Posts tagged “speculation”
In my previous post I described a new research paper with University of Chicago Professor Cynthia Wu on the Effects of Index-Fund Investing on Commodity Futures Prices. Previously I discussed what we found for the prices of agricultural commodities. Here I review our findings about oil prices.
Part of the interest in a possible effect of commodity-index funds on oil prices comes from testimony before the U.S. Senate by hedge fund manager Michael Masters, in which he produced a provocative graph of oil prices against an estimate of the number of crude oil futures contracts held by commodity-index funds. We reproduced his methodology to update his graph below. The figure certainly seems to suggest a strong connection between these two series, particularly during 2008 and 2009.
I am traveling some over the next two weeks, and did not have a chance to record my weekly video segment this week. However, last Friday I was a guest on Alan Colmes’ show on Fox News Radio, so I will share that this week instead. I had been a guest on his show last month to discuss whether President Obama bears responsibility for high gas prices.
As I said then, gas prices are outside the control of a sitting U.S. president. As an aside, gas prices appear to have peaked for now and are on the way down. Does anyone who blamed Obama for higher prices think he is responsible for bringing them back down? That is in fact a dangerous issue to campaign on, because if gasoline prices fall between now and the election — and you have made a big deal out of how they are the President’s responsibility — guess what? President Obama now takes credit for falling gas prices.
Anyway, I am drifting off topic here. On his show, Alan and I discussed my new book Power Plays. Some of the topics we discussed were:
- What peak oil means
- The role of speculators in the oil market
- Why I am skeptical that we will address rising carbon emissions
- Whether methane hydrates are a viable alternative energy source
- The difference between our oil shale resource and oil reserves
- Which alternative fuels are promising
Joseph P. Kennedy II, former Congressional Representative from Massachusetts, and founder, chairman, and president of Citizens Energy Corporation, has a proposal to make energy affordable for all. All we have to do, Kennedy claims, is “bar pure oil speculators entirely from commodity exchanges in the United States.”
Writing in the New York Times last week, Joseph Kennedy (D-MA) explained why he believes that speculators are responsible for the high price that we currently have to pay for oil:
Today, speculators dominate the trading of oil futures. According to Congressional testimony by the commodities specialist Michael W. Masters in 2009, the oil futures markets routinely trade more than one billion barrels of oil per day. Given that the entire world produces only around 85 million actual “wet” barrels a day, this means that more than 90 percent of trading involves speculators’ exchanging “paper” barrels with one another.
It’s true that most buyers of futures contracts don’t actually want to take physical delivery of oil. If I buy the contract at some date, I usually plan on selling the contract back to somebody else at a later date, so that I leave the market with a cash profit or loss but no physical oil. But remember that for every buyer of a futures contract, there is a seller. The person who sold the initial contract to me also likely wants to buy out of the contract at some later date. I buy and he sells at the initial contract date, he buys and I sell at a later date. One of us leaves the market with a cash profit, the other with a cash loss, and neither of us ever obtains any physical oil.
Red Herrings: Speculation & Regulation
As I noted last week, I have been working on a short paper for ASP on gas prices. It was published earlier today with a title of “Cause & Effect: U.S. Gasoline Prices.” I also published an Op-Ed in The Hill “Running on empty: Failing to address high gas prices“ and was quoted in Reuters saying “The truth is, neither party is offering policies that will effectively address high gas prices.”
The report seeks to get beyond both party’s preferred narratives on gas prices and looks more deeply at the root causes of today’s high gasoline prices. Hopefully, it will puncture some of the assertions and rhetoric that both political parties use about gas prices, whether it’s shouting “speculation!” by those on the left or “too much regulation!” by those on the right.
Let’s Play ‘Blame the Speculators’
Most people would probably agree that speculation in the oil and gas markets is hurting American consumers. Consider the case of Aubrey McClendon. Mr. McClendon is the CEO of Chesapeake Energy, where he sells natural gas for a living. Natural gas prices have now been pushed down — by speculators — to below $2 per million BTU. This is a drop of more than 80% from 2008 prices. With these depressed prices, Mr. McClendon will have a hard time ever matching his $112 million of earnings in 2008. Mr. McClendon’s livelihood has been hurt by speculators.
Of course Aubrey McClendon is not your average person, and he isn’t likely to garner much sympathy over the decline in natural gas prices — especially since it has benefited consumers. But I use that example to illustrate the point that speculation is not a one-way street where the average consumer always loses. One of the frequently cited causes of high oil prices is from speculation. In fact, I agree that speculation is helping drive up oil prices. However, there are underlying fundamentals at work as well; otherwise the same speculators who are helping drive up oil prices would be doing the same with natural gas prices. Yet those underlying fundamentals are often overlooked in the rush to blame the speculators for spiking oil prices. CONTINUE»
The following guest post is from OilPrice.com. (Readers know my feelings about using the Strategic Petroleum Reserve to fight high oil prices). ———————————— 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 –… Continue»
On my latest trip to Amsterdam this week I saw 19 oil tankers parked off the coast in the North Sea (ironically next to a Dutch offshore wind farm). These tankers are being used for floating storage due to the glut of oil in the market. Despite this, oil prices have been on a steady climb. Oil passed $66 today – despite a global recession and all of that oil parked offshore. The Wall Street Journal thinks we are headed back to $75: Oil Prices: $75 Crude, Here We Come Oil prices aren’t rising because demand is recovering or because record-setting oil inventories are being burned off. Rather, Mr. Horsnell says, the market believes OPEC is coordinated enough to defend… Continue»
I have grappled over the past year with the question of just how much speculation is playing a factor in runaway oil prices. I think it is primarily a supply/demand issue, but I feel that such a large flow of money into commodities is also driving the surge. Not so, says a new article in Fortune: Hunting for oil villains NEW YORK (Fortune) — Atlanta hedge fund manager Michael Masters has been a star witness in two recent Congressional hearings on how speculators are supposedly driving up oil prices. Masters and I don’t see eye-to-eye on this issue, so I was surprised to get a call from him after my “Don’t Blame The Oil Speculators” column went up on Fortune.com… Continue»