Congressional Hearing on the Effect of Speculation On the Price of Oil

[edward]

I caught this on C-Span last night. It is very interesting, also very long. Some big time players testify here. There is a lot of talk about the "Enron Loophole"

If nothing else watch Dr. Mark Cooper at about the 50 trough 60 minute segment. Yea I know he is involved in consumer affairs, but I think he nailed a big problem concerning the speculative market. Most of the participants did. edit: Including george Soros who's segement begins at about the 20 minute point.

http://www.c-span.org/Topics/Energy.aspx

 

[TheStatutoryApe]

It sounds interesting but apparently my computer can't play it.

 

[edward]

It sounds interesting but apparently my computer can't play it.

Most of the same information is in the link below. It can be viewed with Windows media Player. There is a place to click on the right. To get the main gist of the hearing you can start at about the 33 minute point and see Michael Greenberger.

A lot of hedge fund involvement apparently is not accounted for due to the "Enron loophole"

http://www.c-spanarchives.org/library/index.php?main_page=product_video_info&products_id=205797-1

 

[DrClapeyron]

blah

 

[RobertR]

Speculators cannot defy the fundamental law of supply and demand for very long , unless they wish to loose all their assets.

This is nothing but Democrats trying to blame a problem they partually created by restricting supply, on free enterprise system. Their solution of coarse was stated by Maxine Watters. Socialize the oil industry.

If America let's them get away with creating a problem, and then proposing socialism as the solution, they are destined to rule the world, as our economic knowledge has ceased to exist.

Domestic production of oil in the US has been almost cut in half since 1980. We have approx 120 billion barrels of natural oil in known reserves which is currently off limits to drilling.

Adam Smith figured it out some 230 years ago. It's called supply verses demand.

 

[RobertR]

If I were allowed to post URL's I would direct you to a site which shows where every time OPEC did something to cut supply since 1970, the price increased accordingly.

You can find it at the Energy Information Administration

then add this on the end of it once your there. emeu/cabs/AOMC/Overview.html

Of course it does not matter who cuts supply, the US or OPEC, the effect is the same on the world market.

Both the US and OPEC have been pulling in the same direction. The problem with that is, it is making them rich, and it is going to make us poor.

We are an industrial nation, they are not, and only 40% of each barrel of oil goes to make gas for transportation. The other 60% goes primarely to industrial production, which includes, food, heat, etc

"Our goal is to socialize , ah nationalize, ah take over and run all your companies" Maxine Waters , speaking the truth.

Why else would our government seek to create poverty in its own country if not for the accumulation of their own power?

These dog and pony shows are for no other purpose than propaganda, to sell an idea. Socialism. They have little to do with reality.

 

[loseyourname]

Speculators cannot defy the fundamental law of supply and demand for very long , unless they wish to loose all their assets.

This is nothing but Democrats trying to blame a problem they partually created by restricting supply, on free enterprise system.

Except that speculation takes place on the world commodities market. Whatever you think of domestic supply, worldwide, the supply of oil still exceeds present demand by at least 10% or so if I've been told correctly.

Hedge funds are doing what they're named for - hedging. They're betting that future supply will be impacted by instability in major oil producing regions and that future demand will grow quickly as massive populations in developing Asian markets start to consume like westerners. Betting this will happen, they're getting rich right now in futures trading. In addition, commodities in general are becoming more valuable as the dollar, being the currency in which global commodities are traded, becomes less valuable.

The price of a gallon of crude on the world market doubled between 2003 and 2007, which you can legitimately attribute to changes in supply and demand thanks to the invasion of Iraq, turmoil in Venezuela and oil-producing parts of Africa, and to rapid development in southeast Asia and China. Then, in the last year, it doubled again. We recently saw gasoline domestically hit a record median price for 27 out of 28 consecutive days. Crude futures saw the highest intraday surge in the history of the New York Mercantile Exchange last night, in a span of one hour before trading closed. This is a speculative bubble, plain and simple. If speculators are correct, and future supply and demand truly do surge, it may very well continue for some time. But when has that ever been the case? At this point, they're just betting that the bubble will continue, that crude will go to $200 a barrel by the end of the year, and they'll be able to get out before it collapses.

 

[DrClapeyron]

$200 per barrel would not be bad. People's willingness to pay is much higher. If you consider that new demand comes from a country with large reserves of cash US dollar, they will be much willing to purchase oil. For other countries, willingness is not as high. And for those who pay for gasoline, their willingness may not be as high.

