Thank the Wall Street speculators for high gas prices

From Exon CEO testifying before Congress last May:

WASHINGTON -- Exxon Mobil Chairman and CEO Rex Tillerson said Thursday that heavy Wall Street trading has driven up the price of oil well beyond the level that normal supply and demand forces would suggest.

Under questioning from Sen. Maria Cantwell (D-Wash.) during a Senate Finance Committee hearing, the Exxon chief said that if oil prices were being dictated by normal economic forces, it would cost between $60 and $70 a barrel. Oil is currently trading just below $100 a barrel and has fallen sharply in recent weeks after soaring for most of the year.

"If you were to use a pure economic approach . . . It's pretty hard to judge, but it would be, when we look at it, it's gonna be somewhere in the $60 to $70 range," Tillerson said.

http://www.huffingtonpost.com/2011/05/12/exxon-ceo-wall-street-oil-prices_n_861326.html

 

That's as self-serving a quote as you'll ever see. An oil executive wants to shift the "blame" for gas prices? Shocking.

Analysis, rather than peremptory conclusions, will be more elucidating.

 

Recent Forbes article

http://www.forbes.com/sites/robertlenzner/2012/02/27/speculation-in-crude-oil-adds-23-39-to-the-price-per-barrel/

"If there were no speculation in oil futures on commodities exchange, the price of a barrel of oil might be as low as $74.61– not more than the present price of $108.00 a barrel."

 

Yes, clearly the Exxon CEO should be expected to make an accurate forecast on the market price for oil 10 months in advance. If his forecast is in error, the only plausible explanation is that someone, somewhere, is sticking it to us.

I give up. There is no way in hell I am ever going to convince you that anything other than a sinister combination of forces is at work stealing money out of the pockets of the American public. This combination has figured out a way to make billions risk free! Risk free! I tell you it's a financial perpetual motion machine! I just wonder, though, why the Koch brothers waste their time fiddling around with unions and politics, because, after all, all they have to do is pull the trigger on their little scheme if the bottom line ever gets squeezed.

 

I'm having following that chart.

So once the rules changed one type of buyer from "industrial" to "speculative," the tally for speculative buyers went way up?

That seems kind of like a duh-ism, even despite all the hideous correlation/causation issues involved in that graph.

 

I don't draw many conclusions from that chart, and certainly not the one that some here have drawn.

To me it shows that roughly from 1996-2011, though with curiously no data in '97, '99 or 2000-'05, in general terms 1) the percentage of "speculative" investors has sharply increased relative to "industrial users" in the oil trading market; 2) the price of oil has generally increased over that period, though there were sharp declines as well.

That's all it shows. It's a useful illustration of what happened, but not more than that.

What it DOESN'T show is that the rise of speculation has caused oil prices to rise. Obviously correlation doesn't imply causation. And that Fed study you cited earlier found that over a similar period (I believe there it was '04'-08) that the speculative effect on prices was a small net negative. In other words it tended to drive prices "too low" slighter more often than it drove them "too high."

There are plenty of other reasons that explain the lion's share of that oil price increase. Most simply, over the long term, it's an essential commodity with worldwide demand generally trending upward, especially in developing countries like China, while on the supply side, it's a diminishing resource that one has to keep exploring for, which is very expensive. So the general trend line most see is that demand is rising faster than supply. Period. So you would expect the general trend line of oil prices to go up over this most recent decade and out into the near and even intermediate future. (But how much, and when, and when might it dip unexpectedly but dramatically? If you know the answer to that, you should speculate in the oil markets.)

As to the second question, if speculators are buying oil for storage, I would argue that's actual and not "artificial" demand. They actually want the oil and are willing to pay for it. Why is it your business, or anyone else's, what they want to do with the oil once they buy it, provided it's within the law?

I think some argue that when Koch or the like does this "buy-and-hold" strategy, they're actually artificially restricting supply. Because they've purchased oil that might otherwise go to "real" refineries and be turned into gasoline, so they can hold it for five months or however long and then sell it for slightly more than they paid for it. And the net effect of "removing" that oil for five months or whatever arguably reduces supply.

I would argue (as I did above) that that's a perfectly legitimate trading strategy that's a lot more risky than it looks when it works perfectly. But I think the claim is that it's artificially restricting supply, not that it's artificially creating demand. Though perhaps that's a matter of interpretation.

 

I guess Obama also believes that oil speculation is partly to
blame for high gas prices and he is doing something about it:

http://www.forbes.com/sites/petercohan/2012/04/17/will-president-obamas-52-million-plan-cut-oil-prices-by-10/

 

class warfare!!111