Wishful thinking: Oil prices will drop if speculation is limited
Congress has always had a soft spot for "experts" who tell members what they want to hear, whether it's supply-side economists declaring that tax cuts increase revenue or climate-change skeptics insisting that global warming is a myth.
Right now, the welcome mat is out for analysts who claim that out-of-control speculators are responsible for $4-a-gallon gas.
Back in May, Michael Masters, a hedge fund manager, made a big splash when he told a Senate committee that speculation is the main cause of rising prices for oil and other raw materials. He presented charts showing the growth of the oil futures market, in which investors buy and sell promises to deliver oil at a later date, and claimed that "the increase in demand from index speculators" - his term for institutional investors who buy commodity futures - "is almost equal to the increase in demand from China."
Many economists scoffed: Masters was making the bizarre claim that betting on a higher price of oil - for that is what it means to buy a futures contract - is equivalent to actually burning the stuff.
Somewhat surprisingly, Republicans have been at least as willing as Democrats to denounce evil speculators. But it turns out that conservative faith in free markets somehow evaporates when it comes to oil. For example, National Review has been publishing articles blaming speculators for high oil prices for years, ever since the price passed $50 a barrel.
And it was John McCain, not Barack Obama, who recently said this: "While a few reckless speculators are counting their paper profits, most Americans are coming up on the short end - using more and more of their hard-earned paychecks to buy gas."
Why are politicians so eager to pin the blame for oil prices on speculators? Because it lets them believe that we don't have to adapt to a world of expensive gas.
Indeed, this past Monday Masters assured a House subcommittee that a return to the days of cheap oil is more or less there for the asking. If Congress passed legislation restricting speculation, he said, gasoline prices would fall almost 50 percent in a matter of weeks.
OK, let's talk about the reality.
Is speculation playing a role in high oil prices? It's not out of the question. Economists were right to scoff at Masters - buying a futures contract doesn't directly reduce the supply of oil to consumers - but under some circumstances, speculation in the oil futures market can indirectly raise prices, encouraging producers and other players to hoard oil rather than making it available for use.
Whether that's happening now is a subject of highly technical dispute. (Readers who want to wonk themselves out can go to my blog, krugman.blogs.nytimes.com, and follow the links.) Suffice it to say that some economists, myself included, make much of the fact that the usual telltale signs of a speculative price boom are missing. But other economists argue, in effect, that absence of evidence isn't solid evidence of absence.
What about those who argue that speculative excess is the only way to explain the speed with which oil prices have risen? Well, I have two words for them: iron ore.
You see, iron ore isn't traded on a global exchange; its price is set in direct deals between producers and consumers. So there's no easy way to speculate on ore prices. Yet the price of iron ore, like that of oil, has surged over the past year. In particular, the price that Chinese steel makers pay to Australian mines has just jumped 96 percent.
This suggests that growing demand from emerging economies, not speculation, is the real story behind rising prices of raw materials, oil included.
In any case, one thing is clear: The hyperventilation over oil-market speculation is distracting us from the real issues.
Regulating futures markets more tightly isn't a bad idea, but it won't bring back the days of cheap oil. Nothing will. Oil prices will fluctuate in the coming years - I wouldn't be surprised if they slip for a while as consumers drive less, switch to more fuel-efficient cars, and so on - but the long-term trend is surely up.
Most of the adjustment to higher oil prices will take place through private initiative, but the government can help the private sector in a variety of ways, such as helping develop alternative-energy technologies and new methods of conservation and expanding the availability of public transit.
But we won't have even the beginnings of a rational energy policy if we listen to people who assure us that we can just wish high oil prices away.
PAUL KRUGMAN is a New York Times columnist.
Congress rushes to fill oil speculation loophole
Speculation can add $70 to the price of a barrel of oil, critics charge.
By Gail Russell Chaddock | Staff writer of The Christian Science Monitorfrom the June 24, 2008 edition
Call it Enron, the sequel.
In a scramble to find a fix for energy prices, Congress has tried (and failed) to strip tax breaks from Big Oil, to open protected sites for exploration and drilling, and to jump-start a new era in nuclear power.
Now, Capitol Hill is zeroing in on speculators and the legal loopholes that some lawmakers say are adding as much as $70 to the price of a barrel of oil.
"Energy speculation has become a fine growth industry and it is time for the government to intervene," said House Energy and Commerce Committee Chairman John Dingell (D) of Michigan, at hearing on Monday.
Fixes in the works on Capitol Hill range from new constraints on speculators – including a 50 percent margin requirement on financial speculators, full disclosure of all trading by investment banks in all markets, and prohibiting investment banks from holding energy assets – to more funding and regulatory mandates for the Commodity Futures Trading Commission.
