The fix is in
June 12, 2008 10:37 PM Subscribe
Gasoline prices fixed. 11 Quebec companies and 13 individuals were charged today in a gas price fixing scheme. The Competition Bureau conducted a lengthy investigation into the allegations.
One of the companies will not be challenging (link to pdf on the page) the findings. In the meantime, the industry is claiming that these are "bad apples" in an otherwise competitive market.
Meanwhile, in the US, 62% of those polled believe that "unethical behaviour" is to blame for gas prices.
One of the companies will not be challenging (link to pdf on the page) the findings. In the meantime, the industry is claiming that these are "bad apples" in an otherwise competitive market.
Meanwhile, in the US, 62% of those polled believe that "unethical behaviour" is to blame for gas prices.
T. Boone Pickens says there's no conspiracy. Move along, citizen.
posted by Blazecock Pileon at 10:48 PM on June 12, 2008
posted by Blazecock Pileon at 10:48 PM on June 12, 2008
Gasoline prices fixed.
Good. Now do something about the variable gas prices.
posted by hal9k at 10:52 PM on June 12, 2008
Good. Now do something about the variable gas prices.
posted by hal9k at 10:52 PM on June 12, 2008
Bring back the public pillory. Oil executives and oil arbitrage players would be first.
As for letting the "market" take care of this, too often we forget that the "market" is populated by millions who suffer unnecessarily to satisfy the multi-year windows of opportunity that arbitrage players have in unregulated markets.
They make their fortunes, cause untold displacement, and then the "market" adjusts as these slime balls move into other markets. Repeat indefinitely.
There is no spine among regulators, or policy makers.
There needs to be serious criminal penalties imposed for the manipulation of basic commodity markets in ways that cause harm, displacement, and death.
As well, we should be pointing out the names of every regulator and policy maker who supports this kind of thing, in a way that truly shames them, if that's even possible any more, in a culture that appears to have lost its most fundamental bearings.
posted by MetaMan at 11:29 PM on June 12, 2008
As for letting the "market" take care of this, too often we forget that the "market" is populated by millions who suffer unnecessarily to satisfy the multi-year windows of opportunity that arbitrage players have in unregulated markets.
They make their fortunes, cause untold displacement, and then the "market" adjusts as these slime balls move into other markets. Repeat indefinitely.
There is no spine among regulators, or policy makers.
There needs to be serious criminal penalties imposed for the manipulation of basic commodity markets in ways that cause harm, displacement, and death.
As well, we should be pointing out the names of every regulator and policy maker who supports this kind of thing, in a way that truly shames them, if that's even possible any more, in a culture that appears to have lost its most fundamental bearings.
posted by MetaMan at 11:29 PM on June 12, 2008
Whose bright idea was it to not nationalize the oil industry?
posted by mek at 11:40 PM on June 12, 2008
posted by mek at 11:40 PM on June 12, 2008
mek writes "Whose bright idea was it to not nationalize the oil industry?"
Bad things tend to happen to countries that try to do that.
posted by mullingitover at 12:01 AM on June 13, 2008
Bad things tend to happen to countries that try to do that.
posted by mullingitover at 12:01 AM on June 13, 2008
Bad things tend to happen to countries that try to do that.
what, Big Oil either calls up the USN and/or their buddies in the CIA to foment a coup attempt to get their fixed capital back? Zapata!
seriously, even this lefty has to admit that having Amtrak or USPS-quality industrial effort would not be the optimal solution.
But the economics, to me at least, are pretty simple: the profits of natural resources should not be privatized. The big railroad giveaways were the first real mistake this nation took on the road to economic dumbassery; while I know almost zero in detail about Norway's oil-funded SWF, from the vague outline of it I've gathered I would think it provides about the right balance between public and private exploitation of natural wealth.
posted by tachikaze at 12:27 AM on June 13, 2008 [1 favorite]
what, Big Oil either calls up the USN and/or their buddies in the CIA to foment a coup attempt to get their fixed capital back? Zapata!
seriously, even this lefty has to admit that having Amtrak or USPS-quality industrial effort would not be the optimal solution.
But the economics, to me at least, are pretty simple: the profits of natural resources should not be privatized. The big railroad giveaways were the first real mistake this nation took on the road to economic dumbassery; while I know almost zero in detail about Norway's oil-funded SWF, from the vague outline of it I've gathered I would think it provides about the right balance between public and private exploitation of natural wealth.
posted by tachikaze at 12:27 AM on June 13, 2008 [1 favorite]
Sub-prime lending crisis, speculation, buying on margin, devaluation of the dollar and now this. Seems pretty clear what's going on.
Hang the lot of them.
posted by basicchannel at 2:03 AM on June 13, 2008
Hang the lot of them.
posted by basicchannel at 2:03 AM on June 13, 2008
There was a conviction yesterday in the UK, but it seems the news was reported only in the print edition of the FT; I didn't see it in the other British dailies I read.
In any case, three US based executives were convicted of international cartel activity for their role in fixing the prices of "marine equipment"; hoses and other material that's used to on/offload oil between tankers and storage depots.
The Office of Fair Trade (OFT) estimated consumer prices were impacted by as much as %15.
Curious, but these convictions were for crimes occurring after June 20th 2003, when the UK's cartel offence came into force under the Enterprise Act of 2002. Specifically they were charged under Section 188 which prohibits what OFT delicately calls hardcore cartel conduct (ah those English do indeed have a way with words!).
As this is the first conviction in the UK under this act, a strong deterrent message is expected.
If you're operating a cartel in the UK, OFT wants you to come clean and in fact has setup a web page - Confess your Cartel advising folks just how to do so and avoid prosecution.
Know of a UK cartel? OFT is offering £100K to grass 'em out.
posted by Mutant at 3:01 AM on June 13, 2008
In any case, three US based executives were convicted of international cartel activity for their role in fixing the prices of "marine equipment"; hoses and other material that's used to on/offload oil between tankers and storage depots.
