Oil Price Gouging: From Enron With Love
Remember what Enron did to California and millions of investors? It took advantage of deregulation in California, manipulating electricity prices by raiding the futures market, overscheduling power lines, and creating fears about shortages. PG&E went bankrupt because it could not raise rates to customers.[1] The whole thing unraveled, and Enron went down in flames in the biggest bankruptcy in American history.
Enron was a clumsy corporate attempt to raid a captive energy market. It was also a proving grounds testing how much monkey business a single corporation can get away with. Savvy investment firms and avaricious lawyers analyzed the Enron case – realizing they could turn a huge buck on oil futures – so long as they tacitly let oil companies constrain the oil supply without manipulating the supply directly themselves.
Giant speculative investment funds and oil companies now make tremendous profits raiding the oil spot-market, playing seemingly separate but implicitly cooperative roles serving up the same end-effect as Enron wreaked on California. But this time, the victim is the American consumer, not the energy producers and distributors.
Federal and state politicians in both parties have failed to address this “Enroning of America” because government is on the take too. Taxes rise with gasoline prices, fattening political contributions while feeding slush budgets and pork barrels at both the state and federal levels.
This problem is not limited to oil markets. In the name of “deregulation”, investors are now raiding electricity markets nationwide, driving up home energy costs for everyone. Clearly, constraints must be applied to all energy markets to ensure a free and open market not distorted by giant speculative investors.
Oil companies grin like Howard Stern on satellite because outrageous spot market prices drive windfall profits. Record oil-company windfall profits are derived from gross internal company book-value transfers of oil products made between offshore divisions to U.S. operations – the value differential pegged to spot market prices – which also has the concurrent effect of exporting tax liabilities overseas.
Fears of global warming, fears of shortages due to weather or minor refinery disruptions, Middle-East stability, and consumption in China have turned high gasoline prices into an honorable predation in service of imaginary higher moral and political purposes.
National Public Radio first documented this problem in its story “Analyst: Blame Investors for High Gas Prices”.[2] The story revealed a truth: “Investment banks from Morgan Stanley to Goldman Sachs are making so much money from oil futures that they’ve become a hot investment for all sorts of big-money players.” Ben Dell, an oil analyst and Sanford Bernstein calls it correctly, if not conservatively: “pension funds and other investors are buying oil to remove it from the market — which can help drive up demand — before selling it for a profit some months later”:
“I think if you saw all the pension funds walk away you’d probably see a $20 drop in the crude price.” [3]
Dell thinks that mass speculation will end when production capacity meets demand. This is a backwards analysis. Production capacity will never meet demand so long as mass speculation makes unproductivity immensely profitable. According to the International Monetary fund (IMF), oil companies have not invested in additional production capacity – thus intentionally maintaining record oil company profits.[4] Oil companies are negatively motivated to increase capacity in the speculatively-manipulated market because they reap tremendous profits by sitting on their thumbs.
Gouging by playing “Fear Factor”
Oil companies normally buy some spot oil futures against excess production by other oil companies to make sure they will have enough crude. In this legitimate market, there are only so many dollars chasing so many excess barrels of future oil.
Pension and other large speculative bank-owned investors discovered they could manipulate the market out of sheer size. By making huge purchases of futures, they could accelerate fears, take oil offline, drive the price up even more – and make handsome profits in just a few weeks or months. The spot market is now distorted – too many dollars chasing around the same amount spot oil. Minor fluctuations in gas prices became wide swings. The word “hurricane” is all it takes to provide cover for raiders to buy in. Over time, the constant pressure to maintain futures profits has caused steep, consistent rises in baseline crude and refined prices over the past five years.
Analyzing the roughly 566% increase of crude oil prices since 1995, [5] accompanied by a parallel rise in refined-gasoline prices, the International Monetary Fund (IMF) admits that fear is the major factor driving oil price gouging:
“Naturally, given the tightness in the oil market and uncertainties about demand and supply, factors such as geopolitical developments, fears of potential supply disruptions, and speculation have also all played a part in price movements, but largely through their impact on expectations regarding future fundamentals.” [6]
After identifying fear as the major factor, the IMF absolved its institutional friends manipulating those fears, suggesting the effect of entry into the market by Hedge and pension funds merely adds “diversity” to the market that can “be a source of liquidity and price discovery”.[7] Read between the lines, America: the IMF just admitted that banks and pension funds are “discovering” new oil prices by flooding a brittle market with paper purchases, and laughing all the way back to the bank.
