The US Commodities Futures Trading Commission ("CFTC") has announced that it has been, and will continue to be, monitoring oil futures markets, both at home and abroad, more closely to ensure that the process reflects "fundamental economic forces of supply and demand, free of manipulation and fraud." Apparently the investigation began in December of 2007, just after oil prices hit $90 per barrel. The CFTC stated that they normally conduct these types of investigations in secret, but because of the extraordinary leap in the price of oil over the past few months, were announcing their investigation to the public.
We all know what pervasive fraud on the market can do to a micro-economy (see WorldCom, Enron). What is interesting in this case is, first, that the CFTC is actually investigating oil futures market practices before any bad actors get caught with their hand in the cookie jar, and, second, that the CFTC has announced its investigation.
We are used to seeing the feds investigate bad actors in the financial markets. Anyone who has taken a look at the SEC rules can attest to the fact that the Feds have set up an elaborate scheme of regulations and pitfalls for would be fraudulent traders. What we are not used to seeing is a large-scale investigation of an entire market, especially one that occurs before the investors dump their shares and send the market plunging into oblivion (some might argue that's not such a bad thing for oil prices; I am not one of those people). Several possible explanations come to mind for why the CFTC might have launched its investigation in December instead of, say the day after oil prices plunge to mid-1990's levels and the futures market crashes. I don't want to speculate about the CFTC's motives, but it seems that either there was some evidence of fraudulent practices on the futures market that surfaced around Dec. 2007 or the CFTC is taking a more proactive approach than market regulators have in the past, oh let's say 7 years.
The fact that the CFTC actually announced its investigation is, at least according to the CFTC, a fairly extraordinary measure. Apparently they normally keep their investigations quiet and it is only after the recent massive jumps in the price of oil (30% or so in 5 months) that the regulators have disclosed their interest in the oil futures market. The CFTC's motivations for this one seem a bit more obvious- this is probably a shot across the bow for some institutional investors to go ahead and start cleaning up their practices and abandoning any market positions that might appear, well, fraudulent or manipulative. I'm interested to see where this goes, but, given the fact that the Feds have warned any investors who might be engaged in illicit practices, I'd say that we'll either see a gradual withdrawal from the market by those who might be tempted to engage in fraud or manipulative practices (most likely), or we'll see one or more big-time investors dump their shares suddenly, and send the price of a barrel of oil plummeting.
For my part, I'll keep watching the prices of oil, natural gas and other commodities with bated breath, and I am hopeful that we will see a gradual decline in prices that keeps a relative stasis between supply and demand because a sudden drop in prices, or a period of extreme volatility can be just as damaging as the unprecedented increases of late.
Showing posts with label Energy Crisis. Show all posts
Showing posts with label Energy Crisis. Show all posts
Friday, May 30, 2008
Thursday, May 22, 2008
Economists Don't Understand High Oil Prices
A story in today's Washington Post centers around what seems to be a growing consensus that economists and industry "experts" don't understand exactly why oil prices are rising as rapidly as they are.
The Saudis refused Bush's entreaty to boost production because they didn't want to get caught holding the bag when the prices inevitably drop. They stated that supply and demand are currently balanced and that they didn't want to disrupt the equilibrium.
Some people are blaming speculators, citing some $90 billion of investment money being pumped through the markets in the last two years.
Everybody points the finger (at least partially) at China, which has become the flagship for the rapidly developing world. Certainly China, India, Brazil, and other rapidly developing countries are putting stress on demand, but then, at least according to the Saudis, supply is in balance with demand. Many of those same developing countries are heavily subsidizing oil and China particularly has been cited for hoarding oil in preparation for the Olympics.
Congress seems to think that OPEC is the problem in that they are keeping prices artificially high. The problem with that thesis is that it seems more likely that the weak dollar is to blame for OPEC's high prices. After all, can we really expect the OPEC countries to continue accepting $20 per barrel that is worth about half as much internationally as it was just a couple of years ago?
Further circumstantial evidence that it is actually our own fault that oil prices are rising so rapidly in this country is that, if you'll notice, every time that crude prices hit a new high the Dow drops about 200 points or so (270 yesterday). My theory in the correlation between oil price spikes and stock market tumbles is that all that money being leeched from the stock market is being pumped into the commodities markets which have seen exponential price growth, not just for oil, but also for corn, rice, and natural gas. As the demand for commodities futures rises, so does the price.
