This is Not Good
From CNN/Money:
NEW YORK (CNNMoney.com) — Democratic Senators are working to combat rising oil and fuel prices by attacking what many Americans see as the heart of the problem: speculative trading. Many politicians and energy industry analysts blame oil speculators for cashing in on the fuel cost crisis and, in the process, boosting the price of oil. Hedge funds, trusts, and independent investors have also poured funds into crude oil as a hedge against the weakened dollar. “A major contributor [to high oil prices] is the rise in speculation,” said Sen. Carl Levin, D-Mich, who estimated that speculation has added about $35 to a barrel of oil. “This is not a supply and demand issue.” Levin said the solution can be found in closing the loopholes that allow electronic traders to buy oil outside of the United States. Levin noted that the “Enron loophole” will be ended if President Bush signs legislation that Congress passed as part of the proposed Farm Bill. The “Enron loophole” was codified in the Commodity Futures Modernization Act of 2000, allowing oil futures to be traded electronically in unregulated markets outside of the jurisdiction of the Commodities Futures Trading Commission. But Levin also said he is introducing a bill, calling for an end to all electronic loopholes, including the buying of oil electronically in regulated markets like the commodities exchange in London. “[U.S.] computer terminals will be governed by U.S. regulation, because the computer terminal is located in the United States,” Levin noted. By making global speculative trading more difficult for investors, Levin and other Senate Democrats believe the artificial inflation of the price of oil will eventually fizzle. “This administration needs to begin to lead,” said Sen. Jack Reed, D-R.I. “They need to put together a task force … and begin to look seriously at what’s happening in the marketplace.” Crude prices hit a record $123.90 a barrel Thursday, after a Goldman Sachs analyst predicted earlier this week that oil could rise as high as $200 over the next six months to two years. Gasoline prices have also risen dramatically - more than 18% so far this year. Retail gasoline hit a record $3.645 a gallon, on average, nationwide on Thursday, according to motorist group AAA. “This crisis is really affecting everyday people,” said Sen. Amy Klobuchar, D-Minn. “We need an energy policy in this country … that moves towards a bold energy future.” Klobuchar suggested that the best solution to rising oil prices is to achieve energy independence by investing in alternatives. “Look at Brazil - they’re energy independent,” said Klobuchar. “Of course, it’s easier for them, because they have sugar cane, but it’s unbelievable that our country would be leapfrogged by the country of Brazil.” The Organization of the Petroleum Exporting Countries (OPEC) also drew fire from Klobuchar. “We need to stand up to OPEC, whose oil productionis at artificially low levels,” she said. “We need to invest in the farmers and workers of this country instead of oil cartels.” Thursday’s press conference comes a day after members of the House Judiciary Committee heard testimony about the effect that rising gas prices have taken on the trucking and refining industry as well as the average consumer. A separate House committee also heard testimony earlier in the week about the spike in diesel costs that has hampered the trucking industry and contributed to soaring food prices. First Published: May 8, 2008: 11:42 AM ED
Take speculation out and what are we left with?
Merlin Dewing Added:
May 16th, 2008 at 3:53 pm
It will probably take Senator Levin, and most of the others in Washington, weeks before someone tells them that the real culprit is the weak US dollar. Oil, priced in EUROs is probably about where it was a year ago.
Bill Added:
May 17th, 2008 at 5:12 pm
I completely agree. This is an example of how the Democrats do not understand free market economics. High prices cure high prices.
Speculators (AKA “traders”, of which I am one) provide market liquidity. To quote Jim Rogers, “It is the speculator who puts the exchange in the commodities: When those producers and consumers of commodities hedge their risks in the futures market, on the other side of their trade stands the speculator . . . . ” (Hot Commodities, pp. 72-73).
This is Not Good Added:
May 17th, 2008 at 5:36 pm
[...] Go to the author’s original blog: This is Not Good [...]
Banker Added:
May 17th, 2008 at 8:26 pm
Speculation is not the reason for higher crude prices. A real increase in demand is the reason. If this is pure speculation then the market will come off (and hard …i.e. Internet stocks) and some point. I think we will have sustained high crude (and commodity prices ) fir some time.
Neil C Added:
May 20th, 2008 at 2:04 pm
With Congresses low favorable ratings, it’s no wonder that Congress is blaming anyone but themselves for the problem. There are many facets to the problem, including: the Fed’s preoccupation with fighting inflation while ignoring their other principle responsibility: maintaining the value of the dollar, 2)Congresses inaction on speed reduction, as they did during the last liquid energy crisis, 3) Congresses inaction on drilling in the U.S., 4) Congresses inaction on fuel efficiency standards, 5) Congresses inaction on gasoline taxes, which would be diverted towards public transportation systems, and 6) a total lack of governmental planning at the state and national level to encourage and enforce cluster living, cluster working environments, whereby public transportation would become a viable solution.
Francois Added:
May 20th, 2008 at 9:41 pm
If I may add to the excellent review of Neil C: How about a cogent, long-term oriented Energy Policy, please pretty please?
You know, one that would include support for scientific research? As a Saudi prince once said:” The Stone Age did not end for lack of stones.” Humankind just found something better. And that is achieved by a systematic effort into scientific research.
Caveat: not the kind that MUST have an immediate application. You just CAN’T plan scientific research. (I mean true research) I’m referring to a set of Institutes that explores for the sake of it. It’s only a matter of having a system in place to capture findings that hold promises and let the private sector (or a collaboration public/private sector) run with those findings in development.
Every time a civilization has encouraged that kind of set up, nice things started to happen.
Chuck Cain Added:
May 22nd, 2008 at 12:05 pm
We see an assumption that speculators are always on the long side pushing prices up. What about the speculators that are short and trading against higher prices (and lately losing their shirts). My guess is that when prices start to trend down, there won’t be any thanks for speculators going short and hastening the decrease.
Note: all trades in the oil futures market have been honored. No traders have received a federal bailout.
Tim S Added:
May 22nd, 2008 at 2:36 pm
Being short is defined as having to go to the market at a future date and buy at market prices.
This country has taken a huge short position in oil, and the trade is getting away from us. It’s been too easy to continue to add to position: Larger SUVs, larger houses, longer commutes, etc. I’m as guilty as anyone, but understand the risks involved. Looking at it this way, many are just covering their shorts.
Sad day when the only energy I can legally own will be the gas in my tank. Why can’t I reduce my risk and secure my energy needs for the years to come?
Patrick Added:
May 22nd, 2008 at 4:38 pm
If they close oil then they will close most of the futures. If they close futures, they will have a hell of forex market. If they close forex then uhum.. well you can’t close any of it! US might close crude market but most dealers will open unregulated oil(or any other regulated) market. Remember the black bourse in the old days? Now how hard is it to establish oil futures market in some offshore country?