Is There Really an Oil Shortage?
In 1978, I flew to Europe to visit a college friend who worked in London. An oil-trader friend of his from Paris flew in for a weekend restaurant tour with us. When I asked the man what he did for a living, he replied confidently “I f*** the world”. I was shocked then, and even more-so today.
If data by the United States Energy Information Agency (EIA) is reliable, there is no actual shortage of either oil or production capacity in relation to consumption.
Between 1980 and 2004, world consumption increased by 30.8%[8], while U.S. consumption increased only 21.5%[9]. World production increased 23.2%[10], but U.S. production actually decreased by 40.3%[11].
In terms of world static supply and demand, in 2004 73,387 thousand barrels/day (TBD) of oil were produced,[12] against demand of 82,594 TBD consumed.[13] This would leave a 12% structural deficit. However, looking at 1980 world data, we also see a 5.7% deficit: 59,557 TBD were produced [14] against consumption of 63,113 TBD.[15]
The EIA data suggests a long-term physical impossibility: world consumption has been actually outstripping world production for many years. I conclude there is data missing from EIA reports. This could consist of under-reporting of production, over-reporting of consumption, or perhaps both.
World distillation capacity rose 81% from 47,049 TBD in 1970, to 85,304 TBD in 2007. However, distillation capacity increased only 6.7% between 1980 and 2007.[16] It is interesting to note that the EIA reports 2007 distillation capacity of 85,304 TBD, which factoring-in demand growth, is roughly in-line with 2004 consumption of 82,594 TBD (post-2004 consumption data is not available yet.
In the United States, distillation capacity actually decreased from 17,988 TBD in 1980 to 17,397 TBD in 2007. The lowest point in U.S. distillation capacity occurred in 1994, when capacity was only 15,034 TBD.[17]
Proven reserve data suggests a very positive future outlook. Proven U.S. reserves rose 734% from 29.81 billion barrels in 1980 to 213.32 billion barrels in 2004.[18] Proven world reserves grew 204% from 644.93 billion barrels in 1980 to 1,317.44 billion barrels in 2007.[19]
Now, we look at spot-market oil prices. In 1974, oil cost about $5 per barrel. By January, 1980 oil nearly quintupled to $24 per barrel. It dropped to a low point of $9.50 in 1999, skyrocketed to $58 per barrel in 2005,[20] peaking at $69.52 in August, 2006.
We see that oil prices exploded 173% between 1999 to August, 2006.[21] This is a breathtaking change for a necessary commodity.
Is there really a shortage? We can say conclusively that we have not seen gas lines in any free world country. This suggests there is no actual shortage in either the United States or the world.
Here is what we can take away from the above information:
- U.S. oil companies cut back U.S. distillation capacity substantially between 1980 and 2004. This seeded fears. Spot market prices rose tremendously, thus increasing profits to oil companies.
- U.S. oil companies decreased stateside production 40.3% between 1980 and 2004, driving fears about dependence on foreign oil, and creating an illusion that shortages were imminent.
- These two items, in conjunction with speculative manipulation of the spot market by banks and pension funds, caused oil company profits to soar. The world’s three largest oil companies netted profits of $172,000 per minute during the second quarter of 2006. Profits going forward look similarly bullish.[22]
The Effects of Inflated Energy Costs
Enronesque oil speculation disproportionately affects low-income Americans to the immediate benefit of oil companies, governmental bodies, and upper-class investors. The poorest Americans can least afford transportation, thus marginalizing them.
Economists believe that maximizing private retirement funds will result in lower demands on Social Security as baby-boomers retire. However, the high present-day cost of oil decreases what individuals can afford to contribute to their retirement funds – perhaps taking marginal investors out of the contemporary investment picture entirely.
Robbing the bank today to save the bank tomorrow is a zero-sum game. When low-income Americans can no longer afford to drive longer distances getting to work, they settle for lower wages available close to home. In inner-city and remote rural locations, where employment opportunities are scarce or non-existent, employment may no longer even be feasible. Present-day welfare demands can be predicted to rise, and social security contributions predicted to fall.
