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A question about oil prices

There's a lot of talk these days about how "speculators" are to blame for driving oil prices up to unwarranted levels. It's almost accepted as a given, although I find it odd that no one seems able to explain the mechanism by which these speculators are manipulating the price of crude oil. As someone who dabbles in the derivative markets myself, I confess to being mystified regarding what people believe is actually going on.

Is there anyone out there who can explain it to me? Because honestly, the whole thing is starting to sound reminiscent of the Protocols of Zion -- of generations of malcontents scapegoating their misfortunes on "gold traders from Eastern Europe."


At least one author, F. William Engdahl claims that “As much as 60 percent 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 crucial 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.

“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.”


Much of Engdahl's charge doesn’t seem feasible at all.

For one thing, gasoline SHOULD NOT be $1.60/gallon, nor oil appx. $56/barrel as Engdahl suggests given today's global supply/demand dynamic and while BIG players like Morgan Stanley and Goldman Sachs can impact or "move" the market by buying in such large volume, it has to be noted that investors/speculators large or small only make money if they invest/bet/speculate CORRECTLY on the prices of given commodities or stocks.

The primary problem I have with Engdahl’s assertion is that Goldman Sachs and Morgan Stanley aren’t the only speculators betting on higher oil prices. In fact, the vast majority of commodities investors/speculators are betting that oil continues to rise in price in the short term before falling (perhaps precipitously)...many guess in a couple of months, as many oil exporting countries are already trying to fight higher prices out of fear that those high prices will simulate a move away from oil as the planet’s primary energy source. I join them in NOT wanting to see that, at least for the foreseeable future.

Commodities investors/speculators can and do make as much money when commodity prices fall (by “shorting” those futures) as they can when they rise, so there’s no added incentive for investors/speculators to want higher commodity prices.

Global demand for oil has skyrocketed with the recent rapid industrialization of India and China...and that’s been GOOD for all of us!

The U.S. has a minimum estimate of some 800 BILLION barrels of oil off its shores and on government lands. That doesn’t even count the yet untapped oil sands and shale oil deposits we have in abundance.

So long as our own HUGE SUPPLY stays off the market, the safe bet is on the rising price of oil, at least given current global dynamics.

In the 90s, dotcom speculators "controlled" the price of stocks. In the aughts, housing speculators "controlled" the price of real estate.
That really worked out well.
Remember how everyone insisted that there were no bubbles- until just before they burst?
I learned my lesson when I bought silver at the top of the market in the 70s.

The silver bust was a fiasco engineered by the Hunt brothers, proving that, at least in some localized markets (silver has far fewer investors than real estate, or agri-commodities, or even gold) some investors/speculators can drive up prices artificially and benefit off of that before the inevitable crash. It should be noted that the Hunt brothers did NOT profit from the silver bubble - they declared banruptcy in the late 1980s - by 1987 they had liabilities of $2.5 BILLION versus $1.5 BILLION in assets.


Real estate continually goes through expansions and contractions, the late 1980s thru the mid-1990s contraction was triggered by the stock market drop in 1987.

The current bubble was caused by a combination of bad governmental policy (ending red-lining and doing away with some of the liquidity requirements for loans they deemed "discriminatory") and very bad loan policies on the part of lenders (lending to high risk borrowers) and bad judgment by loan consumers - only an idiot would take an ARM or a balloon payment, front-ended "sub-prime loan when interest rates are at historic lows!

I think Engdahl is right that PART of the price run-up on oil is due to INVESTMENT (rather than mere speculation)....it seems much more a matter of investors and some funds "PARKING" money in oil as a hedge against stock market volatility. Some of it is also due to our allowing the dollar to weaken relative to other currencies.

BUT it's extremely dooubbtful that either of those two factors, even in combination, account for anything close to the 60% hike that Engdahl attributes to that.

We've had decades of BAD energy policies thanks MOSTLY to so-called "enviro-friendly" (they're actually very oil company-friendly) Democrats, who've steadfastly blocked drilling on U.S. lands (Montana and the Dakotas have HUGE oil supplies) and there's an estimated 800 BILLION barrels off our coasts and on government lands such as ANWR and the Bakken Formation in Montana) and the building of new refineries here.

Oil is abundant and easy to use, plus it delivers MORE energy for less fuel (more NRG per gallon) than the currently available alternatives.

We SHOULD remain an oil-based economy for decades to come. The current move to rush into alternatives and so-called "renewables" is almost certainly misguided.

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