By J.D. Seagraves, on September 19th, 2008
On Monday, the Dow Jones Industrial Average – the bluest of Wall Street’s blue chips – lost 4.4% in a single day. Fannie Mae and Freddie Mac have been “seized” by the government. Oil continues to drop while gas prices rise. Inflation runs high while jobless claims continue to soar and gold falters. What a strange economic cocktail! Let’s look at the issues one by one:
First, “Black Monday.” It was prompted by the announcement that investment-banking giant Lehman Brothers would be filing for bankruptcy protection. This, after a weekend spent trying to negotiate a government bailout. For once, the government blinked. A week earlier, the markets soared on the news that the feds had “seized” control of the mortgage industry through Fannie Mae and Freddie Mac. Smart traders who hadn’t already taken the hint knew that those gains were illusory.
Now how is it that oil can continue to fall while gas prices have been on the rise? Two words: Hurricane Ike. It threatened refining capacity, which has nothing to do with the price of crude oil but everything to do with your pain at the pump. The real question is why does oil keep falling? That’s actually a troubling sign given the inflation being felt elsewhere in the economy. And the answer is: demand is softening…even in the face of monetary expansion. That does not bode well.
Is there really any question why consumer prices continue to rise? It can’t be blamed on OPEC (oil is dropping), or greedy corporations (profits are down), or labor unions (they hardly exist anymore), or the greatest scapegoat of them all, illegal immigrants (they’re moving back to Mexico!). No, instead, we’re finally confronted with the reality that the Federal Reserve creates “price inflation” (higher prices) through monetary inflation (creating new money). Just this past Tuesday, they unleashed another $70 billion into the economy. Think that won’t find its way into the price of your milk? Think again.
That jobless claims continue to rise shouldn’t confuse anyone unless they’ve had an economics class recently. Just three years ago, when I was taking introductory Micro- and Macroeconomics courses, my professors still taught the widely discredited Phillips Curve – the Keynesian idea that there’s a “trade-off” between inflation and unemployment (i.e., if you have high inflation you should have low unemployment and vice versa). Of course, this was objectively destroyed by the 70’s stagflation, and we’re headed there again.
But how is it that gold, presumably a measure of the dollar’s value, is falling even as dollar-denominated consumer prices rise? Well, as I stated earlier, it’s because gold was overbought – with Fed-created fiat money – and became its own bubble. As the Fed continues to inflate, though, look for gold to rise.
By G.L.C., on September 12th, 2008
Global oil markets are sensitive to weekly reports of U.S. oil inventory levels. Prices often move up when large falls are reported and down when inventories build – particularly when the data surprises the market. Each Wednesday, the U.S. Energy Information Administration (EIA) publishes its report on oil inventories. Unexpected drops can spark price spikes on the main oil futures benchmark on the New York Mercantile Exchange.
Concerned that companies may be reporting false inventory levels to benefit their own trading positions, regulators are now investigating whether companies are injecting false data into the marketplace to influence perceptions about crude oil supply and demand. A company could under-report barrels in its inventory to suggest oil is scarcer than it really is and then sell its physical oil at a higher price when the prices increase.
It is illegal to provide false data to the EIA. While the EIA does not physically check the inventory to audit the accuracy of the reported data, it looks at other data on supply and demand to determine if the reported data is correct.
The U.S. Commodity Futures Trading Commission (CFTC) is now probing to learn if companies are reporting false inventory. It is now taking depositions about big market moves by companies that occurred unexpectedly, especially during the rapid shift in the structure of the oil markets in July 2007. During that time, oil for near term delivery had been selling at a discount to oil to be delivered months and years into the future. Suddenly oil for immediate delivery became much more expensive when the inventory of oil at a key hub declined rapidly.
The CFTC has been under increasing pressure to take action. Congress is debating whether to require it to take new steps to curb abuses. It has also been criticized for lax regulation.