The Office of Fair Trade (OFT) estimated consumer prices were impacted by as much as %15.
Curious, but these convictions were for crimes occurring after June 20th 2003, when the UK's cartel offence came into force under the Enterprise Act of 2002. Specifically they were charged under Section 188 which prohibits what OFT delicately calls hardcore cartel conduct (ah those English do indeed have a way with words!).
As this is the first conviction in the UK under this act, a strong deterrent message is expected.
If you're operating a cartel in the UK, OFT wants you to come clean and in fact has setup a web page - Confess your Cartel advising folks just how to do so and avoid prosecution.
Know of a UK cartel? OFT is offering £100K to grass 'em out.
posted by Mutant at 3:01 AM on June 13, 2008
let the free market determine prices and stop all govt regulations and control and all will be fine.
posted by Postroad at 3:09 AM on June 13, 2008
posted by Postroad at 3:09 AM on June 13, 2008
Gas prices fixed on top of fixed oil prices. Oh and you can only buy low mpg cars because the car companies lobby together with claims that it's OMGIMPOSSIBUL to make them any more efficient.
Nice.
posted by DU at 4:35 AM on June 13, 2008
Nice.
posted by DU at 4:35 AM on June 13, 2008
I don't know if we have price fixing around here, but I do know that there's not a single gas station in this town that bucks whatever trend is happening with prices. Whether they agree on it beforehand or not, they all charge the same thing. Hardly seems like the ideal of competitive capitalism. Are there any investigations like this going on in the US, or just more ridiculous Congressional hearings?
posted by dellsolace at 5:19 AM on June 13, 2008
posted by dellsolace at 5:19 AM on June 13, 2008
Whose bright idea was it to not nationalize the oil industry?
Then people blame the government when the prices go up. Look at Mexico.
posted by smackfu at 6:15 AM on June 13, 2008
Then people blame the government when the prices go up. Look at Mexico.
posted by smackfu at 6:15 AM on June 13, 2008
Are there any investigations like this going on in the US, or just more ridiculous Congressional hearings?
As far as I know, there's no real serious push to investigate this or any of the other recent examples of anti-competitive behavior in the energy sector. There was a recent congressional vote on a measure to impose a windfall profit tax on the oil companies in the US, but that wouldn't have addressed the underlying issue of price manipulation and was really more of a feel-good measure (not that I don't think it would have made good policy for other reasons).
let the free market determine prices and stop all govt regulations and control and all will be fine.
Without prudent, consistently applied govt regulations and control there is no such thing as a free market: we just come full circle back to the deplorable state of things that compelled us, over time, to organize and adopt governments and regulatory systems in the first place. An unregulated free market is an oxymoron, because without regulation, thuggery, gangsterism, and the logic of tooth and nail win out over fair competition driven by innovation and responsible business practices any day. If there are no referees or penalties, the cheaters will always win the game, and the game is no longer about skill. Why would anyone offer a better product when they could, with impunity, just destroy all their competitors through unfair, anti-competitive practices and if necessary, force their goods on consumers as the only alternative? Or if that doesn't work, just hire a private army to make everyone pay.
As an aside: Then people blame the government when the prices go up. Look at Mexico.
I have a suspicion that this is commonly what happens whenever nations veer a little farther left than certain Captains of Industry consider acceptable: First there's talk of how anti-Democratic the new leftist government is (even if Democratically elected). Then international sanctions are imposed and the big internationals refuse to play ball with the nation in terms of trade and commerce. Then, as a natural result of the sanctions and exclusion from trade with the international community, the economy of the nation starts to implode and basic resources become increasingly scarce. Naturally, there starts to be a groundswell of popular dissatisfaction at this point. Then voila: The US or another nation with some strategic interest in the region denounces the new government as incapable of managing its economic affairs, and agitators within the country are put on the CIA dole to foment more internal dissatisfaction. Then the process repeats until a populist uprising or military coup breaks out, during which hopefully, one of the guys on the dole gets propped up as the strong man. Then we all profit. Almost never fails.
posted by saulgoodman at 6:59 AM on June 13, 2008 [1 favorite]
As far as I know, there's no real serious push to investigate this or any of the other recent examples of anti-competitive behavior in the energy sector. There was a recent congressional vote on a measure to impose a windfall profit tax on the oil companies in the US, but that wouldn't have addressed the underlying issue of price manipulation and was really more of a feel-good measure (not that I don't think it would have made good policy for other reasons).
let the free market determine prices and stop all govt regulations and control and all will be fine.
Without prudent, consistently applied govt regulations and control there is no such thing as a free market: we just come full circle back to the deplorable state of things that compelled us, over time, to organize and adopt governments and regulatory systems in the first place. An unregulated free market is an oxymoron, because without regulation, thuggery, gangsterism, and the logic of tooth and nail win out over fair competition driven by innovation and responsible business practices any day. If there are no referees or penalties, the cheaters will always win the game, and the game is no longer about skill. Why would anyone offer a better product when they could, with impunity, just destroy all their competitors through unfair, anti-competitive practices and if necessary, force their goods on consumers as the only alternative? Or if that doesn't work, just hire a private army to make everyone pay.
As an aside: Then people blame the government when the prices go up. Look at Mexico.
