Wednesday, April 20, 2011

Oil Futures Speculation and the Spiking Price of Gas

The business pages agree and now even the President is chiming in, although it seems the establishment mainstream press tends to avoid publicizing these discussions.   How can the price continue to rise even when surpluses continue to stockpile? [***see below for relevant news***]  According to the theory of supply and demand, when there is an over-supply, prices are supposed to fall...
Ed Wallace in Business week says "It's no secret that speculators are driving up fuel prices. ...  It's no great mystery who is responsible for higher gas prices. As I and others have written in the past, the biggest culprits are the speculators gaming the futures markets to line their own pockets. We know all that."
Huh, maybe no secret to him, but definitely a secret from most of the American public, who blame oil company greed for expensive gas. 
Even Goldman Sachs is alarmed over the inflating bubble in oil speculation:  "Goldman Sachs advised its clients on Apr. 11 to get rid of their commodities holdings, including oil. The Guardian quoted Goldman's advice as warning: 'The record levels of speculative trading in crude have pushed their prices up so much in recent months that in the near term, risk reward no longer favors holding those commodities.' "
Wallace ultimate pins the blame on the easy money policy at the Fed, which is flooding the world with cheap dollars, enabling and encouraging financial speculators to pump up bubbles in commodities:

"The problem starts with Ben Bernanke, no matter how many of his Fed presidents claim they are not to blame for the high price of oil. The fact is that when you flood the market with far too much liquidity at virtually no interest, funny things happen in commodities and equities. It was true in the 1920s, it was true in the last decade, and it's still true today."

In the end, it comes down to creating big profits for banks at the expense of the American citizens, because banks need the profits to pay off the bailout loans that the fedgov gave them:

"Ben Bernanke doesn't seem to understand that while he is allowing huge profits for banks and investment firms so they can recover massive losses from the financial meltdown, he is intentionally damaging what could be a much stronger recovery with the misery he's causing the average American consumer. Maybe he does understand and just doesn't care. There's always China to blame."

[read the whole of Wallace's article here:]


The Law of Supply and Demand Drives Futures Markets Too

The President characterizes the futures contracts as "bets", which is the standard interpretation and justification for these things.  The problem is, the financial elite don't "bet on the market", in the same way that a small dealer is betting when he takes out a futures contract. 

Rather, the financial elite are driving the market, because of the tremendous amount of money they can bring to bear.   When they issue a buy order, the money flows in.   The greater money inflow drives up prices. 

When you have the billions in free money, you can move the market like that.  It is like a money-making machine.  When they issue the sell order, the prices will automatically fall, because they represent such a huge market stake. 

An organized movement to rein in the madness can be found here:

Stop Oil Speculation Now

Obviously, financiers should not be allowed to speculate in markets like this.  It should be made illegal, no exceptions, with harsh penalties for those who attempt to profit like parasites on people's need for basic commodities like food and energy.   Only people with legitimate economic interests in a market, i.e. the producers, retailers, and consumers, should be allowed to purchase futures contracts to hedge their financial positions.   


***The oil minster of Saudi Arabia, for example, points to the large surplus in oil production and stockpiles:

"Saudi Arabia's oil minister says the current high oil price is unjustifiable and that speculation over the future oil markets is mainly behind the hike.  Ali Naimi told reporters the lower demand for Saudi oil in March compared to February was a sign of an existing surplus on the global market.  He says large quantities of oil were available as commercial stockpile or surplus production in some oil-producing countries. Naimi spoke after a meeting on Tuesday with Dutch Economic Affairs Minister Maxime Verhagen.  []

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