This problem is not limited to oil markets. In the name of “deregulation”, investors are now raiding electricity markets nationwide. This is driving up home energy costs for everyone, causing utility companies to defer lifecycle replacement of end-of-life equipment, resulting in massive power outages caused by wet or cold weather failures of antiquated step-down equipment never before experienced by customers.
For example, several extended power outages in Missouri affecting over ½ million customers each can be attributed to failure of Ameren U.E. to proactively replace old step-down transformers, which explode when rusting enclosures permit moisture entry during inclement weather. Here is proof: this past February, I counted seven step-down transformer explosions, on one day, within earshot of my home after a large wet snowstorm.
Clearly, constraints must be applied to all energy markets to ensure free resource exchanges within markets undistorted by giant speculative investors.
High energy costs make international outsourcing of manufacturing and exportable service industries attractive in countries where workers commonly walk, use public transportation, ride bicycles, or live in corporate dormitories. High energy costs also raise the bar at which Americans will work, making illegal immigration more attractive to foreigners and American businesses.
The Answer
The U.S. House of Representative recently passed oil price-gouging legislation that would force the major oil companies to break up.[23] This feel-good legislation will not fix the problem because it does not change the passive but orchestrated role played by oil producers and speculators profiting from the gouging game.
For many years, Presidents and politicians have repeatedly promised actions to reduce dependence on foreign oil, while knowingly permitting oil companies to decrease stateside production capacity and increase our dependence on foreign oil. The jig is up. No politician can survive without taking decisive action to end the “Enroning Of America”. This must be one of the leading issues in upcoming Congressional and Presidential races.
Five things should be done. A free market will not exist until speculative investing is fully disallowed for critical energy commodities including oil and electricity:
- Small investors holding retirement accounts should boycott investment firms and mutual funds that tout or place any of their funds in spot market futures. You do not gain by paying outrageous gas prices now only to be paid back in cheaper dollars later.
- Consumer class-action lawsuits, perhaps invoking RICO should be filed against oil producers and investment firms, to recover illicit profits and return them to consumers. Governmental bodies who received windfall taxes should also be named and forced to return the taxes. With a case like this, it won’t be necessary to shop the case out to the corrupt the corrupt bench in Madison County, Illinois.
- Speculation must not be permitted in mission-critical markets. Congress must enact Federal legislation limiting spot-market trading in oil and utilities to companies that directly produce, refine, or sell oil.
- Congressional hearings must be had to interview executives in both industries and discover the extent of monopolistic collaboration.
- If information discovered in Congressional hearings and class-action suits warrants, criminal charges should be filed against executives in both industries who have knowingly collaborated to gouge the American consumer.
————————————————-
David R. Usher is Senior Policy Analyst for the True Equality Network and President of the American Coalition for Fathers and Children, Missouri Coalition
[1] http://en.wikipedia.org/wiki/California_electricity_crisis#Market_manipulation[2] National Public Radio, “Analyst: Blame Investors for High Gas Prices”, August 24, 2006; http://www.npr.org/templates/story/story.php?storyId=5705263[3] National Public Radio, “Analyst: Blame Investors for High Gas Prices”, August 24, 2006; http://www.npr.org/templates/story/story.php?storyId=5705263[4] International Monetary Fund, “The Structure of the Oil Market and Causes of High Prices”, September 21, 2005; http://www.imf.org/external/np/pp/eng/2005/092105o.htm[5] International Monetary Fund, “The Structure of the Oil Market and Causes of High Prices”, September 21, 2005; http://www.imf.org/external/np/pp/eng/2005/092105o.htm[6] International Monetary Fund, “The Structure of the Oil Market and Causes of High Prices”, September 21, 2005; http://www.imf.org/external/np/pp/eng/2005/092105o.htm
[7] International Monetary Fund, “The Structure of the Oil Market and Causes of High Prices”, September 21, 2005; http://www.imf.org/external/np/pp/eng/2005/092105o.htm
[8] U.S. Energy Information Agency, “International Petroleum (Oil) Consumption”, June 5, 2006; http://www.eia.doe.gov/pub/international/iealf/table12.xls, line 248.
[9] U.S. Energy Information Agency “International Petroleum (Oil) Consumption”, June 5, 2006; http://www.eia.doe.gov/pub/international/iealf/table12.xls, line 19.