I have a suspicion that this is commonly what happens whenever nations veer a little farther left than certain Captains of Industry consider acceptable: First there's talk of how anti-Democratic the new leftist government is (even if Democratically elected). Then international sanctions are imposed and the big internationals refuse to play ball with the nation in terms of trade and commerce. Then, as a natural result of the sanctions and exclusion from trade with the international community, the economy of the nation starts to implode and basic resources become increasingly scarce. Naturally, there starts to be a groundswell of popular dissatisfaction at this point. Then voila: The US or another nation with some strategic interest in the region denounces the new government as incapable of managing its economic affairs, and agitators within the country are put on the CIA dole to foment more internal dissatisfaction. Then the process repeats until a populist uprising or military coup breaks out, during which hopefully, one of the guys on the dole gets propped up as the strong man. Then we all profit. Almost never fails.
posted by saulgoodman at 6:59 AM on June 13, 2008 [1 favorite]
let the free market determine prices
I'm pretty sure you're being sarcastic, but......in the face of proven price fixing, who keeps the market 'free' if there is no government oversight?
posted by spicynuts at 7:00 AM on June 13, 2008
I'm pretty sure you're being sarcastic, but......in the face of proven price fixing, who keeps the market 'free' if there is no government oversight?
posted by spicynuts at 7:00 AM on June 13, 2008
Not sure if anyone can answer this question, but why are the prices always moving around from day to day. One day its $3.85 and then literally the next day, the same gas station has the same gas for $.15 more. How does this happen? The gas is already in the ground! Can someone answer that?
posted by mmkaos at 7:05 AM on June 13, 2008
posted by mmkaos at 7:05 AM on June 13, 2008
I'm pretty sure you're being sarcastic
damn. my sarcasm detector may be on the blink. maybe it's a hardware conflict with my ranting-sanctimony engine. carry on, then.
posted by saulgoodman at 7:10 AM on June 13, 2008
damn. my sarcasm detector may be on the blink. maybe it's a hardware conflict with my ranting-sanctimony engine. carry on, then.
posted by saulgoodman at 7:10 AM on June 13, 2008
It's always the bloody French.
This kind of BS is why I'm happy I take public transit. At least there when I'm getting screwed it's not because of a conspiracy.
posted by dirtynumbangelboy at 7:26 AM on June 13, 2008
This kind of BS is why I'm happy I take public transit. At least there when I'm getting screwed it's not because of a conspiracy.
posted by dirtynumbangelboy at 7:26 AM on June 13, 2008
Not sure if anyone can answer this question, but why are the prices always moving around from day to day.
I think it's because they're not paying for the gas that's already there, they're paying for the gas that is being delivered next week.
posted by dirtynumbangelboy at 7:27 AM on June 13, 2008
I think it's because they're not paying for the gas that's already there, they're paying for the gas that is being delivered next week.
posted by dirtynumbangelboy at 7:27 AM on June 13, 2008
Whether they agree on it beforehand or not, they all charge the same thing.
If every grocery store got their milk from the same distributor, would you expect every grocery store to charge different prices for the milk? The gas stations have to pay middlemen for their gas - the middlemen pretty much are the same people, charging the same prices.
posted by spicynuts at 7:36 AM on June 13, 2008
If every grocery store got their milk from the same distributor, would you expect every grocery store to charge different prices for the milk? The gas stations have to pay middlemen for their gas - the middlemen pretty much are the same people, charging the same prices.
posted by spicynuts at 7:36 AM on June 13, 2008
Gas is clearly not expensive enough if the local yahoos in my neighbourhood can still afford to drive up and down the street honking their horns every time their preferred sports team scores a GOOOOOOAAAAALLLLLLLL!!!
posted by sevenyearlurk at 8:25 AM on June 13, 2008
posted by sevenyearlurk at 8:25 AM on June 13, 2008
mmkaos -- "Not sure if anyone can answer this question, but why are the prices always moving around from day to day. One day its $3.85 and then literally the next day, the same gas station has the same gas for $.15 more. How does this happen? The gas is already in the ground! Can someone answer that?"
Ah, good question. You've picked up on the difference between historic cost and replacement cost, and you're absolutely correct - it might take 30 to 90 days for a barrel of oil to be transported, refined into gasoline and arrive at your pump.
So this volatility you're observing? Well while some might called it profiteering there's no easy way for us at the curb to discern if the daily change in price has anything to do with replacement cost. And we do know the oil markets have been volatile over the past year so it is conceivable the day to day differences observed at the pump reflect changes in prices a couple of months prior.
Curious - but according to the IEA, World Oil Demand has actually reduced slightly [.pdf], from 86.6 mb/d Q1 2008, to 86.0 mb/d Q2 2008 (disclaimer: I haven't cross checked this data against other sources). Further, IEA projects Q3 2008 demand at 86.6 mb/d ad Q4 2008 at 88.1 mb/d.
Now this is very interesting, as we were discussing the possibility of an asset bubble in oil the other day, so naturally (as I'm interested in bubbles) I picked up on this -- Oil Rally of 697% Surpassed Dot-Com Craze in Speculators' Mania (Bloomberg).
So ok, then. The Oil Bubble is now officially larger than the dot com bubble. Interesting. Where is all this demand coming from, why and, perhaps most critically, when will it all end?
First where. Currently the NYMEX margin requirements for Light Sweet Oil futures contract are about 15:1 (e.g., each futures contract controls 1,000 barrels @$135/barrel, with $8,750 needed to establish this position).
The futures contract gives the market participant leverage, as you put down $8,750 and you control $135K of deliverable oil. Reality check: for better or worse, as you've assumed some degree of market risk as both trades and leverage can go both ways, although that downside has admittedly been difficult to see in soft commodities for some time now. Now these margin requirements may sound low, but in fact CFTC have increased margin requirements %140 over the past year in an attempt to return order to the commodity markets (and we'll ignore the view of some academics that raising margin requirements actually de-stabilises a market e.g. the dot com collapse).
In the commodity futures markets we see four distinct types of participants divided into three classes (Spurgin, 2000) : Hedgers (two sub types, short & long), Speculators, and Arbitrageurs.
The last class, Arbitrageurs, are of note as they provide an important inter-market service - namely, insuring prices for fungible commodities don't markedly diverge between, for example, the spot & futures markets.
