Editore"s Note
Tilting at Windmills

Email Newsletter icon, E-mail Newsletter icon, Email List icon, E-mail List icon Sign up for Free News & Updates

July 23, 2008
By: Kevin Drum

OIL SPECULATION....Yesterday the Senate voted 94-0 to proceed with debate on a bill designed to reduce speculation in the oil futures market. Megan McArdle calls the bill "monstrous," which, admittedly, would be my first guess too for any bill that passes a test vote unanimously. (There's gotta be something wrong with a bill that every single U.S. senator likes.) But what does the bill actually do?

The details are a little murky, but basically it cracks down on the enforcement of "position limits" in oil futures markets. Position limits are widely used on financial exchanges as a way to limit the maximum size of the position that any single dealer can take in a particular financial instrument, usually as a way of reducing risk and smoothing market volatility. However, there are ways to evade position limits, and the Senate bill does several things to tighten things up in the oil market: it places responsibility for setting position limits with the CFTC instead of the exchanges themselves, extends these rules to offshore exchanges, and eliminates a "loophole" that allows some large institutional investors to evade position limits.

Now, the CFTC itself doesn't believe that speculation is the reason for high oil prices. Over at The Oil Drum, Nate Hagens has a summary of a CFTC interim report released this month on the subject, and the chart on the right tells most of the story. The CFTC folks, like most other analysts, believe that the fundamental story is simple: supply is constrained and demand keeps going up. Result: higher prices. Speculation has little or nothing to do with it.

I'm pretty strongly inclined to agree. On the other hand, it's not immediately clear to me that there's really anything wrong with the Senate bill. Position limits are a common feature of commodity markets, and allowing the CFTC to tighten up and enforce position limits on oil contracts probably does little harm. In fact, it might even do some good simply by maintaining public faith in the price discovery function of the market.

Now, I'm willing to be educated on this. Maybe there's more to this bill than I realize. But for now, it seems relatively harmless, if probably also unnecessary. Any trading wizards out there who want to chime in?

Kevin Drum 12:42 PM Permalink | Trackbacks | Comments (53)

Bookmark and Share
 
Comments

Excessive speculation is blame for part of the oil runup. The telltale sign of excessive speculation (which I define as overuse of leverage by traders who have no interest in actually taking delivery of the commodity being traded) is a buildup of inventory followed by a rapid decline in price as the fly-by-nights quickly cover their positions. That's exactly what we've seen. If the price of oil was purely an expression of supply and demand between producers and consumers then inventories would stay low and the price would stay high.

To me, to stop gamblers from playing with the price of oil the solution is not position limits but rather regulations on the use of margin. It doesn't make sense that I can put down $10,000 to control $100,000 worth of oil and never actually take delivery of it. Futures contracts play an important role for drillers and refiners to manage supply and demand. We just need to take the "casino" out of the marketplace.

Posted by: Elliott on July 23, 2008 at 12:59 PM | PERMALINK

That's funning, I was just mocking McArdle's halfwitted fetishism for the Invisible Hand, and here she is, the bone-in-the-nose high priestess of Kropotkin's anarchism again.

If investors do it, it must be OK, right?

Funniest takedown of Dumbelina to be found here.
.

Posted by: Grand Moff Texan on July 23, 2008 at 1:00 PM | PERMALINK

Megan McArdle calls the bill "monstrous,"

Megan McArdle said it? Say no more -- I'm convinced.

Posted by: Gregory on July 23, 2008 at 1:05 PM | PERMALINK

The bill is probably pointless. Off-shore exchanges are beyond the reach of the US government, and if the futures markets in oil are materially affected by this change, then this activity will move offshore to an even greater extent.

The bill is idiocy, but probably harmless idiocy to everyone other than American-based traders and exchanges.

Posted by: Yancey Ward on July 23, 2008 at 1:15 PM | PERMALINK

Speculation can't drive the price up, unless the "speculators" buy up product, and store it.