The present probe is a part of a long term investigation as well as an attempt by the CFTC to improve its information and understanding of the workings of the energy market it regulates. As a part of its investigation, the agency sent out information requests to large oil traders, Wall Street firms, energy companies, and physical oil merchants. The agency is seeking the names of firms’ biggest traders and the email and instant messaging correspondence about the markets dating back to early 2007. In some cases, the correspondence requested dates back to 2005. The agency has also requested details of storage holdings and other physical assets the traders may own or control.
The probe as already started drawing criticism. The information requests are being characterized as overly broad. Critics also say that the CFTC is asking the companies and firms to disclose any unfair, improper, unethical, and unlawful practices.
The government, in an effort to control the ever increasing oil prices, has taken a few concrete steps, including efforts to rein in the speculators, and these efforts are beginning to show results. The price of oil today is less than what is was a couple of months back.
The probe is a step in the right direction. It is critical to ensure the integrity of the futures market in oil given the impact oil prices can have on all consumers.
By Evelyn Black, on August 25th, 2008
My last post here at Amateur Economists was all about the crazy run-around I experienced trying to get heating oil delivered to our house this summer for the coming winter. We ordered the tank filled in early June; but it was just last week that I finally got a heating oil company to fill our tank. CBS News also ran a special report last week about how the credit crunch in the financial markets is making it difficult for small East Coast oil companies to purchase heating oil for delivery. Subsequently a number of such companies in New England have already gone belly up.
While everyone I called here in Michigan staunchly denied that Mid-west supply problems or credit issues were crimping the availability of heating oil, the fact remains that, for the first time, it took a summer of arguing with various heating oil distributors to get one to finally deliver some to us, even though we were prepared to pay for it in full (and did). This is very unusual, since in the past these companies have always been anxious to deliver oil out of season, and even offer a discount for ordering it early.
Those days appear to be past.
Last winter it cost us about $2300 to heat a 1000 square foot, well insulated home with our oil burning furnace, and the cost per gallon is higher this year, even now. So we decided to research alternative ways of heating our home without committing to any one particular plan. After getting prices and reading up on all sorts of heating methods, we decided to buy a wood pellet stove.
Wood pellet stoves burn much cleaner than wood stoves. They make so little ash that they can be vented directly outside via a three inch pipe, much like a clothes dryer. They do not require a chimney and they do not build up dangerous creosote. The wood pellets are relatively cheap (currently about $350 for a pallet of bags that will keep a home this size heated all winter), and save the homeowner from constant scrounging for wood and the labor involved in splitting and storing wood.
Best of all, wood pellets are made from waste wood and sawdust that is compressed to remove all the moisture, so no trees are destroyed solely for the purpose of fueling pellet stoves. This is wood and wood products that would be thrown away anyway, and the burn is so clean it produces very little smoke. Some pellet stoves will also burn dried corn. Others will burn switchgrass pellets. So basically, the energy source is almost completely renewable.
One drawback: Because the pellets are fed into the burner from a hopper electronically, a small amount of electricity is needed to run the stove. This means that if you plan to rely heavily on a pellet stove, you want to make sure you have a back-up generator or another source of heat, just in case the electricity goes out.
We found a pellet stove for $1100. The installation will run about $400, and the pellets for the winter between $350 and $500. This means we will completely recoup our investment our very first winter, and we do have a full tank of oil and a working oil furnace that we can use for back up if necessary. Speaking with friends who actually live in larger homes and have used pellet stoves for several years, we discovered they rarely needed to use their original source of heat (the furnace). The pellet stove was sufficient.
So far, so good. But consider this: Almost every place we went to look at these stoves had a story to tell. The first store manager told us that last year he sold two pellet stoves in July. This July he sold 46. The next two places we visited have been unable to obtain the stoves for months and have tons on backorder. Three stores told us the stoves are no longer available from East Coast distributors, but some Mid-west distributors still have them in stock. We felt lucky to find a company that did have some still available for delivery. Ours should be here in about five days.