If a large majority of crude buying nations have a high willingness to pay, then prices will increase as demand increases. Demand will decrease once the willingness threshold has been crossed. Where is that at? I do not know, you may have to speculate on that.

 

[TheStatutoryApe]

Most of the same information is in the link below. It can be viewed with Windows media Player. There is a place to click on the right. To get the main gist of the hearing you can start at about the 33 minute point and see Michael Greenberger.

A lot of hedge fund involvement apparently is not accounted for due to the "Enron loophole"

http://www.c-spanarchives.org/library/index.php?main_page=product_video_info&products_id=205797-1

Thank you Edward. I watched the open and skimmed it at the 10min and 33min marks.
I've always thought that futures trading was dangerous. Perhaps unreasonably since I don't really understand well how the stock market works and it's impact on the economy as a whole. So maybe I'm just afraid that this sort of thing is the norm or somehow inevitable since I don't really understand it.

 

[chemisttree]

Perhaps 60% of today’s oil price is pure speculation

Last weekend the Saudis proposed increasing their output of oil to bring down prices.

Saudi Arabia, the world's biggest oil exporter, may announce an output increase at a meeting it's hosting in Jeddah on June 22, an OPEC official said yesterday. The Middle East kingdom will pump an extra 200,000 barrels a day next month, Agence France-Presse reported yesterday, citing United Nations Secretary-General Ban Ki-Moon.

http://www.bloomberg.com/apps/news?pid=20601103&sid=aJDIEJjFUEk0&refer=us

It seems that the price of oil is largely (if 60% of the price can be considered 'largely') based on speculation!
http://globalresearch.ca/index.php?context=va&aid=8878

Are we doing this to ourselves? Is our greed to make a buck on hedge funds or a better return in the market?

The Senate investigated this back in 2006...

A June 2006 US Senate Permanent Subcommittee on Investigations report on “The Role of Market Speculation in rising oil and gas prices,” noted, “…there is substantial evidence supporting the conclusion that the large amount of speculation in the current market has significantly increased prices.”

What the Senate committee staff documented in the report was a gaping loophole in US Government regulation of oil derivatives trading so huge a herd of elephants could walk through it. That seems precisely what they have been doing in ramping oil prices through the roof in recent months.

The Senate report was ignored in the media and in the Congress.

http://levin.senate.gov/newsroom/supporting/2006/PSI.gasandoilspec.062606.pdf

Why would our candidates for president ignore this absolutely crucial issue? Is there anything more critical at hand?

 

[Astronuc]

I heard this morning a discussion about this very matter. The question was about what is driving the price of oil, and even with the Saudis ramping up production, and even when demand drops below supply, the price of oil keeps rising.

From Marketplace Morning Report - June 16, 2008

Analyzing the oil bubble
http://marketplace.publicradio.org/display/web/2008/06/16/sloan_price_of_oil/

Jagow: Well if this is actually a bubble, are we assuming then that the supply/demand aspect of this isn't as strong as some people are making it out to be?

Sloan: Right. I think a lot of what's going on here is financial speculation. People have made a lot of money betting on oil, and I think that's happening with a lot of the commodities. And you can make a supply and demand case, but I don't believe it. And I can't tell you why I don't believe it, and I can't demonstrate logically that it's wrong, but I don't believe it.

Jagow: How much of this do you think is being driven by fear?

Sloan: The stock market is more fearful now than usual. I would say a lot of it. I just don't think that what's going on in many cases is rational. And if it's not rational, it's going to come to an end. Because it always does.

Part of it is speculation on a number of things. The value of dollar has fallen against other currencies, so there is some speculation this will continue. There is speculation on the stability of supply - from places like Iraq, Iran, Venezuela. There is hold back by non-OPEC producers, and some concern that this will continue.

The question becomes - "how much speculation is too much speculation". Speculation has been tolerated because is enhances the liquidity in the commodities markets, BUT it can also hurt the end-users and consumers when costs go much higher than peoples ability to pay.

There is concern about speculation of all commodities, not just oil.

 

[chemisttree]

And what happens when the speculator's bubble bursts? A bailout? I think I'm going to be sick...