Ultimately, I think that high oil prices are a function of a confluence of factors: irresponsible financial policies on our part, both at the macro- and micro-levels (e.g. the credit markets and hyper-consumption); rising demand around the world as former 3rd world countries begin to industrialize and compete; different rules for different players (e.g. China buys its oil through state-negotiated contracts and does not pay market price); and over investing in commodities market as the boom and bust cycle that has plagued Wall Street over the past 20 years creeps into new territory.
The US solution is probably not going to lie in a business as usual approach, but rather we will need to innovate. We will need to move past the oil economy and into a new age. The problem is that no one really knows what resource will fuel the next era. Interestingly, this seems to be the first time (at least that I can think of) that humans have needed to transition from the fundamental mover of the economy (e.g. stone, bronze, copper, iron, etc.) due to pressures on the resource pool instead of simply using the technological gains of one age to bring about another.
The clock is ticking on the oil age. Global warming threatens the relative environmental stasis we have enjoyed throughout most of human history. Oil supplies are dwindling as new sources become more and more scarce. The question is whether or not we can transition from the oil age before it happens on its own.
The Saudis refused Bush's entreaty to boost production because they didn't want to get caught holding the bag when the prices inevitably drop. They stated that supply and demand are currently balanced and that they didn't want to disrupt the equilibrium.
Some people are blaming speculators, citing some $90 billion of investment money being pumped through the markets in the last two years.
Everybody points the finger (at least partially) at China, which has become the flagship for the rapidly developing world. Certainly China, India, Brazil, and other rapidly developing countries are putting stress on demand, but then, at least according to the Saudis, supply is in balance with demand. Many of those same developing countries are heavily subsidizing oil and China particularly has been cited for hoarding oil in preparation for the Olympics.
Congress seems to think that OPEC is the problem in that they are keeping prices artificially high. The problem with that thesis is that it seems more likely that the weak dollar is to blame for OPEC's high prices. After all, can we really expect the OPEC countries to continue accepting $20 per barrel that is worth about half as much internationally as it was just a couple of years ago?
Further circumstantial evidence that it is actually our own fault that oil prices are rising so rapidly in this country is that, if you'll notice, every time that crude prices hit a new high the Dow drops about 200 points or so (270 yesterday). My theory in the correlation between oil price spikes and stock market tumbles is that all that money being leeched from the stock market is being pumped into the commodities markets which have seen exponential price growth, not just for oil, but also for corn, rice, and natural gas. As the demand for commodities futures rises, so does the price.
Ultimately, I think that high oil prices are a function of a confluence of factors: irresponsible financial policies on our part, both at the macro- and micro-levels (e.g. the credit markets and hyper-consumption); rising demand around the world as former 3rd world countries begin to industrialize and compete; different rules for different players (e.g. China buys its oil through state-negotiated contracts and does not pay market price); and over investing in commodities market as the boom and bust cycle that has plagued Wall Street over the past 20 years creeps into new territory.
The US solution is probably not going to lie in a business as usual approach, but rather we will need to innovate. We will need to move past the oil economy and into a new age. The problem is that no one really knows what resource will fuel the next era. Interestingly, this seems to be the first time (at least that I can think of) that humans have needed to transition from the fundamental mover of the economy (e.g. stone, bronze, copper, iron, etc.) due to pressures on the resource pool instead of simply using the technological gains of one age to bring about another.
The clock is ticking on the oil age. Global warming threatens the relative environmental stasis we have enjoyed throughout most of human history. Oil supplies are dwindling as new sources become more and more scarce. The question is whether or not we can transition from the oil age before it happens on its own.
Sunday, May 18, 2008
I Know Its Almost Summer And All...
But let's take a look at futures for natural gas and heating oil.
Crude oil prices are also hitting record highs almost every day. Bush just got back from Saudi Arabia where he asked the sheiks to boost production of crude oil. Know what they told him?
And, if you look at the above graphs, it seems the prices of heating oil and natural gas are also going up without the conventional pressures on demand (e.g. cold weather). My prediction: demand for blankets will spike around January 2009 when people begin to find that heating their homes is becoming prohibitively expensive.
Special thanks to my friend for bringing these graphs to my attention.
Crude oil prices are also hitting record highs almost every day. Bush just got back from Saudi Arabia where he asked the sheiks to boost production of crude oil. Know what they told him?
Demand does not justify increasing production at this time.
And, if you look at the above graphs, it seems the prices of heating oil and natural gas are also going up without the conventional pressures on demand (e.g. cold weather). My prediction: demand for blankets will spike around January 2009 when people begin to find that heating their homes is becoming prohibitively expensive.
Special thanks to my friend for bringing these graphs to my attention.
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