An article in the New York Times explains that even though oil companies made record profits this year, all of them are having supply problems due to geopolitical issues. U.S. oil supplies have been dropping for five consecutive quarters now, with the most recent quarterly drop being the steepest of all.
Western oil corporations deny vehemently that the scary “peak oil” scenario is responsible for this decline. Instead, they refer to “geopolitical peak oil”; which means that countries like Venezuela, Russia, and Iraq want to keep their oil profits in their own nations, even if it means having to develop the oil fields themselves and shut out multinational oil corporations.
It is completely understandable why developing nations would want to nationalize their oil profits. What is somewhat harder (for me) to understand is why our own government isn’t addressing what could turn out to be a real crisis here in the U.S. should we get hit with a very cold or severe winter.
Last winter, in the Michigan city in which I live, an elderly woman froze to death in her own home because the only disconnect notice legally required of the utility company was a warning flier tucked in her front door. It was still tucked in her front door when relatives found her body. She had been dead of exposure for several days. Family members said she was probably embarrassed to ask for help.
By G.L.C., on August 22nd, 2008
The high oil prices have forced the government to act once again. Earlier it was the Stop Excessive Energy Speculation Act – an attempt to rein in speculations in the oil market.
In July 2008, when the price of oil touched $150 a barrel, the Federal Trade Commission came under increasing pressure from lawmakers to act tough. The lawmakers felt that the main reasons for the high oil prices were excessive speculation and possible manipulation. The Excessive Energy Speculation Act tries to rein in speculation. To combat possible manipulation in the oil market, the FTC has proposed the anti-manipulation rule. This is an attempt by the FTC to fulfill its Congressionally-mandated responsibility to prevent manipulation in wholesale oil and petroleum distillate markets.
Perhaps the biggest and most well hidden goal of the oil manipulators is in their long term strategy. By creating a public perception that there is a shortage of oil, the blame will fall on OPEC. With an angry public attacking some of their politicians to make it better, legal restrictions prohibiting drilling in ecologically sensitive areas might be rescinded. Drilling in the Gulf of Mexico, along the California coast, in Prudhoe Bay Alaska, along the Alaskan coastline – everywhere where they were heretofore prohibited from drilling would be opened by public demand. This long term windfall would make the present flow of cash look like peanuts. And the damage done to fragile environments would be incalculable.
The rule defines manipulation as knowingly using or employing, directly or indirectly, a manipulative or deceptive device or contrivance – in connection with the purchase or sale of crude oil, gasoline, or petroleum distillates at wholesale – for the purpose or with the effect of increasing market price thereof relative to costs.
The proposed rule covers both spot and futures market and prohibits petroleum market manipulation. Under the rule, the FTC can levy fines up to $1 million per violation a day. The FTC hopes to conclude the rule making process by this year end.
The rules would bar any fraud or deceit in the purchase or sale of crude, gasoline, or other petroleum product. Fraudulent or deceptive acts, including false reporting to private reporting services or misleading announcements by refineries, pipelines, or investment banks, will be covered by the proposed rule.
The rules are modeled after the market manipulation prohibitions maintained by the Securities and Exchange Commission and targets fraudulent or deceptive conduct “that threatens the integrity of wholesale petroleum markets.” It would be unlawful for any refineries, pipelines, investment banks, or any other outfit to directly or indirectly commit fraud in the purchase or sale of crude oil, gasoline, or petroleum distillates at wholesale. There would be no new obligations or record-keeping requirements.
The proposed rules also cover the futures market – the domain of Commodity Futures Trading Commission (CFTC) and is likely to spur a regulatory turf battle between the FTC and the CFTC. The CFTC is authorized by the Commodity Exchange Act to bring an action against anyone who has unlawfully “manipulated or attempted to manipulate the market price of any commodity.”
Many experts feel that the new rules will serve no purpose. Why? An FTC report issued on May 22, 2006, found no situations that might allow one firm or a small collusive group to manipulate gasoline futures prices by using storage assets to restrict gasoline movements into New York Harbor, the key delivery point for gasoline futures contracts.
