Neff Zone Column -- June 14, 2008

Print Edition: June 14, 2008

The Oil Game – Part 2

Last week I offered the opinion that the current skyrocketing prices for oil and gasoline cannot be attributed to the supply and demand theory. I cited several sources that showed current (physical) supplies of oil are more than enough to meet the needs of the marketplace. Further, I quoted experts who indicated that there may, in fact, be so much oil some countries and companies are stockpiling millions of barrels because there are no buyers.

On a related front, I also took issue with the oil industry’s assertion that gasoline prices are high because of a lack of refinery capacity. Again, experts in the field affirmed that refinery capacity has been manipulated in order to affect the supply chain.

At the risk of belaboring those points, it might be appropriate to note that these situations are nothing new. Claims of oil and gasoline price manipulation have been ongoing since the first well was drilled, but in the last decade manipulation has become an art form.

In fact, if you’re a history buff, you might like to read "The Oil Industry, Gas Supply and Refinery Capacity: More Than Meets the Eye" by Senator Ron Wyden of Oregon http://wyden.senate.gov/issues/wyden_oil_report.pdf. This document was written in 2001 (when the first President Bush was in office) and it describes an oil industry blueprint that has resulted in what’s happening right now. Using direct quotations from oil industry memos and executives, the document depicts an industry that consciously planned to reduce the oil and gas supply, close 24 refineries over a 6 year period, and reap the benefit of higher prices at the pump. So when oil executives recently appeared before Congress and played their "woe is us we only control 7 percent of the world’s oil we need tax breaks our profits are not that obscene" card, it’s just so much hooey. They had a plan, they executed it, and now you’re seeing it first hand.

With all of this said, then, the bottom line is that there is no shortage of oil but prices are continuing to climb. Why is this happening? Well, there’s a certain amount of price gouging, as I’ve pointed out, but that’s not the entire story. In terms of the global oil market the run up in the price of crude can be summed up in one word – speculation. Some economists will scoff at this, but remember these are the same guys who think it’s great for Exxon to make world record profits at the same time you get 1% interest on your passbook savings account.

It’s really quite simple. Oil pricing is set by movements on the three major international petroleum exchanges. They are the New York Mercantile Exchange, the International Petroleum Exchange in London and the Singapore International Monetary Exchange. It’s a casino mentality on these exchanges and speculators are the main players. There only thought is how best to make the big score. If it ruins families, countries, or economies -- too bad, we’re sad, what’s for lunch.

Here’s the catch regarding oil prices, though. The speculating is not based on the actual physical barrels of oil available in the here and now; the speculating is one what those barrels might be worth at some point in the future. What the speculators are doing is trying to create enough panic to foster an artificial demand so the price per barrel will go up and they will reap the profits. It’s all on paper and it’s all coming out of your pocket.

According to the Financial Standard, "Shane Oliver, chief economist and chief investment strategist at AMP Capital Investors, told ABC Radio (Wednesday) morning that oil prices should be about US$80-90 per barrel based purely on the fundamentals of demand and supply. Oliver’s comments come as oil approaches a new record and after OPEC Secretary General Abdullah al-Badri told Reuters that oil speculation is so extreme daily trading volumes are now 15 times bigger than actual demand. ‘Supply and demand have nothing to do with oil prices,’ he said. The paper market for oil is now 1.36 billion barrels per day compared to the physical market which is only 87 million barrels per day, added al-Badri."

This opinion is similar to that of Michigan Senator Carl Levin who said: "The trading of contracts for the future delivery of oil and gas has increased six fold since 2001. Much of this increase can be attributed to speculators...creating an artificial 'paper demand' that does not reflect actual market conditions."

Who are these "speculators?" Says the Center for Research on Globalization: "In the most recent sustained run-up in energy prices, large financial institutions, hedge funds, pension funds, and other investors have been pouring billions of dollars into the energy commodities markets to try to take advantage of price changes…Most of this additional investment has not come from producers or consumers of these commodities, but from speculators seeking to take advantage of these price changes."

Many of these funds made a killing in the recent housing and mortgage fiasco and now their managers have moved into the energy sector. Isn’t that just dandy?

Next week we’ll take a look at one of these speculators, an international hedge fund. Scary stuff. Is our government asleep at the switch? Stay tuned.

Special note: I want to thank all the readers who sent me research and information relating to this topic. It’s apparent there are a lot of citizens out there who have given this a great deal of thought. Your help is really appreciated.

Jim Neff is a local columnist. Comments to neffzone@gmail.com. Read Neff Zone columns online at www.neffzone.com/cadillacnews.