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Broken oil market and how to fix it
Senator Byron Dorgan was just on CSPAN2. They don't have the video up on http://www.c-span.org/ as of yet but keep an eye out for it. he has more quotes from the CEO of Marathon Oil and others decrying the unregulated speculation in oil.
In the meantime here is Dorgan's proposed bill that would put downward pressure on on gas prices by cutting oil speculation.
Here is a key quote form his press release:
“We are trading 20 times more oil than we take delivery of each day. The
world uses about 86 million barrels of oil per day, yet trades
approximately 1.5 billion barrels of oil per day,” said Dorgan. “This
casino-like speculation is causing sky-high gas prices"
http://dorgan.senate.gov/newsroom/record.cfm?id=299624
Read the whole press release for details on what his legislation would do.
Comments (22)
Crap here's the link to Dorgan's press release:
http://dorgan.senate.gov/newsroom/record.cfm?id=299624
June 25, 2008 12:16 PM | Reply | Permalink
Post hoc ergo propter hoc
June 25, 2008 1:15 PM | Reply | Permalink
Speculating on why oil, gasoline prices are soaring
Although I don't feel particularly comfortable with the vast wealth some hedge funds accumulate by placing bets on the market, I accept that this is how the game is played. Simply put, investing means you're rolling the dice on prices going up or down.
"What does the phrase 'speculator' mean anyway?" asked Francis Longstaff, a professor at the UCLA Anderson School of Management who specializes in financial markets. "Anyone who invests is a speculator."
He said fund managers typically provided liquidity to markets by buying or selling amid uncertainty. "They take risks," Longstaff said.
...
"There's this stereotype of a speculator that gets trundled out every time prices do something we don't like," he added. "This is fiction."
Severin Borenstein, director of the UC Energy Institute, said Congress and some members of the media had spent considerable time theorizing about the role fund managers have played in driving up oil prices.
"The theories may have some initial appeal," he said, "but then they run headlong into some difficult realities."
The first such reality is that there's been no shortage of oil buyers even at current high prices -- a sign that supply and demand are playing their expected market roles.
"If all of the supply of oil is really being consumed at the current prices, then it does not make sense to blame those prices on financial investors who are neither supplying physical oil nor consuming physical oil," Borenstein said.
He said it's possible that mysterious speculators could be creating shortages by buying up vast quantities of oil and squirreling it away for later. But if so, where? "That much oil would be very difficult to hide," Borenstein observed.
His conclusion? "The most likely reason for high oil prices is the simplest and, unfortunately, also the most intractable: too much demand chasing too little supply."
Bingo.
http://www.latimes.com/business/la-fi-lazarus25-2008jun25,0,6050144,full.column
(Sub)
June 25, 2008 1:27 PM | Reply | Permalink
That's not bingo that's bullshit.
The first such reality is that there's been no shortage of oil buyers even at current high prices -- a sign that supply and demand are playing their expected market roles.
The world consumes 86 million barrels of oil per day, yet trades about 1.5 billion barrels of oil per day says it all. We are paying for a huge amount of paper swaps by piggybacking hedge fund middlemen who never take possession of a single barrel thru the deregulation of markets. Oil stocks are high as oil companies have stored up what they need in the face of ever rising prices.
This isn't the law of supply and demand, this is assholes taking advantage of wholesale deregulation to get while the gettin is good.
June 25, 2008 2:09 PM | Reply | Permalink
If you really believe that, prick the bubble. Stop driving so much - buy less gas or diesel. See what happens.
But, Americans already are pricking the bubble. American driving mileage dropped, a lot, for the first time in decades. Oil retreated, what, about ten dollars/bbl? Then rose again. Why? Because oil production has been flat since 2005, and net exports have dropped, as shown here:
http://farm4.static.flickr.com/3130/2601228757_d205d66454_o.jpg
and explained here:
http://www.theoildrum.com/node/4092
"In the absence of any additional crude supply, for every one percent of crude demand, we will expect a 20 percent increase in price in order to balance the market." Energy Secretary Samuel Bodman
June 25, 2008 2:38 PM | Reply | Permalink
post hoc, er·go prop·ter hoc
Exponential increases in the Commodities Price Indices across the board since the magical year of 2000.
June 25, 2008 3:35 PM | Reply | Permalink
Donal I have my own business. I work out of the house. I haven't commuted to work since 1982. I put an average of about 10,000 miles on a car every year.
Americans can't prick the bubble, we can only suffer the most from it. We have 2% of the world's oil reserves and use 25% of the world's oil, mostly to fuel our transportation system.
Quoting Bush Administration hacks doesn't do it for me. The world trades 20 times as much oil as it takes delivery of each day. There's way too many people taking a cut of each barrel of oil and it can't just be passed off as declining supply and rising demand. At least half the cost of a barrel of oil has nothing to do with anybody in the supply chain or customers. It's because of profiteering. Oil company execs know it why don't you?
