Sunday, June 22, 2008
Bashing oil "speculators": A curious alignment of accusations
New Jersey Governor Jon Corzine, speaking as an Obama surrogate:
``Everyone believes there is too much speculation in the oil markets,'' New Jersey's Democratic Governor Jon Corzine, an Obama adviser, told reporters on today's call.
Saudi King Abdullah:
"Among other factors behind this unjust increase in oil prices is the abhorrent act of speculators acting for their own selfish interests."
(You have to admire the sheer hugeness of Abdullah's balls. He's a freaking king in charge of a police state that controls a cartel blaming speculators for "injustice". Bill Clinton does not sport that much brass.)
Iranian president Mahmoud Ahmadinejad:
"At a time when the growth of consumption is lower than the growth of production and the market is full of oil, prices are rising and this trend is completely fake and imposed," President Mahmoud Ahmadinejad said in a televised speech.
"It is very clear that visible and invisible hands are controlling prices in a fake way with political and economic aims," he said when opening a meeting of the OPEC Fund for International Development in the central city of Isfahan.
Democratic Senator Carl Levin:
"A major contributor [to high oil prices] is the rise in speculation. This is not a supply and demand issue."
Ordinarily, I would say that if King Abdullah, Mahmoud Ahmadinejad, Jon Corzine, Barack Obama, and Carl Levin all agree that evil speculators are responsible for high oil prices then they almost certainly are not. But now Paul Krugman comes along and alters the universe's natural order by saying that all these other guys -- you know, Obama, Corzine, Levin, Abdullah, and Ahmadinejad -- are wrong. I am, accordingly, dazed and confused.
19 Comments:
By 
Dawnfire82, at
Sun Jun 22, 07:56:00 PM:
Simple. The price has rocketed upwards in a way totally out of proportion from possible (by nature, gradual) increases in consumption in newly industrializing nations. Therefore, it isn't simple supply and demand talking here.
The numerous headlines that read "oil shoots up $5 on news of Middle East Tensions" sort of gives it away, too.
By D.E. Cloutier, at
Sun Jun 22, 08:23:00 PM:
In Germany Spiegel Online recently had an article about speculators: "How Speculators Are Causing the Cost of Living to Skyrocket."
The thrust of the June 13th article: "After investing in high-tech stocks and real estate loans for years, legions of speculators have now discovered commodities like oil and gas, wheat and rice. Their billions are pushing prices up to astronomical levels..."
At the same time the article had this statement:
"Perhaps this is why there are so many voices seeking to defuse the issue and calm things down, those who admit that speculators are at work in the commodities markets, but who also insist that they have little influence over prices. And if they do have an influence, these people say, it can only be a good thing, because it will force humanity to prepare itself more quickly for the unavoidable: the growing scarcity of resources.
" 'This is not about blame,' US Treasury Secretary Hank Paulson recently said. 'It's about supply and demand.' According to Paulson, 'speculators have had very little impact.' "
I am proving this for information purposes only. I have no interest in arguing about it.
Link:
http://www.spiegel.de/international/world/0,1518,559550,00.html
By D.E. Cloutier, at
Sun Jun 22, 08:26:00 PM:
P.S. Make that "providing," not "proving."
By Purple Avenger, at
Sun Jun 22, 08:40:00 PM:
Dinerjacket has been sitting on a huge pile of pumped oil that's been parked sitting in tankers for months that nobody wants, even at steep discounts off market rates.
He has a point.
By 
, at
Sun Jun 22, 09:38:00 PM:
I have to strongly disagree with dawnfire.
The argument that increased demand should lead to only gradually increasing prices is specious. It rests on textbook-like examples, which contain relatively broad and flat supply curves with constant slopes. Such curves are great for teaching supply and demand. In reality, of course, it can be easy to reach the end of the broad, flat part of the curve and hit an almost-vertical section. I know for a fact that it happens in real-time electricity markets. Therefore I don't rule out that it an happen in other energy markets.
By Assistant Village Idiot, at
Sun Jun 22, 10:08:00 PM:
Krugman does not have a need to believe (or at least claim) that some Terrible Other People are getting rich at your expense. He just happens to be often wrong because he doesn't think that clearly.
The others listed need you to believe certain things to increase their own power.
By , at
Sun Jun 22, 10:59:00 PM:
I recently had a conversation with a lawyer who works for a large oil company that I won't name (Shell) who said that if speculators were driving up the price of oil then oil companies would see an increase in inventories as the speculators artificially drove up prices unwarranted based on demand.
There is no increase in inventory. Demand is keeping pace. You are intelligent. Draw your own conclusion.
By , at
Sun Jun 22, 11:28:00 PM:
I would only tend to agree with other commenters here, that while speculation and futures trading in contracts for oil can certainly "spur" the price up temporarily, there is just not enough capital and the financial risk would just be too great for most investors to sustain.
It might be possible for a nation state to do this sort of thing, but I don't know how they could hide it. The sums of capital and the complexity of the game are just too big.