 

[Ivan Seeking]

The Saudis are worried that the high prices will drive a shift to alternative fuels, and they should be! Let the speculators rock and roll, it only helps to end the misery once and for all; and sooner rather than later. And the sooner we can quit the imported oil, the less painful the transition will be. What we see now is only a birth pang of what's to come if we don't get off the oil.

And the best part is that we add a half-trillion to the US economy annually, instead of sending that money to foreign suppliers.

 

[chemisttree]

I don't think its going to work like that. More likely we will continue to send them the same or more money but have to spend even more at home for a partial replacement of the energy what we already use.

 

[Ivan Seeking]

With China and India coming online, it will have to change.

Notable: In some areas it would now be cheaper if you could run your car on milk.

 

[chemisttree]

Well, I don't live in Wisconsin! How about cow patties?

 

[drankin]

According to this site http://watthead.blogspot.com/2006/03/where-does-your-oil-come-from.html" we only get 12% of our imported oil from Saudi Arabia. I don't know that their increase will make that much of an impact. (FYI, 33% total comes from the US.)

But it doesn't matter where the oil comes from if I understand it correctly.

All the oil produced in the world goes into the OPEC pool and that's where the price is determined. If all oil producers were able to increase production 10% then you would think that the price would drop accordingly unless there are other determining factors outside of "supply/demand".

If I'm wrong, someone help me out. I'm trying to get my head around how this all works.

 

[Astronuc]

This might help to put things in perspective - somewhat -

http://www.eia.doe.gov/emeu/international/contents.html
on that page - http://www.eia.doe.gov/emeu/international/images/int_oil2.gif

Non-OPEC nations produce more crude oil than OPEC.

Petroleum stats - http://tonto.eia.doe.gov/country/index.cfm
http://www.eia.doe.gov/emeu/aer/txt/ptb1105.html

http://tonto.eia.doe.gov/country/country_energy_data.cfm?fips=US

Country Analysis Brief

The United States of America is the world's largest energy producer, consumer, and net importer. It also ranks eleventh worldwide in reserves of oil, sixth in natural gas, and first in coal.

U.S. oil production has been declining for years. In 2005, Hurricanes Katrina and Rita slashed oil output from the Gulf of Mexico.

The U.S. is the world’s largest consumer and second-largest producer of natural gas.

The U.S. has the world’s largest coal reserves, with the Western U.S. accounting for 55 percent of current U.S. coal production.

U.S. electricity demand is increasing, as are prices.

I think we need to become more energy independent. But why is it we have to wait for a crisis?

 

[wildman]

Speculators cannot defy the fundamental law of supply and demand for very long , unless they wish to loose all their assets.

This is nothing but Democrats trying to blame a problem they partually created by restricting supply, on free enterprise system. Their solution of coarse was stated by Maxine Watters. Socialize the oil industry.

If America let's them get away with creating a problem, and then proposing socialism as the solution, they are destined to rule the world, as our economic knowledge has ceased to exist.

Domestic production of oil in the US has been almost cut in half since 1980. We have approx 120 billion barrels of natural oil in known reserves which is currently off limits to drilling.

Adam Smith figured it out some 230 years ago. It's called supply verses demand.

Actually most of it is not off limits. Most of it is too expensive or beyond our present technology. There is still some cheap oil in ANWR (15 billion barrels) which is about enough for 5% of our oil consumption. And some off Florida (5 billion barrels) about enough for 2% of our consumption. The biggest potential (100 billion barrels) is in the deep shelf in the Gulf of Mexico. This is NOT closed to drilling. It is just VERY expensive. It will be long in coming even with the present high prices and will probably never amount to more than 20-25% of our present consumption. There is also other oil here and there (resulting in a total considerably more than 120 billion barrels) but it is all VERY deep and expensive.

The idea that we can just free the oil companies to explore in the US and then everything will go back to normal is a wet dream (literally!). Sorry.

(I think these figures are correct. Someone tell me if they are not)

 

[wildman]

According to this site http://watthead.blogspot.com/2006/03/where-does-your-oil-come-from.html" we only get 12% of our imported oil from Saudi Arabia. I don't know that their increase will make that much of an impact. (FYI, 33% total comes from the US.)

But it doesn't matter where the oil comes from if I understand it correctly.

All the oil produced in the world goes into the OPEC pool and that's where the price is determined. If all oil producers were able to increase production 10% then you would think that the price would drop accordingly unless there are other determining factors outside of "supply/demand".

If I'm wrong, someone help me out. I'm trying to get my head around how this all works.