[10] U.S. Energy Information Agency, “World Crude Oil Production (Including Lease Condensate), Most Recent Annual Estimates, 1980-2006”; May 25, 2007, http://www.eia.doe.gov/emeu/international/RecentCrudeOilProductionBarrelsperDay.xls, line 248.
[11] U.S. Energy Information Agency, “World Crude Oil Production (Including Lease Condensate), Most Recent Annual Estimates, 1980-2006”; May 25, 2007, http://www.eia.doe.gov/emeu/international/RecentCrudeOilProductionBarrelsperDay.xls, line 15.
[12] U.S. Energy Information Agency, “World Crude Oil Production (Including Lease Condensate), Most Recent Annual Estimates, 1980-2006”; May 25, 2007, http://www.eia.doe.gov/emeu/international/RecentCrudeOilProductionBarrelsperDay.xls, line 241, column AD.
[13] U.S. Energy Information Agency, “International Petroleum (Oil) Consumption”, June 5, 2006; http://www.eia.doe.gov/pub/international/iealf/table12.xls, line 248, column AB.
[14] U.S. Energy Information Agency, “World Crude Oil Production (Including Lease Condensate), Most Recent Annual Estimates, 1980-2006”; May 25, 2007, http://www.eia.doe.gov/emeu/international/RecentCrudeOilProductionBarrelsperDay.xls, line 241, column D.
[15] U.S. Energy Information Agency, “International Petroleum (Oil) Consumption”, June 5, 2006; http://www.eia.doe.gov/pub/international/iealf/table12.xls, line 248, column D.
[16] U.S. Energy Information Agency, “World Crude Oil Distillation Capacity, January 1, 1970 – January 1, 2007”, http://www.eia.doe.gov/pub/international/iealf/table36.xls , line 230.
[17] U.S. Energy Information Agency, “World Crude Oil Distillation Capacity, January 1, 1970 – January 1, 2007”, http://www.eia.doe.gov/pub/international/iealf/table36.xls , line 216.
[18] U.S. Energy Information Agency, “International World Proved Crude Oil Reserves, January 1, 1980 – March 12, 2007 Estimates”, http://www.eia.doe.gov/pub/international/iealf/crudeoilreserves.xls , line 16
[19] U.S. Energy Information Agency, “International World Proved Crude Oil Reserves, January 1, 1980 – March 12, 2007 Estimates”, http://www.eia.doe.gov/pub/international/iealf/crudeoilreserves.xls , line 134
[20] U.S. Energy Information Agency, “World Nominal Oil Price Chronology: 1970-2005”, http://www.eia.doe.gov/emeu/cabs/AOMC/Overview.html
[21] U.S. Energy Information Agency, “United States Spot Price FOB Weighted by Estimated Import Volume (Dollars per Barrel)”, http://tonto.eia.doe.gov/dnav/pet/hist/wtotusaw.htm
[22] Bloomberg.com, ”Exxon, Shell Exceed Profit Predictions as Prices Soar”, http://www.bloomberg.com/apps/news?pid=20601103&sid=aHagduY9yp38
[23] MSNBC, “House approves stiff gas-gouging penalties”, May 24, 2007; http://www.msnbc.msn.com/id/18825910/
| More from David R. Usher
Stumble It!
June 7th, 2007 at 8:31 am
Usher, this is one of the best articles you’ve ever written. I knew something was up with the oil prices, no pun intended, but didn’t realize it was this bad.
I guess we could go round and round about the corruption in government and companies, et al. But it might be easier to just say the their has just been a massive debasement of MORALS in today populace especially the leaders.
Proverbs 29:2 When the RIGHTEOUS are in authority, the people rejoice: but when the wicked beareth rule, the people mourn.
June 7th, 2007 at 8:38 am
I had written a long response and the PC crashed…typical.
David this is my vocation (or was). I was a trader for 12 years, trading petrochemicals speculatively, benzene, toluene, xylene, and others all refinery based and crude oil cost driven. These have no official futures market though futures are traded by individuals creating them between the two companies involved. Most of this trade is physical, buying long, selling short, but always ultimately either receiving or delivering a barge of product. Geographic arbitrage, shipping the stuff between Asia, Europe, and here…al that. These trades are hedged using the energy complex on the MERC…futures contracts and all nature of derivatives. Enron was a big player in my business as well as all the other stuff they did. In fact I was thankful in 1994 they offered me a job and I said no!