The spot price drives the market. An offer to purchase forward that provides a premium over and above storage costs plus interests is a sure thing for other participants, even if the speculative premium turns out to be justified. Other participants will just take delivery at the spot price, hold it until the forward contract delivery date and make free money. This is true even if the future purchaser correctly predicted some exogenous shock.

Posted by: jayackroyd on July 23, 2008 at 1:16 PM | PERMALINK

McArdle says "speculation is not gambling." Speculation is gambling when you use margin. As of today, I only need $16,000 in my account to control 1,000 barrels of oil (worth $131,000). That's 8:1 leverage.

Gee, didn't we learn something in the real estate market when we allowed too much easy leverage there? Prices ran up out of control, didn't they?

To reiterate, oil futures contracts are essential for drillers and refiners to manage delivery in the marketplace. They don't need 8:1 leverage to do that. Take out the leverage, the gamblers will go home and the price of oil will be less volatile.

Posted by: Elliott on July 23, 2008 at 1:19 PM | PERMALINK

NPR did a segment on this yesterday -- the GOP rolled back the controls on commodity speculation, and the speculators made the most of the situation. No one could have imagined . . .

http://www.npr.org/templates/story/story.php?storyId=92793924

Congressional Democrats who want to lower gas prices by curbing speculation in oil futures saw their legislation survive a key vote in the Senate Tuesday.

Many Republicans question how much impact speculation has really had on prices, but they voted unanimously to let the bill move forward anyway.

GOP lawmakers are seeking a vote on lifting a longstanding moratorium on oil and gas exploration in the U.S. outer-continental shelf.

Speculation in the oil futures markets has exploded over the past few years, ever since a Republican-led Congress changed the rules so anyone could buy oil futures — not just those who actually intended to use that oil. As a result, the number of futures contracts has increased nearly 12-fold since 2001.

On Tuesday, Sen. Byron Dorgan, a Democrat from North Dakota, called that "excessive, relentless speculation."

In 2000, 37 percent of the people in the oil futures market were speculators, Dorgan said. Now, speculators make up 71 percent of the market.

"They've broken the market," Dorgan said.

Democrats cite estimates that speculation is responsible for between 20 and 50 percent of the recent spike in oil prices.

Sen. Mitch McConnell of Kentucky, the Senate's Republican leader, said he was skeptical.

"Nobody can say with a straight face that simply addressing speculation — a very narrow part of the problem — is a serious approach," he said. ...

At the White House, spokeswoman Dana Perino played down the significance of speculation.

"We believe that speculation does cause some volatility in the day-to-day market fluctuations of oil prices, but we believe that the root causes of high energy prices is supply and demand," Perino said.

The Commodity Futures Trading Commission issued a report Tuesday cobbled together by various Bush administration agencies. The report concluded that supply and demand is indeed the problem — not speculation. ...

Posted by: -ck- on July 23, 2008 at 1:23 PM | PERMALINK

jayackroyd: "Speculation can't drive the price up, unless the "speculators" buy up product, and store it."

No, I don't think that's the case. Let's say widgets cost $100 today. Speculators can bid up the price of the contract to deliver widgets in September to say $200 without actually buying or storing the product. Widget producers react to this by making more widgets and it is they who end up with excess inventory. This is exactly what we've seen with the rapid oil price drop and buildup of inventory. The speculators have closed their positions and never bought or stored a single drop of oil.

Posted by: Elliott on July 23, 2008 at 1:29 PM | PERMALINK

Kevin wrote: "The CFTC folks, like most other analysts, believe that the fundamental story is simple: supply is constrained and demand keeps going up. Result: higher prices. Speculation has little or nothing to do with it."

Speculation is a symptom of skyrocketing demand during a period of declining supply.

Posted by: SecularAnimist on July 23, 2008 at 1:32 PM | PERMALINK

Elliott,

Take out the leverage you described, and you won't have a futures market. When you buy a future, you are only buying the right to purchase oil at the the strike price on the expiration date, not buying the oil itself.

