I heard a report on NPR (rofl, i'm a liberal idiot, sorry) that speculators have piled into oil because it is rising faster than other investments, and that without the speculators, oil would be around $60-70 a barrel.

I've read a teeny bit about forward contracts and futures, but what I can't fathom, is how the price of oil (or any commodity I suppose) can be driven up so high, completely on paper - meaning, some of these contracts don't actually involve the swapping of the commodity. How is this legal, that the price I pay for gasoline is being manipulated by someone that never has to transport, store, or sell the actual commodity, just a paper guarantee.

It just doesn't feel....right?

4/16/2008 1:54:36 PM

Read this. It's pretty well explained in layman's terms.

http://money.cnn.com/magazines/fortune/fortune_archive/2006/05/29/8378002/index.htm

Although, this is not to say that speculation is solely responsible for the current prices of oil. There are myriad factors at play, but the article focuses on the speculation component.

4/16/2008 1:55:47 PM

Quote :

"How is this legal, that the price I pay for gasoline is being manipulated by someone that never has to transport, store, or sell the actual commodity, just a paper guarantee."

without getting into too much jargon, what you're talking about is secondary markets. the existence of speculators, over the long term, creates price efficiency and increases access of said commodity to the consumer. the willingness of speculators to take risk and put skin in the game, ultimately provides the capital necessary to get that next marginal barrel of oil out of the ground.

prices will retreat from time to time but overall, since we're running out of the stuff, prices will continue to rise. Petrobras claims to have found a bunch of oil, but it isn't confirmed yet. Petrochina also found some stuff, but their claims aren't as wild as the Brazilians. the UAE will run dry in 2016, and we are never able to get a straight answer on how much is left in Saudi fields. Iraq and Sudan still have a lot that is untapped. i have a thread on this, so that's enough preaching from me about it running out.

4/16/2008 10:02:23 PM

LoneSnark really needs to check his pager.

4/16/2008 10:30:44 PM

Quote :

"How is capitalism legal???"

4/16/2008 10:33:39 PM

To further aggravate the market, you've got the collapsing US dollar. Oil is priced in USD, so as the value of the dollar drops, even if the actual value of the oil doesn't change, the price will still rise for American consumers. When you add in the other myriad of factors from China to speculators, you've got the prices we're seeing today.

4/16/2008 10:46:08 PM

Nothing else to be added here. Well done everyone

4/17/2008 12:56:16 AM

My job is so much easier when other people do it for me.

4/17/2008 3:22:52 AM

Nothing to be added here.

These are some pretty nasty shocks at an already stressed time for the economy. Rate cuts and parachute drops of cash can only provide hundred point bursts to the Dow for so long. Skills gap, real income stagnation, triple digit inflation on basic necessities, these are some serious fucking problems.

I'd say there's plenty of discussion worth having about this topic. StellaArtois should be very curious about it. She and everyone else will inherit an economy greatly impacted by the ripple effects of artificial inflation by oil speculators. Those, and our equally irrational countermeasures to sacrifice food for energy with ethanol.

I don't see a lot of solution-making going on in the investment world, either. People still treat solutions to the oil addiction as novelties for some reason.

More broadly, everyone seems to be writing-down, preserving cash, and pretty generally, freaking the fuck out. I speak to a few people who see the cheap market as a buying opportunity, but the investor class doesn't exactly make up a good portion of society. We'll see what becomes of this ever-cheaper borrowing as solution to fiasco created by too-cheap-borrowing.

The smart money says...well. Let's put it this way, it says the same thing in a lot of languages because it's in fucking Euros. The EU economy surpassed that of the United States within the last year. (Go look it up. I'll wait.) They are in a better position to barter with oil-producing nations in an oil-tightening marketplace. They even have oil-producing nations arguing on behalf of pricing oil in Euros already.

Meanwhile, back at the ranch. People are losing their jobs. Until recently, I used to talk to them every day. But it's not the Mexicans fault any more than it's the Irish's fault. Or the Chinese's fault. Even though they usually blamed them by rule.

We claim responsibility for our successes proudly in America. But we cower in the face of accountability when it comes to our failures.

The fault is our own. Bush's own Labor Secretary openly speculates that the problem now seems to be a skills gap. The companies, innovation, and decent jobs are out there. Many of you will end up working for them, no doubt. But you're still living in a bubble. You represent about 5-10% of your own economy.

Not enough skilled workers will work for IBM, SAS, Bayer, etc. after coming through our education system at globally competitive rates. Bottom line. That, or not enough people are willing to take the risk to start a business or whatever.

4/17/2008 4:02:09 AM

Thank you Bobby. Much of this makes sense, but some things still don't.