Hedgers come in two types; short and long.
Short hedgers are commercial producers who wish to insure they can lock in a known profit. Long hedgers are commercial consumers who need to lock in a known price. Clearly their view / interests are complimentary and as long as they - and their interests dominate the market, things are fine.
The third group, speculators, leads us to why. Speculators historically have existed to bridge the gap between short and long hedgers, providing needed liquidity to the market. Speculators have historically had a relatively minor - but critically important - role in the markets, one that has changed in the past few years.
Since the dot com and real estate bubbles we've seen lots of money - both retail and institutional as pointed out previously flowing into the speculative part of this market.
In fact, its clear that the interests of speculators now dominate what previously was a rather efficient and well functioning market.
So about all that's left is when will it end?. That's anyone's guess, its always difficult to time these things, but even so it seems the flow of institutional capital is slowing, if not reversing (disclaimer: this is personal opinion only, gleaned from industry contacts, finding out what other folks are doing with their money and it seems lots of people I chat with are reducing bets or pulling out of the market altogether).
This seems to be happening for many reasons - many have made their money, and know that greed can easily turn a profit into a loss. Some don't like to operate in crowded markets, and are moving on to the next big thing (lots of participants reduces the chances that an inefficiency can be discovered, and we make big money in the dark and inefficient nooks and cranny's of a market, not operating in full view and competing directly with other participants). There are lots of lots of reasons why institutional money either is or may soon be moving out of this market.
But another reason seems to be the attention government and regulatory officials are now paying the energy markets. The last thing big funds want is more regulation. And they know the best way to avoid regulation is not to be caught anywhere near a perceived manipulation. So as regulatory attention continues to be focused on these markets I think you're going to see increased institutional outflows, and with the demand not rising as sharply as would be warranted by these price levels, we're sure to see some roll back, some decline in prices. Perhaps sharply and quickly.
So what's left then? Well, lots and lots of retail money is still moving into soft commodities.
Take a look at other market bubbles - the dot com, real estate, etc. Retail money always buys at the top.
posted by Mutant at 8:39 AM on June 13, 2008 [4 favorites]
Ah, good question. You've picked up on the difference between historic cost and replacement cost, and you're absolutely correct - it might take 30 to 90 days for a barrel of oil to be transported, refined into gasoline and arrive at your pump.
So this volatility you're observing? Well while some might called it profiteering there's no easy way for us at the curb to discern if the daily change in price has anything to do with replacement cost. And we do know the oil markets have been volatile over the past year so it is conceivable the day to day differences observed at the pump reflect changes in prices a couple of months prior.
Curious - but according to the IEA, World Oil Demand has actually reduced slightly [.pdf], from 86.6 mb/d Q1 2008, to 86.0 mb/d Q2 2008 (disclaimer: I haven't cross checked this data against other sources). Further, IEA projects Q3 2008 demand at 86.6 mb/d ad Q4 2008 at 88.1 mb/d.
Now this is very interesting, as we were discussing the possibility of an asset bubble in oil the other day, so naturally (as I'm interested in bubbles) I picked up on this -- Oil Rally of 697% Surpassed Dot-Com Craze in Speculators' Mania (Bloomberg).
So ok, then. The Oil Bubble is now officially larger than the dot com bubble. Interesting. Where is all this demand coming from, why and, perhaps most critically, when will it all end?
First where. Currently the NYMEX margin requirements for Light Sweet Oil futures contract are about 15:1 (e.g., each futures contract controls 1,000 barrels @$135/barrel, with $8,750 needed to establish this position).
The futures contract gives the market participant leverage, as you put down $8,750 and you control $135K of deliverable oil. Reality check: for better or worse, as you've assumed some degree of market risk as both trades and leverage can go both ways, although that downside has admittedly been difficult to see in soft commodities for some time now. Now these margin requirements may sound low, but in fact CFTC have increased margin requirements %140 over the past year in an attempt to return order to the commodity markets (and we'll ignore the view of some academics that raising margin requirements actually de-stabilises a market e.g. the dot com collapse).
In the commodity futures markets we see four distinct types of participants divided into three classes (Spurgin, 2000) : Hedgers (two sub types, short & long), Speculators, and Arbitrageurs.
The last class, Arbitrageurs, are of note as they provide an important inter-market service - namely, insuring prices for fungible commodities don't markedly diverge between, for example, the spot & futures markets.
Hedgers come in two types; short and long.
Short hedgers are commercial producers who wish to insure they can lock in a known profit. Long hedgers are commercial consumers who need to lock in a known price. Clearly their view / interests are complimentary and as long as they - and their interests dominate the market, things are fine.
The third group, speculators, leads us to why. Speculators historically have existed to bridge the gap between short and long hedgers, providing needed liquidity to the market. Speculators have historically had a relatively minor - but critically important - role in the markets, one that has changed in the past few years.
Since the dot com and real estate bubbles we've seen lots of money - both retail and institutional as pointed out previously flowing into the speculative part of this market.
In fact, its clear that the interests of speculators now dominate what previously was a rather efficient and well functioning market.
So about all that's left is when will it end?. That's anyone's guess, its always difficult to time these things, but even so it seems the flow of institutional capital is slowing, if not reversing (disclaimer: this is personal opinion only, gleaned from industry contacts, finding out what other folks are doing with their money and it seems lots of people I chat with are reducing bets or pulling out of the market altogether).
This seems to be happening for many reasons - many have made their money, and know that greed can easily turn a profit into a loss. Some don't like to operate in crowded markets, and are moving on to the next big thing (lots of participants reduces the chances that an inefficiency can be discovered, and we make big money in the dark and inefficient nooks and cranny's of a market, not operating in full view and competing directly with other participants). There are lots of lots of reasons why institutional money either is or may soon be moving out of this market.
