Speculation is Knocking the Supply-Demand Fundamentals Out of Whack
Speculators and unregulated energy traders have pushed prices beyond the supply-demand fundamentals and into an era of a speculative bubble in oil markets. While some speculation plays a legitimate function for hedging and providing liquidity to the market, the exponential rise of market participants who have no physical delivery commitments has skyrocketed, from 37 percent of the open interest on the NYMEX West Texas Intermediate (WTI) contract in January 2000 to 71 percent in April 2008. 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.
Of course, supply and demand has played a role in the recent rise in oil prices. Although gasoline demand in America is down more than 1% from a year ago (with Americans driving 37 billion less miles from May '07 to May '08), global demand—particularly in emerging economies like China, India and oil exporting nations in the Middle East—has skyrocketed at a time when the mature, productive and easily-accessible oil fields are in decline. Simply put, oil is a finite resource with which the world has embarked on unprecedented increased demand. But no doubt speculators are making a bad situation far worse, and Americans need help adjusting to high prices.
Rather than demonize speculation generally, the goal is to address problems associated with recent Congressional and regulatory actions that deregulated energy trading markets that opened the door to these harmful levels of speculation. Enron paved the way, as the company nearly single-handedly lobbied successfully to deregulate energy trading in 2000. Removing regulations has opened the door too wide for speculators and powerful financial interests to engage in anti-competitive or harmful speculative behavior that results in prices being higher than they would otherwise be. At least $30 of the current $145 of a barrel of oil—or about 70 cents of a gallon of gasoline—is pure speculation, unrelated to supply and demand.
Indeed, the U.S. Commodity Futures Trading Commission on July 24 filed charges against crude oil speculators, accusing them of manipulating the price of crude oil on the fully-regulated NYMEX exchange. If energy traders are manipulating oil prices on the regulated exchanges, we must assume that they are engaging in far more brazen anti-competitive activities on the unregulated Over-The-Counter (OTC) exchanges.
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that the oil barons say they base the price off of demand. Well, then why do prices go up during the colder months and then they also go up during the warmer months? There seems to be something terribly wrong with this picture, care to explain?
Speculation is at least responsible for 50% of the price of oil during the rise. You can tell by how quick the price has dropped and by how much when the speculators bailed at the peak.
I'd bet oil will hit $40bbl before it starts to recover.
What's needed is a 1/4% tax on each trade of all stocks, commodites, securities so it doesn't pay to speculate on the short term would go a long way to stabilize the oil, other markets against this kind of country destroying gambling by speculators.
jerryd
Do you have any evidence for these numbers whatsoever, or are you just making up estimates?
You say "at least 50% of the price of oil during the rise" -- why did you pick that number? Why do you predict $40/barrel oil? Why is a 0.25% tax enough to counteract the effects you assume exist, and by what mechanism do you suppose it would have the effect you want?
It's a SWAG but based in facts.
The main one is about$60/bbl all kinds of alt energy becomes viable.
For instance ethanol, gas/biomass/coal to liquids, oil shale, solar, wind, NG,ect and electric cars. Had the huge subsidies not been in oil we would have diversified from oil yrs ago when we hit peak US oil in 73. Shortly we'll have those costs in oil and oil will be more stable in price.
But it's the steep rate of rise, fall that pegs it to speculators. What happened was the housing bubble was ending and all that money had to find something else to invest in so turned to commodities like oil which were in tight supplies because of the other bubbles also growing.
And that went on until $4/gal gas, the credit bubble, others burst, sending the speculators for the exit on oil, other commodities, dropping it way down. It will hit $50/bbl and maybe down to $40bbl.
But we are at peak oil now so as the economy improves unless we really change our energy policy, use, the price of oil will get bid up by speculators again in about 18 months or so to probably a $200/bbl in 2-3 yrs.
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On the 1/4% on all securities trades will eliminate all those gamblers who bet on small changes instead of betting for the long haul which is much better for the country, making these corrections much lighter. It will also pay their social cost and the cost of regulating them. As you can see the costs can be quite high.
Luckily I don't have to worry because I use little oil as I drive an electric sportwagon that gets 250mpg fuel cost equivalent. I had to build my own because the 'free market' wouldn't. My total costs are about $.10/mile so actually make money on the mileage deduction ;^D. Many thousands of other EV's drive daily by others who converted cars, pickups, MC's, restored the few older EV's or built them from scratch. Google EV clubs, EV racing for details, links.
There are plenty of alt to oil if we just try. Our national, economic security demands it or we'll be broke slaves of OPEC, Russia and in constant wars over oil as we are now. It's basic econo 101.
jerryd