Financial speculators – that is, hedge funds, investment banks, and other traders who do not take physical possession of the commodities – are surging into commodities markets. On that point, there is no dispute.
But experts differ widely on the impact these new players have on prices. Treasury Secretary Henry Paulson and many financial industry analysts say prices are still set by the fundamentals of supply and demand.
Many lawmakers, along with oil industry spokesmen, the Saudi oil minister, and the International Monetary Fund, say excessive speculation in the futures market is also a factor in the run-up of prices.
Since September 2003, traders holding crude-oil futures contracts jumped from 714 contracts traded to more than 3 million contracts traded in May 2008, says Rep. Bart Stupak (D) of Michigan, who chairs the House Energy and Commerce Subcommittee on Oversight and Investigation. His panel held its second hearing on energy speculation Monday.
Speculators now account for 71 percent of the oil futures market, up from 29 percent in 2000, he says, citing data from the Commodity Futures Trading Commission (CFTC). Overall, commodity index speculation has jumped from $13 billion in 2003 to some $260 billion today.
"Given this imbalance, you have to wonder if the regulator [CFTC] is missing the forest for the trees," Representative Stupak said Monday.
Many lawmakers insist that such a surge cannot help but contribute to the surge in oil prices.
"The [commodities] market is broken. It doesn't work. It is full of speculators and what they're interested in is to drive up the price. They don't give a rip about the damage to the economy," says Sen. Byron Dorgan (D) of North Dakota, who is chairing another hearing on speculation.
Many of these trades are exempt from CFTC oversight, and Congress is racing to pass laws to change that: The Enron loophole, the London loophole, the swaps loophole, among others, are on the blocks in bipartisan bills pending in both the House and Senate. (The Enron loophole to a 2000 law allows oil futures to be traded outside the jurisdiction of the CFTC.)
As recently as December, CFTC acting chairman Walter Lukken told Congress that "excessive speculation" was not a problem. But in response to mounting criticism, the CFTC this month launched a national crude-oil investigation to consider recent evidence on speculation. It also announced an agreement with the UK Financial Services Authority to expand the data received from institutions trading crude-oil products across borders – a bid to close the so-called London loophole.
"We've been slow to react and we're beginning to do what we need to do," said CFTC commissioner Bart Chilton in a phone interview.
Despite the surge in investment in commodities markets, the CFTC has only 448 staff, compared with 3,700 for the Securities and Exchange Commission.
"We are down 175 staff members from a high in 1992, despite a rising tide of hedge fund and pension fund investment in the commodities market," says Mr. Chilton.
But there is not yet a consensus within the CFTC that further steps to rein in speculation are needed.
"There's no evidence of speculative influence. Speculators are not contributing to the demand for physical oil as they almost always roll positions prior to delivery," says Craig Pirrong, a professor of finance at the University of Houston and a member of the CFTC energy markets advisory committee.
But at Monday's hearing, Michael Masters, portfolio manager of the hedge fund Masters Capital Management said: "This is an acute crisis. The time for studies and examinations is past."
A key witness in recent congressional hearings, Mr. Masters said in an interview that "even though speculators are not hoarding actual commodities, they have the effect of driving up the price for consumers around the world because of the linkage between the commodities market and the spot market."
"They have the same effect on price as if they were buying real physical commodities," he said.
US senator seeks curb on oil speculation
By Joanna Chung in New York
Published: June 24 2008 22:04 | Last updated: June 24 2008 22:42
Political pressure to combat speculation in oil markets increased on Tuesday as a senior US senator called for restrictions on pension funds and other big institutional investors investing in energy and farming commodities.
The proposal is one of three put forward yesterday by Joseph Lieberman, a Democratic-turned-independent senator from Connecticut. It is the latest in a series of calls for tougher regulation, amid growing US worries over food and fuel costs.
Politicians fear that traders might be exploiting the more lightly regulated London oil and oil-futures markets – via the “London loophole” – to trade in a way that might be artificially boosting prices. An act to close that loophole was proposed by five US senators last week.
Many politicians attach much of the blame to financial investors, including pension funds, which have poured billions of dollars into the futures market in recent years, largely through commodity indices. The two leading presidential candidates, Barack Obama and John McCain, have also weighed in, pledging to propose remedies to rein in market speculation.
On Tuesday, Mr Lieberman, a close ally of Mr McCain, said he was “persuaded” that speculators were a “significant contributing factor to the economic distress now being felt by American consumers every time they stand in the grocery store checkout line or pay for a fill-up at the gas pump”.
Amid growing political pressure, the Commodity Futures Trading Commission, the chief futures regulator, imposed limits last week on the size of speculative positions that could be taken out on London’s ICE Futures Europe exchange. About 15 per cent of futures trading on the benchmark West Texas Intermediate oil contract takes place there.
