Talkback: “Don’t blame the oil ’speculators’”

Hmm.. sounds like he’s saying “if I actually didn’t take anything it isn’t really stealing”. Maybe he’s right, nothing was ever taken, it was all paper oil. Maybe speculators need to take posession of the oil in 5 days of purchase and then they can sell it back to the oil companies or whoever they sell it to. The way I see it, if I was to decide that demand for gas would increase by 40 billion barrels next month, I would say that and purchase an excessive amount of futures for it. oil producers would say that there is no way they can meet that demand and so now the price of a barrel of oil would have to be raised to meet the demand. I now sell the “paper oil” that I have purchased back to refineries at a hefty some. Don’t forget that I bring this to the attention of news outlets and whoever else does little fact checking but can create a panic to the masses. I will also get the attention of investment firms and now they will start hyping the false shortage news to the media, their clients and whoever else they can tell or create a panic with about the prices of oil and the short supplies. I’ve made my money but I will still keep playing because that’s the type of greedy S.O.B . that I am. I will be smart enough to get out before I get caught. Now I start betting against oil since I know there is no natural reason that it would be so high. Either way I win!!!
This does sound like a big ole casino and the worse part is speculators and investors are playing with other people’s money!! This is no different than the illegal hyping of penny stocks only we don’t have to buy penny stocks, most all of us have to buy gas or fuel or transportation of some sort that we can no longer afford. Remember the hype about $7.00 per gallon gas??? Notice there is no mention of that anymore?? You are right, I don’t fully blame the speculators. I partly blame the media, the current administration, big oil, investment companies and a whole slew of people that I may have forgotten but you already know who you are!!! As someone once said “Fear is Big Business”, I think all of the above mentioned proved that.

Spot on.

All trades must settle, and these are no different. In the future, those who are not going to either receive or deliver oil (read “speculator”) must cover their contract. In other words, every long speculator today, must become neutral (by rolling the contract) or bearish (by simply covering their contracts). Over time, the net effect of a speculator on price is zero. In the short term, the effect is more likely to stabilizing (read today’s article on onions).

If you truly believe that bullish oil speculators are driving up the price of oil and creating artificially high prices silmilar to the real estate and technology markets of the past, then step in and sell them some futures. When the trades start settling – like they did in the other bubbles – the prices will fall and you will make a nice profit.

I’ve traded futures for years. That counterpart pressure theory is irrelevant bunk in this market of fever. If the majority is long, prices go up, regardless of any logic. This keeps the over-inflated prices up, and then the actual buyers that receive delivery have no option than to pay higher prices which continues the spiral upward. The idea that speculators only trading paper isn’t proof they aren’t the problem; it’s the proof that they are. That trading executive is tricking everyone by telling them they don’t know enough. One simple piece of math – inventories are down less than 10%… how does that justify doubling and tripling the price? Side note: there is no comparison here to the CA real estate bubble. It was easy to add a multitude of builders to catch up with the speculation there. Finding massive amounts of new oil is different. We won’t find the insane quantities it will require. The keys are to hinder speculation, and have the world market take responsibility and reduce its consumption.

Everyone here makes a good point but there are some things to think about. I do think speculators are part of the problem and here is why. Why is it that everytime the stock market drops or the dollar falls people pump all there money into oil. That is exactly what speculators and investors are doing. They are hedging against inflation. It seems that this thinking is a self fulfilling prophecy. The stock market drops so investors buy oil. Oil goes up because people are buying so the stock market drops again due to high oil. Does anyone else see the thinking here. Another situation to think about is the effect of information about oil. Last week Saudi Arabia stated they would increase oil production by about 500,000 barrels a day. The market and “experts” stated that was not enough to make a difference. This week Libya even mentioned that they would cut production by 300,000 barrels a day. Now the same “experts” say that is a huge amount and it helped drive prices higher. There needs to be some sort equal playing field. One of the comments here stated that the speculator market needs to be balanced. Part of the issue with that is there are too many who think it will go up and not enough that think it will go down. Hence Oil keeps rising. All the investors who are wealthy are continuing to put the worst of everything back on the consumer. Guess what? When the consumer is dead broke everything is bad.

