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By Robert Rapier on May 9, 2011 with 33 responses

It’s Time for Obama to Spook the Oil Markets

The following guest post is from OilPrice.com. (Readers know my feelings about using the Strategic Petroleum Reserve to fight high oil prices).

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It’s Time for Obama to Spook the Oil Markets

The fate of the Obama presidency hangs not on a birth certificate or the red ink on the federal budget but by the hose nozzle of your local gas station.

Electoral discontent is measured by the price of a gallon of gasoline. Heading past $4 toward $5, that is a lethal trajectory for President Barack Obama.

Enter the demagogues, especially the clown-in-a-business-suit, Donald Trump. Unfettered by the gravity that goes with facts, Trump says that he would fix the oil price – now around $110 a barrel – by facing down the producers, particularly the Organization of the Petroleum Exporting Countries (OPEC). He told an interviewer on television that he would call OPEC and tell them to pump more or face the consequences. The latter, he did not specify. War? Against whom?

In a compelling book by Leah McGrath Goodman, “The Asylum: The Renegades Who Hijacked the World’s Oil Market,” the author lays out the ugly fact that often – in fact, as often as not – the price of oil is set not in Vienna at the headquarters of OPEC, but in downtown Manhattan at the New York Mercantile Exchange (NYMEX).

Tens of thousands of future contracts are traded in nanoseconds at the NYMEX, and the price of oil is set. This price affects not only the price which will be paid when these contracts expire and delivery takes place, but also, according to Goodman, the all-important over-the-counter market, where sellers trade more directly with buyers without government oversight.

Goodman contends that there is little oversight of the NYMEX because the agency charged with the role is the weak and ineffectual Commodities Futures Trading Commission (CFTC), where many staff and commissioners are busy burnishing their resumes so they can cash in later as market executives.

The over-the-counter market is not regulated at all because of a pernicious interference from Congress known as the “Enron Loophole.” How did it get into law? It is one of those pieces of special-interest protection that owes its existence to legislative immaculate conception. It was not in the committee version of the bill; it slipped in along the way without parenthood, but is largely believed to be the work of former Sen. Phil Graham (R-Texas) whose wife, Wendy, was chair of the CFTC.

In classic theory, a market is where a willing buyer and a willing seller strike a price. In the world of traders, it is something else: It is where volatility is rewarded and myths hold sway.

Today there is no actual shortage of crude oil. Supply and demand, according to those who monitor these things, is in balance. But fear stalks the trading floors because fear is good for traders; and fear is a critical part of the oil price.

Wars and rumors of wars are relished in trading pits. They raise the specter of coming shortage and introduce the instability the traders love. During the electricity shortage in California in 2001, traders, particularly at Enron, sought not only to capitalize on fears of shortage, but also to guarantee shortage by taking generating equipment off line.

Of course, reality must eventually catch up with speculation. The production of oil must meet demand and the price will briefly reach real world equilibrium. This happened in 1986, when the price collapsed because Saudi Arabia opened its spigots after the volatility of the 1970s. Many traders were wiped out and speculative billions were lost.

Some oil industry observers believe that the market is trading on a “fear premium” of about $1 per gallon of gasoline, spooked by the uncertainty in the Middle East and traders exploiting that fear.

Good for Obama. Time for the president to engage in a little market spookery of his own.

The nation has about eight months of supply of crude oil saved in salt domes, in what is called the Strategic Petroleum Reserve. There is more oil available in the Naval Petroleum Reserve, a set-aside of oil in the ground. Obama needs to say that we are going to start using this oil as soon as it can reach the refineries.

He has to go the whole hog – to set the machinery of using our special reserves in motion. That will counter-spook the market and humble the traders.

However, any new wars in the Middle East, and all bets are off. Poltergeists would stalk lower Manhattan.

Source: http://oilprice.com/Energy/Crude-Oil/It-s-Time-for-Obama-to-Spook-the-Oil-Markets.html

By Llewellyn King for OilPrice.com. For more information on oil prices and other commodity related topics please visit www.oilprice.com

  1. By rrapier on May 9, 2011 at 2:28 pm

    When I first posted this, I forgot to click the link to start an automatic forum discussion. So there are some responses directly after the essay that aren’t in the forums. They are the first five responses to the article, and can be viewed here.