Posted by: Yancey Ward on July 23, 2008 at 1:40 PM | PERMALINK

I agree with you that a bill going 94-0 is probably a great sign of groupthink...;-)

As you're aware we've been writing for years at theoildrum.com on the fundamental demand and supply reasons for high oil prices. If we are at or near peak oil, that means we have around 1 trillion barrels of extractable oil left at an economic (or energetic) profit. For $8,000 margin one can control a futures contract which is 1,000 barrels. 1 trillion / 6.8 billion means there are about 150 barrels left for each person on the planet and all of their descendants. Thus, the clash we are witnessing between finite energy and infinite dollars is inevitable.

Position limits are probaby one necessary step forward on an increasingly slippery slope. With the Senate vote and likelihood of government equity injections to shore up FNM and FRE, it feels like we are moving from capitalism to socialism almost overnight. One wonders what the order will be on which industries will get nationalized first? Current trends would suggest airlines, banks, hospitals, and then energy companies? Am I missing anyone?

The CFTC report logically outlines that speculation is not to blame for high oil prices. But people don't want to hear it. I don't know how to get our political leaders to look three, two or even one step into the future. Our leaders continue to react to the problems on the surface while neglecting the fundamental willpower to address the problems underneath. These goings on at least make me glad I wasn't a female herbalist in 18th century Salem, Mass, or an evolutionary biologist in the days of the inquisition.

Freedom, just another word for nothing left to lose.

Posted by: Nate Hagens on July 23, 2008 at 1:40 PM | PERMALINK

I agree with you that a bill going 94-0 is probably a great sign of groupthink...;-)

As you're aware we've been writing for years at theoildrum.com on the fundamental demand and supply reasons for high oil prices. If we are at or near peak oil, that means we have around 1 trillion barrels of extractable oil left at an economic (or energetic) profit. For $8,000 margin one can control a futures contract which is 1,000 barrels. 1 trillion / 6.8 billion means there are about 150 barrels left for each person on the planet and all of their descendants. Thus, the clash we are witnessing between finite energy and infinite dollars is inevitable.

Position limits are probaby one necessary step forward on an increasingly slippery slope. With the Senate vote and likelihood of government equity injections to shore up FNM and FRE, it feels like we are moving from capitalism to socialism almost overnight. One wonders what the order will be on which industries will get nationalized first? Current trends would suggest airlines, banks, hospitals, and then energy companies? Am I missing anyone?

The CFTC report logically outlines that speculation is not to blame for high oil prices. But people don't want to hear it. I don't know how to get our political leaders to look three, two or even one step into the future. Our leaders continue to react to the problems on the surface while neglecting the fundamental willpower to address the problems underneath. These goings on at least make me glad I wasn't a female herbalist in 18th century Salem, Mass, or an evolutionary biologist in the days of the inquisition.

Freedom, just another word for nothing left to lose.

Posted by: Nate Hagens on July 23, 2008 at 1:40 PM | PERMALINK

What galls me about the summary is that "in theory, position limits should curb excessive speculation... but no longer serve their original purpose."

That wasn't the original point of position limits AT ALL. The point of position limits is to prevent a single entity gaining control of the PHYSICAL market by actually TAKING DELIVERY. See, for example, the attempts to corner the silver market in the 80s.

That's also why you're not allowed to have large positions in any given contract month. Perhaps the most harmful part of the law is the fact that it eliminates the contract-month limits in favor of one global limit on all delivery months. Presumably they are doing this to encourage long-only commodity investors to invest in the front contract, rather than further forward contracts. Various economists have raised the theoretcial possibility that there is a speculative impact on the real market by raising the price in the forward market, even in the face of backwardation. In the near term this has some justification on the basis of convenience yields (see Krugman) but even those economists speculating about the theory of whether a backwardated market could lead to a spot rise in price don't believe it's actually happening.

So basically, we're fighting a very theoretical, hypothetical speculative impact, with legislation that greatly increases the chances that we'll be subject to a cartel cornering the market in the future. Sounds like good policy to me...