That to attempt to get standing on the matter….
In these physical trades manipulation is rampant, hoarding or massive short selling can push the market violently, and even here though, every few months if the speculators have been pushing counter to fundamentals of cost and supply demand, the market will reset and correct. Indeed that is occurring as we speak. Why do I mention this? Because crude oil is the textbook example of an efficient market the speculators cannot materially build and hold a premium in this market that is divorced for the realities of the market…its just too big and efficient. Further, without the ability to buy forward crude against future gasoline production or sell forward crude against future well production the market would be whipsaw insane…the futures market serves to smooth out what would be utter chaos. Imagine 1 barrel of oil and 3 buyers and no futures market…it’s a friggin auction. The futures market tempers this by offering a well defined and always available alternative if there is timing flexibility. Unlike physical product, there is theoretically infinite future contract oil available, it being a mere commitment that can simply match up and net out all on paper. The spot market and futures market reflect back and forth…that’s why it works.
On distillation (as you put it) or gasoline production and fuels, we are supply constrained here simply because of environmental and safety reasons…some reasonable some not…especially the ones making new green-field plants non-starters. As I write BP Texas City refinery is down because they had the explosion a couple years ago, and are so afraid that a flickering light bulb in a restroom sends them to the Off switch to make sure nobody gets hurt…every 3 letter government agency is permanently there. OSHA isn’t a small Wisconsin town.
The government is double minded, restricting drilling and refining while crying about lack of product…that’s the place to start. Allegations of and legislation regarding gouging will create chaotic price changes and shortages. I will never trust government to meddle in any way in the free marketplace…it is Pandora’s box defined.
June 7th, 2007 at 11:49 am
The truth emerges from the conservative with experience in field operations of the oil industry. Thanks for the enlightening post. The price I pay for energy is a small fraction of funds sent to the tax collectors. Furthermore, the price paid for bottled water is far higher than gasoline at the pump–where is the outcry? In my experience water has little energy value while the gasoline moves me rapidly down the road or through the air. Which is the better deal? If energy is the better deal, use it and invest in it. Whining about companies making a profit is wasted energy.
June 7th, 2007 at 12:15 pm
David Usher – I can’t believe I’m hearing you say this crap. You just lost 90% of your credibility with me. NPR? Come on.
conservativation – spot on. Supposedly, no one wants a refinery in their backyard, so none have been built in decades. I’ll donate my backyard, as long as they give me a cushy job. Then maybe prices will start to moderate. They actually are already beginning to fall, albeit not very much.
June 7th, 2007 at 12:30 pm
Cons! That was a lesson! I hope to someday hear quite as much as you can muster in your experience. Not yet convinced of the value of these speculation markets, so your view appears opposite of mine.
Yes, Squiggy. But Look out, you might be a pariha like me if you start considering the sources
June 7th, 2007 at 12:41 pm
NPR is not always wrong. I have been interviewed on social issues many times by regional NPR stations. Does that make me wrong? No. There is no news source that is always right or always wrong.
You can’t believe everything you read in the news. You have to look at the perspective and see if objective facts support the view.
NPR gets the bone because they were the first to report the issue.
June 7th, 2007 at 12:44 pm
I failed to mention that in the late 90’s when oil approached USD 10/bbl and gasoline dipped below a dollar in many places, it was these same speculators pressing downwards. Industry was losing billions, and they simply kept going. The point about them losing big then and winning big now is often made. I’m just adding that the net of all futures contracts in the energy complex during that time was massively short…more puts than calls, more longs than shorts. Today, speculators see supply demand factors, such as China trotting about sewing up more and more physical supplies, China, India, etc., all huge growing economies needing more and more oil, and in reality not a whole lot of extra supply coming (but talk of peak production is nonsense…it is peak at THESE economics and with this set of regulations), they also see wars and instabilities literally on top of the oil wells, etc. etc. and see being long the better bet. Micro moves up and down aside, they are dead correct in the macro and the net of all futures contracts these days will trend towrds the long side, more buyers than sellers.
Speculators read the tea leaves and put money for mouth, thereby defining the market in exact terms based on best guess with all factors. To suggest they are a problem begs the comparison then of real estate speculators…and any speculator for that matter. Buying ever increasing home and real estate values on a bet creates artificial demand, meaning a family needn’t own all these homes…they are simply “for profit” purchases. Shall we regulate that as well? To my mind they aren’t making anymore land (except in Holland with ocean reclaim and new islands off Dubai…wink)
so is it “fair” that those with cash can push up the price of this fundamental substance?