    RR

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  2. By James Clary on May 9, 2011 at 2:30 pm

    Robert,

    I am not sure why you allowed a guest post that is clearly one not grounded in the same philosophy as you have set forth. I would understand if it was well developed in a way that presented a contrary position/worldview from the one you offer.

    This seemed to be more a cheerleader piece for Obama, a dig at trump (deserved admittedly), and switching blame from OPEC to speculators. This, without establishing with either evidence or linked reports to anything that could be called evidence. I also like how ENRON is included to make sure we know speculators are evil.

    I agree with your basic contention that speculators are part of the market process, particularly including expectation of the future in market prices. That yes, speculators tend to move prices quickly because predictions of future tend to change quickly. That many people have gotten rich speculating, and as he acknowledges, many have gone broke. I also agree that while high gas prices are a threat to the economy and to Obama’s reelection, small changes that come from higher oil prices are better engaged in now, rather then later.

    Also, he asserts that Obama is standing up to oil speculators, and implicitly links it to his reelection chances. I think that regardless of my disagreements of Obama politically, is probably the least of his concerns when trying to control current oil prices.

    James

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  3. By doggydogworld on May 9, 2011 at 2:35 pm

    It’s foolish to start a war when your ammo clip is almost empty. OPEC can easily outlast the SPR. Llewellyn King is a fool.

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  4. By rrapier on May 9, 2011 at 2:36 pm

    Hi James,

    I have often hosted guest posts based on ideas that I don’t agree with. The basic premise there is that as long as they provide substance for debating the issue, everything here doesn’t have to agree with my philosophy. If someone wanted to write a guest post explaining why ExxonMobil was ripping everyone off, I would post it if it was well-written and well-argued. But then I might proceed to debunk it. (That is also why I posted a link explaining my own position on the SPR; so readers wouldn’t presume that I endorse the position promoted by this article).

    That’s just my philosphy. There are a lot of guest posts I have hosted that fall into that sort of category.

    RR

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  5. By mac on May 9, 2011 at 4:06 pm

    Webdell said:

    Taibbi goes into great detail explaining how investment banks and hedge funds manipulate the commodities market, forcing up prices, then taking profits for their clients and investors (and themselves) when the price is high. His chapter on the 2008 oil price spike is fascinating, and a reminder that what is truly criminal is what’s been made legal.

    Thanks for the reference to Taibbi’s book.
    Here are a few similar thoughts (exerpts) from an op-ed piece that appeared in Time Magazine, August, 2008 entitled Are Oil Prices Rigged ?

    ………….”The futures market is much smaller than the real oil market. When you consider margin, the amount of money actually invested is even smaller. Indeed, one dollar invested in a long-term position in the futures market carries the leveraged weight of more than $300 in the physical oil market.

    The point is, it would only take about $9 billion to control the entire long position in oil.
    That sounds like an enormous amount of money, but some of the major individual players in oil are bigger than the market itself: Sultan Hassanal Bolkiah Muizzaddin, of Brunei Shell Petroleum, is worth about $23 billion; Saudi Prince Alwaleed Bin Talal Alsaud is worth about $21 billion; Russian Vagit Alekperov of LUKoil is worth about $13 billion. No, we’re not implicating any of these guys in market rigging; in fact the list of billionaires with that kind of swag is long. The point is that anyone in that category could clearly handle the risks of the oil futures market, and they might even be willing to take delivery on oil. With suppliers holding back their large stakes in oil before delivery, those speculators and hedgers on the other side (those who have sold oil) will need to pay higher prices to get out of their positions. Oil suppliers’ ties to the oil market itself give them a unique advantage in cornering the market.