But another reason seems to be the attention government and regulatory officials are now paying the energy markets. The last thing big funds want is more regulation. And they know the best way to avoid regulation is not to be caught anywhere near a perceived manipulation. So as regulatory attention continues to be focused on these markets I think you're going to see increased institutional outflows, and with the demand not rising as sharply as would be warranted by these price levels, we're sure to see some roll back, some decline in prices. Perhaps sharply and quickly.
So what's left then? Well, lots and lots of retail money is still moving into soft commodities.
Take a look at other market bubbles - the dot com, real estate, etc. Retail money always buys at the top.
posted by Mutant at 8:39 AM on June 13, 2008 [4 favorites]
Why do I keep getting the feeling that if I was smart enough I could read between the lines of everything mutant says and become a very wealthy person. Too bad I'm not smart enough.
posted by spicynuts at 9:15 AM on June 13, 2008
posted by spicynuts at 9:15 AM on June 13, 2008
In fact, its clear that the interests of speculators now dominate what previously was a rather efficient and well functioning market.
Doesn't seem at all clear to me. As far as I've seen, the people who argue this tend to depend on models for what the oil price ought to be that may no longer be at all relevant if there is approximately zero world spare oil production capacity, as may be the case today. That's hard to determine, but it looks like a good possibility, and it seems like at least as good an explanation for the high prices.
On the other hand there are of course plenty of people, including some who would be in a position at least as good as anyone else to make the call, who seem fairly sure it's not a speculative bubble. Many simply assume they're part of the conspiracy, of course.
To reiterate some of my constantly-changing thoughts on the influence of speculators: Even if this is a speculative bubble, do not expect it to play out quite like dot com stocks or Florida real estate. Commodities futures are somewhat different. As well as having a connection to the spot market, there's the fact that every long position has an equal and opposite short position. If oil supply and demand are roughly in balance, the position of speculative buyers can increase only if they find some other speculator who wants to hold a short position. Both of them are evenvually going to have to close their positions; buyers drying up won't drive prices down unless speculative sellers decide to go for it, you might say. So intuitively, you'd absolutely expect increased speculative volume to drive up volatility, but not necessarily price. And volatility we have seen. Personally I think it looks a bit more like a normal commodities cycle, for yes they are sometimes cyclical even in the absensce of price-moving levels of speculation. The long-term trend of rising price will be ended, if it's going to end at all, by higher production. The mighty forces of speculation may affect its magnitude, but should have little effect on when it begins and ends.
Sometimes forgotten in the chatter about speculators driving up the price are the changes in the world oil markets, so just as a reminder: The rapid decline of production in Mexico. Russia may be past its peak. Venezuela seems to be in decline. Nigeria has some problems. Saudi Arabia may have considerably less spare capacity than they claim. Norway is on the way down, and of course the North Sea decline is relatively recent as well. Brazil and Canada haven't been increasing production as quickly as some had anticipated. Angola is becoming more important. Yeah, there's still apparently been some increase in total world production, but it's very much unclear whether production has actually increased faster than demand, and the prices would suggest probably not. Demand has been rising rapidly in some net exporting contries, and famously in China. That may have slowed down, but it's still rather large. At the least, there are some significant changes in world export patterns of trade, as for instance the US looks elsewhere to find the oil it's no longer getting from Mexico.
In short, I want some actual hard evidence that speculators are to blame before I start blaming them (yeah, "them" rather than "us", as lately I'm out of the futures market for now; too hard to make sense of it this past few weeks. I'm back to boring and safe stuff like stock options for my financial entertainment.) I haven't seen anything too convincing as of yet, though I have seen enough to believe it's a possibility.
As for retail price fixing in Quebec, well, that's great if they've actually found some. Glad they're out there enforcing those laws. Won't make much difference to anyone, of course. A few cents per litre isn't going to change anyone's life in a big way.
Last week I watched them talk about high oil product prices in federal parliament. Investigating price fixing is all very nice, but it has very little to do with the topic at hand. No, liberals, a carbon tax is probably not going to lower prices in the foreseeable future. Conservatives, yes we know you like to talk about cutting taxes, but that is even further from addressing the problem. Stupid politicians. The MP from the arctic who spoke about the hardship that fuel prices are causing up there was the only one who made any attempt to address actual reasons why the prices are rising and will most likely be higher five years from now. Nobody had a substantial response.
Buy anyway, if you're waiting for a speculative bubble to burst, you'd better hope it happens soon; because if it doesn't happen this year, it might well be that before it does, world oil production will be undeniably in permanent decline. At which point, the causes of the 2008 oil price spike will be pretty much irrelevant.
posted by sfenders at 10:06 AM on June 13, 2008 [2 favorites]
Doesn't seem at all clear to me. As far as I've seen, the people who argue this tend to depend on models for what the oil price ought to be that may no longer be at all relevant if there is approximately zero world spare oil production capacity, as may be the case today. That's hard to determine, but it looks like a good possibility, and it seems like at least as good an explanation for the high prices.
On the other hand there are of course plenty of people, including some who would be in a position at least as good as anyone else to make the call, who seem fairly sure it's not a speculative bubble. Many simply assume they're part of the conspiracy, of course.
To reiterate some of my constantly-changing thoughts on the influence of speculators: Even if this is a speculative bubble, do not expect it to play out quite like dot com stocks or Florida real estate. Commodities futures are somewhat different. As well as having a connection to the spot market, there's the fact that every long position has an equal and opposite short position. If oil supply and demand are roughly in balance, the position of speculative buyers can increase only if they find some other speculator who wants to hold a short position. Both of them are evenvually going to have to close their positions; buyers drying up won't drive prices down unless speculative sellers decide to go for it, you might say. So intuitively, you'd absolutely expect increased speculative volume to drive up volatility, but not necessarily price. And volatility we have seen. Personally I think it looks a bit more like a normal commodities cycle, for yes they are sometimes cyclical even in the absensce of price-moving levels of speculation. The long-term trend of rising price will be ended, if it's going to end at all, by higher production. The mighty forces of speculation may affect its magnitude, but should have little effect on when it begins and ends.