By Evelyn Black, on August 14th, 2008
In early June, worried about the rapid increase in the cost of oil, I called my home heating oil provider here in Michigan and ordered a delivery to fill our tank, which is currently almost on empty. The price to fill the tank at that date was just shy of $1100, and last winter we needed to fill it four times. The house we live in is about 1000 square feet and well-insulated, and we’ve added extra insulation and stopped using hot water. Last winter cost us about $2300 to get through: This winter will easily be double that, if not worse, barring a miracle.
We don’t have a gas line to our house, and even if we could afford to install one this year, we would also have to replace the furnace, so my thought was, better to start out with a full tank of heating oil at the outrageous June price than an empty tank in November when the temperature starts to plummet and prices might be anything at all.
Three weeks later, no oil delivery. I called our company and was asked if I needed the oil to heat water. I said, “What does that have to do with it?” The woman on the other end of the line said they rarely deliver oil in the summer unless it’s truly needed, which I know is untrue: Usually oil companies like it if you order in  summer because it’s one less winter delivery they need to make when everyone and their brother is calling after the first snowfall. Often you even get a discount for summer delivery.
I said, please, deliver it. We’re nervous. Fill our tank. We have payment in full.
Another month went by, no oil. I called again. They said no trucks had been out our way. (We live in a city of under 100,000 people.) I said, well, when might trucks be out this way? She didn’t know. A couple weeks maybe?
Now it’s three weeks later and still no oil, and tonight on CBS news I learned that because of the credit crunch, many small home fuel oil delivery companies are unable to obtain credit to buy the oil their customers need. Some customers on the east coast have paid as much as $5000 in advance for winter heating oil, only to find out the company has gone belly up, their money is gone, and they still don’t have oil. Basically, they will have to pay for it twice because you can’t get through winter in New England without some way to heat your home, but can you imagine, in this economy, having to come up with 10K on the spur of the moment just to make sure your pipes don’t freeze this winter?
So now, I have to start calling oil companies in our locale and find one that actually has oil that they will actually deliver to our home. It’s sailing into mid-August now, and in another six weeks it will no longer be a topic for an economics blog; it will be time to get out mittens, long underwear, and start burning furniture in a hot-wired wood burner.
Over the not-very-long run, we will have to find a different way to heat our house. Sooner would be better than later. But for the short term, we need oil, and at least one of us is getting scared. I’m not writing this to cause a panic. Panic never solves anything. I just thought some of our readers might like a heads up. I know I certainly would have liked one in June, as in the truth straight out, instead of waiting to see it on the Nightly News from Katie Couric, who is not exactly my best friend.
I’m a Brian Williams kind of girl myself.
To read the complete article at the CBS New website about the coming home heating oil crisis, you can go to Home Heating Oil Hell at the CBS website.
Then, without making to much of a fuss or freaking out overly, you might want to get on the phone and keep calling oil companies until you find one who will deliver some heating oil to your home, now. Today.
That’s what I’m going to do. I’ll let you know how it turns out in a future post, along with our best and worst ideas for what to do to change this next year.
By G.L.C., on July 30th, 2008
The rising oil prices have forced the government to act. Many experts have blamed the recent increase in oil prices on speculation. The government is planning to introduce a legislation – the Stop Excessive Energy Speculation Act – in an attempt to rein in speculations in the oil market. Will the legislation in its present form achieve its goal?
The legislation requires the Commodity Futures Trading Commission to eliminate excessive speculation in oil. It aims to do this by restricting the amount of trades by certain participants. The CFTC will have to differentiate between “legitimate” and “non-legitimate” hedging by market participants and gather data on over-the-counter and index traders and swap dealers. It will increase transparency and disclosure requirements so as to equip the CFTC to more effectively carry out its proper role of commodity market oversight.