    Why would these individuals or their companies risk their own money and reputations, should they be discovered? They don’t need to. There’s an anonymous investment vehicle — the hedge fund — with which they can even risk other investors’ money for futures speculation. Although we’re all affected by oil prices, we as oil consumers don’t set the prices. Herein lies the problem. The futures market that serves as a price discovery mechanism for the physical oil market is open only to the elite. We trust these elites to determine the prices, but who are they? Who are the so-called experts? Hedge funds, oil companies, OPEC — the very people who profit from massive, consistent increases in prices. Notice a conflict of interest?

    All an oil supplier would have to do to raise prices is buy up futures contracts.

    It’s not even that risky. Either the suppliers/investors risk an insignificant fraction of their gargantuan fortune, or they entice other investors to share the risk. With virtually unlimited resources and an actual tie to the underlying commodity, oil suppliers are in a far better position to accomplish this manipulation than, say, the Hunt brothers were during their attempt to corner the silver market in the 1970s.

    It is in every oil supplier’s best interest for prices to go up. Oil is a finite commodity. The world will eventually become more efficient and develop alternative energy sources. In the meantime, suppliers want to squeeze out as much profit as possible from their limited resources. Even if they know that the price of oil is too high (to the point of reducing demand) it is not in their interest to correct it. By setting prices in the smaller but more “trusted” futures market, oil producers realize multiplied gains on their physical oil sales.

    http://www.time.com/time/busin…..-1,00.html

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  6. By Rufus on May 9, 2011 at 4:30 pm

    The CFTC Investigation revealed that the “non-commercials” (speculators) were, actually, net, very short in the six months leading up to the high of $147.00/bbl in 2008.

    I think a lot of these guys that write these things have never faced a “margin call.”

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  7. By Wendell Mercantile on May 9, 2011 at 5:12 pm

    The CFTC Investigation revealed that the “non-commercials” (speculators) were, actually, net, very short in the six months leading up to the high of $147.00/bbl in 2008.

    Rufus~

    I don’t think that includes those pension funds and high rollers who put money in the Goldman Sachs Commodity Index Fund in 2008 as Goldman leveraged price upward. Goldman didn’t go short until the bubble was about to burst.

    You should trundle over to your local library* and check out Griftopia to read how Goldman manipulated the market.

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    * I’m sure Tunica has a library. By the way, how are you guys doing with the water?

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  8. By Rufus on May 9, 2011 at 5:26 pm

    We have a nice library, but I won’t be picking up a copy of “whatever.”

    Noncommercials are noncommercials. Goldman might have been long, but others were short. There were more shorts than longs among the “speculators” – Goldman included.

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  9. By Rufus on May 9, 2011 at 5:29 pm

    We’re fine on this side of the river. There’s a dust cloud outside my window from a guy planting beans.

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  10. By Benny BND Cole on May 9, 2011 at 5:45 pm

    Sooner or later, people figure out how to game stock and commodities markets. It is profitable to do so. For many, not only is it profitable, but as they are outside US jurisdiction, there is no risk.

    As in sovereign wealth funds.

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  11. By paul-n on May 9, 2011 at 6:19 pm

    So another person who wants to blame speculators – and then release SPR oil – *yawn*

     

    I don’t actually see what is wrong with speculators speculating – they have the right to try to make/lose money betting on price movements.  But ultimately, unless they physically supply or take delivery of oil, they can’t influence the spot price, and the futures drift up and down with the spot price movements, not the reverse.

    However, Goldman Sachs etc certainly do not have the right to make money trading for their own account, where they are possibly doing one thing, while recommending their clients do another.  That is where things need to change.

     

    Oil is expensive primarily because everyone wants to use it, and keep using it – as the grandstanding about minor price increases shows.  As long as people demand oil, OPEC is happy to satisfy that demand – for a price.

    If he (Obama) really wanted to spook the markets, he should do a Kit and announce rationing – but that would likely spook voters even more.  Though it would likely ensure a record turnout at the next election.

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  12. By rrapier on May 9, 2011 at 6:42 pm

    Wendell Mercantile said:

    The SPR was intended as a reserve for national emergencies when the oil stops flowing — not as a way to manipulate market price.

