Oil Prices Are All Speculation
"The problem you had in California was caused by a combination of things: an unwise regulatory scheme, because they didn't really deregulate. Now they're trapped from unwise regulatory schemes, plus not having addressed the supply side of issues. They've [Californians] obviously created major problems for themselves." —Vice-President Dick Cheney, May 17, 2001, on PBS's Frontline
"Market fundamentals show us that production has not kept pace with growing demand for oil, resulting in increasing prices and increasingly volatile prices. There is no evidence that we can find that speculators are driving futures prices for oil." —Secretary of Energy Sam Bodman, June 21, 2008, on MSNBC
Today, while energy prices are crushing American families, I think we'd all benefit by reflecting on what happened with energy in 2001. Seven years ago, Enron was fleecing California, extorting its people for electricity to the tune of billions of dollars. As is true today, some voices in the Administration claimed that supply shortages, not manipulation, formed the core of California's soaring electricity prices. Yet, now that we know the whole story of Enron's criminal manipulations, many menbers of the media have forgotten how in 2001 the White House deflected any blame for California's suddenly stratospheric electrical costs away from their Houston friends.
Likewise, our Energy Secretary has a real problem discussing issues with facts. Like a broken record, he continues to maintain that in no way has speculation had anything to do with today's high oil prices. No, to hear Sam Bodman tell it, they are now and always have been caused by too many buyers chasing too few barrels of oil. But, while that might have been true in 2004, things have changed. And so I give you just one week of news from the oil market. To be more exact, it's the oil news from the seven days preceding our Energy Secretary's comments about supply and demand.
It Was Printed in English
"[U.S.] demand for oil over the first five months of the year was off 2.5%* from last year." —American Petroleum Institute, June 18, 2008, Associated Press Online (*Translation: We are using approximately 525,000 fewer barrels of oil per day.)
"Iran has 15 [oil] supertankers idling in the Persian Gulf capable of storing more than 30 million barrels of crude." —Bloomberg, June 16, 2008
"Thunder Horse started pumping from a single well on Saturday…and on schedule to have the field online by yearend. Thunder Horse alone will increase overall U.S. oil and gas production by 3.6%. Add British Petroleum's Atlantis platform that started up last year, and the boost grows to 6.4%." —Houston Chronicle, June 16, 2008
"Asian refiners cut West African crude oil imports in June. Asian imports will fall 36%* to 830,000 barrels a day this month from May's 1.3 million barrels per day." —Bloomberg, June 17, 2008 (*Translation: Another 470,000 barrels a day of mostly light sweet crude rejected by the market.)
Saudi Arabia's Role
"Refiners across Asia said on Monday they were not likely to buy more Saudi crude at current prices, highlighting the kingdom's challenge in attempting to contain soaring markets by promising extra barrels. The world's top exporter is set to increase output to 9.7 million barrels per day in July. The extra 200,000 bpd, if confirmed, would come on top of the 300,000 bpd it promised to pump this month." —Livemint (part of the Wall Street Journal Digital Network), June 16, 2008 (That's another 500,000 barrels of oil apparently not purchased.)
"Daily shipments of North Sea Brent crude…will rise 8.6% in July. Tankers are set to load 175,097 barrels a day of Brent crude next month, up from 161,300 barrels a day scheduled for June." —Bloomberg June 9, 2008
"'[U.S.] Drivers Cut Back by 30 Billion Miles:' Americans drove 22 billion fewer miles from November through April than during the same period in 2006-07, the biggest such drop since the Iranian revolution led to gasoline supply shortages in 1979-1980." —USA Today, June 22, 2008
"South Korea's May Oil Consumption Falls on High Price" —Bloomberg, June 20, 2008
"Faced with increasingly severe fuel shortages and the prospect of power failures during the summer air conditioning season, the Chinese government unexpectedly announced a sharp increase* late Thursday night in regulated prices for gasoline, diesel, and electricity." —The New York Times, June 20, 2008 (*Translation: Gasoline and diesel prices in China increased by 18% immediately to cool demand.)