Or the stock market…what about that? Is it bad the increases? Are the huge retirement funds and investment houses, 401k’s and mutuals doing a dirty deed by buying long positions in stocks, thereby increasing their value? In fact if pressed I’d make the case that the stock market serves no real purpose and yields nothing like the benefits of the energy futures markets.
One other benefit…if you are Exxon Mobil and you can actually see oil prices out 2-3 years (there are actually forward price curves subject to transactional buying and selling that go decades, done privately) and you are deciding to drill in the middle of the Pacific, where it is an extra USD 20/bbl to get the oil…would you drill it if you had zero way of hedging the gazillions you’d spend? Or would you sit and let supply dry up, shortages and even maybe wars break out over the product, then drill? Even then you may not drill, making massive investments that are in brick and morter yet 100% speculative?
The net of the speculators participation, though they are risk takers, is to lower the risk for Exxon Mobil, and thus for you and me. It could be said that energy speculators are “consumers” of risk, removing it fom the complex.
June 7th, 2007 at 12:50 pm
CORRECTION…sentence 7 should say “more shorts than longs” not the reverse
June 7th, 2007 at 12:56 pm
I am sure that this would be a 40 hour course for me to consume Cons.
Still on the other side though. It is going to take reading and lots of time, but you are factaul and dispassionate, and that helps!
June 7th, 2007 at 1:01 pm
Believe me thurston I can see why the opposite view exists, and respect those who hold it. Invective about BIIIIGGG OOIILLLL is the norm, and JR Ewing didn’t help. My argument isn’t a grand one, defending oil per se as the nectar it has become. My points reside within the industry and come from the two sides that say…
Specualtion Bad, Oil companies gouge, therefore regulate
vs.
Well, what Ive said.
June 7th, 2007 at 2:10 pm
This is a major point of this article: in order to keep the oil market free, you have to regulate who can and cannot participate in it. This is not regulation of the market itself: it is firewall regulation to keep the market open and free.
June 7th, 2007 at 2:20 pm
David you’ve just overtly contradicted yourself…in order to keep it free we must restrict the participants? The contradiction is more then semantics.
So do we limit the stock market to the companies listed being able to buy and sell? Can only families who rent go and buy a home?
It just doesn’t fly.
June 7th, 2007 at 2:36 pm
Careful Cons. We all know what happens when you gore the Statst Ox. (wink wink)
June 7th, 2007 at 3:38 pm
Any market subject to massive gratuitous external interference is not a free market. The notion that a market is free in a complete absence of regulation is nonsense. Regulation is sometimes necessary in order to keep a market free. Where the state becomes an active participant in market raiding, a statist conflict of interest exists. This will not change unless voters rise up and hold their feet to the fire.
Case in point: the marriage market has been destroyed by no-fault divorce and automated child support entitlements. The marriage market will not be free unless laws are changed to prevent invasion of the marriage market by feminists and governmental bodies who vicariously profit from the destruction of marriage.
June 8th, 2007 at 6:46 am
There is no useful analogy between marriage and the “market”…any market, though we losely use the term marriage market. Buyers, Sellers? Be the a man or a woman they can only “own” one at a time, and cannot materially impact the “market”….if the license is the product it can only be owned one at a time.
Sure intrinsic “value” of marriage can change, but it in no way speaks to the issue here. Anyway…enough from me on markets.
June 8th, 2007 at 10:11 am
For many years, Presidents and politicians have repeatedly promised actions to reduce dependence on foreign oil, while knowingly permitting oil companies to decrease stateside production capacity
You make it sound like a conspiracy, but I think it’s just the physical maturity of American production and no/few new big finds; they aren’t drilling to tens of thousands of feet in The Gulf for nothing. Fields in texas and oklahoma (as well as alaska) have been in production for so long that we’re on the inevitable backside of the Hubbert curve.
Otherwise, what conservativation’s been saying… Maybe there’s something subtle in your piece that I’m missing, but I don’t think the spot oil market is even 5% of what moves via futures contracts, which exist to help companies plan ahead. Yes, there’s lots of speculative money in the futures markets, but it serves the purpose of supplying liquidity to the system so there’s always someone available to take the other side of a trade, and if correctly done it’s rewarded for supplying that service.
