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Oil Price Speculation???
I can't help but notice references across the weekend in various media outlets about the role of speculators and / or commodity traders relative to oil prices. How the global price for oil has been driven by speculative trading was the common theme.
This isn't something I really know much about and I was wondering if anyone knows the extent to which global commodity prices are influenced because trading itself has driven a price escalation.
Multiple references to speculators driving the price escalation varied somewhat but the collective commentary suggests per gallon gas price increases beyond the $2.50 range have been because of speculative trading and bears little relationship to actual supply and demand. I heard people say the cost of a barrel of oil would likely be in the $50 - $75 range absent this speculation.
I'm just curious how much of this commentary might be accurate. Does anyone know if such assertions have merit?
Comments (7)
The number cause of rising oil price is falling value of the dollar. The dollar has fallen from about 90 cents to the euro to 1.60 to the euro since 2002. Oil has risen lock step with that.
And 'speculators' are now betting big time that the US government will further devalue their currency as a way to bail out bankers, mortgage holders and the explosive government debt load and so, naturally, they are 'hedging' themselves by buying things that will go up in price . . . like oil, gold, silver, copper, wheat, etc.
The Opec president, Chakib Khelil, said in March that US economic mismanagement was to blame for the high oil price.
April 28, 2008 8:08 AM | Reply | Permalink
What they don't mention is that oil speculators, and all commodity traders, make money by guessing correctly whether the price is going up or down. While some may profit from volatility, they don't necessarily profit more from high prices than from low prices. And there's plenty of volatility due to wars in the Middle East, rebellions in Africa, and political mavericks in South America.
AIUI, the reason for speculation in commodities is that less speculative investors, like retirement fund managers, are seeking a safer place to put their clients' money. After watching the value of real estate and esoteric wall street funds evaporate, the value of ever-scarcer commodities appears very reliable. This conservative investment leads to speculation by the more risk-taking traders.
Fundamentally, oil is getting more expensive to extract, and OPEC has not been willing or able to extract more to meet putative world demand. Players like Saudi Arabia's Prince Ali al Naimi find it convenient to blame speculation instead of admitting that they are no longer the world's swing producer of oil.
April 28, 2008 8:18 AM | Reply | Permalink
I take this to mean that the falling dollar, speculation and rising U.S. debt all have contributed to the elevation of oil prices and that the increase is, to a lesser degree, associated with supply and demand. Is that correct?
April 28, 2008 8:34 AM | Reply | Permalink
I'd say the increase is to a *larger* degree associated with supply and demand. Oil was produced very slowly, over millions of years. We've used about half of all the oil we could reach in about one hundred years. We are now spending more to extract oil from much harder places. We are even mining oil-like substances, bitumen or kerogen, then using up natural gas (that could be heating homes or used in manufacturing) to heat them into synthetic oil.
As far as demand, millions of middle class people in China and India are buying automobiles for the first time.
April 28, 2008 9:42 AM | Reply | Permalink
I think it's a little hard to say lesser/greater degree in a vacuum, as it depends on what time frame you're talking about. Over the time frame of a couple years or less, I think monetary policy, speculation, and geopolitical issues could be considered to be bigger factors, but over larger time frames supply and demand are definitely the ones driving this.
April 28, 2008 9:51 AM | Reply | Permalink
The fact is that none of those other factors mattered much before 1971 when the US was the swing producer of oil, or after the 1973 OPEC embargo when Saudi Arabia became the swing producer. For the last five years, SA has been unwilling or unable to increase production, and the world effectively has no swing producer to increase supply and dampen the effect of those other factors on the market.
April 29, 2008 7:39 AM | Reply | Permalink
Oil and Natural Gas are artificially high compared to the abundant supplies of both. OPEC is doing its level best to control the amount of Oil that is brought into the market thereby controlling price. They have announced consistenly in the past 3 years that they are set on controlling production.
There are no controls on those prices on the mercantile exchanges in a similar fashion to corn/wheat. The Oil and NG price can bounce with the whim of the market. I would propose that this is a behavior that can only hurt the US. and the US economy. If Wall Street has instituted market controls based on Price based on market fluctuations it can't be unreasonable for commodity markets to do the same.
I think its reasonable that we as a Nation do two things.
1. Bring Energy and energy sources more under the control of the Energy Department. Its clear that Energy is a Strategic Component of our national health. Not having more control and some sort of positive intereaction is warranted. I don't necessarily advocate price controls but we need to do something on this side to control consumption. Pricing is the best way to do that.
2. The Consuming Nations of US/UK/India/China should get together as well for a strategic consuming group. Ideas about local growth, types of alternative choices used, and what markets to "favor" in opposition to others should be made. Its a classic buy/sell situation. In Energy, countries should try to act like typical consumers. To date, we allow the producers to rule the day. If we allowed WalMart to negotiate our oil pricing we'd fare much better.
April 28, 2008 10:22 AM | Reply | Permalink
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