Yes oil supply is diminishing. But that's not causing this.
June 25, 2008 3:48 PM | Reply | Permalink
The Senator is probably not an expert on the subject.
The CEO of Marathon Oil is hardly an objective source. Oil companies want people to remain dependent on oil; conveniently blaming speculators gives consumers a reason to continue with business as usual. If consumers were told that the price will only continue to rise, they would leave the market so fast that it would create a real disruption for the oil companies. The smarter oil companies are realizing that the jig is up, but they want to make the transition away from oil slow and gradual, to maximize profits and avoid market disruptions. Thus, they'll say things to keep demand relatively stable, or at least a slow, predictable trend.
BTW, is this 20 to 1 ratio (of paper barrels to actual barrels traded) observed for any other physical commodity? It would be a good basis for comparison of price inflation from speculative trading.
June 25, 2008 6:10 PM | Reply | Permalink
This article analyzed costs when gas was only $3.00/gallon:
Oil traders: While often blamed for pushing up prices, traders don't necessarily benefit from the high price of crude or gasoline; they profit from how much the price changes. Traders can get rich - as long as they bet correctly on whether prices will rise or fall.
For example, an investment bank that makes a bet that the price of oil will rise makes money when oil prices go from $95 to $100 a barrel - or $100 to $95 if it bet the price will fall - not on the difference between production cost and trading price.
"If you wanna keep your job, you gotta be more right than wrong," said John Kilduff, an energy analyst at the trading firm MF Global in New York, explaining how traders make their money.
http://money.cnn.com/2008/03/13/news/economy/gas_gallon/index.htm
June 25, 2008 8:02 PM | Reply | Permalink
Great article. Amazing that gas has risen to $4/gal in the 3 months since it was written.
Mr. Garrity doesn't even mention the rising demand in the context of China and India.
A conservative estimate of their GDP growth rates over the last decade or two is like 8%; they are both projected to continue GDP growth at such a rate for another decade or two.
At 8% growth, GDP will double every 9 years.
Finally, consider the demand for oil along with this statistic: China had 30 million cars in 2003; it has about 120 million in 2008.
June 25, 2008 9:42 PM | Reply | Permalink
If consumers were told that the price will only continue to rise, they would leave the market so fast that it would create a real disruption for the oil companies.
How would they do that? Seriously how? Buy a fuel cell vehicle? Where? An electric car? Again where? In case you haven't noticed gasoline now costs almost 3 times what it did when Bush took office. It's double what it was a few years ago. How the fuck is that business as usual? It's on the verge of crippling the world's economy.
For example, an investment bank that makes a bet that the price of oil will rise makes money when oil prices go from $95 to $100 a barrel - or $100 to $95 if it bet the price will fall - not on the difference between production cost and trading price.
Duh. Just like anyone can make money shorting and longing stocks. Except as Dorgan says it's much easy to get into the oil speculation game:
"There is a 50 percent margin requirement for people when purchasing stocks, but only a five to seven percent requirement for those speculating in energy futures,” “These speculators are using money they don’t have to buy oil they’ll never use, making money on both ends, and the American public gets stuck with the bill every time we fill up our tank.”"
How many cars did China add in the last 3 months? How about India? That explains a $1.00 per gallon rise in 3 months? You guys are kidding yourselves.
June 25, 2008 10:52 PM | Reply | Permalink
How will they leave the market? Answers: Public transportation, bicycle, walk, car/vanpool, highly fuel efficient vehicles, and relocation.
All of these are seeing huge increases. Public transport has seen skyrocketing ridership.
Demand destruction in the American market is already occurring.
American oilmen want to slow down this demand destruction by waving this speculation business around, giving people a false excuse to wait for prices to fall.
The World price of oil explains a $1/gal rise in 3 months. The reason oil is so expensive is because demand exceeds supply significantly. Worldwide demand only grows, while daily supply remains fairly stable, but will begin to diminish soon. When demand significantly exceeds supply, precipitous and rapid price increases are to be expected.
And it will only get worse. Any American demand destruction will be more than made up by World demand growth.
America alone cannot significantly affect the price of a globally traded commodity like oil - at least, not for any length of time, and not rapidly. The best we can do is lessen the pain, by doing like I said people should do: leave, or lessen their dependence upon, the oil market.
June 25, 2008 11:42 PM | Reply | Permalink
SPQR once again it isn't just supply and demand driving up the price of oil. It is unregulated futures markets brought to us via the Enron Loophole Phil Gramm (McCain's top economic advisor) snuck into the omnibus spending bill in Dec. 2000 just before Clinton left office. parasites in the financial community are piling on with almost sure bets that because of rising demand prices will go up. They can daisy chain the price up until even oil companies squeal because they're getting the majority of the blame. Of course they're probably in on it too but they'd like to have the game all to themselves.