Harry Truman once said he wished to hell he could find a one handed economist in reference to his advisors telling him on one hand we can expect this but on the other hand this may happen. Today, more than ever before, congressional leaders need to know the real truth about oil and explain it the people. With all the meetings and chastisement of U S oil companies maybe they should work to find a one handed ecocomist to explain to them how we got to where we are today with oil prices. We’ve had enough of Washington’s voodoo economics – tell the people the real truth!

All who have commented make great points. But I think everyone has missed the simplest and most basic point.

We need to increase the supply and the United States has the power to do this. We have more untouched oil in our borders than Iraq, Iran, Russia, Venezuela and others have in their countries.

All we have to do is open these areas up for drilling. Drilling is a lot cleaner and safer than it was 30 years ago when the regulations were written during Carter’s administration. We need to modernize our regulations to go along with the improvements in technology.

I think the speculators are shouting “It’s not our fault” all the way to the bank!

This is an ill-informed and dated analysis of how the futures markets work. Does Congress understand the markets? No. But obviously Jon Birger doesn’t either. Neither does he understand Congress. There is zero chance that any action will be taken on this, at least in the next year. This is just the usual scrabbling for issues and headlines that goes on daily in Congress to persuade the electorate that their government is actually doing something. Sound and fury, etc.

Personally, I’d say the run on oil has another few months to go based on this week’s Federal Reserve meeting, and the fact that the Fed is historically reluctant to change direction in the months leading up to an election. But at some point the Fed will raise interest rates, and I suspect that will be the pin that pricks the balloon. Until then, the party can rage on. Just don’t stay too long or you might be the one who gets stuck with the check.

This is the best writing on business I have seen in months. Nice job Mr. Birger.
The difference between this situation and other bubbles is that in futures contracts there has to be a counterparty taking the other side of the transaction, and the transaction must be unwound before it expires. One side is betting that the price will go up, the other side is betting the price will go down. One side will win, one side will loose. The spot price of oil impacts the winner or loser on the futures contract. The price of the futures contract has nothing to do with the spot price of oil since a speculator doesn’t supply or demand any real oil.

The futures markets, regardless of commodity, are a zero-sum game. For every buyer there is a seller. For every seller, there is a buyer. Speculators make money on price movement – up OR down – not on price stability. It is interesting to note that for all the bluster from Washington about regulating speculation, I don’t see any evidence of anyone ‘running for the exits’. One would think that with the threat of regulation, and possible prosecution, those ‘evil speculators’ would be taking their money and running. It will be interesting to see what happens when Congress does their thing. My guess: The price will change very little, despite all of the promises. Not too much different than the promises of a $.05 to $.25 drop in the price of gasoline if the deposits in the Strategic Petroleum Reserve were (and have been) stopped. Demand may be dropping (in the US at least), but a drop of 200,000 barrels of gasoline per day is nothing against a demand of 9+ million barrels per day.

He’s absolutely right. Our government should be totally blamed. They let the big oil companies as well as the big three automakers influence their energy policies. It was all started when Reagan took office and removed controls on oil prices, creating an era of cheap oil. He even went as far as to remove solar panels installed on the White House while Carter was in office. So long as oil has been cheap, it’s been “business as usual” in Washington. Had this country done the right thing a long time ago and invested in alternate energy sources, we wouldn’t be in this mess.

Oh yeah, and thank you GM and the California Air Resources Board for killing the EV1. Bet you guys are sorry about that now. Especially GM with its current stock price!