Quote :

"the willingness of speculators to take risk and put skin in the game, ultimately provides the capital necessary to get that next marginal barrel of oil out of the ground"

How does this tie in with the fact that a cartel is controlling some of the worlds supply of oil? Also, I thought tax incentives we give to American oil companies was also supposed to spur innovation and investment, is that happening on a reasonable scale, or are the oil companies sitting back and enjoying their massive massive profits (and please, don't talk to me about profit margin).

4/17/2008 10:22:56 AM

Gamecat, you are mixing up short term issues and long term issues. Oil prices, the weak dollar, bank insolvency, weak housing market, the current stagnation, all are short term problems and will solve themselves with time if we just let them. Oil is caught in a speculative bubble just as housing prices were. It will burst eventually and reasonably priced oil will be here again. The U.S. trade deficit is what is driving down the dollar, and the trade deficit is being driven by high oil prices. If you exclude oil from the trade deficit statistics, the U.S. trade deficit has been falling for the last three years. When the trade deficit improves then the dollar will improve, either from falling oil prices or surging exports. As for housing prices, they must find their floor. It is a painful process, but houses were bid up and now they must be bid down, and everyone is just waiting for that day, including the banks. We are getting close, existing home sales are growing every month as various regions of the country settle out price wise, enabling banks to finally begin liquidating their stock of foreclosures. And the current stagnation is just what we need to fix all these problems: imports including oil will fall, exports will continue growing, and the trade deficit and thus the dollar will improve. A general sense of desperation will encourage home sellers to drop their prices, restoring equillibrium sooner.

As for the rest of your assertions they are long term issues. There is indeed a skill gap and it is why the less skilled in our society are falling behind. But this is a systemic problem due to bad education policy (I think education vouchers would fix it). But this problem only harms those individuals it hits, the system as a whole can survive it. Yes, the poorest of the poor get bad educations and therefore remain poor, but that is the end of the problem. If allowed to do so, wages will adjust (down) to keep them either employed or incarcerated. So, while I wish we would fix our education system, it is a doomsday situation, it has been broken for the last half century and could be ignored for another half century with the same costs we have already become accustomed to paying.

4/17/2008 10:45:52 AM

Quote :

"The U.S. trade deficit is what is driving down the dollar, and the trade deficit is being driven by high oil prices."

Among other things, you mean...

The collapse is not occurring in a vacuum. The dollar's lack of efficacy as a reserve currency is directly tied to OPEC's shift away from pricing oil in $US. Throw in Moody's uneasiness over the US Government's AAA credit rating due to circumstances the institution is wholesale failing to address, and I don't see how this perfect storm of "short term problems," as you call them, avoid becoming long term liabilities.

Quote :

"If you exclude oil from the trade deficit statistics, the U.S. trade deficit has been falling for the last three years."

Isn't that a great way to look at it?

Rosy statistics that ignore keystone facts make for shitty forecasting and shittier economic planning. This is like saying the inflation rate's awesome when you factor out gas and food; or saying that we're not in a recession when you rely on the definition of 2 consecutive quarters of GDP shrinkage.

Quote :

"When the trade deficit improves then the dollar will improve, either from falling oil prices or surging exports."

What exactly are we doing to improve that trade deficit?

Somehow after all the innovation and gains in productivity (which trickled up, not down, in terms of wealth and real income effects), our economy still resembles a grossly out-of-balance washing machine thrashing wildly around.

Also, what exactly leads you to believe oil prices will fall?

The wait it out approach--which is Wall Street's answer for the average consumer generally--looks long and painful. Sure, banks and now the Fed will be "liquidating their stock of foreclosures" while incomes continue to stagnate against inflation; meanwhile Americans will be losing their homes and wind up less likely to buy new ones due to higher prices elsewhere.

Quote :

"But this problem only harms those individuals it hits, the system as a whole can survive it."

What!?

That's less tax revenue for Uncle Sam, Inc. You know, that failing enterprise that collects about one out of every four dollars you earn (at least). How many more will they ask for from the skilled workers as the number of unskilled, and thus lower income tax base, increase?

I know education and training are part of the problem. I've offered solutions in other threads about that. The costs will only accumulate. Our society needs to place more a premium on knowledge...

4/17/2008 11:55:10 AM

Quote :

"Throw in Moody's uneasiness over the US Government's AAA credit rating due to circumstances the institution is wholesale failing to address, and I don't see how this perfect storm of "short term problems," as you call them, avoid becoming long term liabilities."

If moody is considering revoking the US Government's AAA credit rating then moody is an idiot. Afterall, it owns the printing presses, how could is possibly fail to pay its debt?

Quote :

"What exactly are we doing to improve that trade deficit? Somehow after all the innovation and gains in productivity (which trickled up, not down, in terms of wealth and real income effects), our economy still resembles a grossly out-of-balance washing machine thrashing wildly around."

