Best of the Week
Most Popular
1.War on Cash, Bank of England Planning Hyper QE, Scrapping Cash for Digital Currency - Nadeem_Walayat
2.Stock Market End Run Smash Crash Looks Imminent... - Clive_Maund
3.Europe Refugee Crisis, UK to Repatriate 120,000 Hungarian Economic Migrants Back to Hungary - Nadeem_Walayat
4.The Great Deflation Will Destroy All Bubbles – These Too - Harry_Dent
5.Deflation Signals Abound for U.S. Dollar, Forex Markets and Commodities - Rambus_Chartology
6.U.S. Housing Market Two Outs in The Bottom of The Ninth - James_Quinn
7.Poland, Czech, Slovakia and Hungary Refugee Hypocrisy After Flooding UK with 4 Million Economic Migrants - Nadeem_Walayat
8.The Two Real Reasons Crude Oil Prices Are Currently Slipping - Dr. Kent Moors
9.R.I.P. Interest Rates - Andrew Snyder
10.Steps from a Deep October Stock Market Selloff - Bob_Loukas
Last 5 days
Putin’s Blitz Leaves Washington Rankled and Confused - 4th Oct 15
More Selling for Stock Market, Gold? - 4th Oct 15
Gold And Silver – A Reality Check - 3rd Oct 15
Stock Market Primary IV Still, or Primary V Underway? - 3rd Oct 15
The Oil Industry’s Day of Reckoning - 3rd Oct 15
U.S. Interest Rate Hikes Keep On Slippin' Into the Future; Treasury Yields Sink Again - 3rd Oct 15
China's Stock Market Crashing; Time for Panic or Restraint - 3rd Oct 15
SPX Stocks Bulls Struggle to Regain the Upper hand... - 2nd Oct 15
The Two Faces of Stock Market Volatility - 2nd Oct 15
Money Supply and the Fed’s Serious Inflation Risks - 2nd Oct 15
Stock Market How Bad Can This Get, And How Fast? - 2nd Oct 15
A Worrying Set Of Recession Signals - 2nd Oct 15
Negative Jobs Report Sents SPX, TNX Lower - 2nd Oct 15
Don't be Fooled by the Recent Equity market Rallies. Its a Bear Market, Stupid! - 2nd Oct 15
US Bond Market - How to Fix This - 2nd Oct 15
Survival Secrets from Colorado Resource Investing Front Lines - 2nd Oct 15
What Two Risks From Rising Interest-Rates Could Each Trigger A New Global Crisis? - 1st Oct 15
Stock Market S&P 500 Volatility-Based Price Probability Range - 1st Oct 15
Dow Stock Market About To Crash Like October 1929? Get Your Physical Silver - 1st Oct 15
Stock Market Negative Expectations Once Again - Will It Break Down? - 1st Oct 15
Advice for Biotech Investors: 'Hold Your Powder' 'til Winter - 1st Oct 15
Best Short-Term Commodity Market Opportunities - Video - 1st Oct 15
The Coming Corporate "Crime Wave" - 30th Sept 15
Stock Market Retracement May Have Run Its Course - 30th Sept 15
A Stocks Bear Market Is Now More Likely Than Not - 30th Sept 15
The Killer Ape, Human Evolution, Artificial Intelligence and Extinction End Game - 30th Sept 15
Junk Bond Market Imminent Collapse Threatens (Unwelcome) BIG Rate Rises - 30th Sept 15
Stocks: Why Following the Crowd is Usually a Big Mistake - 29th Sept 15
This Stocks Bear is Just Waking from Hibernation - 29th Sept 15
Interest Rates All Bad at 0%? - 29th Sept 15
If Stocks Can't Hold These Levels, We'll Have a Bear Market - 29th Sept 15
7 Bullish Gold Price Indicators - 29th Sept 15
Crude Oil Price Is Going to Fall by 50%… Again - 29th Sept 15
SPX Triggers a Amall Head & Shoulders Formation - 28th Sept 15
Stock Market Bubble Balloons in Search of Needles - 28th Sept 15
Gold and Silver, Precious Metals Complex Getting Interesting - 28th Sept 15
Economic Channels of Distress - Fourth Turning Crisis of Trust - 28th Sept 15
Stock Market Testing Important Levels - 28th Sept 15
Stock Market Going Down, Gold Chop Continues - 27th Sept 15
Stock Market Primary Wave IV Inflection Point - 27th Sept 15