Saying that the speculators are not the issue is like saying the home speculators were not the problem in the ridiculous buildup of home prices in the past 10 years. The speculators typically put up 5 – 10% of the contract price. So for that $142 barrel of oil they have only invested between $7 – $14. If the price of the oil drops, they can prop up the prices with fairly small investments. However, if it drops too far they could lose everything. So it is to their benefit to keep the prices propped up. However, just as it was in the housing market, at some point there will not be enough money left to keep the prices up. This is ‘The Bubble’. The market will eventually crash. This is the same lesson we learned in the 20’s when there was wild speculation in the stock market, the silver market in the 70’s, the ‘dot com’ market of the 90’s and the housing market in the 2000s. When the market crashes there will be many ‘Institutions’ that will be bankrupt. Will our government have to bail them out as well?
I also find it interesting that the so called ‘Analysts’ that keep telling us the prices are going to remain high are the same ones that are profiting from the high prices.

You truly are crazy! Tell me how it is that oil can go up 5 dollars on nothing more than an OPEC guy, someone who has a vested interest, and Libya saying they might limit there production? Saudi’s already increased by 200k and the market said it does not matter, because it is not enough, but Libya might, I said “might” remove that many barrels and it is disaster? I will never understand that. Also they claim supply and demand and there has not been one shortage in the past 10 years, but here we are paying through the nose because there is a “shortage.” We are below average, but still not below the necessary levels to work, which is far off. Speculation is killing the market and that is all, because there is plenty of oil now and for the near future.

I think the author is not accurate..he is looking at this from a “days gone by view” Gone are the days when you would use the “process” of buying up a commodity to increase it’s price or worth.
The cost of future product should not increase the cost of current inventory.
Speculation is driving this commodity out of it’s norm. Supply is there, demand is decreasing (because cost is so high) what else is there? The hard pill to swallow is the fact that we need to raise intrest rates..get the focus off this commodity and let true market value dictate the price.

Jon Birger is basically wrong in his assessment. I agree with those who pointed to the exhuberant change in price levels overnight. This has nothing to do really with supply and demand as a basic ingredient. No, by consistently tightening the supply prices are up, leaving a lot of headroom for the speculators to drive with the shortage flow.
Saving energy by consumers and plants doesn’t help very much: OPEC just limits the supply further, to restore the unhealthy balance. Messages like “prices wil go up to 150 or 170″ automatically push the prices up. Or the statement of some Libyan saying that Libya should cut production because there is already too much oil circling in the market. A stupid remark like this is a contradictio in terminis that also automatically leads to higher prices. It’s all a matter of politics. The driving forces behind it create their own bubble, but it is yet very profitable to do so.
However, there are dangers. We are coming closer to the point that will bring turmoil and misery. No respectful nation will or can accept that the frenziness in the oil trade will cause an economic fallout, with progressively increasing turmoil, lost elections, etc.
One of the weird phenomena we have here is that rising prices and consequentical lower demand do not inherently lead to a price correction. The supply is simply cut! OPEC knows how to play this out.

The author of the article reminds me of the mortgage brokers who said at the height of the mortgage crisis; “We aren’t the cause of the high home prices, we are just providing a service to fill a need.” Technically, the mortgage broker just provided cheap and easy financing, the “lubrication” of the price run-up. Investors of all stripes saw an opportunity and jumped in. It was chic and hot and new to put your money in mortgage backed securities, even if you didn’t understand the basics of the mortgage secondary market. Anyone see a parallel here?

The claim in this article is that the commodities traders are not the cause of the run-up in the price of oil. I strongly disagree. Many of the institutional investors who lost (and lost big) in mortgage securities have jumped over to the commodities market in a big way. They are doing what they are supposed to do, make money. If you don’t beleive there is an unprecedented influx of new money and traders in the oil futures market, just ask the author to compare the numbers of futures contracts outstanding for 2008 vs. 2007 or 2006.