Sometimes forgotten in the chatter about speculators driving up the price are the changes in the world oil markets, so just as a reminder: The rapid decline of production in Mexico. Russia may be past its peak. Venezuela seems to be in decline. Nigeria has some problems. Saudi Arabia may have considerably less spare capacity than they claim. Norway is on the way down, and of course the North Sea decline is relatively recent as well. Brazil and Canada haven't been increasing production as quickly as some had anticipated. Angola is becoming more important. Yeah, there's still apparently been some increase in total world production, but it's very much unclear whether production has actually increased faster than demand, and the prices would suggest probably not. Demand has been rising rapidly in some net exporting contries, and famously in China. That may have slowed down, but it's still rather large. At the least, there are some significant changes in world export patterns of trade, as for instance the US looks elsewhere to find the oil it's no longer getting from Mexico.
In short, I want some actual hard evidence that speculators are to blame before I start blaming them (yeah, "them" rather than "us", as lately I'm out of the futures market for now; too hard to make sense of it this past few weeks. I'm back to boring and safe stuff like stock options for my financial entertainment.) I haven't seen anything too convincing as of yet, though I have seen enough to believe it's a possibility.
As for retail price fixing in Quebec, well, that's great if they've actually found some. Glad they're out there enforcing those laws. Won't make much difference to anyone, of course. A few cents per litre isn't going to change anyone's life in a big way.
Last week I watched them talk about high oil product prices in federal parliament. Investigating price fixing is all very nice, but it has very little to do with the topic at hand. No, liberals, a carbon tax is probably not going to lower prices in the foreseeable future. Conservatives, yes we know you like to talk about cutting taxes, but that is even further from addressing the problem. Stupid politicians. The MP from the arctic who spoke about the hardship that fuel prices are causing up there was the only one who made any attempt to address actual reasons why the prices are rising and will most likely be higher five years from now. Nobody had a substantial response.
Buy anyway, if you're waiting for a speculative bubble to burst, you'd better hope it happens soon; because if it doesn't happen this year, it might well be that before it does, world oil production will be undeniably in permanent decline. At which point, the causes of the 2008 oil price spike will be pretty much irrelevant.
posted by sfenders at 10:06 AM on June 13, 2008 [2 favorites]
sfenders -- "In short, I want some actual hard evidence that speculators are to blame before I start blaming them (yeah, "them" rather than "us", as lately I'm out of the futures market for now; too hard to make sense of it this past few weeks. I'm back to boring and safe stuff like stock options for my financial entertainment.) I haven't seen anything too convincing as of yet, though I have seen enough to believe it's a possibility."
Gosh sfenders apologies for crafting a comment that immediately raised questions. I actually had a cite to cover that point but omitted it while posting as the justification behind my conclusion covers more than a few points and is subjective to no small extent. But that is some quantitative data behind my thinking, however I certainly can't put it together in a hard and fast formula.
I tend to note things I read and think a lot about the various pieces, how they all fit together. So in no particular chronological order (some) of the points I've noted:
Now for the (possible) collapse - well, already there are reports of speculators moving capital out of this market. That brings us back to my view, that much of the professional money will move out faster than retail, and it is retail that will get left holding the overpriced assets when (a nod to your point, 'if') a correction comes.
Not hard and fast data (which I wish I had), rather putting together lots of disparate data points that I've read, as well as talking to folks who, as previously noted, have either pulled out totally or are sharply cutting back.
Finally, I have no idea if this market is in backwardation or contango at present but either way it doesn't impact what I feel are some excessive forces operating here. I've actually been watching all the fun rather enviously from the sidelines as I don't trade oil but the longer I watch and the more I read, the more bubble like I think this market is.
posted by Mutant at 12:10 PM on June 13, 2008 [1 favorite]
Gosh sfenders apologies for crafting a comment that immediately raised questions. I actually had a cite to cover that point but omitted it while posting as the justification behind my conclusion covers more than a few points and is subjective to no small extent. But that is some quantitative data behind my thinking, however I certainly can't put it together in a hard and fast formula.
I tend to note things I read and think a lot about the various pieces, how they all fit together. So in no particular chronological order (some) of the points I've noted:
- We know that open interest in NYMEX oil futures has increased some %77 in the past three years to 1.35 million contracts.. My gut feel - no data mind you - is this increase outstrips the demand side, indicating that commercial producers / suppliers are not responsible for such a large increase in such a short time. The same article mentions shipping and storage with regards to increasing oil prices - the next point.
- It appears that some producers, for example, Iran, have been deliberately withholding oil from the market by pumping but storing crude in offshore tankers. The last I'd read Iran had at least 20 million barrels of oil, equal to about 5 days of the country's output. Admittedly five days is very small in terms of the overall markets size, but this is very, very difficult information to come by, and I've seen other reports of intermediaries at all levels engaging in this - potentially very lucrative - practice.
- In April Blooomberg had an interesting story about capital inflows, `Tidal Wave' in Commodities Rises to $400 Billion. Bloomberg identified two agents as driving capital into this sector - Hedge Funds who had increased holdings some %25 YOY, and the favourite of retail investors, ETFs, who had increased holdings by %31 YOY. They noted that roughly $70B in capital - speculative capital had been drawn to this sector in Q1 2008 alone. Also of note (and formative to my thinking about a possible collapse of the bubble) the comment : "The ``tidal wave'' of the past quarter is showing ``signs it is already ebbing,'' Heap and Tonks wrote. ``We don't think it is sustainable.''"
