http://blogs.forbes.com/warrenmeyer/2011...her-oil-prices/
Are Speculators Responsible for Today’s Higher Oil Prices?
Apr. 21 2011 - 12:06 pm
This week, Barack Obama joined much of the progressive Left in blaming recent increases in oil prices on nebulous and nefarious “speculators.” It’s a charge that has been leveled, and investigated, numerous times since the early 1970’s. And its a charge that is as empty of truth as it has been frequent.
There’s very little that’s new in politics. In 301AD, the Roman Emporer Diocletian issued the edict of maximum prices, which set prices on a bewilderingly large array of goods. It was backed up by the death penalty on speculators, who were decried by Diocletian as a scourge worse than the barbarian hordes. As could be expected by our modern understanding of economics, the edicts mainly resulted in painful shortages of critical commodities. In fact, the original price increases that led to the edict were caused not by speculators, but by profligate government spending and a debasement of the currency (any of that sound familiar?)
In fact, it is almost impossible to find examples of private action sustaining an artificially high price floor. Only with the cooperation of an interventionist government are such sustained price floors possible — that’s why at one point or another in history we have had minimum prices set by the government for taxis, airline fares, rail freight rates, farm products and government-enforced limits on supply that have driven up prices of everything from attorneys to real estate agents to funeral homes to interior design.
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So lets consider speculation in this context. We start from a market in oil for current delivery that is in balance, where the price is such that supply and demand are roughly equal. Now, enter speculators. They supposedly drive the price up above this “natural” price. As the price rises, we know producers will seek ways to bring more oil to market, and consumers will reduce their consumption. The result is a glut – an excess of supply over demand.
Here is the real question to ask if one suspects that speculators are driving the price of oil for current delivery above and beyond the market clearing price: Where is all the extra oil going?
Let’s consider the example of when the Hunt’s tried to corner the silver market in the late 1970s. Over six months, they managed to drive the price from $11 to almost $50 an ounce. Leverage in futures markets allowed them to control a huge chunk of the available world supply. But just driving the price up temporarily did not get them anywhere — to make the fortune they wanted, the prices had to go up and stay up. As prices rose, no one but the Hunt’s were buying, while new supplies flowed onto the market. The only way the Hunt’s could keep the price up was to pour hundreds of millions of dollars in to buy up this excess supply. Eventually, of course, they went bankrupt. They only could maintain the artificially higher commodity price as long as they kept buying and storing excess capacity, a leveraged Ponzi game that eventually collapsed.
So how do oil traders’ supposedly pull off this feat of keeping oil prices elevated above the market clearing price? Well, there is only one way: Excess supply created by the artificially high price has to be stored, either in tanks or in the ground.
... To keep prices elevated, someone would have to be buying this amount of oil every day, and keep on buying and storing this amount indefinitely.
Certainly this would bankrupt anyone in the attempt — it would cost something like $80 billion (just for the oil) to maintain this game for six months and require storage larger than the entire US strategic petroleum reserve. So it should not be surprising that we see no such trends in inventories. Crude oil and gasoline inventories are among the most carefully watched economic statistics there are. Crude oil inventories always rise this time of year (in anticipation of summer gasoline demand) and the rise in inventory this year has been well within historic norms. Gasoline inventories have actually been falling, indicating that the price of gas is perhaps a bit too low.
The only real option for raising prices is to store the oil in the ground — in other words, don’t allow it to get produced in the first place.
How do speculators pull this off? I have no idea. Despite people’s image, the oil producer’s market is incredibly fragmented. The biggest companies in the world have less than 5% share of world production, and it rapidly steps down from there. It is actually even more fragmented than that, because most oil production is co-owned by royalty holders who get a percentage of the production.
Producers and royalty holders are a very fragmented and independent group, and have every incentive to produce fast and hard when prices are high.
Is there a crime in the current oil prices? Yes, but it’s not one of speculation.
Prices are a form of communication. Higher prices tell consumers to use less oil, and producers to go find more. The real crime today is that while the signal is flashing today to oil companies to go find more crude, the Obama administration has bent over backwards to make such efforts all but impossible. In fact, the Obama Administration desperately tried and failed to increase oil and gas prices via cap and trade last year. President Obama is not really against higher oil prices, he just wants them driven higher by the state, not by the markets. (end of quote)
I have to ask this question: who is benefitting when the Obama Administration restricts oil exploration and drilling in the US? Who benefits when the Obama Administration intervenes in Libya -- not to change the regime, because the State Department has on a number of occasions says that's not our objective, and if it was then we could have done it in a matter of days with the proper application of military force?
If one believed in conspiracy theories, one might suggest that Mr Obama is trying to keep more oil in the ground, to drive up the price of crude. So who would benefit? Might it not be some of the hedge fund managers who helped Mr Obama get elected in 2008, and who are prepared to spend up to $1 billion to get him reelected in 2012?
Speculation only works if the fundamentals justify higher prices. Mr Obama is doing his part to keep oil in the ground -- George Soros and his pals may be doing very well, but Obama never mentions Soros by name as that would be attacking his own political ally.