Yet I dont think that the inflow of the money is the only problem. More than anything, the whole idea of commodity traders setting a price is crazy. Let me explain. Any oil producing nation can clearly state a specific price for their commodity. Canada is our largest source of imported oil, followed by Mexico. Both of our NAFTA trading partners can somply decide they are willing to sell us oil at $50 per barrel. Yet they sit back and let the traders decide a daily price for a barrel of oil.

This price is not based on basic supply and demand fundamentals. The price flucuates based on rumor and innuendo. Show me one area of this world where there are fuel shortages. You can get all the oil, gas and deisel you want, as long as you are willing to pay the price.

This is absolutley a trader induced speculative bubble that will break at some point. Unfortunately, our economy will suffer for quite sometime before the bubble bursts.

The author argues that its not the traders causing the price run-up. He’s drinking to cool-aide that the commodity market is distributing. That’s too bad.

If our invenotories are only down to 309 from 330 million barrels, why has the price of oild doubled since June 2005? Sorry – but whether sombody takes a drop of oil of the market or not, if something is bought, doesn’t matter what is, and sold later, someone is looking to make money. No one can convince me that demand has doubled since June 2005. It’s all about greed.

If Jon Birger is right, then why is it that speculators are in the market if not to make money? Why do they call it “Profit Taking” when they leave the market? As most of all, why do prices jump $5 in 1 day, where 2 years ago, movement of $1 was seen as extreme? If I was a speculator trying to make money passing paper around, I would shout at the top of my lungs that it wasn’t my fault. Here is the true question if speculation is not part of the problem. In the past 2 years oil has jumped $80 a barrel….Has there ever been a time in the last 2 years that someone in the world was not able to get enough oil? NO!! There is no shortage now, yet oil is trading (ie. speculators) at $140. If it is not supply and demand, what is it?

Nonsense. Even the Saudis have said prices are inflated. Speculators are actually offering inflated prices, with the expectation that consumers will be willing to pay even more inflated price (and so far, have done so). To oversimplify: I know you are offering a product at only $1, but I will give you $2 because I believe I can resell it at $3. And so goes the frenzy (remember the real estate bubble). The real question is: Is this wrong? This is capitalism, afterall. But speculators beware: things are good for now, but when will it go the way of CA real estate? And that’s why it’s called speculation. Good luck.

Anytime there is huge money flowing to a sector the prices are likely to follow up. There doesn’t need to be “hoarding” of oil to have the price go up. Back in the tech and real estate bubble people were flipping stocks and houses faster than ever before. There was no hoarding needed to push prices higher, just lots of money flow and little regulation. That is exactly what we have going on today.
Between fast/large money (speculators, hedge funds, endowments) this sector has not only become a hot area but a new asset class for investing. This and the weak dollar is the cause for the run-up. And it will pop just like every other bubble………..World consumption of oil was just lowered to .3% from 1% at the beginning of the year and oil is up another 50% YTD= Pop.

This article is insane. Of course the traders never take delivery of the product, but the price of the physical commodity is tied to its paper value in the open market. If the price of futures are driven up, so to is the value of the acutal product.

So, let me get this straight. It is not the speculators, it is not the oil companies, it is not the oil producing countries. I got it, it is the US consumer willing to have the price of oil go up to reduce their disposable income…sounds like the author has no more grasp on the issue than the elected officials he so vigorously panned. Maybe someone, William Bonner perhaps, or other knowegdeable indvidual can shed some light on who is making the obscene profits since all we know so far is who purpotedly is not…

I don’t think there is a person out there on Wall Street who can even explain in depth, how all of the mechanics of “their system” works. Even most economists and experts appear stumped and have even admitted it. That said, how can you or anyone else honestly expect politicians to be able to explain speculative trading? If the experts can’t explain it, perhaps it’s continuation isn’t justifiable and the whole system is as out-moded, ironically, as the electoral college. It’s becoming a widely acknowledged sentiment that the global nature of the world market is changing the mechanics of trade as we know it. With that being the case, it’s about time we consider how old practices fit (or don’t fit) in with that new era.