The limits would bring oversight of traders’ behaviour on the London ex-change in line with oversight on domestic markets.
Yet that is unlikely to stop legislators who are considering proposals to extend US regulation over the “London loophole” or to close it.
Despite seven congressional hearings into “excessive speculation” in the past three months, there is little agreement on whether speculation is causing food and energy price inflation. The commodities regulator has repeatedly said that fundamental supply and demand factors are mainly behind the recent price movements – though it is stepping up its focus on the potential impact of speculators and commodity index traders.
Some observers say lawmakers have not explained how speculators or pension funds are boosting commodity prices or why the price of raw materials such as iron ore, rice or coal – in which speculators have limited access – are also booming.
On Tuesday, William Quinn, chairman of the Committee on the Investment of Employee Benefit Assets, which represents 110 of the largest US pension funds, told senators that pension funds were long term investors – not speculators.
“We are deeply concerned about the prospect of any legislation that would bar pension plans from investing in certain types of assets,” he said.
PERHAPS 60% OF TODAY'S OIL PRICE IS PURE SPECULATION
By F. William Engdahl, 2 May 2008
The price of crude oil today is not made according to any traditional relation of supply to demand. It’s controlled by an elaborate financial market system as well as by the four major Anglo-American oil companies. As much as 60% of today’s crude oil price is pure speculation driven by large trader banks and hedge funds. It has nothing to do with the convenient myths of Peak Oil. It has to do with control of oil and its price. How?
First, the role of the international oil exchanges in London and New York is crucial to the game. Nymex in New York and the ICE Futures in London today control global benchmark oil prices which in turn set most of the freely traded oil cargo. They do so via oil futures contracts on two grades of crude oil―West Texas Intermediate and North Sea Brent.
A third rather new oil exchange, the Dubai Mercantile Exchange (DME), trading Dubai crude, is more or less a daughter of Nymex, with Nymex President, James Newsome, sitting on the board of DME and most key personnel British or American citizens.
Brent is used in spot and long-term contracts to value as much of crude oil produced in global oil markets each day. The Brent price is published by a private oil industry publication, Platt’s. Major oil producers including Russia and Nigeria use Brent as a benchmark for pricing the crude they produce. Brent is a key crude blend for the European market and, to some extent, for Asia.
WTI has historically been more of a US crude oil basket. Not only is it used as the basis for US-traded oil futures, but it's also a key benchmark for US production.
’The tail that wags the dog’
All this is well and official. But how today’s oil prices are really determined is done by a process so opaque only a handful of major oil trading banks such as Goldman Sachs or Morgan Stanley have any idea who is buying and who selling oil futures or derivative contracts that set physical oil prices in this strange new world of “paper oil.”
With the development of unregulated international derivatives trading in oil futures over the past decade or more, the way has opened for the present speculative bubble in oil prices.
Since the advent of oil futures trading and the two major London and New York oil futures contracts, control of oil prices has left OPEC and gone to Wall Street. It is a classic case of the “tail that wags the dog.”
A June 2006 US Senate Permanent Subcommittee on Investigations report on “The Role of Market Speculation in rising oil and gas prices,” noted, “…there is substantial evidence supporting the conclusion that the large amount of speculation in the current market has significantly increased prices.”
What the Senate committee staff documented in the report was a gaping loophole in US Government regulation of oil derivatives trading so huge a herd of elephants could walk through it. That seems precisely what they have been doing in ramping oil prices through the roof in recent months.
The Senate report was ignored in the media and in the Congress.
The report pointed out that the Commodity Futures Trading Trading Commission, a financial futures regulator, had been mandated by Congress to ensure that prices on the futures market reflect the laws of supply and demand rather than manipulative practices or excessive speculation. The US Commodity Exchange Act (CEA) states, “Excessive speculation in any commodity under contracts of sale of such commodity for future delivery . . . causing sudden or unreasonable fluctuations or unwarranted changes in the price of such commodity, is an undue and unnecessary burden on interstate commerce in such commodity.”
Further, the CEA directs the CFTC to establish such trading limits “as the Commission finds are necessary to diminish, eliminate, or prevent such burden.” Where is the CFTC now that we need such limits?
They seem to have deliberately walked away from their mandated oversight responsibilities in the world’s most important traded commodity, oil.
Enron has the last laugh…
As that US Senate report noted:
“Until recently, US energy futures were traded exclusively on regulated exchanges within the United States, like the NYMEX, which are subject to extensive oversight by the CFTC, including ongoing monitoring to detect and prevent price manipulation or fraud. In recent years, however, there has been a tremendous growth in the trading of contracts that look and are structured just like futures contracts, but which are traded on unregulated OTC electronic markets. Because of their similarity to futures contracts they are often called “futures look-alikes.”