    This weekend I finished reading a book by Matt Taibbi called, “Griftopia: Bubble Machines, Vampire Squids, and the Long Con That Is Breaking America.”

    Taibbi goes into great detail explaining how investment banks and hedge funds manipulate the commodities market, forcing up prices, then taking profits for their clients and investors (and themselves) when the price is high. His chapter on the 2008 oil price spike is fascinating, and a reminder that what is truly criminal is what’s been made legal. Recommended read.

    The commodities bubble of 2008 led to global food shortages and prompted the price of oil to rise over $140 per barrel. Taibbi depicts as its cause investment-bank led commodity speculation, after having convinced regulators to dismantle sensible regulations that had safeguarded the process of commodity trading, in place since the Great Depression. Goldman Sachs’ invention was the Goldman Sachs Commodity Index inviting pension funds and other investors to speculate long in such index trading leading to higher prices for commodities that directly affect the livelihoods of people.


     

    Just copying this over to make sure it isn’t lost. The comments after a post only show the 15 most recent, and I think there were 5 comments before I realized that I forgot to link to the forums. So I am going to copy and paste a couple more comments here.

    RR

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  13. By rrapier on May 9, 2011 at 6:44 pm

    Benny BND Cole said:

    Imagine if a sovereign wealth fund, say Russia, tried to manipulate the NYMEX. Oh, that couldn’t be done. No way. Who would plant rumors, fund scaremongering websites? Trade at higher prices on the NYMEX?
    Some say US investment banks caused the oil bubble of 2008. But a sovereign wealth fund has vastly greater resources.
    BTW, I don’t think Obama can spook the markets. OPEC has so much more oil they can take off the market.
    If Obama (and the GOP) really, really, want to spook the oil markets, announce the new federal 25 cent-a-gallon gasoline tax, that will rise by 25 cents every three months for three years.
    Oil would fall to $40 a barrel and probably stay there for a long time. Global crude oil demand is flat anyway–imagine if the biggest consumer, the USA, starts using a lot less.
     


     

    Just copied this over.

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  14. By rrapier on May 9, 2011 at 6:45 pm

    Steve Funk said:

    I don’t know too much about futures trading, but I would like to see
    some serious analysis of how much speculation would be dampened by
    increasing the down payment requirement to 33%, 50% or 100% cash. There
    would be some fear premium regardless. Libya’s 2% of world production
    being off line is not inconsequential.


     

    Last one to copy over.

    RR

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  15. By Optimist on May 9, 2011 at 6:53 pm

    Supply and demand, according to those who monitor these things, is in balance.

    The same, tired hogwash again? As reported on this blog before, the 2008 spike was preceded, by a business-as-usual growth in demand and a stagnation of supply.

    That said, herd behavior did play a role. On the way up, things just got crazier by the day. Then the housing bubble burst, and the herd went the other way, all the way to $30/bbl. AFAIK, there is no way to outlaw herd behavior.

    Tens of thousands of future contracts are traded in nanoseconds at the NYMEX, and the price of oil is set.

    How many factual errors can you make in one sentence? And pray tell, how much are we going to add to the deficit to create a bureaucracy large enough to police tens of thousands of future contracts … traded in nanoseconds? And then, how do we police the new mega-bureaucracy? Get the FBI involved? The CIA? Or create an Orwellian Ministry of Truth? Because, as Benny knows, the manipulators have an unlimted supply of money. Better get Congress involved too. We all know how well those hard-working elected representatives look after their voters.

    There is a couple of amazing things going on here: First there is the fact that Americans, from a country that has benefitted from the free market like no other, are quite willing to suspend the free market, any time gas goes to the wrong side of $4/gal. It appears that Americans know with unwavering certainty that the fair market price of gasoline is way less than $4/gal. They just can’t quite articulate why.

    So, let’s see if we have this straight: we want a free market, for everything, all the time. Unless gas is over $4/gal. Then we want the Nanny State to kiss our ouchie, and to give the Big Oil bully a good spanking. We’re a nation of rugged individualists, able to face anything life can throw at us, other than $4/gal, don’t you understand?