Posted by: David on July 23, 2008 at 1:41 PM | PERMALINK

My mother always told me to not invest in commodities. Normally, I'd say that you can't always trust your mother. But mom was a trust officer, and she had responsibility for maintaining the value of massive pension funds. She was no amateur. Her opinion was that, in most markets, the investors understand the market. But in commodities, even the best traders don't really understand the market. It's just too complex and too manipulated to invest in. She made a lot of money for a lot of people by staying away. My guess is that if someone claims to know the oil market, they're lying.

Posted by: fostert on July 23, 2008 at 1:41 PM | PERMALINK

SecularAnimist: Speculation is a symptom of skyrocketing demand during a period of declining supply.

That's probably true, but it doesn't mean that speculation is desirable. Extreme volatility is economically destructive. I also suspect makes it psychologically harder for people to adjust. To a certain extent they're getting screwed by a casino that's rigged against them, and so blame everything on the casino effect. Hence they're less likely to accept the underlying reality of increasing demand and decreasing supply.

Posted by: alex on July 23, 2008 at 1:41 PM | PERMALINK

Kevin,

I think a better rule of thumb would be that if McMegan finds a piece of legislation to be "monstrous" then there must be something right with it.

Posted by: Steve Balboni on July 23, 2008 at 1:44 PM | PERMALINK

Yancey, you've confused an Option with a Future. An Option is the right to buy/sell at a later date. A Future is the obligation to make/take delivery of a commodity at a later date.

Posted by: royalblue_tom on July 23, 2008 at 1:53 PM | PERMALINK

The most important thing to regulate is speculating on margin. The ability to speculate with borrowed money opaquely is the real problem, and greatly distorts actual demand. Otherwise speculation and shorting stocks are important market functions.

Posted by: Brojo on July 23, 2008 at 1:58 PM | PERMALINK

It's a start. Speculation has been part of the problem, but until there is some sort of oversight of the refinery and distribution parts of the pipeline we will remain vulnerable to players gaming the market.

In California it's all about the refinery capacity, and the state would do well to buy a refinery that's been shut down, upgrade it to current specs and run it as a public utility, making enough gasoline that the price spikes even out. And then, the state would know how much it costs to upgrade and run a refinery, and the refinery owners couldn't use the 'regulations are killing my business' crap that gets trotted out every time gas prices spike.

I'm tired of the "we're switching to a summer blend" 20 cents a gallon surcharge every spring, and the 'California Blend' 40 cent bump all year long. Jesus, isn't an extra 40 cents a gallon enough margin for somebody in another state to make and ship us some gas? Well, it would be, if the same companies didn't own refineries in both places.

I'm also very tired of hearing conservatives complain that we 'haven't built any new refineries because of regulations' in an age of industry consolidation and lax regulators. There's a closed refinery 4 miles from me, owned by a group of investors including Pat Robertson. It's the subject of this article from Raw Story;

"The memos from Mobil, Chevron and Texaco show the following.

-- An internal 1996 memorandum from Mobil demonstrates the oil company's successful strategies to keep smaller refiner Powerine from reopening its California refinery. The document makes it clear that much of the hardships created by California's regulations governing refineries came at the urging of the major oil companies and not the environmental organizations blamed by the industry."

http://rawstory.com/news/2005/Group_Internal_memos_show_oil_companies_limited_refineries_to_drive_up__0907.html

Posted by: Jim 7 on July 23, 2008 at 2:12 PM | PERMALINK

According to Sen. Dorgan the world uses about 86 million barrels of oil each day. Yet the world trades 1.6 billion barrels of oil on paper each day. That's crazy.

Posted by: markg8 on July 23, 2008 at 2:14 PM | PERMALINK

The editors note that Kevin Drum and the Oil Drum are not related.

Posted by: K on July 23, 2008 at 2:20 PM | PERMALINK

Jim 7: In California it's all about the refinery capacity ...

Haven't you people heard about Canada and Mexico? Here on the East Coast we like to get our gas refined in New Brunswick.