The only practical difference between futures look-alike contracts and futures contracts is that the look-alikes are traded in unregulated markets whereas futures are traded on regulated exchanges. The trading of energy commodities by large firms on OTC electronic exchanges was exempted from CFTC oversight by a provision inserted at the behest of Enron and other large energy traders into the Commodity Futures Modernization Act of 2000 in the waning hours of the 106th Congress.
The impact on market oversight has been substantial. NYMEX traders, for example, are required to keep records of all trades and report large trades to the CFTC. These Large Trader Reports, together with daily trading data providing price and volume information, are the CFTC’s primary tools to gauge the extent of speculation in the markets and to detect, prevent, and prosecute price manipulation. CFTC Chairman Reuben Jeffrey recently stated: “The Commission’s Large Trader information system is one of the cornerstones of our surveillance program and enables detection of concentrated and coordinated positions that might be used by one or more traders to attempt manipulation.”
In contrast to trades conducted on the NYMEX, traders on unregulated OTC electronic exchanges are not required to keep records or file Large Trader Reports with the CFTC, and these trades are exempt from routine CFTC oversight. In contrast to trades conducted on regulated futures exchanges, there is no limit on the number of contracts a speculator may hold on an unregulated OTC electronic exchange, no monitoring of trading by the exchange itself, and no reporting of the amount of outstanding contracts (“open interest”) at the end of each day.”
Then, apparently to make sure the way was opened really wide to potential market oil price manipulation, in January 2006, the Bush Administration’s CFTC permitted the Intercontinental Exchange (ICE), the leading operator of electronic energy exchanges, to use its trading terminals in the United States for the trading of US crude oil futures on the ICE futures exchange in London – called “ICE Futures.”
Previously, the ICE Futures exchange in London had traded only in European energy commodities – Brent crude oil and United Kingdom natural gas. As a United Kingdom futures market, the ICE Futures exchange is regulated solely by the UK Financial Services Authority. In 1999, the London exchange obtained the CFTC’s permission to install computer terminals in the United States to permit traders in New York and other US cities to trade European energy commodities through the ICE exchange.
The CFTC opens the door
Then, in January 2006, ICE Futures in London began trading a futures contract for West Texas Intermediate (WTI) crude oil, a type of crude oil that is produced and delivered in the United States. ICE Futures also notified the CFTC that it would be permitting traders in the United States to use ICE terminals in the United States to trade its new WTI contract on the ICE Futures London exchange. ICE Futures as well allowed traders in the United States to trade US gasoline and heating oil futures on the ICE Futures exchange in London.
Despite the use by US traders of trading terminals within the United States to trade US oil, gasoline, and heating oil futures contracts, the CFTC has until today refused to assert any jurisdiction over the trading of these contracts.
Persons within the United States seeking to trade key US energy commodities – US crude oil, gasoline, and heating oil futures – are able to avoid all US market oversight or reporting requirements by routing their trades through the ICE Futures exchange in London instead of the NYMEX in New York.
Is that not elegant? The US Government energy futures regulator, CFTC opened the way to the present unregulated and highly opaque oil futures speculation. It may just be coincidence that the present CEO of NYMEX, James Newsome, who also sits on the Dubai Exchange, is a former chairman of the US CFTC. In Washington doors revolve quite smoothly between private and public posts.
A glance at the price for Brent and WTI futures prices since January 2006 indicates the remarkable correlation between skyrocketing oil prices and the unregulated trade in ICE oil futures in US markets. Keep in mind that ICE Futures in London is owned and controlled by a USA company based in Atlanta Georgia.
In January 2006 when the CFTC allowed the ICE Futures the gaping exception, oil prices were trading in the range of $59-60 a barrel. Today some two years later we see prices tapping $120 and trend upwards. This is not an OPEC problem, it is a US Government regulatory problem of malign neglect.
By not requiring the ICE to file daily reports of large trades of energy commodities, it is not able to detect and deter price manipulation. As the Senate report noted, “The CFTC's ability to detect and deter energy price manipulation is suffering from critical information gaps, because traders on OTC electronic exchanges and the London ICE Futures are currently exempt from CFTC reporting requirements. Large trader reporting is also essential to analyze the effect of speculation on energy prices.”
The report added, “ICE's filings with the Securities and Exchange Commission and other evidence indicate that its over-the-counter electronic exchange performs a price discovery function -- and thereby affects US energy prices -- in the cash market for the energy commodities traded on that exchange.”
Hedge Funds and Banks driving oil prices
In the most recent sustained run-up in energy prices, large financial institutions, hedge funds, pension funds, and other investors have been pouring billions of dollars into the energy commodities markets to try to take advantage of price changes or hedge against them. Most of this additional investment has not come from producers or consumers of these commodities, but from speculators seeking to take advantage of these price changes. The CFTC defines a speculator as a person who “does not produce or use the commodity, but risks his or her own capital trading futures in that commodity in hopes of making a profit on price changes.”