I congratulate the congress for finally focusing their attention on something that has run rampant far longer than it should have. This criminal behavior under the cloak of free market trade is utter baloney and those who defend its continuation are likely benefitting from it in some way – or knows someone who does. My hope is that all of these congressional sessions aren’t pre-election posturing but actually bring something beneficial into fruition.

Where do I start. First you say “Speculators would be hoarding oil – building up inventories…” then you say “other so-called speculators almost never take delivery of any oil.” Followed by the quote from Mr Pirrong “For speculators to be propping up the price of oil, they somehow have to be taking physical oil off the market.” As I see it, what the speculators are doing is buying future contracts and forcing those who actually would take delivery to buy at a higher price unless they want to wait until the expiration date to purchase the contract, and what entity that actually needs the oil can do that?

This article misses one key point. Price can be driven up by a shift in the demand curve outward rather than a move along the curve. As pension funds and institutional investors unrelated to the oil industry were allowed to purchase futures contracts as investments, the demand curve shifted outward and price went way up. This is because the actual number of oil futures contracts available is constrained by the amount of oil produced in the world. The supply curve of futures is almost a vertical line in the short term (5-7yrs or less). In the past the primary groups bidding on futures contracts were those affilliated with the oil industry or were reliant on large quantities of petroleum products. Once everyone and their grandmother decided to bet on the price, the demand curve shifted to the right (outward). When your supply curve has a very steep slope as in this case, this causes a price spike, what we see today.

Its ridiculous to say futures buyers cannot affect the price of oil because they don’t pull oil off the market. When there is a limited supply of futures contracts, and an increased demand for the contracts, the price of contracts will inevitably go up. There is a strong correlation between the current price of oil and the future price of oil and thus future buyers affect the current price of oil, just as options trades and short sellers affect a stock price, even though they do not actually own a stock.

Are speculators to blame? I don’t think so, but there is a hidden aspect to their business and if Congress does the right thing and makes that a little more transparent, then we can see that they aren’t the root cause.

Once we can see and understand what is going on, then maybe a policy can put in place to make changes to the process. To something blindly is just reckless.

So there ‘has’ to be a buildup of inventory in order for there to be a bubble? How did that concept work during the tech bubble? There was no buildup of inventory, only unreasonable bidding up of stock prices with no basis in fact, similar to today’s bidup in oil ‘futures contracts.’ Same thing is happening today that happened in the ’90’s with tech; the smart-guy hedge-fund and pension-fund managers have to find somewhere to generate eye-popping returns. Typical money-market and bond returns aren’t gonna cut it and the stock market is dead in the water. So where, oh where, can they go for investment returns that will make the pension funds & Park Ave-types wet their drawers? Oil ‘futures’! Efveryone’s pouring their money in & watch the price go up, up, up! It’s the 21st century answer to the tulip plant! Here’s what I think: Anyone who has absolutely no intention of taking delivery of a barrel of oil should stay the hell out of the way for those who actually need it for refining, etc. Then you would have a true market of buyers & sellers coming together without speculators mucking everything up.

If I were to believe Jon Birger, oil speculators are philanthropists, performing a great service for the good of the “Market” without seeking personal gain. And his logic seems to be based on the fact that they never take delivery of physical oil, only futures contracts which they sell days prior to delivery. If that is the case, then all agents who deal in paper contracts, all stock holders, mutual fund investors, banks, credit issuers, in fact, everybody who invests but does not take physical delivery of whatever is a philantrothropist! Birger’s argument is too ridiculous to be taken seriously. Any time you hold an auction, which is what the futures market is, speculators bid the price up, not down. And they do this for their own personal profit, which adds to the price of oil. I think they should be forced to take delivery of the physical oil, or stay out of the market altogether.