    I know, I know. You can replace Big Oil bully with Nasty Oil speculator if you wish.

    Second: when I said Americans aren’t given to wild conspiracy theories, as long as the topic is not Big Oil, I didn’t think that many posters on this blog would validate my comment. Sad.

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  16. By armchair261 on May 9, 2011 at 10:39 pm

    All an oil supplier would have to do to raise prices is buy up futures contracts.

    and

    It is in every oil supplier’s best interest for prices to go up.

    I guess we’re forced to conclude from this that oil suppliers have never really wanted to raise prices very much since 1983 (when futures trading started), except in 2005-2008 and again this year. History suggests that they wanted prices to go down from 1983 through 1986, and then wanted prices to remain flat until about 2004. And that they had a hankering for big losses in 1998 and 2008/2009 (guilt, presumably). And here I thought these guys were greedy!

    I wonder if Taibbi can tell us why some of the same villains have allowed natural gas prices to drop so much?

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  17. By doggydogworld on May 10, 2011 at 2:22 pm

    Supply and demand, according to those who monitor these things, is in balance.

    Except for very brief times of disruption, supply and demand are always in balance. The question is at what price do they balance? Today the futures markets estimate balance is achieved around $100/bbl. The futures markets may be wrong, or other factors may affect supply and/or demand enough to require a different price. But that’s today’s best guess of the equilibrium price.

    Matt Taibbi is an entertaining read until he hits on a subject you understand well and you suddenly realize he’s clueless. Don’t get me wrong, a lot of the things he says are correct. But he makes enough obvious factual errors that it’s clear he does not understand his subject matter. He’s not stupid, it’s just that he addresses some extremely complex subjects. I admire his ambition and sometimes sympathize with his point of view, but unfortunately one simply cannot rely on his “facts” or conclusions. He just gets too much wrong.

    The point is, it would only take about $9 billion to control the entire long position in oil.

    In theory. In reality, not so much. First, there are large oil markets besides NYMEX. Second, you can’t “control the entire long position” in oil or any other commodity. The NYMEX CL open interest may only be 1.65m contracts today (that’s 1.65 billion bbl of oil) and the initial margin requirement may only be $6,000 per contract, but if you wade in with $10b you will not be able to buy all 1.65m existing contracts. Or even half of them. Instead NYMEX will open new contracts. Additional speculators, arbitrageurs and commercials will come in and take the other side of your trade. Open interest will grow to something like 2.5m contracts. Your $10b will influence the price, perhaps significantly, but the forces arrayed against you will do everything in their power to force the price down and transfer that $10b from your pocket into their own. And they only have to drive the price down $6/bbl to do it. Unless you have multiple $10b’s standing ready to meet margin calls they will break you. No one is bigger than the market.

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  18. By armchair261 on May 10, 2011 at 4:00 pm

    Additional speculators, arbitrageurs and commercials will come in and take the other side of your trade. Open interest will grow to something like 2.5m contracts. Your $10b will influence the price, perhaps significantly, but the forces arrayed against you will do everything in their power to force the price down and transfer that $10b from your pocket into their own.

    This is a point I wish all politicians and conspiracy theorists would read three times a day. Those who are long on oil (or any commodity) can’t always outwit the guys across the table who aren’t.

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  19. By paul-n on May 10, 2011 at 5:46 pm

    I can;t contribute much to the discussion of futures here, except to offer a really good way to see what is going on with them.

    The following chart is from the Futures Databrowser, a free online tool that can view the most traded commodities, such as WTI crude oil;

    A quick look shows that the futures market did not predict last weeks “correction”, and the entire market moved down with it.

    The shape/gradient of the futures line shows whether the market is expecting greater or lesser demand (or supply) in the future, but the position (price) of the futures always follows the spot price, which of course reflects dealings on physical product.

     

    This same company produces some othert data browsers, most notably the Energy Export Databrowser, which lets you look at the energy picture (oil, gas, coal, hydro, nuclear) for any country in the world;

     

    You only need to look at this graph to answer the question of whether rising oil prices are caused by increased speculation, or increased demand.

