Who’s to Blame for Sky-High Oil Prices?
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Editor’s Note: Sky-high crude oil prices and gas prices are becoming something of a national obsession.
They’ve also becoming the mother of all political punchbags. Washington’s finest are scrambling over each other to be seen as championing ‘ordinary Americans’ over the big, bad oil companies and, even worse, the oil speculators.
Today a Congressional subcommittee focused on whether oil speculators were responsible for sky-high crude oil and gas prices.
“We risk having our economy brought to its knees” by “excessive” speculation in commodity markets, said the chair of a House Energy and Commerce Subcommittee, Bart Stupak.
The politicians even got their hands on a hedge fund manager who said they oil prices could quickly fall by half more regulation on oil trading was put in place.
The Daily Reckoning Australia’s Dan Denning says there’s a lot of blame going around when it comes to oil. Is it OPEC? The Saudis? The speculators? Pension funds? The Asians? Oil vigilantes? The Fed?
What the Saudis give, the Nigerians take away. There was a big oil summit in the Saudi city of Jeddah this weekend. Men in suits from 36 countries, 7 international organizations, and 25 oil companies gathered to solve the world’s energy crisis, or at least look like they were doing something.
In a statement released at the end of the summit, the group said, “The transparency and regulation of financial markets should be improved through measures to capture more data on index fund activity and to examine cross-exchange interactions in the crude market.”
That doesn’t sound like it’s going to make oil any cheaper, does it?
The trouble here is that people are divided on what’s driving the oil price up. OPEC’s Chakib Khelil says it’s the deliberately weak U.S. dollar. He says increasing oil supply is “illogical” because oil refineries - the ones that produce refined fuels - already have plenty of supply.
The Italians, the French, and a handful of U.S. politicians are blaming “the speculators.” U.S. Senator Joe Lieberman wants to make it illegal for pension funds to invest in commodities. Others blame Asian countries for subsidising consumer fuel prices, which they say prevents higher prices from discouraging demand and leading to lower oil prices.
Gee. There is a lot of blame to go around. Who’s right? Well, for starters, the Saudi promise to increase oil production to 9.7 million barrels per day was instantly nullified by the loss of nearly 400kpd from oil production in Nigeria. Both Shell and Chevron had to shut off pipelines that were threatened by sabotage in the Niger Delta.
Another explanation is one Bill Bonner offered while we were away on holiday in Colorado earlier this month: the oil vigilantes. That is, professional investors used to monitor inflation via the bond market. Today, oil could be their weapon of choice in trying to combat inflationary monetary policy.
In the past, if governments started printing too much money (leading to inflation), bond vigilantes sold bonds, driving up yields and interest rates (bond prices and yields move in opposite directions). By pushing up market interest rates, the bond vigilantes could tip the economy into recession. It was a handy threat to have in your back pocket.
The bond market enforced monetary discipline by punishing governments that printed too much money. That all seemed to go out the door in the last ten years. Exactly why is a bit of mystery.
Our guess is that everyone bought the bogus line that inflation was dead (the so-called Great Moderation during which you could have growth without inflation). In a world made safe from inflation, there was no need for vigilance! The battle was won. The posts were abandoned. The defenses fell into disrepair.
Instead of being vigilant about inflation, investors chased rising asset prices (and higher-yields in riskier bond markets). The easy monetary conditions created the kind of asset inflation that was simply too tempting for most people to resist. Seduced by the simultaneous rise in all asset classes (bonds, stocks, real estate, commodities), no one was especially vigilant from 2002 to June of 2007 (more on last June below).
But when the Fed cut rates from 5.25% to 2% and bailed out Bear Stearns in March, investors began to get nervous that by saving Wall Street, the Fed was dooming the rest of us to much higher prices for oil, food, and anything else priced in dollars. The need for vigilance returned, but how could investors punish the Fed for unleashing inflation and still protect their assets?
Think back to a year ago. This week is the one-year anniversary of the beginning of the subprime crisis. A year ago this week we covered the slow-motion collapse of two Bear Stearns funds, the High Grade Structured Credit Strategies Enhanced Leverage Fund and the High Grade Structured Credit Strategies Fund.
On June 22nd of last year, you could still buy a barrel of West Texas Intermediate crude for $68.85. Today-even after the big oil summit-a barrel of oil traded on NYMEX will cost you $135.02. Oil prices are up 96% since the semi-official beginning of the credit crisis.
On March 17th, when the Fed announced the Bear Stearns (BSC) bailout, the oil price closed in New York at $105.75. It’s up 27% since then.
When you take a step back, it’s hard not to see what’s going on. The worse the credit crisis gets, the higher the oil price goes. The more the Fed creates new liquidity to try and contain the damage in the credit markets, the higher the oil price goes.
Can you blame investors for wanting to own commodities? Joe Lieberman wants to ban people from doing the sensible thing. Investors see that central banks have lost control of inflation, or are even making it worse. It is not speculation to find a better store of value for your money. It’s common sense. No wonder certain governments want to ban it.
Source: Happy Birthday Subprime Crisis, Oil Price up 96%
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Tags: BSC, Crude Oil Prices, Dan Denning, Saudi Arabian oil produciton, subprimeAbout the Author
Dan Denning is a contributing editor to Diggers & Drillers and a regular columnist for Money Weekly, a Taiwanese financial publication. From 2000 to 2006, Dan was the editor of Strategic Investment of Agora Publishing. His reporting and analysis for The Daily Reckoning is read by more than 500,000 people regularly.
Comment by Phil L. on 25 June 2008:
Who cares who’s is to blame. What are we going to do about it. From my viewpoint, there are 2 or 3 options. Sell your car, buy a bike and take mass transit. Drive less or buy an electric car or a car powered by hydrogen. And option 3 is buy a pair of comfortable Nike’s and get ready for some walking. Since all of these options are out of the question for me, I decided to try and do something about it. While looking around, I stumbled across GasBankUSA, located at http://www.gasbankusa.com. The site talks about fixed price gasoline and locking in at a fixed price. An interesting concept and a little better than my magic 8 ball which continually tells me “try again later” everytime I ask it where are gas prices going OR will gas prices continue to rise. Looking through this site, it looks like a way to take control over something we had no control over in the past.