The US also buys a lot of gasoline from Europe, where their heavy use of diesel means they have surplus gas. I imagine it's cheaper to ship it to the East Coast.

Posted by: alex on July 23, 2008 at 2:20 PM | PERMALINK

I have a different take. The bill sounds heavy handed (and probably ineffectual) but speculation has indeed driven the cost up. Before the housing crash- flip bids amounted to less than twice the amount of oil available. Now it is twice as much because of the involvement of banks and investor houses. In other words, Citibank never bought big positions in oil futures until recently, so did everybody else. The massive investment lead to demand change driven by, yes, a bubble which would necessarily get busted. The institutions are hoping to ride the wave for 1-2 years as the housing market settles- when that happens, they will be out. The "real" price should be $100/barrel +/- $20 for the next 3-5 years.

Posted by: Raoul on July 23, 2008 at 2:21 PM | PERMALINK

Oil is underpriced. Buy.

Posted by: Luther on July 23, 2008 at 2:27 PM | PERMALINK

RoyalTom,

True, they are different up to a point, but they are similar in the most important respect, you can always close either at any time- in the case of futures, you do this by taking the opposite side of the contract. The obligation comes due only if you don't close out early, or you don't settle the contract on cash terms.

Without the leverage, all you would have is long-term oil delivery contracts and spot buyers/sellers, with no ability to hedge price risk outside the group.

Posted by: on July 23, 2008 at 2:56 PM | PERMALINK

The comment at 2:56 is mine.

Posted by: Yancey Ward on July 23, 2008 at 2:58 PM | PERMALINK

I wouldn't support the bill either, but "monstrous"?

"You keep using that word. I do not think it means what you think it means."

Posted by: Brock on July 23, 2008 at 3:06 PM | PERMALINK

Elliot--

Your argument implicitly presumes that the manufacturer cannot also participate in the market. In fact, not only can the manufacturer participate, but the vast majority of the partipants are people with inherently long and short positions, like bakers and wheat producers.

Note also that successful commodity markets involve commodities that have price uncertainty that both sides of the market want to hedge against. These are the majority of the participants.

In your example, speculators who offer long contracts at above the spot plus cotango will find the manufacturer purchasing those contracts before any production increase, making that increase riskless, and leaving the stupid speculator with a need to take delivery, as his actions have had the effect, in your example, of lowering price. You can't stay in markets for very long if the actions you guarantee that you are going to buy high and sell low.

This may create a boom and bust cycle, as has happened with corn and pork bellies, but even an exogenous weather shock was involved. All commodity markets are designed to protect both sets of participants from shocks, at a price, and are always the bulk of the participants.

Now what may be different here is that there are a lot of non-participants who believe that oil is inevitably going to rise in value, and so the speculative participation is more than usual. But those contracts are still driven by the spot price, plus cotango for the reasons I outlined above. You may have half the participants just nakedly betting on higher prices with heavy leverage, but they can't move the spot price by doing so, except, perhaps, by doing the equivalent of what you suggested by producers building inventory. But there's no reason to do that. Producers can get those forward prices by buying the contracts now, and delivering. That's what forces prices down, because, of course, even you think oil will cost 200 in 12 months, you'd rather buy a contract for 170 than 195.

Everything has to be driven by supply and demand as reflected in the spot price. I think the reason for gas prices being where they are is that the heavily concentrated refinery industry is restricting supply.

Posted by: jayackroyd on July 23, 2008 at 3:16 PM | PERMALINK

Grand Moff: I suggest a futures market, or simple office pool, betting on the next time Kevin links to Megan.

We could do another one on Amy Sullivan.

Nate: Unfortunately, B.O. will do no more to talk about Peak Oil than will Schmuck Talk. Maybe a dime's worth of difference, but often, not more than a quarter's worth.

Posted by: SocraticGadfly on July 23, 2008 at 3:27 PM | PERMALINK

Yancey Ward: Without the leverage, all you would have is long-term oil delivery contracts and spot buyers/sellers ...