The legislation also authorizes the CFTC to increase its staff by 100 to fulfill its new responsibilities.
The legislation will place sensible checks on the influence of speculators by placing reasonable limits on large, over-the-counter trades and by closing the loopholes that have permitted traders to make large-scale speculative trades through overseas exchanges. It will compel U.S.-based traders to abide by the U.S. regulatory regime when placing trades on foreign exchanges.
The legislation is sponsored by Senate Majority Leader Harry Reid (D-Nev.) and Sens. Dick Durbin (D-Ill.), Patty Murray (D-Wash.), Charles Schumer (D-N.Y.), and Amy Klobuchar (D-Minn.).
Critics point to a provision in the legislation that would allow the regulator to order companies to liquidate their swaps transactions if it concludes that a major market disturbance has occurred. In reality, this would require companies to break their privately negotiated risk management contracts, even if the swap complied with trading limits that were in place when it was originally negotiated. In its present form it is likely to face strong opposition, especially from the Republicans, unless it includes provisions for expanding domestic oil drilling. The legislation could drive commodity markets out of the U.S. and make it more expensive for bona fide hedgers to protect themselves from volatile prices, according to the group.
This legislation is not the only effort underway to rein in speculators. Collin Peterson (D-Minn.), House Agriculture Committee Chairman, is working on a bill to tighten regulation of over-the-counter and swaps trading in the agricultural and energy futures markets. The Chairman of the House Energy and Commerce Subcommittee on Oversight and Investigations Rep. Bart Stupak (D-Mich.) has introduced legislation to curb participation by investors and other financial players in the energy markets.
Is it just speculation or is there more to the rise in oil prices? On July 18, oil prices tumbled below $130 a barrel for the first time in more than a month. Did the proposed legislation have anything to do with this? What will happen if the oil prices increase after the proposed legislations is passed?
By Evelyn Black, on July 25th, 2008
On July 8, oilman T. Boone Pickens launched a personal initiative to promote wind power as a primary renewable energy source for the United States. Pickens wants the next U.S. president to lead the nation to 20% wind power by 2018 by tapping a “wind corridor” that runs from the Northern Midwest all the way through Texas. Pickens himself has invested in wind energy in Texas.
Why would an oilman take on this kind of public environmental project?
A better question is, why wouldn’t Big Oil take on this kind of project? It’s clear that alternative and renewable energy is a big part of America’s future, and oil is already fast becoming a much smaller part. Pickens points out at his website PickensPlan that in 1970 the U.S. imported 24% of its oil; now we import nearly 70%. This dependence on foreign oil, while lucrative in the short term for the oil companies, has resulted in the greatest outflow of money from the U.S. to the rest of the world in history.
Though most of our oil is imported from Canada, much of this lost U.S. wealth is flowing to nations with which we have very troubled relations: Iran, Iraq, Saudi Arabia, and Venezuela. The painful result is that the U.S. economy is currently experiencing a contraction the like of which has not been seen since the Great Depression. When a country has to import its most basic energy resource at great cost, that country is in trouble economically. We cannot compete effectively in a global economy when we have to spend that much money just to get a business running. We are rapidly losing ground on the world stage.
While Big Oil may have made some big short term profits in recent years, those profits have greatly lowered the average American’s standard of living. They have destroyed any kind of positive feeling consumers might have ever had toward Big Oil. How many people do you know (outside of actual oil company employees) who do not hate the oil companies? No ad campaign showing waving fields of corn and pristine oceans can counteract the rancor that currently exists in the hearts of most Americans for Big Oil.
Poverty is radical; wealth is conservative. No one changes course while being deluged with money. So it’s not surprising that innovation is not exactly the middle name of the CEOs who lead successful corporations, unless they happen to be working in the field of information technology, where innovation basically is the product. Most other corporations just hire big publicity departments to spin what is already working to make it palatable to the public at large. In fact, if the corporations are doing well enough, they don’t even care that much about the consumer; they care about the stockholders.