The large purchases of crude oil futures contracts by speculators have, in effect, created an additional demand for oil, driving up the price of oil for future delivery in the same manner that additional demand for contracts for the delivery of a physical barrel today drives up the price for oil on the spot market. As far as the market is concerned, the demand for a barrel of oil that results from the purchase of a futures contract by a speculator is just as real as the demand for a barrel that results from the purchase of a futures contract by a refiner or other user of petroleum.
Perhaps 60% of oil prices today pure speculation
Goldman Sachs and Morgan Stanley today are the two leading energy trading firms in the United States. Citigroup and JP Morgan Chase are major players and fund numerous hedge funds as well who speculate.
In June 2006, oil traded in futures markets at some $60 a barrel and the Senate investigation estimated that some $25 of that was due to pure financial speculation. One analyst estimated in August 2005 that US oil inventory levels suggested WTI crude prices should be around $25 a barrel, and not $60.
That would mean today that at least $50 to $60 or more of today’s $115 a barrel price is due to pure hedge fund and financial institution speculation. However, given the unchanged equilibrium in global oil supply and demand over recent months amid the explosive rise in oil futures prices traded on Nymex and ICE exchanges in New York and London it is more likely that as much as 60% of the today oil price is pure speculation. No one knows officially except the tiny handful of energy trading banks in New York and London and they certainly aren’t talking.
By purchasing large numbers of futures contracts, and thereby pushing up futures prices to even higher levels than current prices, speculators have provided a financial incentive for oil companies to buy even more oil and place it in storage. A refiner will purchase extra oil today, even if it costs $115 per barrel, if the futures price is even higher.
As a result, over the past two years crude oil inventories have been steadily growing,
resulting in US crude oil inventories that are now higher than at any time in the previous eight years. The large influx of speculative investment into oil futures has led to a situation where we have both high supplies of crude oil and high crude oil prices.
Compelling evidence also suggests that the oft-cited geopolitical, economic, and natural factors do not explain the recent rise in energy prices can be seen in the actual data on crude oil supply and demand. Although demand has significantly increased over the past few years, so have supplies.
Over the past couple of years global crude oil production has increased along with the increases in demand; in fact, during this period global supplies have exceeded demand, according to the US Department of Energy. The US Department of Energy’s Energy Information Administration (EIA) recently forecast that in the next few years global surplus production capacity will continue to grow to between 3 and 5 million barrels per day by 2010, thereby “substantially thickening the surplus capacity cushion.”
Dollar and oil link
A common speculation strategy amid a declining USA economy and a falling US dollar is for speculators and ordinary investment funds desperate for more profitable investments amid the US securitization disaster, to take futures positions selling the dollar “short” and oil “long.”
For huge US or EU pension funds or banks desperate to get profits following the collapse in earnings since August 2007 and the US real estate crisis, oil is one of the best ways to get huge speculative gains. The backdrop that supports the current oil price bubble is continued unrest in the Middle East, in Sudan, in Venezuela and Pakistan and firm oil demand in China and most of the world outside the US. Speculators trade on rumor, not fact.
In turn, once major oil companies and refiners in North America and EU countries begin to hoard oil, supplies appear even tighter lending background support to present prices.
Because the over-the-counter (OTC) and London ICE Futures energy markets are unregulated, there are no precise or reliable figures as to the total dollar value of recent spending on investments in energy commodities, but the estimates are consistently in the range of tens of billions of dollars.
The increased speculative interest in commodities is also seen in the increasing popularity of commodity index funds, which are funds whose price is tied to the price of a basket of various commodity futures. Goldman Sachs estimates that pension funds and mutual funds have invested a total of approximately $85 billion in commodity index funds, and that investments in its own index, the Goldman Sachs Commodity Index (GSCI), has tripled over the past few years. Notable is the fact that the US Treasury Secretary, Henry Paulson, is former Chairman of Goldman Sachs.
The Speculation Explanation: Framing the Energy Crisis
By Matthew S. Miller, AlterNet
Posted on June 28, 2008
"There is nothing in that equation that says oil should cost what it costs today. Nothing! With one exception -- speculation." -- Mike Norman, Fox News Central
"A major contributor (to high oil prices) is the rise in speculation." -- Sen. Carl Levin, D-Mich., to CNNMoney
"Perhaps 60 percent of today's oil price is pure speculation." -- F. William Engdahl, Global Research
The $11 spike in the price of crude oil on Friday, June 6, pasted a great big exclamation point on the sentence, "Something is wrong with oil prices" banging around in the worried minds of America's happy motoring hoi polloi. With the national average for a gallon of liquid mobility hovering around four bucks, fear, now the only motive for action among the populace of fortress America, inevitably initiated some reflection among them. Such instinctive fear-inspired attention developing around the plug-in of the matrix must be deflected, and so it was: Enter the speculation explanation.