In other words, all you'd have would be a commodities market that serves the purpose of a commodities market.

Posted by: alex on July 23, 2008 at 3:27 PM | PERMALINK

And now I've done something I've been meaning to do for a while.

Elsewhere in the industrialized world, the actual cost of gasoline ranges from $2.15 a gallon (France) to $2.61 in the Netherlands. But the after-tax price is $5.80 in France and over $6 a gallon in most other major European countries. Japanese drivers get off relatively easy: taxes there only push pump prices to about $4.50 a gallon.

Federal taxes are 18.4 cents a gallon. NJ has one of the lowest tax rates (and doesn't allow self-serve) at 14 cents. So total tax there is 42.4 cents a gallon. Current price in Fort Lee is $3.93 according to a cheap gas website.

That works out to $3.51, rounding, before taxes more than half again as in much of Europe. I would say that the refiners are indeed restricting supply.


Sources found through teh Google for this:


http://money.cnn.com/2007/05/22/news/economy/full_service/index.htm

http://www.msnbc.msn.com/id/12452503/

http://www.eia.doe.gov/bookshelf/brochures/gasolinepricesprimer/

Posted by: jayackroyd on July 23, 2008 at 3:32 PM | PERMALINK

The argument for restricting leverage is to protect speculators from themselves. As we have been seeing, doing at the back end, after they've burst the bubble is a lot more expensive than keeping it from growing in the first place. This isn't a bubble, but the same reasoning applies. Hordes of potentially broke investors in financial instruments must be bailed out. Homeowners? Not so much.

Posted by: jayackroyd on July 23, 2008 at 3:38 PM | PERMALINK

Yet the world trades 1.6 billion barrels of oil on paper each day. That's crazy.

No it's not. Futures contract are over long periods of time. The whole point is that you're not trading just today's usage, but the next year's usage, with the prices farther out reacting to product supply/demand, and exogenous shocks.

Posted by: jayackroyd on July 23, 2008 at 3:45 PM | PERMALINK

jayackroyd>> The argument for restricting leverage is to protect speculators from themselves.

It's to protect the economy. Restricting leverage on oil contracts will help lower the volatility. That, in turn, will help lower the volatility in gasoline prices. Joe Sixpack is really hurting right now and the economy is hurting right along with him. Energy is a necessity for everyone and it doesn't make sense to allow it to be jerked around by speculators chasing a fast buck who play with 8-to-1 leverage.

Posted by: Elliott on July 23, 2008 at 3:52 PM | PERMALINK

Yancey,

There is no inherent leverage in the future's price, whereas the option has the leverage built in.

It's the exchange allowing margin for futures trading accounts, that adds leverage back in artificially. Removal of it would just mandate that futures traders put up the full money for the contract. Whereas your subsequent explanation to Eliot suggested that you could'nt actualy have Futures without leverage.

So you are correct - "you would have is long-term oil delivery contracts and spot buyers/sellers", but technically, this is still a Futures market ...

Posted by: royalblue_tom on July 23, 2008 at 3:55 PM | PERMALINK

jayackroyd: I think the reason for gas prices being where they are is that the heavily concentrated refinery industry is restricting supply.

If refineries were the bottleneck, that would tend to reduce the price of crude. Is that happening?

Also, gasoline prices are actually lower than the price of crude would suggest. That's why in the last few years diesel has gone from being cheaper than gasoline to more expensive.

There is a glut of gasoline compared to distillates like diesel and jet fuel. Partly this is driven by Europe, because so many of their cars are diesel and they sell us the leftover gasoline from their refineries.

Posted by: alex on July 23, 2008 at 3:59 PM | PERMALINK

Restricting leverage on oil contracts will help lower the volatility

Can you show some evidence of that? I don't see why it would.

Posted by: jayackroyd on July 23, 2008 at 4:04 PM | PERMALINK

If refineries were the bottleneck, that would tend to reduce the price of crude. Is that happening?

Sure. But look at Kevin's chart. World GDP growth swamps that effect. How do you explain the pre-tax price differential between the US and the EU?