But one thing big corporations do understand is profit. CEOs understand it keeps them in their overpaid jobs. Stockholders understand that it makes them money.
As the graphic above shows, the U.S. is, Pickens puts it, “The Saudi Arabia of Wind Power.”
All we have to do is invest in infrastructure to tap that power.
Big Oil can stay on its current course, winning the enmity of the world and destroying the environment and the political peace, or it can lead the way to energy independence and thereby nearly monopolize the profits that will come from renewable technologies. Wind and solar are often pooh-poohed because they take significant initial investment before they pay off. But so does oil. Without refineries, crude oil is nearly worthless, and we have not built any new oil refineries for over 30 years because of the huge cost.
Instead of investing even more money in oil, why not invest it in renewable energy? When corporations start to see the potential for profit in these technologies, no amount of Congressional oversight and bumbling will be able to stop corporate investment in them. We won’t be looking for ways to promote renewable energy, we’ll be looking at anti-trust laws to make sure the profits are being properly shared amongst the prospective players.
Pickens will no doubt be the butt of much cynical critique from pundits who note the potential for big profits down the line for Pickens. So what? The market works or it doesn’t. Right now it is working by showing us corporate failure after failure; profits without product, policies so self-serving and harsh they’d be despicable even if they worked. But they don’t work!
Big Oil should back renewable energy because it works, because the potential for profit is enormous, because it is what the future has in store for us if we do not fail entirely. They will want to be on the cutting edge, not left behind. Forward thinking is not their strong suit. But we’re only talking ten years forward here.
Even I know how to make a ten year plan. My job at a regional bank is pretty shaky right now. Anybody out there need a renewable energy CEO?
By Evelyn Black, on July 18th, 2008
In 2005, the U.S. Department of Energy published a report entitled Peaking of World Oil Production: Impacts, Mitigation, & Risk Management. Called “The Hirsch Report” after its lead author, Robert Hirsch, its purpose was to lay out a governmental strategy for softening the effects of peak oil and its aftermath: that is, the chaos and economic crises sure to follow the point at which the world’s oil reserves would begin to fall.
The Hirsch Report laid out three possible scenarios for mitigation and risk management. In the first scenario, alternative energy sources, redesign of U.S. infrastructure, and other extraordinary measures are taken 20 years in advance of peak oil, with significant negative impact on the economy but a good chance at a positive outcome after a period of adjustment.
In the second scenario, extraordinary coordinated emergency measures are taken at all levels of government 10 years in advance of peak oil, with a period of severe shortages and social stress in the immediate 5-10 years after peak oil.
In the final and scariest scenario, nothing is done until after worldwide peak oil production occurs. In this scenario, severe shortages, widespread social upheaval, the collapse of financial markets, and violence are predicted, with an uncertain and painful adjustment period that could take decades.
What is alarming is that the U.S. government and the oil industry have known since the mid-1950s that peak oil would occur sometime between the year 2000 and 2010 if not earlier. Shell Oil itself commissioned the original study, done in 1956 by geophysicist M. King Hubbert. Hubbert predicted that after the peak, reserves would drop off very sharply, creating an environment in which social upheaval, famine, violence, and general chaos could occur if other energy sources were not in place. The first chart at the top of this post shows M. King Hubbert’s original 1956 peak oil curve.
Ever since Hubbert’s peak oil curve became the touchstone for oil supplies and the mitigation of their depletion, very little has been done in terms of preparing for what both the U.S. government and big oil have known would happen all along. I think it is disturbing and revealing that, even though the Hirsch report was commissioned in 2005, the U.S. is still basically doing nothing to mitigate the effects of peak oil.
 Why would that be? Is it because the U.S. Department of Energy thinks peak oil is still 20 years off in the future or more? Or is it because it is already too late and the U.S. is being run by a pack of oil executives like George W. Bush, Dick Cheney, and Condoleezza Rice? I mean, it’s not like they personally are going to suffer when the worst consequences hit. On their way out, to very wealthy established lives, they have little to lose at this point.