    If you really want to depress yourself, take a look at their charts for coal use almost half the coal that is burnt in the world, is burnt in China! 

     

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  20. By Benny BND Cole on May 10, 2011 at 6:18 pm

    The problem with the NYMEX is that oil demand is short-term inelastic. So prices can move upwards on the NYMEX (for a while) without a real world market correction.

    If speculators decide oil is worth more, I cannot stop commuting to work tomorrow. I might adjust in a year–move closer to work, take the bus, rideshare, buy a smaller car, scooter etc.

    I suspect we will see another glut for this reason. Oil this high is not sustainable in the long-run.

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  21. By Optimist on May 10, 2011 at 7:57 pm

    I suspect we will see another glut for this reason. Oil this high is not sustainable in the long-run.

    We’ll find out soon enough.
    IMHO, it’s a sign of robust economic growth if oil stays above $100/bbl for an extended period of time.

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  22. By mac on May 10, 2011 at 11:29 pm

    “I suspect we will see another glut for this reason. Oil this high is not sustainable in the long-run.”

     

    This graph shows crude prices dropping while retail gasoline prices continue to climb and inventories pile up at Cushing. The graph is from an interesting article on oil speculation. 

    http://www.econmatters.com/201…..h-oil.html

    The CME just raised the margin call on contracts for the fourth time since February trying to reign in the volatility.

     

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  23. By Wendell Mercantile on May 11, 2011 at 9:37 am

    We’re fine on this side of the river. There’s a dust cloud outside my window from a guy planting beans.

    Rufus~

    Heard on the radio this morning that they are shutting down all the casinos in Tunica County until the water goes down. Just out of curiosity, do any of those casinos have wind turbines or solar panels?

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  24. By Benny BND Cole on May 11, 2011 at 1:57 pm

    Oil tumbling again today–at more than $100 a barrel, the demand flatlines. And soon starts to actually go down. (BTW, crude oil demand has been falling for decades in Europe and Japan–thus proving you can have higher living standards, a cleaner environment and consume less oil at the same time).

    So the whole Peak Oil scaremongering nightmare is just that–a warped dream, in which the price signal does not enter the realm.

    In real life, the price signal works, and does enter the economic landscape.

    Crikey, Ford is selling a luxury car that gets 40 mpg (the Lincoln MKZ). A guy driving that has incredible luxury and consumes half the gasoline he did five years ago. One-half! Higher standard of living, and lower consumption of crude. Much lower!

    At more than $100 a barrel the crude demand goes limp, but the desire to supply—well, I would drill through the White House lawn if I thought there was oil underneath. Every sort of bio-fuel begins to look good. Gas to liquids looks good. Methanol looks good (from natural gas) CNG looks good. LPG looks good–all while demand is fading.

    Peak Demand just knocked Peak Oil to the canvas.

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  25. By mac on May 11, 2011 at 4:28 pm

    All of the doomsday scenarios require that we stick with crude until the bitter end. It’s the only way their horror movie can work.

    To depart from the refined gasoline and diesel paradigm is inconceivable for them. And so, every time gas goes up or there is some minor disaster in one of the oilfields, it’s a huge big deal to the doomsday crowd and
    everyone runs around screaming “Chicken Little, The sky is falling.”

    Well, the sky is not falling. We are merely at the beginning of an energy paradigm shift away from crude oil.

    Again, the underlying assumption that keeps the fear churning for the doomsday crowd is that we must stick with gasoline forever, that we must forever be slaves to oil and that we have no choice, That’s the assumption that makes “Doomsday” work.

    If you steadfastly refuse to see any alternatives on the horizon, then this “peak oil” thing will indeed keep you up at night…..,.

    Myself, I sleep well, because there are already alternative vehicles entering the marketplace that are cheaper to operate by the mile than the standard internal combustion engine. Ford has priced its new Lincoln MKZ hybrid at exactly the same price as the standard Lincoln, Since Ford has eliminated the “hybrid premium” it’s actually cheaper by the mile to operate the hybrid than the conventional Lincoln running on gas alone. CNG and electricity are also cheaper by the mile.