Posted by: jayackroyd on July 23, 2008 at 4:06 PM | PERMALINK

...supply is constrained and demand keeps going up. Result: higher prices. Speculation has little or nothing to do with it.

Actually demand is NOT going up anymore, people have cut back on gasoline consumption very noticeably and we stopped filling the national oil reserves, so how could speculation have NOTHING to do with it, it OIL is the only profit game left in town?

Everybody is speculation on oil, and if does go, I mean without backing off slowly, if we have any big bank collapse in a one market economy we're going to see precisely how bad all this speculation on oil has been to our national economy.

There is nothing else out there holding the US ecomony up right now except for oil spectulation. Not getting those oil contracts in Iraq may just cause China to reconsider their loaning us anything anymore. We've very close to having a full out, full blown depression, thanks to Bush's big corporate only government policys for the last eight years.

Posted by: Me_again on July 23, 2008 at 4:09 PM | PERMALINK

I was surprised to read this business about US importing gasoline from Europe, because I'd remembered reading stories like this one:

Trend confounds observers
Tom Doggett, Reuters
Published: Friday, July 04, 2008

While the U.S. oil industry wants access to more federal lands to help reduce reliance on foreign suppliers, American-based companies are shipping record amounts of gasoline and diesel fuel to other countries.

A record 1.6 million barrels a day in American refined petroleum products were exported during the first four months of this year, up 33 per cent from 1.2 million barrels a day over the same period in 2007. Shipments this February topped 1.8 million barrels a day for the first time during any month, according to final numbers from the Energy Department.

The surge in exports appears to contradict the pleas from the U.S. oil industry and the Bush administration for Congress to open more offshore waters and Alaska's Arctic National Wildlife Refuge to drilling.
[snip]

However, both the EIA and API admitted they do not know why daily U.S. gasoline exports to Canada skyrocketed to 41,000 barrels in January-April this year, from 9,000 barrels in 2007.

http://www.canada.com/calgaryherald/news/calgarybusiness/story.html?id=1a0f5188-84ec-49ef-b983-f626c0664ecd


Posted by: jayackroyd on July 23, 2008 at 4:13 PM | PERMALINK

Weekly gasoline import totals for July from the US EIA:


7/4 1,181
07/11 1,174
07/18 1,170


Posted by: on July 23, 2008 at 4:21 PM | PERMALINK

Alex,

Forwards and futures markets were started by commodities buyers and sellers for the purpose of hedging risks outside the commodity's market itself. Eliminating the leverage in futures trading that Elliot was advocating above would eliminate the futures market altogether. Practically no one will put up, for example, $131K to to take delivery of 2011 oil- such a person is simply trading one risk for another. How do I know this? I know this because futures on oil trade on a free-bidding market for a fraction of the underlying value of the commodity.

Royaltom,

Such futures without leverage would not work, but I get the feeling people here are talking about two separate things- margin requirements and the observable fact that futures contracts trade at a fraction of the underlying commodities present/predicted future value. Even simple contracts for future delivery of a good rarely require complete upfront payment, but rather defer most of the payment to the future date of delivery, and for a very good reason- you would be taking on credit risk if you paid up front. If the exchanges' margin requirements are raised, then it seems to me that the actual contracts themselves will trade at even lower ratios, not higher.

Posted by: Yancey Ward on July 23, 2008 at 4:41 PM | PERMALINK

Restricting leverage on oil contracts will help lower the volatility

Also, in general, high volatility is associated with thin markets. More participants means less volatility.

Posted by: on July 23, 2008 at 4:56 PM | PERMALINK

Wall Street Got Drunk?

That is what Bush says in this recent video that was taken unawares. Didn't Bush get to big for his pants? I wonder if Wall Street investors thinks so?

WaMu Has $3.3 Billion Quarterly Loss on Delinquencies (Update3)
Bloomberg - 21 hours ago
Citigroup recorded a $2.5 billion loss last week, while JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co. reported drops in profit.

