Wikinvest Wire

Every crisis needs a culprit

Monday, June 23, 2008

Michael Masters was quite the star on Capitol Hill today as he testified before the Subcommittee on Oversight and Investigations, a group that is currently tasked with delving into the question of what role "speculation" is playing in soaring energy prices.

With just a little prodding from elected officials, he went so far as to say that, if his recommendations are turned into legislation, the price of gasoline will drop by 50 percent within a month.

Who could have possibly imagined that solving the near-term global energy crisis could be that simple?
He had lots of company on the panel of experts, all of whom were singing pretty much the same tune - just get rid of the speculators and oil will drop to $65 or $70 a barrel and all will be right again in the world.

The most interesting parts of the Masters testimony were the repeated references to "speculators" disrupting the "price discovery process" between producers and consumers, a contention that is being hear quite often in the "hang the speculators" camp.

While there is a case to be made for commodities futures markets not being intended and perhaps not capable of handling the amount of money that seems to desperately want to go there these days, the fact that so much money desperately wants to go there these days remains the fundamental problem that no one wants to talk about.

Maybe the right price is being discovered as part of this process.

There are occasional references to the weaker dollar causing higher energy prices, which are then routinely dismissed since a 30 percent decline in the dollar couldn't possibly cause the price of oil to double or triple.

That argument ignores the fact that all paper money is declining in value.

And then of course there's the growing demand from Asia to go along with flat global oil production for the last few years. But these explanations don't seem to satisfy elected officials who view themselves as problem solvers.

Just once it would be nice to hear someone say to Congress, "There's just so damn much paper money in the world today, most of it in the form of U.S. Dollars, that people feel they have to do something to protect themselves from its declining value. If the government would be a little more honest about inflation and if you could get a reasonable rate of return on your money elsewhere, then maybe pension funds wouldn't be so keen on buying oil futures".

Interestingly, the Commodities Futures Trading Commission noted in a fact sheet that "speculative positions have not been increasing during the past year". Some variation of this statement has been heard a number of times in recent weeks, though no one seems to want to listen to it.

The "hang the speculators" angle and the chants of "close the Enron loophole" have drowned out those arguing that the doubling of the oil price over the last nine months can't reasonably be blamed on "index speculators", then name applied by Mr. Masters to pension funds that invest based on well-known commodity indexes.

According to this Bloomberg report, analysts at Sanford C. Bernstein noted in a written report to the committee "Every crisis needs a culprit. Active speculation is a catalyst for market movements, not an underlying cause.''

Wouldn't it be embarrassing for both Congress and Michael Masters if all the speculators were banned from energy markets and the oil price just continued to go higher?

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Anonymous said...


"Wouldn't it be embarrassing for both Congress and Michael Masters if all the speculators were banned from energy markets and the oil price just continued to go higher?"

Especially if the rising price was accompanied by spot shortages. Want gas? Take a number!

Anonymous said...


I've been reading your blog for a while as well as following gold and oil markets. In my opinion, there is a great element of speculation in oil (much like there was in gold futures in 1980 when the futures market completed disconnected from the physical market). One big reason is that NYMEX uses cash settle, not physical delivery.

Also, there is plenty of deflationary forces out there. Stocks and real estate are deflating. Yes, commodities are inflating , but only in select segments. Gold is starting to believe in deflation as well (I would probably call a close below 850 a confirmation of that belief). The big story is in emerging markets where deflation is just now starting out, but when it gets going, the demand for oil will drop significantly at these prices.

My prediction is we will be at $85 next summer.

Anonymous said...

I will leave a side the use of the imprecise term speculator for another day.

On the day to day, the price of oil will rise and fall. On the month to month, the price oil will rise.

We are running out of the stuff. And few people want to develop realistic alternatives.

We live in an era of peak oil, boys and girls. I predict the price of oil, barring a revolution or a category 5 hurricane in the Gulf of Mexico, will hit $175 by this time next year.

But if Anonymous is right, and oil drops below $100 a barrel. I am BUYING!

Chuck Ponzi said...

I remember at the peak of the housing bubble that there were no end of anonymous posters that predicted if San Diego condos went down 10% that they would be BUYING!

Jeebus, all of the idiots come out at the top.

The last bubble is barely deflating and the newest one is peaking and people are still oblivious as to what a bubble is.

As long as we have our monetary policy, there will be a place for idiots to bet.

Chuck Ponzi

Anonymous said...

Pretty simple. Since the bubble in credit instruments popped, foreigners no longer put their savings there. They now buy things they need like oil and grains. Eventually, they will be unloading US dollar instruments they already to hold to buy more oil and grains. Setbacks surely, but US$ prices have a long, long way to go up.

Anonymous said...

Speculators !!!

Good thing I'm an investor not a speculator. And if the price of oil does indeed fall below $100 then I'm going to 'invest' even more. At least until Bush and Cheney get their fingers off the triggers in January '09.

Anonymous said...

I watched that dog and pony show as well. The classic clip was Oppenheimer's Fatih Berol (another speculator prosecutor)letting slip "oil is in a permanent bull market". OK, thanks a lot, now why should I go short?

I'll leave shorting oil to other geniuses.

Anonymous said...

"Who could have possibly imagined that solving the near-term global energy crisis could be that simple?"

Have you ever considered that maybe it is that simple? Personally I find the Peak Oil crowd to be as unhinged as the Bird Flu--African Killer Bees--Acid Rain--Global Warming--Chicken Little Luddite crew.

Nick said...

I don't think Congress would be the least bit embarrassed if their "solutions" not only failed to address the problem, but actually caused a larger problem. Not only that, but they are so bad at doing anything helpful that the American people don't even expect anything helpful or useful to come out of Congress; it's just a waiting game to see how bad whatever next piece of fecal explosion comes out of their collective colons and sprays all over the American populace.

Which will win the race to the bottom? In this corner, the huge new government bureaucracy to regulate financial markets and make sure nothing bad happens, costing companies billions, grinding the economy to more of a halt, causing more real damage to businesses, and having no positive effect whatsoever. In another corner, a $300 billion payout package for BofA, other reckless lenders, and speculators. In still another corner, the new contender underdog in the race to be most destructive, proposals to curb oil speculation through market manipulation and meddling. In still another corner, legislation to give corporations which trample on Constitutional rights a free pass to not be liable for damages. Will one of these emerge victorious, or is there a new, incomprehensibly worse proposal lurking just around the corner? Stay tuned...

Anonymous said...

When Congress's solution fails, they will find someone else to blame or they will become strangely silent like they did when the 1990 banking crisis emerged.

BTW, something that appears to have slipped by is that the oil companies are now off the hook. Maybe they "gave" at the till, but the "speculators" didn't give enough ?


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