Free Instant Analysis

Free Instant Technical Analysis

Market Oracle FREE Newsletter

What President Obama Doesn't Understand About Crude Oil Price Manipulation

Politics / Crude Oil Apr 20, 2012 - 06:54 AM GMT

By: Money_Morning


Best Financial Markets Analysis ArticleKeith Fitz-Gerald writes: If you think gasoline prices are volatile now, stay tuned. President Obama's plan to clamp down on oil speculators is going to make things worse.

I'm sure you've seen the news by now.

The president wants to clamp down on so-called "oil price manipulation" and has proposed a $52 billion plan to increase federal supervision of oil markets.

What the president doesn't understand is that the oil markets already have this function built in.

Speaking from the Rose Garden last Tuesday, President Obama noted specifically that we can't afford to have "speculators artificially manipulating markets buy buying up oil, creating the perception of a shortage and driving prices higher - only to flip the oil for a quick profit."

Evidently, the president hasn't passed Econ 101.

If he had he would know that prices on everything from eggs to houses are by their very definition self regulating.

Speculation, as opposed to manipulation, is a vital part of the markets - they are not the same thing despite the fact that the president is interchanging the terms.

If prices are too high, people stop buying. If prices are too low, they stop selling. By authorizing $52 billion in oversight, he's chasing a ghost that he'll never catch.

The Real Problem with Oil Prices
The real problem is that the United States consumes 20% of the world's crude but only produces 2%.

It comes a time when oil demand is expected to rise more than 25% (to 105 million barrels a day) by 2015, according to a new report titled Oil and Gas: A Global Outlook by Global Industry Analysts, Inc.

If you want the biggest piece of the pie from the deli, you have to pay a premium.

There is no hocus pocus and there's no additional oversight necessary. Rather, we need to enforce the laws we already have on the books.

Sure the $10 million fines he's jawboning about (up from $1 million) sound great but they're really a non-starter. In fact, given that Exxon Mobil Corporation (NYSE: XOM) alone generated an average of $1.33 billion a day in 2011, they're little more than an acceptable cost of doing business. Nice try.

Take gasoline, for example.

Prices have jumped 78.2% since the p resident took office and that doesn't sit well with the party faithful who are convinced that evil oil price speculators are responsible.

They are distraught that traders put hundreds of billions of dollars into energy every month because that may cause prices to rise.

This is not complicated. Any time there are more buyers than sellers, prices go up. Any time there is more demand than supply, prices go up.

Contrast what's going on in the oil markets with what's happening in natural gas.

Prices for natural gas are at ten- year lows. Demand has risen but supply has risen faster. There are more suppliers than buyers. So natural gas prices drop.

Natural gas, by the way, is traded by many of the same traders who trade oil.

Oil Price Manipulation, Gas Prices and the Free Market
Gasoline prices at the pump have never been proven to be a direct consequence of oil price manipulation. But it's widely conjectured.

Believe me, I hate paying more just as much as the next person, but get over it.

Geopolitical tensions, supply constrictions, war, tyrants with spigots and other buyers are the real factors at work and they always have been. When risks go up, so do prices - that's the way free markets work.

Apple didn't produce nearly 115 million iPhones and iPads in 2011 for kicks. They did it because there's huge demand for their products and they can make big bucks.

Things are just more critical now because we've failed to develop a comprehensive energy policy over the past 50 years at a time when global demand is increasing rapidly in absolute terms.

The president wants votes in an election year; this is pure political pandering.

For example, China's per capital oil consumption has increased by 350% since the early 1980s.

The International Energy Agency estimates that China alone will account for 42% of global oil demand by 2015. And they're one of the slow growers with consumption rising a mere 100% in the last ten years.

