Oil Crisis And Offshore Drilling
Burton Golden [bgolden@ix.netcom.com]
Despite the pejorative texture of the word, a speculator in the oil futures market is simply a trader--a pension fund, say, or a sovereign wealth fund--who hasn't the intention or the capacity to physically receive oil. Their barrels are 'paper barrels.' Originally, futures were employed by heavy users of petroleum products, like refiners or airlines, to hedge their physical commodity exposure, and they are important for that reason. Some speculative capital is needed for adequate liquidity, but the recent huge influx has overweighted the physical hedgers. Speculators now account for about 70% of all benchmark crude trading on the New York Mercantile Exchange, up from 37% in 2000.
In effect, these investors are hedging dollars, whose weakness has been driven by the Fed's lengthy monetary expansion. With the drying-up of investment vehicles associated with the sub-prime market, vast sums were left hungry for new feeding grounds. Thus, for example, in an April report, Lehman Brothers said the price of oil had been pushed to inflated levels by a $40bn inflow into commodity index funds this year, much of it coming from Mid-East sovereign wealth funds. The result of all this is the chaotic market we see every day, with a distorted price-discovery mechanism, and prices uncoupled from physical supply.
There is now legislation afoot to rein-in some of this. Among the proposed remedies are increased margin requirements for non-physical hedgers (perhaps to the 50% already required for stocks), position limits for speculators, better disclosure of positions, and, perhaps, preventing pension funds and investment banks from owning commodities at all. A panel of oil analysis experts, testifying earlier this week before a sub-committee of the House Energy and Commerce Committee, felt such measures might quickly drop the oil price to $65 to $75 a barrel. Even doubters among the Republican congressmen seemed more inclined to question the feasibility of such measures than their desirability.
All of the panelists favored offshore drilling for the long term (one mentioned energy security), but were unanimous that, at present, big oil would be unwilling to develop such remote sites, since oil industry executives themselves consider the current oil price to be fundamentally unsustainable (plus of course current supplies are meeting current demand). This is consistent with a Bloomberg report on Monday that insiders at the big refiners, like Valero and Tesoro, are buying more of their own stock than at any time since 2000, in anticipation of a drop in the oil price. We'll see.
If that panel's testimony is still available at C-Span's website (6/23, Bart Stupak, D-MI, presiding; it's the first panel, comprising Fadel Gheit of Oppenheimer & Co., Roger Diwan of PFC Energy Consultants, Michael Masters of Masters Capital Management, and Dr. Edward Krapels of Energy Security Analysis), I heartily recommend it as a great three-hour window into the complexities of the oil market, and the limited applicability thereto of the homilies of lemonade-stand economics. My own view is we need to act immediately on speculation, because $4 gasoline and $5 diesel is killing our economy (and others), and perhaps these prices could be halved by Labor Day. Later, we can debate the value of developing U.S. domestic reserves to come onstream five to ten years from now. It would be a tragedy to hold Americans hostage by trying to conflate these two approaches into a single piece of legislation, since the latter is controversial while the former is not.
Via CCNet
Burton Golden [bgolden@ix.netcom.com]
Despite the pejorative texture of the word, a speculator in the oil futures market is simply a trader--a pension fund, say, or a sovereign wealth fund--who hasn't the intention or the capacity to physically receive oil. Their barrels are 'paper barrels.' Originally, futures were employed by heavy users of petroleum products, like refiners or airlines, to hedge their physical commodity exposure, and they are important for that reason. Some speculative capital is needed for adequate liquidity, but the recent huge influx has overweighted the physical hedgers. Speculators now account for about 70% of all benchmark crude trading on the New York Mercantile Exchange, up from 37% in 2000.
In effect, these investors are hedging dollars, whose weakness has been driven by the Fed's lengthy monetary expansion. With the drying-up of investment vehicles associated with the sub-prime market, vast sums were left hungry for new feeding grounds. Thus, for example, in an April report, Lehman Brothers said the price of oil had been pushed to inflated levels by a $40bn inflow into commodity index funds this year, much of it coming from Mid-East sovereign wealth funds. The result of all this is the chaotic market we see every day, with a distorted price-discovery mechanism, and prices uncoupled from physical supply.
There is now legislation afoot to rein-in some of this. Among the proposed remedies are increased margin requirements for non-physical hedgers (perhaps to the 50% already required for stocks), position limits for speculators, better disclosure of positions, and, perhaps, preventing pension funds and investment banks from owning commodities at all. A panel of oil analysis experts, testifying earlier this week before a sub-committee of the House Energy and Commerce Committee, felt such measures might quickly drop the oil price to $65 to $75 a barrel. Even doubters among the Republican congressmen seemed more inclined to question the feasibility of such measures than their desirability.
All of the panelists favored offshore drilling for the long term (one mentioned energy security), but were unanimous that, at present, big oil would be unwilling to develop such remote sites, since oil industry executives themselves consider the current oil price to be fundamentally unsustainable (plus of course current supplies are meeting current demand). This is consistent with a Bloomberg report on Monday that insiders at the big refiners, like Valero and Tesoro, are buying more of their own stock than at any time since 2000, in anticipation of a drop in the oil price. We'll see.
If that panel's testimony is still available at C-Span's website (6/23, Bart Stupak, D-MI, presiding; it's the first panel, comprising Fadel Gheit of Oppenheimer & Co., Roger Diwan of PFC Energy Consultants, Michael Masters of Masters Capital Management, and Dr. Edward Krapels of Energy Security Analysis), I heartily recommend it as a great three-hour window into the complexities of the oil market, and the limited applicability thereto of the homilies of lemonade-stand economics. My own view is we need to act immediately on speculation, because $4 gasoline and $5 diesel is killing our economy (and others), and perhaps these prices could be halved by Labor Day. Later, we can debate the value of developing U.S. domestic reserves to come onstream five to ten years from now. It would be a tragedy to hold Americans hostage by trying to conflate these two approaches into a single piece of legislation, since the latter is controversial while the former is not.
Via CCNet
This is congenial Matt Simmons not some bleeding doom ladend cassandra like Mat Savinar.