    Long before we physically run out of oil, gasoline will in all likelihood price itself out of the marketplace, Mad Max ? Sorry, I don’t think I wanna go there, It’s too easy to simply drive a CNG, a PHEV, alt. fuel vehicle or an electric car.

    Let the doomsday crowd have nightmares about Mad Max

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  26. By Rufus on May 11, 2011 at 7:43 pm

    No, Wendell, they don’t. And, it’s a shame, too. We have a pretty good “Wind,” and “Solar” Resource, here; plus they could use the positive PR. I was, actually, considering talking to a couple of them this year, but I’m afraid “Ole Man River” might’ve put’em in a pretty foul mood for awhile.

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  27. By Wendell Mercantile on May 12, 2011 at 12:11 am

    I’m afraid “Ole Man River” might’ve put’em in a pretty foul mood for awhile.

    Stay safe my friend.

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  28. By Walt on May 9, 2011 at 7:46 am

    Yes, this article is right on point. It is nice to see someone admit supply and demand is not the driver of the price, but rather speculators. The free market does not exist on Wall Street, backed by Washington DC, but rather is a broken market designed to allow bankers to become untouchable.

    Add to this naked shorts and the group is even smaller and more powerful. Offices are offshore in Bahamas and other tax free/regulation free jurisdictions.

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  29. By Will on May 9, 2011 at 11:21 am

    Pretty much the standard take on how to use the SPR for electioneering, but even if it were a great time to cross our fingers and hope nothing happening in the middle east gives rise to further supply constraints, I don’t think it’s this administration’s plan.

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  30. By Wendell Mercantile on May 9, 2011 at 11:44 am

    The SPR was intended as a reserve for national emergencies when the oil stops flowing — not as a way to manipulate market price.

    This weekend I finished reading a book by Matt Taibbi called, “Griftopia: Bubble Machines, Vampire Squids, and the Long Con That Is Breaking America.”

    Taibbi goes into great detail explaining how investment banks and hedge funds manipulate the commodities market, forcing up prices, then taking profits for their clients and investors (and themselves) when the price is high. His chapter on the 2008 oil price spike is fascinating, and a reminder that what is truly criminal is what’s been made legal. Recommended read.

    The commodities bubble of 2008 led to global food shortages and prompted the price of oil to rise over $140 per barrel. Taibbi depicts as its cause investment-bank led commodity speculation, after having convinced regulators to dismantle sensible regulations that had safeguarded the process of commodity trading, in place since the Great Depression. Goldman Sachs’ invention was the Goldman Sachs Commodity Index inviting pension funds and other investors to speculate long in such index trading leading to higher prices for commodities that directly affect the livelihoods of people.

    [link]      
  31. By Benny BND Cole on May 9, 2011 at 12:43 pm

    Imagine if a sovereign wealth fund, say Russia, tried to manipulate the NYMEX. Oh, that couldn’t be done. No way. Who would plant rumors, fund scaremongering websites? Trade at higher prices on the NYMEX?

    Some say US investment banks caused the oil bubble of 2008. But a sovereign wealth fund has vastly greater resources.

    [link]      
  32. By Benny BND Cole on May 9, 2011 at 12:46 pm

    BTW, I don’t think Obama can spook the markets. OPEC has so much more oil they can take off the market.

    If Obama (and the GOP) really, really, want to spook the oil markets, announce the new federal 25 cent-a-gallon gasoline tax, that will rise by 25 cents every three months for three years.

    Oil would fall to $40 a barrel and probably stay there for a long time. Global crude oil demand is flat anyway–imagine if the biggest consumer, the USA, starts using a lot less.

    [link]      
  33. By Steve Funk on May 9, 2011 at 1:06 pm

    I don’t know too much about futures trading, but I would like to see some serious analysis of how much speculation would be dampened by increasing the down payment requirement to 33%, 50% or 100% cash. There would be some fear premium regardless. Libya’s 2% of world production being off line is not inconsequential.

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