The speculation explanation blurs the issues involved in our present energy crisis by suggesting the wrong semantic frame to truthfully explain high oil prices and the likely consequences of depletion. Oil futures speculation is only tangentially relevant to an honest discussion of the price of oil. In fact, it is harmful because it undermines and replaces a reality-based appraisal of the problem. This meme arose simultaneously from a variety of sources by institutional necessity from within the propaganda apparatus to serve the interests of the military-industrial-congressional-cultural complex. Those interests are "business as usual" at all costs. The story will sound familiar.
The speculation explanation filtered through the media system like a virus; the cable TV culture conduit showed footage of it being uttered by corporate shills, politicians, kings and think tank pundiots until it became common knowledge. It was repeated like the pledge of allegiance, everyone marching in lockstep, in exactly the fashion predicted in the propaganda model of media. It was the version of events created for public consumption.
Pairing the words oil and speculation ubiquitously and uncritically, the usual cable news talking heads faithfully disseminated the meme to the masses. The cacophony reached new heights in congressional hearings last week. Politicians from the auto state opined repeatedly about speculation for an obvious reason -- the inverse relation between high gas prices and Michigan's economic survival. The notion of speculation as the principle cause of recent price spikes also found a defender from among those who also believe that oil comes from a magic oil fairy that lives at the center of the Earth and abiotically refills oil reservoirs as they deplete (making the 60 percent speculation quotient easier to estimate presumably?). So what is the average American to make of this?
Economists employ the term speculation to refer to a specific kind of market activity. Markets generate wealth in four ways: profit from direct financing of business activity or investment; profit through risk minimization or hedging; profit from price differences between two distinct markets, or arbitrage; and profit through price differences in a single market, known as agiotage, or speculation. The speculator tries to buy low and sell high, thereby profiting from the market uncertainty about the future supply. Speculation and market manipulation are two different things. The speculator is simply betting the price will go up.
Oil is a fungible commodity in a global market. Used to be that speculation was never a problem for the oil market, since world supply steadily grew year on year, and if the price ever got too high "somebody" would just turn on the pump and flood the market with cheap crude. Call it supply-side price controls. In the early days of the 20th century, that somebody was Uncle Sam and his nephew Standard Oil.
Since the '70s, the world's swing producer has been the kingdom of Saudi Arabia. This macro-manipulation of the price of oil, neo-liberal reservations aside, never garnered a congressional or popular objection, as long as it was the United States or our ally in the desert doing the manipulation in order to keep things humming right along for the disaster capitalists.
While the Saudis announced plans last week to increase their production by a quarter of a million barrels, they -- or even a unified OPEC -- cannot lower price by increasing supply. The proposed increase represents a mere quarter of a percent of daily world production, and it has no chance of making even a minor dent in price. Considerable doubt remains about whether such an increase can be sustained for long. The Saudis cannot increase supply to match demand in any event, so that's it for supply-side price controls. It should come as no surprise that even Abdullah joined the speculation sing-along lest he witness his vast dollar-denominated assets devalue further.
According to many prominent geologists, the planet reached or will reach very soon its all-time petroleum production peak. No amount of investment or innovation can alter that fundamental geologic fact. Because of this, according to legendary oilman T. Boone Pickens, only demand destruction can lower prices now.
The argument for speculation as the cause of the price run-up is both right and wrong. It is true that investors, the big banks and funds especially, are trying to make some money by buying up commodities, especially oil, after losing their shirts buying bad mortgage paper. Their activities can be accurately characterized as speculation in the economist's sense of the term. These commodities futures purchases also function as a hedge against the weakness of the dollar.
Criminal only in the sense that all capitalism is criminal, such speculation remains an integral part of a free market system. Consumers remain stuck between the Scylla of speculation-induced price shocks and the Charybdis of shrinking retirement portfolios directed by money managers frantically trying to offset massive write-downs with profits from commodities speculation. Bad news any way you slice it.
In an economy where Bubbles Greenspan blew hot air into tech stocks and the housing market in rapid succession, it is easy to view any steep rise in prices as the result of a speculative bubble. The real long-term value in the underlying market remains the question. There is no oil bubble, only a widening gulf between the amount of oil available and the amount of oil we want to use. Since world supply has remained flat since 2005, prices have risen and consumers in poorer nations simply quit buying, creating the facade of equilibrium and postponing inevitable shortages in the industrialized nations. According to energy analysts Matt Simmons and Dr. Robert Hirsch, oil at $140 remains significantly underpriced.