- In February The Economist published an interesting analysis Pumped up:Soaring prices for oil and more where they quoted some Citigroup research as '...the recent rise in the oil price “is driven principally by a sharp uptick in fund flows.” '.
- As long ago as September 2006, Calpers had announced plans to move capital into direct commodity exposure. At that point in time they already had some %8.4 of their total capital invested in shares of commodity related firms e.g., Exxon, and, of course, they had indirect exposure via their $9B investment in hedge funds (of a total portfolio of $208B).
- Calpers is willing to put at least as much as $8B into this market. When asked about these plans a Calpers spokesperson commented "Why would we overlook any potential strategy that would give us good returns?". Calpers has explicitly noted they'll engage in both long & short sides of the trade.. The same article notes that The Ontario Teachers' Pension Plan, which has about 2% of its $106 billion (Canadian) in investments allocated to commodities as well.
Now for the (possible) collapse - well, already there are reports of speculators moving capital out of this market. That brings us back to my view, that much of the professional money will move out faster than retail, and it is retail that will get left holding the overpriced assets when (a nod to your point, 'if') a correction comes.
Not hard and fast data (which I wish I had), rather putting together lots of disparate data points that I've read, as well as talking to folks who, as previously noted, have either pulled out totally or are sharply cutting back.
Finally, I have no idea if this market is in backwardation or contango at present but either way it doesn't impact what I feel are some excessive forces operating here. I've actually been watching all the fun rather enviously from the sidelines as I don't trade oil but the longer I watch and the more I read, the more bubble like I think this market is.
posted by Mutant at 12:10 PM on June 13, 2008 [1 favorite]
Skipping all of the Speculation stuff above, I get really pissed when the no-name gas station automatically raises (or lowers) its prices based on the Shell across the street. So on any give day the no-name is consistently .02 less per gallon than the Shell. What they seem to miss is that they would sell more if they kept their prices akin to the no-name price level. No one likes to feel they've been cheated, but everyone likes to feel they're beating the system.
posted by Gungho at 1:16 PM on June 13, 2008
posted by Gungho at 1:16 PM on June 13, 2008
We know that open interest in NYMEX oil futures has increased some %77 in the past three years to 1.35 million contracts.
Wow, I didn't realize it was that much, but it is not that surprising. I have no reason to distrust all the various reports that speculative interest of various kinds has become much larger; that much does seem clear.
Yes, it is in large part all the reports of massive investment flows into commodities (though again, long positions are equalled by the shorts, and some short-sellers have been pretty eager at times too) that make me consider the possibility they're responsible for a significant part of the price rises. That and the fact that so many disparate commodities have gone up in price at the same time, though some more than others and some are more physically related for more or less obvious reasons. But yes, it seems reasonable to assume it likely that all this new "investor" interest has had some effect on prices, but very much wrong to assume that it therefore accounts for the majority of the price change over any given period. Seems like that might be reversing cause and effect. As I mentioned, I did look at a few reports that try to quantify it, and none I found are at all convincing. Perhaps I am too skeptical, but this seems a natural reaction to so many forecasts being so very wrong over the years.
For instance that Citigroup forecast you mention. On searching for it, to maybe see whether they did a better job than the rest, I found two things: First, a more reasonable quote from a Citi analyst saying "The oil price outlook arguably remains more subjective than ever and hence leaves any long-term oil price assertion equally subjective and somewhat irrespective of traditional 'fundamental' analysis." It is good to see they share at least my feeling on that; the old kind of analysis they're used to no longer works for whatever reason. And second, an article discussing their more recent forecast, which raises price outlook substantially and expects higher prices next year than this...
Regarding Iran ... storing crude in offshore tankers, that is probably heavy oil. There may be some truth in what has come to me only as a rumour basically, that there is still a shortage of refining capacity that can deal with heavy sour oil. The prices we follow so closely are largely set based on the light sweet stuff. But aside from that, there are plenty of more bullish things going on in the news concerning inventories, perhaps most notably at the moment the recent decline in US crude in storage, down some 13% year-over-year. Overall I would not say there is much to go on here by studying inventories, unless you have better data than I do.
A "correction" will most certainly come if you define that word the way I do, which is as in a counter-trend correction... I wouldn't be at all surprised to see NYMEX crude go all the way back down to $100, in fact when it fell 10% the other week I was expecting it to get down around $100-110 before looking for a short-term bottom. But no, it's been uncooperative, despite all the much-heralded demand destruction. Which, by the way, may put an upper limit on how high prices can go over a period of years, even in the pessimistic supply scenario.
No matter how much influence hedge funds and ETFs may or may not have, one thing at least I think is clear: they could be easily overwhelmed in either direction in the future at any time by either persuasive evidence that we're at peak oil, which as well as raising the price by the usual supply/demand mechanism could incite a whole new wave of speculative buying and hoarding, or else by persuasive evidence that we're not at peak oil and supply is so plentiful for now that it makes no sense to expect prices to go anywhere but down, which could do the opposite. I think one of those is fairly likely to happen soon, maybe even this year. And how much interest hedge funds have in commodities tells you exactly nothing about which one.
Gungho: Skipping all of the Speculation stuff above, I get really pissed when the no-name gas station automatically raises (or lowers) its prices based on the Shell across the street.
No doubt it happens often, but probably not as often as some people think. There's also the possibility that they're both setting prices each day based on exactly the same futures market prices that you see on the news. Someone last year (somewhere in Atlantic Canada I think) worked out the formula one major retailer used, so he could accurately predict tomorrow's gas prices just by knowing today's closing price on nymex or whatever else they use.
posted by sfenders at 1:40 PM on June 13, 2008
Wow, I didn't realize it was that much, but it is not that surprising. I have no reason to distrust all the various reports that speculative interest of various kinds has become much larger; that much does seem clear.