Have banks bottomed out?
Chicago Tribune, United States - Jul 19, 2008
The news drove down the KBW Bank Index by 8.5 percent on Monday. But as the week wore on, megabanks Wells Fargo, JPMorgan Chase and, on Friday,

It all sort of looks like Saving and Loan scandal we had last big oil spike of 1985.

Posted by: Me_again on July 23, 2008 at 4:58 PM | PERMALINK
Actually demand is NOT going up anymore, people have cut back on gasoline consumption very noticeably and we stopped filling the national oil reserves

US demand may not be going up, but is world demand still going up? Oil is traded globally, after all.

Posted by: cmdicely on July 23, 2008 at 5:33 PM | PERMALINK

*

Posted by: mhr on July 23, 2008 at 6:48 PM | PERMALINK

As you're aware we've been writing for years at theoildrum.com. It's not been easy, getting millions from the oil industry to pretend to be just concerned citizen experts. Astroturfing isn't what it used to be. Corporate contributions are down, the Abramoff scandal made us all look bad, and people are getting harder to fool.

But we'll continue on, because the only alternative isn't a solar and wind powered world, the only real alternative is to get a real job.

Posted by: Nate Higgins on July 23, 2008 at 6:57 PM | PERMALINK

"has suggested that the US oil industry be nationalized. "

All major infrastructure should be nationalized.

Leave Capitalism to the new ideas and products. Private ownership of common-as-dirt utilities is stupid, consumers just get ripped off.


Posted by: Harold S on July 23, 2008 at 7:01 PM | PERMALINK

I took a quick look at Megan's post, and it looks to my eyes like she didn't look at the specifics of the legislation. There's no analysis of its contents like the stuff Kevin provides us. I suspect she reacted emotionally, without bothering to learn the details, as in "Free markets good, a government curb on free markets bad!" For what it's worth I actually like Megan's blog (and free markets, too). But as Kevin points out, this legislation is pretty unradical stuff. Megan would have learned that had she bothered to read up on the contents of the bill.

Posted by: Mister P. on July 23, 2008 at 7:53 PM | PERMALINK

>The "real" price should be $100/barrel +/- $20 for the next 3-5 years.


Oh man, screw the bill, it's way too tame. Just make the whole market illegal, and let Raoul and his Magic Price Calculator tell everybody what the actual price should be.

And then he can apply it to wheat, and water, and pretty much everything. "Knowing" what soemthing should cost worked so well for the USSR.

Posted by: doesn't matter on July 24, 2008 at 8:33 AM | PERMALINK

I have sent this same message to quite a few senators, congressmen, President Bush and reporters. It is ridiculous that our government offers tax incentives to speculators, all while talking about trying to reduce speculation in the energy markets.

I have read several articles surrounding placing limits on oil speculation. One angle has not been addressed in any of the articles is why there is preferential tax treatment for trading futures contracts?

The Tax Act of 1981, treats short-term profits in futures trading as 60% long-term (therefore subject to a maximum tax of 15%), and 40% short-term. This applies to Capital gains from trading IRS Section 1256 contracts such as commodity futures, index futures, and index options as reported by your brokerage 1099-B (or 1099-C for tax years prior to 2006).

PLEASE HELP ELIMINATE THE TAX INCENTIVE FOR SPECULATING IN THE ENERGY AND FINANCIAL MARKETS!!!

This tax policy is contrary to the rhetoric spewed out by the politicians daily.

Posted by: Bob on August 21, 2008 at 12:38 PM | PERMALINK

Hello very nice site! sitemap

Posted by: alaska schools sexual harassment policies on April 12, 2009 at 6:30 AM | PERMALINK

E933SM comment3 ,

Posted by: Mhoiisxn on June 25, 2009 at 12:42 AM | PERMALINK




 

 

Read Jonathan Rowe remembrance and articles
Email Newsletter icon, E-mail Newsletter icon, Email List icon, E-mail List icon Sign up for Free News & Updates

Advertise in WM



buy from Amazon and
support the Monthly