Thursday, 5 June 2008

oil speculation

i've been meaning to post about speculation and its effects on oil prices for a while now, but something else would always catch my attention. however, i can delay it no longer after hearing this interview with tyscon slocum on radio nz today. it's absolutely brilliant, you MUST listen to it. it follows on from rod oram's discussion last week, which is unfortunately no longer online.

the main point is that oil prices are rising so rapidly because of speculation, particularly by large corporates investors (your pension funds, managed investments funds etc) and by the oil companies themselves. it's a similar story with food prices.

the thing with speculation is that it's a zero sum game. if someone wins big, it means that someone else has lost big. nothing new is produced; the size of the pie does not grow larger because of the futures market. in this case, the speculative investors are winning, and all of us forced to buy extremely expensive petrol are losing.

yet there in not a huge public push to solve the source of the problem. for example, there is not a huge push for improvement in the operation and oversight of the futures market. we're not hearing calls for more transparency, as mr slocum does in the radio nz interview and as may result from the investigation by the commodity futures trading commission.

no, the average person on the streets is taking it out on their governments and complaining about fuel taxes. here in nz, we have calls for gst to be taken off petrol; or a reduction of other taxes that cover the acc costs of road accidents or the costs of roading infrastructure. similar calls are being made in australia and uk.

reducing taxes will not solve the source of this problem. if we do take off the petrol taxes, that money will have to come from elsewhere. if it's not recovered from some other form of tax, then it will have to be covered from a loss of services. ie people would have to pay their own health costs in the case of a car accident, or we'll have to pay tolls to travel on new roads.

as a side issue, some people seem to be comfortable with toll roads but i have a real problem with them. my experience is from malaysia, which has an extensive system of toll roads. the result is a country where the poor people get to use the crappy, congested public roads, and the rich people get to use the lovely, many-laned and less congested toll roads. at peak times, there probably isn't too much difference between the two, but at other times i'm sure there is. it bothers me that poorer people should have a poorer class of road. given that they'd be more likely to be driving in vehicles without air-conditioning, it means they will be more exposed to pollution and more likely to get health problems, because they are more likely to face congestion. it's not the kind of thing i'd want to see in this country, simply because it isn't fair and it isn't right.

but back to the main issue. let's be clear that the government isn't making a killing on petrol taxes just because the price is rising. this is because consumption drops as the price rises, so that the actual amount collected doesn't increase so much. the greater issue though, is that a drop in petrol taxes will not solve the speculation problem.

if it was upto me, i'd just abolish the futures market. just dismantle it and disallow any kind of speculation of this nature. there must be a better way to get produce from seller to buyer, without having vultures take a huge cut in the middle for no reason at all. some of that money we pay should be going to the producers, the rest should stay with us in the form of cheaper prices at the supermarket and the pump.

given however that i don't yet rule the world, i'd definitely go for the increased transparency option. and activism against corprates who behave in this manner. are we happy to be earning money in this way? many of us are doing so, because we have investments with amp, tower, etc or because we've joined kiwisaver and those managing our savings are making money in this way. we can demand a ban on speculating in oil and food. are we prepared to take the drop in investment income?


you'll notice some new blogs on my blogroll lately. i've added the sometimes irreverent but always entertaining dr sapna; my friend dave moskovitz has joined up with a couple of others to blog about the 3 abrahamic faiths; jafapete writes some really good stuff - which i found out when i read his comments on the changes to laws around contractors (much better than my rather lame attempt!). there are a couple of others, hope you'll take the time to have a look at them.

3 comments:

Anonymous said...

Unfortunately I have not been able to listen to the interview with tyscon slocum on Radio NZ since the sound on my computer has problems and presently is mute and although after much effort on my part I have had no success in restoring its vocal chords. Although I have been deaf to that interview, the unquestionable thrust of your article in placing the rapid rise in oil prices on market speculation is at variance with the explanation in the Economist (http://www.economist.com/finance/displaystory.cfm?story_id=11413334) where they indicate that Shokri Ghanem, Libya’s oil minister, has claimed that oil may soon hit $200 a barrel and along with others is blaming speculators, who are investing ever more enthusiastically in oil futures. While the Libyan minister propagates this view few bankers agree that speculation has much to do with these price rises for a number of very sound reasons outlined in the Economist’s article.