I completely agree with the author of this column. The speculators are easy scapegoats. However, Congress and other people who wish to blame the speculators know nothing about the futures markets, or economics in general. I have even heard members of Congress who wish to socialize the oil industry. If that were to happen, gasoline would be double or triple what we’re paying now. Perhaps the members of Congress should be required to take Economics 101 once they’re elected.

Finally someone tells the truth about “evil” speculators. I don’t fill my gas tank with futures contracts, I fill it with real gas. Oil for August delivery has nothing to do with the price of real gas at the pump. Congress wants to blame everyone but themselves for this problem. Allow more supply of real oil and the price will go down. When Congress says “no” to drilling, “no” to nuclear, “no” to coal, “no” to offshore drilling, “no” to Alaska drilling, then the price is going to go up.
The way to solve the domestic oil production issue: rebate 10% of any oil production to the citizens of that state.

I am a middle class consumer trying to survive the chaos being created by the surging oil prices. If actual supply and demand were the drivers I would agree that speculators are not to blame but when oil and gas prices escalate over night at the rates we have seen lately it is obvious that there are other drivers. Demand can not change that quickly and I believe speculators are the culprit by fabricating increased demand sytematically People say the defalation of the dollar is to blame.Again the dollars rate of decline does not proportionately reflect in the increase in oil and gas. I believe our economy as well as the world is falling victim to pure greed plain and simple. It is a case of capitalism out of control. I do not like government intervention however it is obvious the speculators will take oil as high as possible with no regard to the world economy .They are bidding themselves into a regulated environment that will squelch future earnings. They are not looking at the long term at all.

I guess what hurts more is when people, like you, write columns and make statements that can be argued almost 100% opposite your position. Why is it that there is written comments in many places that the cost of oil is actually about $65 a barrel? So how do you explain the difference between $65 and $140 a barrel? It is sad, that many of us have to suffer through workforce reductions and pink slips and layoffs and all you need can provide is written speculative stories that aren’t substantiated either. Good luck taking our country, our econmy and our work force to the outhouse.

I don’t blame the speculators exactly. But, I do blame the regulations under which they trade. Anytime you can leverage your money by a factor of 25 (according to a recent article I read. Previously I thought it was 10) there just isn’t going to be enough contracts to meet the demand. It is a supply and demand problem. There just aren’t enough contracts out there to soak up all the leveraged money available.

Make Futures margin accounts trade the same as stocks. I believe the max is $3 for every $1 you bring to the table. If that isn’t the problem, the Hege funds will still make plenty of money.

Yes I do think speculators have a big role in driving oil prices much the same way real estate speculators drive property prices and stock speculators drive stock prices. The more that is purchased by speculators setting a trend, the higher the price goes.

The problem is that the oil market is openly and not-so-openly manipulated, which makes the outcome in the futures market a fait accompli. Oil is controlled at one end by a production cartel and at the other by a political establishment that is content to maintain or increase US oil dependence. What’s good for Texas isn’t good for the rest of us.

So we are idiots for thinking that commodities trading of oil has any impact on prices and we just don’t understand the oil market? We know the oil companies aren’t to blame because they explain to us that we don’t understand the oil market if we believe they can have any control over prices. It’s not OPEC because they are just reacting to overall world demand (which I guess has suddenly doubled this year?) so if you think they are to blame then you’re told you don’t understand the oil market. So if none of the major players in the oil makret are to blame then who is left? According to most of these people telling us we are uninformed, the real blame should be on ourselves. We are told that we just use too much oil and that’s the only reason they are higher; it’s all our own fault don’t you see. Brilliant…

This is totally illogical. Are the oil traders not making money? I don’t think they are doing this for charity. If they are maing a profit, then the money has to come from somewhere…the price of oil. If Walmart can undeprice their competitors by removing the middleman, imagine what this could do for oil prices. Basic economics. At $4+ dollars a gallon, we can no longer afford the price of middlemen who had no value to the product!