Your solution is very Republican. Don't like being buffeted by financial forces beyond your control that the government ought to control but won't? Buy a new car! Move closer to work! Ride your bicycle 30 miles to work! Take a train that doesn't exist!
Never mind that for a lot of people those are lousy options. Never mind that most of our transportation system currently runs on oil. We can and do have to adapt. But if this keeps up by the time Bush leaves office the American economy will be in a deep recession possibly on it's way to a depression.
As I see it the rats who have been winning the rat race for the last 30 years blowing up one bubble after another are getting their last
licks in. Just as religion needs the threat of going to hell to keep the faithful in line capitalism needs regulation to keep the profiteers in line. They know it's coming and they're getting while the getting is still good.
It took an FDR to save capitalism from it's worst excesses in the 1930s and it looks like it's gonna take an Obama to clean up the mess this time. We all better hope he succeeds or we just may be walking whether we like it not.
June 26, 2008 10:27 AM | Reply | Permalink
i take issue with your describing my solutions as "very republican." if you need an explanation, maybe you should review some of the energy and transportation policies of the democrats & compare to the republicans, since, oh, the Carter administration. and besides, you conceded that adaptation is necessary toward the latter end of your comment. your reduction of my solutions to hyperbolic/unrealistic exclamations is a belittling distortion, and you don't even refute the fact that we're already seeing the increases. real people are already turning to these completely realistic options.
i won't take issue with the contention that speculation and the inflation of the dollar are playing a role in rising oil prices. the dollar's inflation is like $20/bbl by itself. consider how the dollar's value in relation to commodities and other currencies has dropped over the last 12 to 18 months, the world food price crisis, consistent trade deficits, the credit crisis/mortgage meltdown, and the sheer volume of money (a lot in loans, for the Iraq War) that's travelled overseas in order for inflation to occur so steeply and rapidly. consider the amount of wealth destroyed by the dollar's diminished value. and yet, inflation is only responsible for about $20/bl over this period. how is it possible for the amount of money involved in oil futures to even approach this kind of effect? your 1.5 billion bbl/day is about $200 billion at $130/bbl. sorry for not quoting linked stats here, these are best guesses from a fairly well-informed news junkie.
i still think increasing demand is a more important force. and if it's not the most important force this year, it will be next year and every year after that.
any luck finding another commodity whose paper incarnation trades at 20 times the daily rate of its physical incarnation? we need a basis for comparison here.
June 26, 2008 9:22 PM | Reply | Permalink
SPQR telling people who sunk their nestegg into a home in the exurbs 5 or 10 years ago because it gave them the square footage they needed at a price they could afford to take a loss and move closer to work, or public transportation, or buy a car that doesn't currently exist is the same as Ronald Reagan telling laid off auto workers to "vote with their feet" and get the hell out of Michigan and move to the sunbelt.
It's basically saying you're on your own, don't expect the government to do anything because that would require regulation of markets and Republicans don't do regulation. You're evidently against upping the margin requirements to play the oil futures market and putting transparency back into them which is the Phil Gramm/John McCain/George Bush position.
I say make 'em put up 50% of their own money to bet on oil futures and show us who's getting a cut and exactly how much every time we fill up the tank. The fact that there's so much guesswork involved in all aspects of the oil biz, the lifeblood of modern civilization, shows just how little transparency there is.
So yeah people are already turning to the options you mentioned. They're getting killed financially in the process, the economy is in the toilet, and consumer confidence is as low as it's been since the recession that devastated the rust belt in the early 1980s.
And nobody is arguing that the price of crude oil isn't going up. I'm arguing that it's not just supply and demand. The nation that stands to suffer the most from these wrenching changes is the USA because of our Republican head in the sand, 1950s style energy policy over the last 27 years.
June 30, 2008 11:42 AM | Reply | Permalink
comparing my solutions to ronald reagan asking people to move across the country is again hyperbolic. moving across the country is nothing at all like riding a bike, taking a bus, buying a fuel efficient car that DOES exist, or moving 10 or 15 miles into the city. you're really grasping at straws here. for the family living in the exurbs and being forced to take a loss on their house if they move, THERE ARE OTHER SOLUTIONS IN MY LIST THAT MIGHT WORK, like buying a more fuel efficient vehicle or commuting into the city by public trans. the left has been advocating all of those changes for years; i don't know wtf you've been. rapid adaptation forced by today's energy market will be painful for some people, but they've had years (decades) to hear the left talking about global warming, energy, CAFE standards, and so on.
don't pigeonhole my position just because i disagree with your solution. just because i think you're wrong doesn't make me a republican; if i happen to agree with a republican position from time to time, that doesn't make the position wrong, either. believe it or not, republicans are sometimes right too; and when they are right, the correct positions that they choose shouldn't be less attractive for being supported by republicans and rejected by democrats.