We in the United States have come to expect low energy prices as a birthright; however, because our economy and infrastructure cannot function without massive amounts of hydrocarbon energy, we will pay whatever it costs for as long as possible to keep the lights on and the trucks moving. Given rapidly growing demand from Chindia, the only direction for the price in the near term is up. As the true picture of future supply becomes apparent to all, oil at $140 will look like a real bargain.
Speculators are not artificially reducing supply through hoarding, which is the kind of fraud that our now-gutted market regulations were meant to curb. Closing the Enron loophole and exposing the NYMEX cabal that manipulates world oil flows to further American and British interests is not going get more oil out of the ground, but it will function as a convenient distraction from the larger depletion issue. At the end of the month, those institutions trading in the oil futures markets must really take their oil or sell it to somebody who will. Inventories are not increasing, and every bit of supply is going into the system. The market is functioning according to its own estimate of the future.
This is not to say that day-to-day oil price is exclusively a function of geology. There is a shortage of drilling rigs worldwide. Aging refineries strain to process the massive flow of capitalism's lifeblood, producing the most oil we will ever produce -- remember, we are at peak. Conflict rules in the oil zones. Offshore is not Ghawar!, i.e., energy returned on energy invested is decreasing as extraction peaks. Climate-crisis wacky weather doesn't help. The dubious sanity of the Oilman with his finger on the biggest red button causing an "insecurity premium" must figure to be at least $9.11 of the price. None of this would be a problem if King Abdullah could still flip the oil switch. Instead of buying back their own stock, the oil majors would be building rigs, tankers and refineries to accommodate future supply increases. We wouldn't need the oil from the conflict zones. We wouldn't have 140,000 American troops building permanent bases on top of the last big puddle of it. The day-to-day price is driven by the fluid economic and political dynamics of resource competition.
*****
If it is true that oil supply is not being artificially but geologically and politically constricted as I have suggested, then the whole discussion of oil speculation as the cause of high prices must have a different purpose. It does! A quick dose of cognitive science reveals it.
The last 30 years of research in cognitive science and linguistics have decisively changed our understanding of human thinking. One major innovation has been the discovery of "frame semantics." Frames are the mental structures that we employ to comprehend reality, and they unconsciously shape our reasoning and action. Frames are not merely abstract associations; rather they are embodied relations in the neural networks of our brains acquired through learning. Frames provide the starting point for the inferences we make about the world. Frames are the basis for thinking itself.
Hotel! Simply reading the word evokes a frame. One thinks immediately of a building with many rooms, clerks, maids and guests. The word implies a whole set of institutionally sanctioned behavioral possibilities and prohibitions for the players of the various roles. It conjures a constellation of locations (guest rooms, lobby, lounge), actions (checking in, checking out, cleaning rooms) and objects (luggage, plastic card keys, and housekeeping carts). It allows us to infer that if someone is a guest, then they probably have luggage, and so on.
Framing expert and Berkley Cognitive Science professor George Lakoff asserts as his first point in an article titled "Simple Framing," "Every word evokes a frame." Words set the stage for thinking. What sort of frame does the term speculation evoke, especially when paired with the term oil?
First, because of oil futures, speculation is specifically an economic phenomenon; it keeps discussion of oil focused on the economic aspects of the problem. Second, in a more colloquial usage, speculation implies generalized uncertainty about something because to speculate is to reason based on inconclusive evidence. Finally, the speculation frame, understood as criminal market manipulation, provides an action structure to which an explanatory narrative can then be attached. We implicitly understand how frames function in the propaganda system if we understand the difference between collateral damage and dead civilians. They deflect and redirect.
Evoking the speculation frame serves to keep the entire discussion of our energy crisis within the province of economics. The implication is that markets, investment and economic growth are primary considerations in understanding it. This frame interprets high oil prices as an economic problem and thus infers that the problem has an economic solution. The appropriate tools to handle the problem are market oversight, tax incentives for business, and removal of restrictions to free enterprise, i.e., permit offshore and ANWAR drilling immediately. The solution is to do more of what we are doing now. The market will adapt and all will be well.
While the energy crisis will have severe economic impacts, it is not fundamentally about economics. It is about human ecology and the limits of growth. Our cultural institutions like driving and consumption conflict directly with the material conditions that make them possible. When the discussion of energy remains in the province of economics, the key assumptions of the economist that the planet is an infinite resource, that the free market will solve all problems, and that growth is a universal good are effectively concealed beyond the focus of critical evaluation. The speculation frame hides the truth by suggesting the wrong context to understand our energy predicament. It just keeps us speculating about what percentage of the price is speculation.