Oil is heavy and costs a lot to move. We get the oil that is closer to us (like South America). Europe takes the oil closer to them. It is all one big market.

 

[wildman]

And what happens when the speculator's bubble bursts? A bailout? I think I'm going to be sick...

I wouldn't sell short if I were you.

 

[AhmedEzz]

What worries me further is that IF the US is actually going to attack/bomb Iran, the oil prices are going to increase sharply since the whole gulf area will be affected and Iran will stop supplying oil as well, Iraq is also a potential target...

 

[chemisttree]

According to this site http://watthead.blogspot.com/2006/03/where-does-your-oil-come-from.html" we only get 12% of our imported oil from Saudi Arabia. I don't know that their increase will make that much of an impact. (FYI, 33% total comes from the US.)

But it doesn't matter where the oil comes from if I understand it correctly.

All the oil produced in the world goes into the OPEC pool and that's where the price is determined. If all oil producers were able to increase production 10% then you would think that the price would drop accordingly unless there are other determining factors outside of "supply/demand".

If I'm wrong, someone help me out. I'm trying to get my head around how this all works.

Last year the US imported about 35 billion dollars worth of 'business' (it's either oil or sand) with Saudia Arabia. Our deficit with them was about 25 billion. If that's only 12% of our petroleum, it is easy to see how much leverage a speculator could have in our economy by nearly doubling the price for that commodity. http://www.census.gov/foreign-trade/balance/c5170.html

I think we are about to learn a lesson about supply and demand in the petroleum business later this summer. Let's see if it works...

 

[chemisttree]

A little math.

42 gallons, US = 1 barrel
Current price per barrel of oil is approximately $130.

130/42 = $3.10 per gallon (FOB Saudi Arabia or wherever)

Cost to ship oil by supertanker is roughly 3 to 4 cents per gallon... that's about 1% of the cost of the oil. http://www.enewsbuilder.net/aopl/e_article000391720.cfm" Only Saudia Arabia is an OPEC country in that short list but Canada and Mexico still enjoy the benefits of a ginned up price for the stuff.

http://tonto.eia.doe.gov/dnav/pet/pet_pri_wco_k_w.htm"

 

[drankin]

A little math.

42 gallons, US = 1 barrel
Current price per barrel of oil is approximately $130.

130/42 = $3.10 per gallon (FOB Saudi Arabia or wherever)

Cost to ship oil by supertanker is roughly 3 to 4 cents per gallon... that's about 1% of the cost of the oil. http://www.enewsbuilder.net/aopl/e_article000391720.cfm" Only Saudia Arabia is an OPEC country in that short list but Canada and Mexico still enjoy the benefits of a ginned up price for the stuff.

http://tonto.eia.doe.gov/dnav/pet/pet_pri_wco_k_w.htm"

Don't forget, only a portion of "crude" oil equates to gasoline. It has to be refined.

 

[drankin]

Last year the US imported about 35 billion dollars worth of 'business' (it's either oil or sand) with Saudia Arabia. Our deficit with them was about 25 billion. If that's only 12% of our petroleum, it is easy to see how much leverage a speculator could have in our economy by nearly doubling the price for that commodity. http://www.census.gov/foreign-trade/balance/c5170.html

I think we are about to learn a lesson about supply and demand in the petroleum business later this summer. Let's see if it works...

Also, that is 12% (so 12% of 66%) of the imported oil. 33% of all of our oil comes from the US, if that article I cited is correct.

 

[chemisttree]

Don't forget, only a portion of "crude" oil equates to gasoline. It has to be refined.

I didn't forget. I just wanted to drive home the point that if you were to pump crude oil into your car, you would start off at about $3.10 a gallon! Refining, distribution, TAXES and profit add only about a dollar.

 

[DrClapeyron]

In the short run, supply increase cannot immediatley catch up to demand increase in order to reach equilibrium. In the long run however, as demand increase wanes supply increase will catch up. This equilibrium in the long run does not mean oil price per barell will fall it means change in oil price will not increase or will not increase with the same magnitude as it previously had.

That is why drilling in remote regions like ANWR is costly. Only after a supply shock in the early 1970's were oil companies capable of producing oil at Prudhoe Bay on the Alaskan North Slope. Price increases were expected to be great in magnitude and last for several years. If however, OPEC suddenly creates a supply shock by increasing supply, the price will fall and investors who take risk in expensive projects will be ruined.