Excess Oil on the Market
Now, just for fun, let's add up all of the excess oil on the market, resulting either from cutbacks in demand, as in the U.S., Asia, or Korea, or from surplus production from oil producers such as Saudi Arabia and in the Gulf of Mexico. Just in the articles I cited, it comes to 1,989,000 barrels of oil a day. That does not include the upcoming Saudi Khursaniyah field that will open in August with another 500,000 barrels per day in production. Some shortage, huh?
And that's just one week of articles. And, to be fair to the oil market and the spirit of this column, the world did lose some production out of Mexico, more out of Nigeria; Russian production is down slightly; and the Thunder Horse platform in the Gulf of Mexico, three years late thanks to hurricanes, is not fully operational as of this writing. But, then again, the surplus 1,989,000 barrels of oil per day we counted did not include what's potentially in those 15 oil supertankers leased by Iran and parked in the Persian Gulf. Now is also a good time to note that on June 20, Saudi Arabia announced that its Khurais oil field would be online by this time next year, and that would contribute another 1.2 million barrels of oil per day to the world market.
"Oil Market Hype" as News
Over the past two months in this column, we've discussed how speculation is distorting the oil market (and that of any commodity with an inelastic price, such as foods). I discussed how the "dark, unregulated" futures look-alike markets allowed overbidding of oil contracts with little if any oversight from regulators. Within a few weeks the Commodities Futures Trading Commission (CFTC) said it would move to bring those "dark, unregulated" markets under its oversight in an attempt to bring order to speculation and bring prices within the guidelines of legitimate supply and demand. And by the way: "Dark and unregulated" was how both the Senate and the House referred to ICE Futures OTC. Those adjectives weren't mine.
(ICE Futures OTC refer to the trades made by Intercontinental Exchange and its subsidiaries in futures and over-the-counter (OTC) commodities, and derivative financial products in the U.S. and around the world.)
Once the cat was out of the bag, internationally the media started discussing speculation as the real reason behind today's high oil prices; major articles ran in the Houston Chronicle and Der Spiegel in Germany. On hearing about the CFTC's intent to rein in speculators in these unregulated markets, a vice-president with a Dallas energy firm wrote me to ask: "Do you feel like the two guys at The Washington Post on the day Nixon resigned?"
The most surprising e-mail came from Chris Cook, a former director of the London Petroleum Exchange—now ICE Futures Europe. Cook wrote: "I am convinced there has been manipulation of the Brent Complex [the term that defines North Sea Brent crude prices] by ICE members for the last 10 years at least. I think it is quite likely that the Brent forward price is being kept artificially high—which does require deep pockets and accounts for the continuing barrage of Goldman [Sachs] forecasts and much of the other oil market hype that passes for news."
Think about what Mr. Cook said: "Oil market hype that passes for news." That sums up what you hear and read daily about oil.
Can't Touch This!
Since the publication of those columns, however, four senators have introduced legislation to "close the London Loophole Act," which in fact validates the reporting. Also worth noting is that, according to the London Financial Times, ICE Futures Europe "bowed last week to pressure to introduce position limits for speculative traders." Jeffrey Sprecher, CEO of Intercontinental Exchange (ICE), was quoted in that article as saying: "At some point, some of the extreme proposals in the Congress would drive the business out of the U.S. There's no question in my mind that the capital flows and trading behavior will move quickly offshore."
Let me translate that, too: If we move to bring sanity to the commodity markets, then those markets will simply go do business where our federal regulators can't touch them.
And so, while our Energy Secretary continues to blame America's oil crisis solely on supply and demand instead of speculators, much as Dick Cheney blamed California instead of Enron in 2001, it takes little research to verify that no one yet has been denied an oil contract—and in fact, refiners around the world are today turning down oil they're being offered.
One last thought on speculation in the oil market. In 2006, 100% of those who purchased oil contracts lost money because of the market's contango (meaning spot oil prices were less than the contracted price on the date of delivery). In the fall of that year, when banks started demanding that margins be paid on those losing contracts, oil collapsed back to nearly $50 a barrel. In only 18 months, we've forgotten that lesson, too.