it's a world oil market.
changing the way we regulate oil futures in america doesn't change how the EU chooses to regulate them. your idea will simply chase money out of american financial markets.
i've seen pundits on pbs, on the bbc, on nbc, and on fox all saying the same thing about speculation and trying to reign in the influence; all of them warned that the money would just go overseas.
you should learn how to argue without alienating people. i haven't called you a republican yet. try not to 'misunderestimate' your peers in this community.
you haven't even heard me say whether i intend for the solutions i've suggested to receive more public support, incentives, tax breaks, and so on. it's not like i intend for all of the adaptation i suggested to be occurring in a vaccuum, with no support from local, state or federal government. public transportation projects obviously need money; purchasers of fuel efficient cars should receive big tax incentives; there should also be better financing available for people who want to buy more fuel efficient vehicles; rail throughout the nation needs to be upgraded; even a small tax rebate on bicycles...
the speculator problem is real; but solving it will only temporarily affect oil prices; and solving it is impossible unless you can change all oil futures markets, not just america's.
people should start adapting now. government should start facilitating those adaptations in a utilitarian manner. the solutions i offered are both active and concrete; relying on the government to regulate the american oil market is both passive and nebulous in its potential effect on the world price of oil.
June 30, 2008 2:26 PM | Reply | Permalink
SPQR when gas prices jump as much as they have over the last 6 months it isn't because of supply and demand. Jimmy Carter tried to start weaning us off of foreign oil 3 decades ago. He also told us to suck it up, put on a sweater and turn the thermostat down. It's not a winning strategy to tell the American public to just eat their peas and take their lumps while fatcats game the unregulated system to get stinking rich while our economy goes to hell. For a lot of people your options just aren't possible. They've built their lives around the society and systems as they exist and they're getting swamped by the sudden change.
Seeing as the heads of major oil companies and Saudi sheiks are even angry about the profiteering (though they're just pissed off at speculators horning in on their game while they get the blame) if we push for and get tighter trading regulations and greater transparency of all commodities it'll force other governments (last I checked Europe and Asia aren't dominated by insaniacs who think any government = bad) to do the same. And if Republicans fight it we'll have a hell of a campaign issue to use against them.
June 30, 2008 4:36 PM | Reply | Permalink
prove it.
i think the opposite will happen, actually. i mean, why would they regulate our money out of their markets, after we've chased that money out of our own markets and into theirs with that regulation you're talking about?
show me the international support for this kind of regulation of world commodities markets and you'll have a point.
June 30, 2008 8:48 PM | Reply | Permalink
why would they regulate our money out of their markets, after we've chased that money out of our own markets
Um because it's incredibly destructive to let a few assholes try to get obscenely wealthy while bringing the world's economy to a crashing halt, that's all.
June 30, 2008 9:36 PM | Reply | Permalink
i agree with you in spirit.
care to help me dismantle the WTO?
yah, easier said than done.
every signatory has subscribed to this free market b.s. you have to get them all, mister.
June 30, 2008 11:27 PM | Reply | Permalink
on top of that, why would the EU bend to american will on this issue? many of those countries are Kyoto signatories and have a jumpstart on investment in renewable energy, and in reducing oil dependence. america could've signed on in 1997, and the current oil crunch might've been averted for a few years or more. why would any of the serious Kyoto countries help us after we spurned our chance? furthermore, the euro is rising while the dollar falls, and thus the EU would stand to lose a great deal by cooling the market. what do you think russia will say to regulating its energy market? (hint - the opposite of whatever will help america.)
the pressure of the status quo will prevail.
the WTO almost guarantees that. the conflicting interests for those countries that would want to regulate energy markets as opposed to those that would oppose such regulation, would probably result in the destruction of the WTO or the withdrawal of some of its charter members (like the US). supremely unlikely.
and our political capital on these kinds of issues internationally is pretty much gone; it will be some time before we regain the kind of influence it will take to affect this problem.
July 1, 2008 12:01 AM | Reply | Permalink
It's not regulating the oil market it's regulating the oil futures market. The futures markets are meant to hedge prices for producers and customers alike. Not as a get rich quick scheme for anybody who can put up 5 to 7% and borrow the rest to drive what should be a slow rise in prices to heights that'll cripple the world's economy.
And it has nothing to do with dissolving the WTO. When we changed our laws with the Enron loophole the WTO didn't even enter into it.
That money doesn't get spread around NYC or London to any great extent unless you count the personal spending by those getting rich.
The EU nations as much as they're doing to wean themselves off oil aren't there yet by a longshot. As much as they dislike the Bush administration they don't want to see the world's biggest economy and one of their biggest trading partners go in the toilet.
An effort like this would do wonders for regaining the political capital Bush has squandered.
July 1, 2008 2:33 PM | Reply | Permalink
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