 

[mheslep]

I wouldn't sell short if I were you.

I would. December 08 contract.

 

[wildman]

I would. December 08 contract.

You are probably right. The price always goes down in the winter.

 

[Astronuc]

The London Loophole

U.S. oil regulators work on London
http://marketplace.publicradio.org/display/web/2008/06/18/us_british_oil_regulation/

The American oil regulator told Congress it will try to impose its regulations on a London contract.
. . . .

the American regulator, the CFTC, has just told Congress that it's going to attempt to impose its regulations on this contract traded in London. Because the feeling is that U.S.-based oil traders are evading the American regulations, dealing directly with London.
. . . .

Of course it requires approval by the British regulatory authority, which is apparently reluctant to put constraints on the British market.

 

[Art]

I didn't forget. I just wanted to drive home the point that if you were to pump crude oil into your car, you would start off at about $3.10 a gallon! Refining, distribution, TAXES and profit add only about a dollar.

Aren't you forgetting most of that initial $3.10 is pure profit for the oil companies?

I read somewhere one of the price drivers in the US is the shortage of light, sweet crude oil. There is plenty of heavy, sour oil available on world markets but to refine this is more complicated and would require expensive retooling by US refiners.

 

[Astronuc]

In the article -
Bush Will Seek to End Offshore Oil Drilling Ban
http://www.nytimes.com/2008/06/18/washington/18drill.html

it states:

No one knows for certain how much oil is in the moratorium area, but the federal Energy Information Administration estimates that roughly 75 billion barrels of oil in the United States are off-limits for development, and that 21 percent of this oil — or 16 billion barrels — is covered by the offshore moratorium.

https://www.cia.gov/library/publications/the-world-factbook/print/us.html

According to the CIA Country Brief (World Factbook) on the US, the oil consumption is about 20.8 million bbl/day! So if ANWR has 15 billion bbl, that's good for 721 days (about 2 yrs) equivalent. Of course, there is other oil, so really that would stretch out.

For the entire 75 billion bbls cited in the NY Times article, at present consumption, it would be gone 3606 days or ~ 9.9 years, barring other supplies. Matching those supplies elsewhere would simply extend the consumption to 20 years, barring alternative fuels.

Two decades would pass quickly, and my kids' generation would be stuck in the same dire situation we now face. I don't want to leave the next generation and subsequent ones to suffer from the folly of this generation or previous ones.

 

[DrClapeyron]

So if ANWR has 15 billion bbl, that's good for 721 days (about 2 yrs) equivalent.

You would have to assume that there would be no oil loss from pumping. If there are 15 billion bbl, I would imagine that only half could be pumped under optimal conditions.

 

[mheslep]

In the article -
Bush Will Seek to End Offshore Oil Drilling Ban
http://www.nytimes.com/2008/06/18/washington/18drill.html

it states:https://www.cia.gov/library/publications/the-world-factbook/print/us.html

According to the CIA Country Brief (World Factbook) on the US, the oil consumption is about 20.8 million bbl/day! So if ANWR has 15 billion bbl, that's good for 721 days (about 2 yrs) equivalent. Of course, there is other oil, so really that would stretch out.

For the entire 75 billion bbls cited in the NY Times article, at present consumption, it would be gone 3606 days or ~ 9.9 years, barring other supplies. Matching those supplies elsewhere would simply extend the consumption to 20 years, barring alternative fuels.

Two decades would pass quickly, and my kids' generation would be stuck in the same dire situation we now face. I don't want to leave the next generation and subsequent ones to suffer from the folly of this generation or previous ones.

Certainly the US wouldn't want ANWR as a sole source nor could it be. Consider instead that ANWR provided just 4 million bbl/day, i.e. double the best ever flow rate of the Trans-Alaska pipeline. That would cut imports from 13m bbl/day to 9 and places the country back under 50% imported oil. That could be sustained for 10 years out of ANWR alone, and would have the desirable effect of rapidly cutting the price of oil back down to something manageable, and improves the geopolitical energy security problem. Meanwhile, investment into renewable and liquefied/gasified coal energy goes on, as the nation then has the GDP to fund research and deploy results instead of going broke on imported oil prices. Why must one be done exclusive of the other? I doubt you want your kids generation paying half of their income on 95% imported oil, all because Pappy Astronuc bet the ranch all-or-nothing on renewable fuels.