The point about speculation and the nature of oil inventories is epsecially insightful, with respect to the oil companies, etc. They just don't have enough capital to sit on that much oil for that long. And they couldn't hide what they were doing because of the the nature of SarbOx anyways.
All of the characters listed in the original post have their own reasons to misdirect the public's wrath. As was said before, draw your own conclusion.
-David
By Dawnfire82, at
Sun Jun 22, 11:41:00 PM:
"And they couldn't hide what they were doing because of the the nature of SarbOx anyways."
What makes you think they're American? Or even private companies?
"The argument that increased demand should lead to only gradually increasing prices is specious."
Very well. Where are the shortages then? Theoretically, the price would be increasing because of increasing scarcity; that is, as demand outstrips supply people would be willing to pay more to have the privilege of obtaining it instead of some other poor sap. Right? That's how famines and other great shortages work.
So who's losing out? Who's starved for oil? Anyone?
By , at
Mon Jun 23, 12:45:00 AM:
Dawnfire,
Demand does not have to outstrip supply for prices to increase.
But to attempt to answer your question about the location of shortages, the "shortages" are incurred by people who are willing to buy less gas at $4/gal than they would buy at $3/gal.
By TigerHawk, at
Mon Jun 23, 02:20:00 AM:
Purple Avenger -- Dinner Jacket's oil is sludgy and takes a lot more effort to refine than other oil. At a time when refineries are working at high capacity to get through better grades, you can imagine that the economics would move sharply against the Iranians. Dinner Jacket would know that, of course, if he had a refining capacity to feed his domestic consumption. Sadly, there is a limit to the top-drawer engineering talent in Iran, and he has it working on a nuclear weapon.
By davod, at
Mon Jun 23, 07:40:00 AM:
Obama, Corzine, Levin, Abdullah, and Ahmadinejad. The views of these people may be biased because non of them want the US to start drilling.
By BillM, at
Mon Jun 23, 09:14:00 AM:
Just a question, perhaps yje most basic question. At this point in time, today not yesterday or the future, is oil a necessity or just another commodity? If iy's the former, then how can it be treated as a commodity open to hoarding and speculation?
By , at
Mon Jun 23, 09:18:00 AM:
CORRECTED FOR SPELLING!! (Sorry)
Just a question, perhaps the most basic question. At this point in time, today, not yesterday or the future, is oil a necessity or just another commodity? If it's the former, then how can it be treated as a commodity open to hoarding and speculation?
By Dawnfire82, at
Mon Jun 23, 10:39:00 AM:
Nobrainer: "Demand does not have to outstrip supply for prices to increase."
If there is no shortage, why would people pay more for the same good? Unless they expect the price to go up in the future...
"the "shortages" are incurred by people who are willing to buy less gas at $4/gal than they would buy at $3/gal."
But that is a reduction in demand in response to the price increase, not a shortage of the commodity. The gas is there for anyone who wants it. That's a far cry from the rationing and long lines from the Carter administration.
Caveat: I am not an economist, nor economically inclined. I only studied economics in college at the macro-level as it related to international relations and fiscal policy. But when the freaking king of Saudi Arabia says that the price of oil is too high (as he did a year ago) for the market to support, I'm inclined to believe him. Especially when his words are backed up by actions. If he believes that bubble will pop and the price will plummet, increasing production now is not in his long term interest.
If he really thought that it was a supply and demand issue, he'd be cranking up production in order to stave off drops in demand from markets like the US.
Ref: http://www.saudi-us-relations.org/articles/2007/ioi/070129-oil-policy.html
“High prices are not in the interest of Saudi Arabia,” said Sadek Boussena, a former OPEC president from Algeria.'
"Saudi officials repeatedly point out that they do not set the price of oil on international commodity markets — they point the finger at hedge funds and other speculative traders for the heightened volatility in recent years."
By Dawnfire82, at
Mon Jun 23, 10:41:00 AM:
Wouldn't a necessity be the absolute best thing to hoard?
By , at
Mon Jun 23, 11:46:00 AM:
Your comments are all true but my question was just a simple one: is oil necessity or tradable commodity?
As to hoarding, I do believe in time of war or national crisis, it�s illegal and a Federal crime. So I guess that raises yet another question, or questions. Are we at �war� in the economic sense? Does home heating oil at $4.50 a gal create a real National crisis for the poor, elderly and average American family trying to stay warm this winter? Read more at http://www.economycrisis.com
By , at
Mon Jun 23, 01:10:00 PM:
So, do I classify as a speculator in that when I saw Gasoline pass $3 a gallon and oil break $100 a barrel, I put more money into mutual funds that own oil companies, oil drillers, driller suppliers, and oil futures? Am I also evil because I saw the US Dollar index plummeting in 2006 and put money into mutual funds that bet against the dollar and bought gold and commodities?
By , at
Mon Jun 23, 10:19:00 PM:
Probably not. You sound like an investor, someone who buys something to "own" - mutual fund and so on. I'm just wondering about a pretty basic question - is oil necessity or tradable commodity?
