quote:So, to briefly recap what we’ve learned thus far:
- buyers and sellers trade commodities on markets
- speculators help provide liquidity, by buying when sellers wish to sell but no one wishes to buy, and selling when buyers wish to buy but no one wishes to sell
- however, the biggest banks got exemptions from the government to purchase huge positions on commodities
- instead of selling these positions to buyers, these banks hang on to them, because their investors are all “long”, meaning they think the price is going to go up; at the end of every month, they just “roll over” their positions, and keep on holding the things they were supposed to have sold
- because none of the banks sell what they hold, the price goes up; because the price goes up, more people make money on their positions; because they make more money on their positions they buy more stuff and don’t sell what they hold; and on and on forever
Are we seeing evidence of this today?
Remember how Libya is being blamed for diminishing the world’s oil supply with its 1.5 million barrels per day of output?
Well, the investment bank JP Morgan owns over 270 million barrels of oil – equivalent to almost a third of the United States National Emergency Reserve – so much so, in fact, that they, and other banks, are now buying supertankers to store their excess reserves offshore because they’ve simply run out of space on land.
quote:The current spike in gas prices is not primarily a result of anything to do with the freedom fighters in the Arab world. Nor is it a result of OPEC’s production levels, which would suggest a far lower $/gallon than can be found on the open market.
Rather, the spikes are primarily a result of the speculative market on oil. This speculative market is driven by the practices of the biggest banks, who have special exemptions to treat commodities like a casino, who have zero incentive to appropriately hedge their bets, who do not provide the liquidity they were designed to provide, and who generally provide nothing of value to society except to push prices of things higher and higher so that very rich people will continue to invest with them.
Futures have an expiration, and will eventually be reconciled. As in the quotation above, they have had to take delivery and are holding. Sooner or later they will have to bite the bullet and sell off the physical oil. They hope this happens at the highest possible price, of course.
Let's just hope that when this bubble bursts that our government won't bail out JP Morgan when their oil winds up worth 30 cents on the dollar.
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However, I also doubt that it is going to sustain more than $110/barrel for any significant amount of time(too many alternate synthetic fuel types are more than viable at that price). Also, if they've taken delivery, they're spending money to continue keeping that oil in storage. That kind of storage capacity doesn't come particularly cheap, it will eventually be more cost effective to unload the oil than to continue holding it.
Let's also note that a little less than a decade ago, energy corporations clearly conspired to force shortages, drive profits up, and thus benefit by manipulation the free market (they took advantage of "government" regulation that their prior lobbying efforts had helped put into place).
Unsurprisingly, under the Bush Administration, the federal government elected not to investigate rigorously (despite the pleas from the Governor of California, among others). And then came the move towards the War in Iraq, which pushed all other stories out of the news.
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quote:The Commission’s findings are divided into two categories in the report – those related to market manipulation and other types of illegal anticompetitive conduct, as required by the Energy Policy Act of 2005, and those related to “price gouging,” as defined by Section 632 of the Commission’s appropriations legislation for fiscal year 2006.
During the time period examined, the Commission found:
* No evidence to suggest that refiners manipulated prices through any means, including running their refineries below full productive capacity to restrict supply, altering their refinery output to produce less gasoline, or diverting gasoline from markets in the United States to less lucrative foreign markets. The evidence indicated that these firms produced as much gasoline as they economically could, using computer models to determine their most profitable slate of products.
* No evidence to suggest that refinery expansion decisions over the past 20 years resulted from either unilateral or coordinated attempts to manipulate prices. Rather, the pace of capacity growth resulted from competitive market forces.
* No evidence to suggest that petroleum pipeline companies made rate or expansion decisions in order to manipulate gasoline prices.
* No evidence to suggest that oil companies reduced inventory to increase or manipulate prices or exacerbate the effects of price spikes generally, or due to hurricane-related supply disruptions in particular. Inventory levels have declined, but the decline represents a decades-long trend to lower costs that is consistent with other manufacturing industries. In setting inventory levels, companies try to plan for unexpected supply disruptions by examining supply needs from past disruptions.
* No situations that might allow one firm – or a small collusive group – to manipulate gasoline futures prices by using storage assets to restrict gasoline movements into New York Harbor, the key delivery point for gasoline futures contracts.
An interesting thing about collusion: an article I read just today about that whole airline price fixing scandal that broke a couple of years ago included a number of quotes from DoJ representatives who observed that they would never had any way to detect or prosecute the crimes had a couple airlines not taken advantage of an announced amnesty deal and come forward to reveal the extent of the collusion that was happening. So I'm a little skeptical of any federal finding of "no evidence."
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