If there is anything the public relations executives running the propaganda system have learned, it is that perceived uncertainty about factual issues generates apathy among the proles. It's no wonder that the Fox News presentation of the "speculation" story is to simply repeat the word speculation as many times as possible. The last 20 years of public discourse on global warming perfectly illustrates the technique: Just keep saying "there is still a debate," and the masses tune out and flip back to HGTV.
Pairing the word oil with the word speculation and repeating it over and over creates the impression that there is some uncertainty about the future of oil rather than merely about the price of oil futures contracts. This short-circuit thought about the issue and reasoned prognostication, like that made by the Association for the Study of Peak Oil, becomes mere speculation. Just think of the vernacular uses of the term speculation, as in "that's just speculation" or "he's only speculating." The speculator is somebody who believes his own ill-founded conjectures.
We are led to reason that there is not enough information about the energy problem to take drastic measures. It's as if the system is screaming, "Don't revolt, don't revolt." While the facts of oil depletion and peak production are undeniable and the inferences about the likely effects of depletion on global politics and economics are very strong arguments, the speculation frame undercuts actions based on these facts. This framing just reinforces the petroleum preservation paralysis that is the precondition of the status quo energy use paradigm.
This oil uncertainty is paradoxically palliating to boomers who lived through the '70s and thus learned to understand energy issues in exclusively economic and political terms. Their apathy stems from the mistaken inference that this energy crisis will be like the last one: painful for a while but only a blip in the permanent bliss of our American petroleum paradise. News flash: There will be no Prudhoe Bay this time around, boys and girls.
The uncertainty associated with oil in the average American mind leaves room for the hope and belief that we'll get back to normal soon enough. Maybe, just maybe, gas prices will drop. Americans will soon realize that a drop in oil prices will only come after the global economy, one that now uses every available drop of crude, crashes and burns in an entropic catastrophe. It will take more than airline inconvenience or high gas prices to get Americans to unplug themselves from the hologram, but remember, petroleum powers the propaganda system, too. It's the lubricant that makes social order possible. I'm betting they will come unplugged in droves when the "Out of Gas" signs start showing up at 7-Eleven, that is, the ones that don't just go postal on the spot. The near future won't be normal!
Joe Average experiences high oil prices as a constriction of discretionary income, or worse, a shortfall for basic needs. This fact requires an explanatory narrative. Such a downgrade in one's standard of living requires someone to blame. Price shocks ascribed to speculation provide this framework.
Speculation that artificially restricts supply through hoarding in order to gouge consumers is a crime. While this is not actually occurring, it makes compelling news copy. There are victims, perpetrators, law enforcement, and a predicable sequence of actions and outcomes. The poor schmuck driving an hour each way to work from his McMansion and the homemaker who can't afford eggs and milk any longer easily recognize themselves as the victims in this cruel petroleum farce. The big boys on the trading floor running up the price of crude, consumed with greed and lust for profit, play the role of dastardly yet faceless criminals. The affable sheriff Levin and his slapstick deputy Stupid, uh, I mean Stupak, investigate the complaints and haul the speculators in for questioning. After some reprimand for the bad apples, all will be back too normal in Consumption County.
While it remains a comforting thought to some that Congress is exercising some sort of oversight, the whole episode of investigative hearings is about creating a scapegoat and thus political cover for the next election. It also provides voters with the illusion of potency and action from their elected representatives. When you can buy whole city blocks of houses for $5,000 apiece in Detroit, "somebody's gotta do sumthin."
Michigan's senatorial contingent likely believes their own speculation about why oil prices have spiked; however, the political calculus remains the proximate cause of their hearings. The speculation explanation pacifies both the drivers and former factory workers composing the Michigan electorate by postponing the grim news that the American auto industry and our personal transportation system are on their way to the morgue. Kudos to Carl for such an exhibition of political jujitsu!
The speculation explanation simply delays the arrival of the moment when we will begin, as a nation, to address the reality of our energy crisis. No market solutions will address the geologic and cultural roots of the problem. Enforcing apathy through uncertainty will only buy time for the status quo to profit from the collapse and temporarily deflect the political wrath of the proletariat. The hope for a return to normalcy afforded by the contention that today's price shocks resulted from criminal behavior also postpones the tipping point of the national consciousness necessary to demand reality-based energy policy. It won't be long until disruptions and disasters that are the face of the energy crisis make it impossible to keep the accoutrements of the American Way of Life up and running.
One other aspect of the speculation frame bears mentioning. The speculator engages in risky business ventures in the hope of considerable payoff. The speculator is a gambler. However, buying into the speculation frame places another risky bet. The American people, by not demanding effective leadership that places energy and environment as the number one priority, have rolled the dice, and the odds are against them. The stakes are nothing less than our children's future. Let's hope we don't lose everything.
No comments:
Post a Comment