The dollar is being devalued. That is how you fix a trade deficit, the exchange rate changes to encourage exports and discourage imports. And your metaphore is rediculous. An out-of-balance washing machine? What the hell are you talking about? Sure, the system is having trouble digesting a few current events, but they are nothing we have not seen much worse before. One or two insolvent banks compares to the thousands we saw in the early 90's how? We have problems, but compared to earlier decades there has never been a better time to be alive.

Quote :

"That's less tax revenue for Uncle Sam, Inc. You know, that failing enterprise that collects about one out of every four dollars you earn (at least)."

Tax revenue Uncle Sam has learned to live without for the past half century. Poor education standards are nothing new in America, so how can you consider it a shock to the system? And how is uncle sam a failing enterprise? It commands the largest military on the planet and rules over 300 million docile yet productive people. It couldn't fail even if it wanted to, the American people are too damn good at bailing it out.

4/17/2008 12:48:35 PM

Quote :

"We are getting close, existing home sales are growing every month as various regions of the country settle out price wise, enabling banks to finally begin liquidating their stock of foreclosures."

How do you figure this? The last report should sales dropped nearly 20% year over year. Don't tell me you fell into the NAR trap where they reported the typical seasonal increase as the positive news. I've also read that it might take 2 years before all the foreclosures work their way through the system. That should help get us out of a recession in a timely manner, right?

Quote :

"And the current stagnation is just what we need to fix all these problems: imports including oil will fall,"

How do you figure? People become so broke that they just don't drive anywhere? This doesn't jive at all with predictions of $150 oil that some have floated.

I guess I should ask you what time frame, because it doesn't look short term to me.

4/17/2008 1:32:38 PM

Quote :

"I thought tax incentives we give to American oil companies was also supposed to spur innovation and investment, is that happening on a reasonable scale, or are the oil companies sitting back and enjoying their massive massive profits (and please, don't talk to me about profit margin)."

The tax incentives were given out based on new oil and gas exploration and development. The idea wasn't to spur innovation. It was to encourage companies to find and develop new oil and natural gas fields, with the hope that increased supply would lower prices.

As for oil companies enjoying their massive massive profits, they are doing what any company would do. They are focusing on their product, which is oil, and trying to increase production despite opposition from Congress.

Quote :

"How do you figure? People become so broke that they just don't drive anywhere? This doesn't jive at all with predictions of $150 oil that some have floated."

Oil consumption is inelastic in the short term, but more elastic in the long term as high prices linger. Just look at the effects of the 1973 Oil embargo. Prices shot up, and by the late 70's oil consumption had declined quite a bit.

[Edited on April 17, 2008 at 3:50 PM. Reason : 2]

4/17/2008 3:45:23 PM

Quote :

"Oil consumption is inelastic in the short term, but more elastic in the long term as high prices linger. Just look at the effects of the 1973 Oil embargo. Prices shot up, and by the late 70's oil consumption had declined quite a bit."

And was the dollar being devalued with inflation starting to get alarming during this period after 1973? And were there other nations rising extremely quickly to also add to this supply/demand problem we are experiencing today?

4/17/2008 3:57:08 PM

Inflation was in the double-digits by the late 70's. Does the term, "stagflation" ring a bell?

The reality is that oil producers can meet demand in the short term. Inventories are pretty stable, even with OPEC underproducing by 2 or 3 million barrels per day. And that doesn't even factor in the oil that Iraq will bring once it's vast reserves are fully brought online. Prices are bound to stabilize or drop some in the next few years.

4/17/2008 4:15:31 PM

We don't need housing to get out of a recession. Hell, it is not yet assured we will have an recession, merely slower growth.

Quote :

"I guess I should ask you what time frame, because it doesn't look short term to me."

Good point. I suppose what I meant was medium term, within the next two years. To be blunt, we don't have any short term problems except for the investment bank insolvencies, but these are already being taken care of by the Federal Reserve. Either way, whatever the scale, there is nothing that we need Congress to do to fix these issues beyond stay out of the way and let regulators enforce the rules already on the books.

Education is a long term problem which would take decades to fix if we introduced vouchers everywhere right now.

Quote :

"How do you figure? People become so broke that they just don't drive anywhere?"

In a sense, yes. Airlines are going broke which means fewer planes in the air which means less fuel consumed and therefore falling oil imports.

4/17/2008 4:47:01 PM

Quote :

"Prices are bound to stabilize or drop some in the next few years."

Unless global demand continues to increase...

Right?

4/17/2008 5:59:49 PM

^yeah, and a lot of it also depends on OPEC. They have 80% of the world's known reserves, but set their quota to meet less than 40% of global demand. This, along with the turmoil in the region, keeps supply tight and prices artificially high.

