Best of the Week
Most Popular
1.Dow Stock Market Trend Forecast 2015 by Nadeem Walayat - Nadeem_Walayat
2.Gold And Silver – Forget The News. Silver $12 – 14? Gold $1,000 – 1,100? 5 - Michael_Noonan
3.A TOP Formation In Apple Inc. - Crash Condition Signal Recorded - David Harris
4.Gold Gets Safe Haven Bids But COMEX Has Stopping Power - GoldSilverWorlds
5.The Swiss 10-Year Bond Illustrates Central Banks` Flawed Monetary Policy - EconMatters
6.Exponential Explosions in Debt, the S&P, Crude Oil, Silver and Consumer Prices - DeviantInvestor
7.“Forgive Us Our Debts” – Only Way To Prevent Economic Meltdown - GoldCore
8.Is Russia Planning a Gold-Based Currency? - Marcia Christoff-Kurapovna
9.Stock Market Trend Forecast 2015 Video - Nadeem_Walayat
10.Gold GDX ETF Technical Analysis - Austin_Galt
Last 5 days
Stocks Bull Market Continues - 28th Feb 15
U.S. Debt Breaking Bad - 28th Feb 15
NATO Frankenstein - When Centralization Scales Beyond Our Control - 28th Feb 15
Gold And Silver Insanity Prevails; Precious Metals Without Direction - 28th Feb 15
Fed Raising U.S. Interest Rates - Shovelin’ Schmitt Against the Tide - 28th Feb 15
Don't Let This Stock Market Myth Cost You Your Gains - 28th Feb 15
Recession is On The Way; Beat The Stock Market Crowd, Panic Now! - 28th Feb 15
Stock Market Indexes Creeping Towards the Edge - 28th Feb 15
GGD Going for Mexican Gold - 27th Feb 15
Foreign Real Estate Is the New Swiss Bank Account - 27th Feb 15
10 Reasons Washington Has War Fever - 27th Feb 15
Gold and the Euro Tragedy, Iraq 3.0, Ukraine Conflict Three Ring Circus - 27th Feb 15
Deepak Chopra - New Age Genius or Bullshit Expert? - Video - 27th Feb 15 - Videos
New Greece Drachma Revealed Amid Bank Runs - Greeks Buy Gold Sovereigns - 27th Feb 15
Will Month Long Stocks Rally Continue? - 27th Feb 15
The Only Public Hedge Fund You Should Own - 27th Feb 15
UK House Prices Trend 2015 and the May General Election - 27th Feb 15
Why America is Ungovernable - The Republicans’ Civil War - 27th Feb 15
Gold vs Gold Stocks: Bullish Anomaly Developing? - 27th Feb 15
I Heart Capitalism, Nasdaq Stocks, Then And Now - 27th Feb 15
The Fed’s History of Assassination - 27th Feb 15 i
Gold Bull Market Forecast - Money Will Rotate Into These Dead Investments - 27th Feb 15
"Audit the Fed"? We've Already Done That (Well, Kind of) - 26th Feb 15
Forget Peak Oil; Worry About Peak Demand - 26th Feb 15
Currency Wars, Again - 26th Feb 15
The Fed Waited Too Long: Here Comes Inflation - 26th Feb 15
Investing Inertia Won’t Keep Your Cash Safe - 26th Feb 15
The Net Neutrality Scam - 26th Feb 15
Will Conservatives Out of Control Immigration Crisis Boost UKIP Election 2015 Prospects? - 26th Feb 15
EU Warns Ireland and Euro Zone of Debt Dangers - 26th Feb 15
Commodity Prices Set To Plunge Below 2008 Lows - 26th Feb 15
Ukraine Hyperinflation as Currency Plunges 44% in One Week! - 26th Feb 15
The State of the Global Markets 2015 - 53 Page Report - 26th Feb 15
NASDAQ New 15 Year High - Stock Market Death By Overdose - 25th Feb 15
12 Reasons Why Barry Ritholtz and Many UK Experts Are Mistaken On Gold - 25th Feb 15
Sugar Commodity Price To Sweeten Up - 25th Feb 15
Investor Profits from China 2,000-Year Unstoppable Trends - 25th Feb 15
How to Borrow Cheaply from a Government-Owned Bank - 25th Feb 15
Debt Be Not Proud - 25th Feb 15
Liberal Democrat Election Blood Bath - Could Nick Clegg Lose Sheffield Hallam? - 25th Feb 15
Wheat Commodity Price Technical Trend Forecast - 24th Feb 15
Bitcoin Price Might Stay below $250 - 24th Feb 15
Another Important Stock Market Inflection Point Approaching - 24th Feb 15
Gold: The Good, Bad, and Truly Ugly - 24th Feb 15
Eurozone Gold Holdings Increase to 10,792 Tonnes As “Reserve of Safety” Amidst Crisis - 24th Feb 15
Bird Doo; Yellen Goes to Congress - 24th Feb 15
Is Gold Investing Risk Free? - 24th Feb 15
The Bull Case For Gold Price 2015, and the Bear - 24th Feb 15
Europe - The Intersection of Three Crises - 24th Feb 15
Gold Price Just Needs More Time - 24th Feb 15
Gold Price Downtrend Looks Set to Continue - 23rd Feb
Silver Price Depressing Downtrend Will Eventually End - 23rd Feb 15
5 Reasons Why You Should Sell Amazon Stock - 23rd Feb 15
Global System Catastrophe Is Key Threat To Human Civilisation - 23rd Feb 15
Greece Crisis Yields Ideal Market Opportunities - 23rd Feb 15
Gold and Silver Stocks or General Stock Market Indices? - 23rd Feb 15
Swimming With Sharks: Goldman Sachs, Schools and Capital Appreciation Bonds - 23rd Feb 15
Stock Market - The Fed Still Has Your Back - 23rd Feb 15
Soybean Commodity Price Technical Outlook - 23rd Feb 15
Gold Weekly COTs and More - 23rd Feb 15
Stock Market New Highs With Weak Breadth - 23rd Feb 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The State of the Global Markets 2015

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

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

By: Money_Morning

Politics

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 :http://moneymorning.com/2012/04/20/oil-price-manipulation-what-president-obama-doesnt-understand-about-oil/

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: customerservice@moneymorning.com

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 http://www.MarketOracle.co.uk - 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

Free Report - Financial Markets 2014