Houston, I think we have a problem.
I think we had a problem back in the seventies, and we should have dealt with it then by instituting a sane longterm energy policy. We didn’t. By general agreement, we passed our own peak oil production point during that same time period and for the past 30 years have been relying heavily on imports (as shown by the chart at the bottom; the middle chart shows all the competing current theories on when peak oil will occur worldwide). By all the best estimates, globally, we are now at or just past peak oil, and we’ve done basically nothing to mitigate its effects. This has happened just as global demand for oil in developing industrial nations like China and India has spiked and continues to climb rapidly.
Yes, commodities speculators are driving up prices right now, including oil prices, but trading in oil commodities is tightly regulated. Speculation is a very small part of the total picture. What is happening right now with oil (and by default gas prices) is more consistent with increased demand in the face of limited or even decreasing supply.
If in fact we have passed peak oil production, we will know it very quickly because things will get very, very bad very, very fast.
 But let’s say the optimists are right and peak oil will not hit until 2020 or 2030. (I think they’re wrong, but for the sake of argument, let’s say they’re right.) Even then, by our own government’s study on mitigation, we know that right now we need to be taking extraordinary measures toward alternative energy and energy independence just to soften the blow. Where are these measures? Why are we not taking them?
Think about that for awhile, and while you’re thinking about it, think about planting some food in your backyard and getting to know your neighbors.
I think we’re in for quite a ride.
By G.L.C., on July 13th, 2008
The price of oil continues to hit record high. Many believe the main reason for this is speculation.
The price of oil has nearly tripled since 2004. The trading in oil on the New York Mercantile Exchange also tripled since 2004. A mere coincidence? OPEC no longer controls the price of oil. Majority of the trade in oil is done in London or New York. The price of oil is now determined by Wall Street.
According to the Commodity Futures Trading Commission (CFTC) a speculator does not produce or use the commodity but risks his or her own capital trading futures in that commodity in hopes of making a profit on price changes.
Speculators on the other hand blame the increased demand from China as the reason for the rise in oil prices. According to the Department of Energy, annual Chinese demand for oil has increased over the last five years from 1.88 billion barrels to 2.8 billion barrels. Over the same five-year period, Index Speculators demand for petroleum futures has increased by 848 million barrels. The increase in demand from Index Speculators is almost equal to the increase in demand from China. With the impact of the subprime crisis on the real estate market and the downward slide of the U.S. stock markets, more money is being pumped into the futures market by investors. According to The Economist, about $260 billion has been invested into the commodity market – up nearly 20 times from what it was in 2003. It is estimated that in the commodities market, half of the bets are placed on oil. This increased investment along with a week dollar has resulted in the price of oil rising to record high. A majority of these investments are bets placed by hedge and pension funds looking out for risky but high-yielding investments. Unlike stocks where the margin requirements may be as high as 50%, for commodities, it is a 5–7%. So with $130 billion, the speculators can take positions of about $2.5 trillion.
The CFTC is no longer able to properly regulate commodity trading to prevent speculation, manipulation, or fraud because much of the trading takes place on commodity exchanges in the U.S. and abroad that are not within the CFTC’s purview.
Traders on NYMEX (New York Mercantile Exchange) are required to keep records of all trades and report large trades to the CFTC, enabling it to gauge the extent of speculation in the markets and to detect, prevent, and prosecute price manipulation. But traders on unregulated over-the-counter electronic exchanges are not required to keep records or file any information with the CFTC as these trades are exempt from its oversight.
Merely introducing laws that would regulate the trading of future commodities in the U.S. will not help control speculation. It is possible for a person in the U.S. to trade in a key U.S. energy commodity such as oil and avoid all U.S. market regulators by routing his or her trade through an exchange located in London or any other place. The law should regulate all trading of key U.S. energy commodity – traded through an exchange in the U.S. or abroad.
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