuel price rises and the associated images of hungry people in the developing world and angry people in the industrial world have focused attention on “…the difference between money and real wealth, between “demand” in markets and the real needs of people without money.”
    - Social responsibility in investing means transparency, better corporate governance and true-cost pricing by investors and asset managers.
    - Socially responsible investing would internalize social and environmental costs into risk-analyses, company balance sheets and national GDP accounting.
    - Recent phenomena detailed by Henderson that show the Global Casino for what it is:
    (1) Market players refuse scrutiny and turn to private equity deals, often ruining companies by selling off pieces for profit.
    (2) Companies buy their own shares boost the stock prices (Ex: oil companies are using profit to drive up the share price instead of spending on new exploration and production).
    (3) Hedge funds (630 speculating in energy) total $2.9 trillion. Playing private equity game they buy companies with borrowed money and ruin them by selling off pieces for profit. They speculate in commodities ($8 trillion in oil futures contracts in 2007) and drive up commodity prices.
    (4) Managers of employee pension funds, foundations and university endowments, playing against private equity and hedge funds, invest retirement funds for short term market performance and ruin retirees retirements.
    (5) Sovereign wealth funds, swelled with oil revenues and trade surpluses, are buying assets to get rid of falling dollars and thereby driving the value of the dollar further down and the price of oil higher.
    (6) Banks, struggling from bad investments (CDOs, SIVs, CDSs - $62 trillion), are being bailed out by sovereign wealth funds, weakening the dollar, feeding inflation and driving speculative bubbles in oil and commodities.
    - Henderson’s recommended reforms:
    (1) tax the speculative 90% of daily $2 trillion currency trading;
    (2) curb the $260 billion oil/commodity index funds;
    (3) raise margin requirements on oil/commodity trading;
    (4) repeal the 2001 “ENRON loophole” that de-regulated energy trading;
    (5) repeal US and EU subsidies/mandates for ethanol;
    (6) increase transparency/oversight of hedge funds, private equity and sovereign wealth funds.

    From Hazel's earlier work on New Energy and new technology. (click to enlarge)

    QUOTES
    - Henderson, on high oil prices: “I believe that Peak Oil is still looming, as well as that control of 77% of oil reserves is by national governments; but I agree also with the growing expert opinion that the speculative bubble in oil can be addressed and is the best way to reduce oil prices. It is also necessary to keep US gasoline prices at current levels which are more realistic and nearer to global prices of $7-10 a gallon.
    - Henderson, on the socially responsible reforms needed: “Reforming tax policies is urgent: taxing carbon emissions, pollution, waste, planned obsolescence and resource-depletion while reducing income and payroll taxes. Shifting the still-massive subsidies showered on the oil, coal, gas and nuclear industries to production tax credits can accelerate the growth of renewable energy. Solar, wind, geothermal, tidal, fuel cells, hydrogen, mass transit, smart DC electric grids as well as capturing the 40% of energy currently wasted in the US fossil fuel economy can shift human societies to the Solar Age.”

    (Full disclosure: Henderson’s Ethical Markets is a NewEnergyNews sponsor and NewEnergyNews.)

    1 Comments:

    At 11:01 PM, Blogger MM said...

    There may be speculative froth, but it's a symptom and not the disease.

    Iron prices and prices of other non-tradable commodities are going up as much as oil despite the lack of speculators.

    Go to the International Energy Agency's site and look at the Oil Market Report. What you'll see is 88 million barrels of oil a day demanded vs 87 million demanded. Demand outpaces supply so price rises -- econ 101. So where's the mystery?

    Price has gone up and up but it's not pushing supply past demand. Until it does in a clear way, prices must rise. "Simple as that" as Boone Pickens says. And he's right.

    Rather than blame "speculators" we need to find alternatives or more oil. Sugar-based ethanol is a first step. By massively increasing production of sugar production the world can slow down the advance of oil prices until better biofuels are coming online.

    Otherwise, Chinese oil price subsidies (which make it so a gallon of gasoline costs only $2 in China) and similar subsidies in the Middle East and other areas are forestalling demand destruction. Look to this type of thing before destroying the financial markets.

    The only real control on speculation that I see as feasible and beneficial is abolishing "long-only" oil ETFs. Speculators in commodity markets play a real and important role, but if they can only go long, then they're treating commodities like they're stocks, and there's some of the problem.

    That said, the real issue truly is supply and demand. Surely you guys have heard of peak oil?

    People don't understand the financial markets and often think money's evil. The fact is that financial markets are a large part of what has made the world a wealthier place. The markets can run into major problems, but they're not bad in and of themselves. Instead, the "global casino" is often a far better allocator of resources than central planners ever could be.

     

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