Other countries like Malaysia have seen per capita usage quadruple since the 1960s. Brazil and Thailand have seen oil demand double to 5.7 barrels/year and 4.8 barrels/year per capita.

And don't forget the weak dollar. Because oil is generally priced in dollars, Bernanke's weak zero interest rate policies are helping drive prices higher. Producers have to compensate with higher prices to make up the reduction in margin being forced upon them by greenbacks that have diminished purchasing power.

Speaking of which, the Beltway Boys, in their infinite wisdom have got it in their heads that margined trading - meaning you can borrow money to control more of the underlying asset - gives too much power to financial investors aka the speculators.

What they don't realize is that:

•Even if you tighten up margin requirements, traders will shift to derivatives like options, swaps and other so-called exotics.
•Higher margin requirements lead to less liquidity which, in turn, actually exacerbates the speculative volatility they're trying to control.
Think about it.

Futures markets like those which drive oil and gas prices are a function of two groups of market participants - hedgers and speculators. Those, incidentally are the CFTC's terms so don't confuse them with the politically charged versions the p resident is using.

Hedgers are farmers, importers, exporters and manufacturers who depend on consistent pricing to make, sell or otherwise produce something using oil. They participate in the markets in order to keep prices stable to protect against pricing risk. But they can only buy or sell so much. They are actually interested in delivery of the oil or gas they need.

For example, McDonald's wants to hedge against rising potato costs that could affect the profitability of its world famous f rench fries. The farmer who sells them potatoes normally wants to hedge against falling potato prices so as to maximize crop prices and his profit margin.

The position is much the same for Starbucks and coffee just as it used to be for dentists and the silver they used for fillings, for example.

Speculators, on the other hand, are those who profit from the price changes against which hedgers are trying to protect themselves. They are not interested in taking delivery.

Speculators serve a very important function in that they bridge the gap between higher and lower prices often buying and selling when hedgers can't or won't.

If speculators are taken out of the picture, prices become less liquid and more jumpy.

Instead of moving smoothly from $100 to $120 a barrel, for instance, oil prices might simply gap higher because hedgers will be forced to trade directly with each other or through intermediaries who have effectively got their financial hands tied.

This would back all the way through the gasoline refinery process to the pump.

And investors who are dumfounded by the price increases we've seen so far, may be absolutely gob fobbed when things jump $1 or more at a time. Then there really would be a link.

Shutting down speculators would be like banning ice cream delivery trucks in July.

The President is Chasing a Ghost He Can't Catch
To think that oil companies will not shift to other pricing mechanisms is naïve. If U.S. markets are restricted, traders will simply shift to London or Shanghai and conduct business as usual using new contracts structured specifically to avoid additional U.S. regulation.

They will also create trading entities that act as a proxy for the "speculators" the White House has targeted in this latest gambit.

This is exactly what many did with credit d efault s waps after the United States clamped down on them.

Why do you think funds shunted to London are at the heart of the MF Global fiasco or Goldman's most aggressive traders are located there? Because money goes where it's treated best. There are more accommodative regulations in the land of crumpets.

We don't need more regulation. We need to enforce what we have. This is another misguided political con job drawn from the well of bad ideas.

The p resident says he wants cheap gas, yet he kills the Keystone Pipeline, stymies drilling and allows the Fed to engineer a bailout of that put trillions into the system over the past four years - every dollar of which makes gas more expensive.

He says he wants to rein in speculators while not drawing a line between what constitutes legitimate speculation (as a function of free markets) and already illegal manipulation.
If anything, the f ederal government is the biggest manipulator in the history of manipulators.

Quantitative easing has done more damage to gas prices and the wallets of millions of consumers than a few speculators ever could. Frankly, it's a miracle prices aren't $10 a gallon at the pump by now.

I say let the markets work. Prosecute the true oil price manipulators but otherwise quit meddling. Piling on more regulation will only detract from economic activity, not create it.

Oh...and by the way, investors need to stay long energy especially in growing economies using more fuel.

Higher oil prices mean higher oil profits and there is a link between rising fuel consumption and GDP growth.

Source :

Money Morning/The Money Map Report

©2011 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email:

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2015 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Biggest Debt Bomb in History