However, there was not a lot of new oil and gas exploration in the 90's when oil was trading for less than $20 a barrel. New exploration is ramping up, and we'll see the results of it in a decade or so.

4/17/2008 7:33:11 PM

Quote :

"To be blunt, we don't have any short term problems except for the investment bank insolvencies, but these are already being taken care of by the Federal Reserve."

I guess that is sort of like saying - You're perfectly healthy except for that brain tumor thing.

More seriously though, I think the problems extend beyond insolvency or illiquidty in I-Banks. At least as big of a problem are massive writedowns and capital depletion at traditional banks. This forces a restriction of lending that in turn slows consumption and investment.

In addition, we have collapsing real estate prices, which will be a serious balance sheet problem for many households and some firms.

There is of course also the surge in commodity prices which I am begining to see less and less of a bubble in. For example, though it has surged in recent days, oil looks to me like less of a bubble than it did last summer. Now that is not to say we couldn't still see major declines but the fundamentals are catching up to price.

Perhaps, more frightening for the whole complex though is how the world will respond to rapidly slowing US consumption.

If the US were a small economy then everything would be fine. The dollar would collapse, exports would surge and the decline in US consumption would be a small effect distributed around the world. However, the US is large and declining US consumption could break the growth of the Chinese and European economies. This in turn will diminish US exports.

As a side note I think rumors of the dollar's demise as the reserve currency are exaggerated. Right now the dollar and the Euro are the only games in town and is this really the time you want to be getting into the Euro, when its at a record high and the meager Eurozone growth spurt is in jeopardy?

Plus the long run outlook for the Eurozone is not the best unless they can get over the declining birth rate and elevated unemployment issues.

4/21/2008 3:53:16 PM

Quote :

"How does this tie in with the fact that a cartel is controlling some of the worlds supply of oil?"

None. Most everything you buy is ran by a cartel of some sort. Heck, the NFL is a cartel.

[Edited on April 21, 2008 at 4:46 PM. Reason : /]

4/21/2008 4:45:41 PM

Quote :

"We are getting close, existing home sales are growing every month as various regions of the country settle out price wise, enabling banks to finally begin liquidating their stock of foreclosures."

Again, please explain yourself, consider this information when you do

http://www.bloomberg.com/apps/news?pid=20601087&sid=a3CdecFaWGiw&refer=home

Purchases dropped 2 percent, less than forecast, to an annual rate of 4.93 million, from 5.03 million in February, the National Association of Realtors said today in Washington. The median sales price fell 7.7 percent from a year earlier.

Defaults on subprime mortgage loans have led banks to tighten borrowing rules, while home values are decreasing as foreclosures add to the glut of unsold properties. The housing slump, now in its third year, is one reason some Federal Reserve policy makers are concerned the U.S. is heading into a recession.

4/22/2008 12:30:01 PM

Quote :

"Perhaps, more frightening for the whole complex though is how the world will respond to rapidly slowing US consumption."

4/22/2008 12:50:04 PM

Quote :

"How does this tie in with the fact that a cartel is controlling some of the worlds supply of oil? "

In a short answer: It doesn't. The speculative bunch is downstream of the cartel producing the underlying barrels of oil.

As for the tax breaks thing, i don't even want to touch it. I wanted McCain to run in 2000.

4/22/2008 4:33:48 PM

Paging LoneSnark

http://edition.cnn.com/2008/BUSINESS/04/30/iran.oil.ap/index.html?iref=mpstoryview

4/30/2008 12:24:12 PM

Finally. Me and the zionist conspirators were waiting for Iran to sell out. After all the oil Iran exported to earn those dollars the least it could do was sell them at a massive loss buying rediculously inflated Euros. Now that Iran is out of dollars me and my fellow zionist conspirators are free to drive the dollar up, the Euro down, and cause oil prices to fall:

Quote :

"April 29 (Bloomberg) -- Crude oil fell more than $3 a barrel, the biggest decline in four weeks, after BP Plc restarted a North Sea oil pipeline and the dollar strengthened, reducing the appeal of commodities to investors."

http://www.bloomberg.com/apps/news?pid=20601086&sid=aRoaiNYSN6kY&refer=latin_america

In about ten years we will finish driving the Euro to record lows, the dollar to record highs, and Iran can dump its Euro's to buy rediculously inflated Yen. Is it any wonder we are able to keep Muslims poor when they insist on buying high and selling low?

4/30/2008 12:53:07 PM

And as this affects the national currency reserves of other nations?

4/30/2008 1:49:25 PM

Is it any wonder we (zionist conspirators) are able to keep <other nations> poor when they insist on buying high and selling low?

4/30/2008 1:52:04 PM