Yes, it is in large part all the reports of massive investment flows into commodities (though again, long positions are equalled by the shorts, and some short-sellers have been pretty eager at times too) that make me consider the possibility they're responsible for a significant part of the price rises. That and the fact that so many disparate commodities have gone up in price at the same time, though some more than others and some are more physically related for more or less obvious reasons. But yes, it seems reasonable to assume it likely that all this new "investor" interest has had some effect on prices, but very much wrong to assume that it therefore accounts for the majority of the price change over any given period. Seems like that might be reversing cause and effect. As I mentioned, I did look at a few reports that try to quantify it, and none I found are at all convincing. Perhaps I am too skeptical, but this seems a natural reaction to so many forecasts being so very wrong over the years.
For instance that Citigroup forecast you mention. On searching for it, to maybe see whether they did a better job than the rest, I found two things: First, a more reasonable quote from a Citi analyst saying "The oil price outlook arguably remains more subjective than ever and hence leaves any long-term oil price assertion equally subjective and somewhat irrespective of traditional 'fundamental' analysis." It is good to see they share at least my feeling on that; the old kind of analysis they're used to no longer works for whatever reason. And second, an article discussing their more recent forecast, which raises price outlook substantially and expects higher prices next year than this...
"We believe current theories of a 'bubble' developing in the oil price are largely overdone," [Citigroup analyst] Khan said in a research note. "We continue to see fundamental reasons behind the ongoing upward trend in oil prices largely driven by the erosion of non-OPEC supply and the lack of significant demand response to materially offset tightening supply."
Regarding Iran ... storing crude in offshore tankers, that is probably heavy oil. There may be some truth in what has come to me only as a rumour basically, that there is still a shortage of refining capacity that can deal with heavy sour oil. The prices we follow so closely are largely set based on the light sweet stuff. But aside from that, there are plenty of more bullish things going on in the news concerning inventories, perhaps most notably at the moment the recent decline in US crude in storage, down some 13% year-over-year. Overall I would not say there is much to go on here by studying inventories, unless you have better data than I do.
A "correction" will most certainly come if you define that word the way I do, which is as in a counter-trend correction... I wouldn't be at all surprised to see NYMEX crude go all the way back down to $100, in fact when it fell 10% the other week I was expecting it to get down around $100-110 before looking for a short-term bottom. But no, it's been uncooperative, despite all the much-heralded demand destruction. Which, by the way, may put an upper limit on how high prices can go over a period of years, even in the pessimistic supply scenario.
No matter how much influence hedge funds and ETFs may or may not have, one thing at least I think is clear: they could be easily overwhelmed in either direction in the future at any time by either persuasive evidence that we're at peak oil, which as well as raising the price by the usual supply/demand mechanism could incite a whole new wave of speculative buying and hoarding, or else by persuasive evidence that we're not at peak oil and supply is so plentiful for now that it makes no sense to expect prices to go anywhere but down, which could do the opposite. I think one of those is fairly likely to happen soon, maybe even this year. And how much interest hedge funds have in commodities tells you exactly nothing about which one.
Gungho: Skipping all of the Speculation stuff above, I get really pissed when the no-name gas station automatically raises (or lowers) its prices based on the Shell across the street.
No doubt it happens often, but probably not as often as some people think. There's also the possibility that they're both setting prices each day based on exactly the same futures market prices that you see on the news. Someone last year (somewhere in Atlantic Canada I think) worked out the formula one major retailer used, so he could accurately predict tomorrow's gas prices just by knowing today's closing price on nymex or whatever else they use.
posted by sfenders at 1:40 PM on June 13, 2008
Mutant, right on. Supply- or uncertainty-driveness aside, I definitely perceive the oil run-up as the result of capital fleeing housing.
Here's my recent history of the bubble. When investment moolah fled the dot-com crash, it went into domestic energy, effectively killing off inexpensive utility power across the country and immediately affecting manufacturing and consumption costs in many industries in the US. When Enron was revealed to have been a massive criminal enterprise, the money went into housing. Now that housing has suffered the exact same cost run ups that power did, the money went into oil.
It won't actually be leaving oil yet - there's too much damage left to be done to the economy. Once a generation-long pattern of suburban ghetto cities is locked in for good, we will see the dough flow into, in this order, food, instantiating the hunger crisis we've been hearing predicted for about a year now, and after that, into health care.
And finally, into higher education. The net effect of all of this will be to re-establish the class norms of the late 1800s, where only the super-rich could afford health care, travel, education, or reliable food supplies.
Wealth creation is class warfare, end of story.
posted by mwhybark at 2:32 PM on June 13, 2008 [1 favorite]
Here's my recent history of the bubble. When investment moolah fled the dot-com crash, it went into domestic energy, effectively killing off inexpensive utility power across the country and immediately affecting manufacturing and consumption costs in many industries in the US. When Enron was revealed to have been a massive criminal enterprise, the money went into housing. Now that housing has suffered the exact same cost run ups that power did, the money went into oil.
It won't actually be leaving oil yet - there's too much damage left to be done to the economy. Once a generation-long pattern of suburban ghetto cities is locked in for good, we will see the dough flow into, in this order, food, instantiating the hunger crisis we've been hearing predicted for about a year now, and after that, into health care.
And finally, into higher education. The net effect of all of this will be to re-establish the class norms of the late 1800s, where only the super-rich could afford health care, travel, education, or reliable food supplies.
Wealth creation is class warfare, end of story.
posted by mwhybark at 2:32 PM on June 13, 2008 [1 favorite]
Three bubbles in less than a decade?
Our system is broken.
posted by five fresh fish at 3:30 PM on June 13, 2008 [2 favorites]
Our system is broken.
posted by five fresh fish at 3:30 PM on June 13, 2008 [2 favorites]
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