If only speculation explained gas prices

[BzaDem]

"After I wrote my last piece on gas prices, a number of you e-mailed to urge me to place more of the blame on speculators. So I spent a couple of days looking into the speculation explanation, and am walking away with two main conclusions: First, speculators probably aren’t the problem here. Second, the things that are the problem here are really, really scary.

Speculators are an easy bad guy, says Michael Greenstone, an energy economist at MIT. “They’re a malevolent other. They’re thought to produce nothing of value, and so blaming them has a long and rich history.” But it’s worth understanding what exactly you’re saying is happening when you place the blame on speculators. “Speculators make money by pulling oil off the market, putting it in inventory, and selling it later,” Greenstone continues. So if you’re seeing speculation, you should be seeing a massive run-up in inventory. And we are seeing a bit of an inventory bump, particularly in recent weeks. But not enough of one.

James Hamilton, an energy economist at UC San Diego, has studied not only the current oil prices, but the 2007-2008 run-up, in great detail. “Speculation is a convenient scapegoat for people who can’t be bothered to look seriously at the numbers,” he says."

--snip--

“The key question you should be asking is the following,” says Hamilton. “Is the current price too high in the sense that the physical quantity being produced is greater than the physical quantity being consumed? If yes, then where is the difference going, and what mechanism accounts for that?” Left unsaid is the “if no.” But if no, then who is supposed to start using less oil in the coming years, and if the answer is no one, then how, absent recurrent recessions, are we supposed to make what oil we have go around at a price the global economy can handle?"

http://www.washingtonpost.com/blogs/ezra-klein/post/if_only_speculation_explained_gas_prices/2011/04/27/AF70yqFF_blog.html?wprss=ezra-klein

Very interesting article. It basically points out that now (in greater degree than the past), people are willing to use the same amount of gas even if the price jumps (due to the Libya shortfall or simply Saudi Arabia's refusal to produce more). In other words, demand for gas is more and more inelastic, and Saudi Arabia has no reason to produce at capacity when it can wait to produce more later at a higher price. This makes the future for gas prices look quite bleak. SA will have no incentive to produce more until people actually start using less -- enough to lower the price. It looks like it will take even higher gas prices for that to occur.

[Tarheel_Dem]

1. This was the discussion on Diane Rehm's show yesterday, and a couple

of the panelists were trying to make this point. Speculation is just an itty bitty part of this explosive problem. Thanks for posting.

[bobbolink]

2. It has been shown that less use does NOT lower prices.

[MadHound]

3. No mention of one other key factor,

The weakening dollar, and the inflationary pressures that brings.

[bbinacan]

4. After all the speculator bashing on DU

This is my favorite quote,

“Speculation is a convenient scapegoat for people who can’t be bothered to look seriously at the numbers,” he says."

[KeepItReal]

5. I'm with Bernie Sanders, the CFTC, and even the head of OPEC on this one

"Sen. Bernie Sanders (I-Vt.) demanded on Thursday that regulators impose limits on oil speculation to help lower the price of gas in a letter sent to President Obama.

“There is mounting evidence that the skyrocketing price of gas and oil has nothing to do with the fundamentals of supply and demand, and has everything to do with Wall Street firms that are artificially jacking up the price of oil in the energy futures markets,” Sanders wrote. “In other words, the same Wall Street speculators that caused the worst financial crisis since the 1930s through their greed, recklessness, and illegal behavior are ripping off the American people again by gambling that the price of oil and gas will continue to go up.”

Last year’s financial reform bill required the Commodities Futures Trading Commission to crack down on commodities speculation by imposing “position limits” -- a cap on the size of the bets that Wall Street traders can place. The agency was required to apply the new rules by January 22, but the CFTC has delayed the rules in order to collect data.

“What is particularly offensive is that this could and should have been prevented under current law,” Sanders wrote."

http://www.huffingtonpost.com/2011/04/29/bernie-sanders-demands-ac_n_855495.html


"Commentators from Saudi oil barons to Goldman Sachs to the AARP agree, according to Professor of Law Michael Greenberger, a former director of the Division of Trading and Markets, Commodity Futures and Trading Commission (CFTC), that oil market speculation is sending a false demand signal to the market, driving the per-barrel price far beyond the supply-demand-driven $75-to-$85 range and wreaking havoc with gasoline’s per-gallon price, as well.

It is putting a $40 premium on every barrel the oil companies sell and, according to Daniel J. Weiss, Senior Fellow and Director of Climate Strategy at the Center for American Progress (CAP), one-half to two-thirds of that premium is likely being reinvested in oil company stock, driving the stock price up and enriching shareholders, executives and the board in a classic case of the-rich-get-richer."

The speculators’ nefarious intent, according to Greenberger, emerged on January 26, 2011. “On that date, the CFTC proposed a rule that was not only weak in terms of limiting speculation but clearly did not have the support of the majority of the commissioners.

“That’s the day oil started its dramatic increase,” Greenberger said, because the CFTC had signaled it would not support speculation limitations by exercising powers allowed by the Dodd-Frank reform bill. “That was Pearl Harbor for this market, Greenberger said. “The price took off because it was a signal to speculators that there was no cop on the beat.”

http://www.greentechmedia.com/articles/read/will-big-oil-and-oil-speculators-take-the-enron-fall/

OPEC’s El-Badri Sees Crude Price Staying Above $100 in 2011

OPEC Secretary General Abdalla el-Badri said he expects crude prices to remain above $100 a barrel for the rest of 2011 and blamed speculation for playing “a very important role” in oil markets.

http://www.bloomberg.com/news/2011-04-19/u-s-commodities-day-ahead-gold-advances-to-a-record-on-dollar.html


My thoughts: Clear out the speculators, or at least limit the size of the positions they can gamble on, *THEN* supply and demand will properly govern oil prices.

[Curmudgeoness]

6. As the price went above the record high here, I realized

that the last time the prices went so high was summer of 2008---and that lead us into our little recession. Since we have not recovered yet from this last dip in the economy, I worry about what is coming now.

But an interesting thing I have noticed, in 2008, I would be driving the speed limit with cruise control, and very few people would be passing me at the height of the prices. So far, most of the cars on the road are still passing me. This means that I can only assume people are not reaching their upper limit for gas price yet. Lord, I wonder what that upper limit is this time.