Really big money can temporarily move the futures markets because of the leverage involved, but the fix is to increase margin requirements – just as was done with stocks following 1929. Arguably, the futures markets are Ok with 10% margin because the underlying involves something real and physical. Arbitraging will keep the spot market from deviating very far from the futures for very long. So I just don’t see how it can be important.
Enron was able to screw california by being able to take advantage of the fact that the electricity market is regional/national, whereas the oil market is global and less easily controlled by a single entity. Enron set itself up as the market maker in electricity and was therefore able to wrack things in its favor by being on both sides of the market – but only for a relative blip in time.
June 9th, 2007 at 7:19 am
This is what happens when an egoist like Mr. Usher begins writing articles concerning that about which he knows absolutely nothing.
Liberals often do this and as I have previously pointed out, Mr. Usher is a Liberal. He doesn’t truly believe in a free market, he believes in a government regulated market. Only government can truly tell us how commodities can be traded.
The lack of refining capacity, and its causes is no secret, and has been noted by “big oil” for some time. Its just that some “experts,” generally self-annointed-don’t like the explanation and therefore choose to ignore the underlying facts.
GAsoline prices rise solely due to supply and demand pressures. Refineries across America are generally running well above their designed capacities (110-120%). This is due to efficiencies in operations and new and better catalysts being invented by those evil private corporations who then-gasp-dare to seek to recover the cost of development of these efficiencies.
Developing new technologies is neither easy nor cheap. I have 20+ years of experience in production, enhanced oil-recovery, and in refining. Corporation spend a tremendous amount of money in R&D.
The other reason for the shortage of gasoline and the resultant high prices is the difficulty in obtaining the required permits, licenses and approvals from local, state, and federal authorities. As in the building of a nuclear power plant, our government entities, spurred mostly by tree-hugging Liberals, have made the construction untenable. They did this by intent, not serendipitously.
Groups like the Sierra Club have made it their business to interfere with energy corporations wherever and whenever they could, and they have been astoundingly successful, and networks like NPR and self-proclaimed experts like Mr. Usher have provided them the support they have needed to accomplish their aims.
A simple exercise for those of you who so strenuously object to the price you are currently paying at the pump is to look at the rise in the price of comparable commodities over the same time period. Compare the price of gasoline in the early and mid 70’s with the price of milk, bottled water, bread and most any other consumer product. Then compare the prices of today. You will find that on a percent inflation basis, gasoline lags far behind most other items on your list.
Oh yeah, and remember that it is those same folks on the Left who, like Al Gore, believe that higher prices on gasoline are ultimately good for America because they force people to drive less. The only reason they are upset with the higher prices is that the profits go to our citizens, the investors who comprise these corporations, rather than to the government, where we are to believe, they will spend the money far more wisely than can we poor ignorant citizens.
Small wonder Mr. Usher has chosen to stop allowing comments to his posts, he can’t stand the heat.
Conservativation has absolutely destroyed your entire premise and your prevarications won’t change that.
Oh yeah, and NPR is nothing more that a leftist propaganda machine. He’s correct about that as well.
June 9th, 2007 at 9:27 am
Scottkirk,
Nothing intelligent to say? Just personal attack? My how clever you are.
I based my statement on my 20+ years of personal experience in the industry. I know what has been occurring in the industry, and the reason for prices being as they are.
Try, just for once, to use that organ in your head called a brain for something other than filling the vacuum between your ears.
June 10th, 2007 at 8:17 am
Will thanks for the hat tip….David touched only a little on supply demand fundamentals, and focused more on the EEEVIIILLLL futures market. That was the focus of my rebuttal, though exactly like you said, I also touched on the regs and taxes etc.
Higher prices may indeed be a good thing though, meaning that is also the market as work…and if it incents new production or even conservation…market driven conservation is the only real kind…the rest is ribbon bracelet and t-shirt declaring liberal feel goodism.
November 15th, 2008 at 2:47 am
[...] Sustainable and Secure Energy: Republicans have been opposing a renewable portfolio standard and any legislation to save substantial amounts of imported oil. They also failed to ensure that energy speculators are not manipulating prices and that consumers are not being gouged at the pump. [...]