In addition to the Economist’s presentation, the Wall Street Journal http://online.wsj.com/article/SB121139527250011387.html outlines that world's premier energy monitor, the Paris-based International Energy Agency (IEA) and counterweight in the market to the views of the Organization of Petroleum Exporting Countries (OPEC), is in the middle of its first attempt to comprehensively assess the condition of the world's top 400 oil fields. Its findings won't be released until November, but the bottom line is already clear: Future crude supplies could be far tighter than previously thought and not for the reasons put about by alarmists who claim that “peak oil” has now been reached.
In this IEA assessment it has been anticipated that the cooperation by Venezuela, Iran and China, and others like Saudi Arabia typically treat the detailed production data of individual fields as closely guarded state secrets, so it's not clear how specific their contributions will be. Plainly, many OPEC countries do not have helpful interests in mind. To understand this, one need look no further than Iranian president Mahmoud Ahmadinejad or Venezuela’s Hugo Chávez, who famously boasted in his opening address at an OPEC conference in 2006 that “the American empire will be destroyed”

These articles referenced from over at “Inquiring Mind” are well worth reading and may go someway to giving you food for thought.

stargazer said...

if that's the case, it's very strange that the commodity futures trading commission would be carrying out an investigation in relation to this issue. also, "bankers" would be some of the people involved in speculating, so i wouldn't be too taken by what they say. they aren't a disinterested third party.

since you can't hear the interview, i'll give you a link to the pdf file containing mr slocum's submission to a US house of representatives subcommittee: http://www.citizen.org/documents/House08.pdf

i'll quote from page 11:
Contrary to some public opinion, oil prices are not set by the Organization of Petroleum
Exporting Countries (OPEC); rather, they are determined by the actions of energy traders in markets. Historically, most crude oil has been purchased through either fixed-term contracts or on the “spot” market. There have been long-standing futures markets for
crude oil, led by the New York Mercantile Exchange (NYMEX) and London’s International Petroleum Exchange (which was acquired in 2001 by an Atlanta-based unregulated electronic exchange, ICE). NYMEX is a floor exchange regulated by the U.S Commodity Futures Trading Commission (CFTC). The futures market has historically
served to hedge risks against price volatility and for price discovery. Only a tiny fraction
of futures trades result in the physical delivery of crude oil.

The CFTC enforces the Commodity Exchange Act, which gives the Commission authority to investigate and prosecute market manipulation.33 But after a series of deregulation moves by the CFTC and Congress, the futures markets have been increasingly driven by the unregulated over-the-counter (OTC) market over the last few
years. These electronic OTC markets have been serving more as pure speculative markets, rather than traditional volatility hedging or price discovery. And, importantly, this new speculative activity is occurring outside the regulatory jurisdiction of the CFTC.

keep reading from that point onwards. you'll find that "the american empire" is pretty good at destroying itself, without any outside help, by doing things like this:

Congress followed Wendy Gramm’s lead in deregulating energy trading contracts and moved to deregulate energy trading exchanges by exempting electronic exchanges, like those quickly set up by Enron, from regulatory oversight (as opposed to a traditional trading floor like NYMEX that remained regulated). Congress took this action during last-minute legislative maneuvering on behalf of Enron by former Texas GOP Senator Phil Gramm in the lame-duck Congress two days after the Supreme Court ruled in Bush v Gore, buried in 712 pages of unrelated legislation. As Public Citizen pointed out back in 2001, this law deregulated OTC derivatives energy trading by “exempting” them from the Commodity Exchange Act, removing anti-fraud and anti-manipulation regulation over these derivatives markets and exempting “electronic” exchanges from CFTC regulatory oversight.

This deregulation law was passed against the explicit recommendations of a multi-agency
review of derivatives markets. The November 1999 release of a report by the President’s Working Group on Financial Markets—a multi-agency policy group with permanent
standing composed at the time of Lawrence Summers, Secretary of the Treasury; Alan Greenspan, Chairman of the Federal Reserve; Arthur Levitt, Chairman of the Securities and Exchange Commission; and William Rainer, Chairman of the CFTC—concluded that energy trading must not be deregulated. The Group reasoned that “due to the characteristics of markets for nonfinancial commodities with finite supplies … the Working Group is unanimously recommending that the [regulatory] exclusion not be extended to agreements involving such commodities.”

stargazer said...

oh, and i suggest you read some of the comments on the economist article you linked to. like this one:

In a question put to him (by me) on the London Times homepage, Shell's CEO makes quite clear that the impact that psychological factors are playing in the present oil spikes. He says:

"There are a great many psychological factors in the current price. The reality is that there are no hold-ups in the supply chain: refineries do not have to wait for tankers, trucks are not held up at the refinery and consumers do not have to wait at the filling station. The physical logistics are working well."

This ties in with OPEC statements that they are fulfilling all orders lodged with them. The price spike then is coming from elsewhere and the only place it can come from is the trading floor. The question then is, is the rise coming out of genuine concern for the future, or is it being driven by an appetite for price increases to increase profits. Considering that the same people driving up the price are by and large also earning good money on that same price increase it is hard to believe that all traders genuinely believe what they are claiming to fervently believe.
(http://www.economist.com/members/persona.cfm?econUId=2976052)