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WASHINGTON (MarketWatch) — The price of retail gasoline could fall by half, to around $2 a gallon, within 30 days of passage of a law to limit speculation in energy-futures markets, four energy analysts told Congress on Monday.
Testifying to the House Energy and Commerce Committee, Michael Masters of Masters Capital Management said that the price of oil would quickly drop closer to its marginal cost of around $65 to $75 a barrel, about half the current $135. Fadel Gheit of Oppenheimer & Co., Edward Krapels of Energy Security Analysis and Roger Diwan of PFC Energy Consultants agreed with Masters’ assessment at a hearing on proposed legislation to limit speculation in futures markets. Krapels said that it wouldn’t even take 30 days to drive prices lower, as fund managers quickly liquidated their positions in futures markets.“Record oil prices are inflated by speculation and not justified by market fundamentals,” according to Gheit. “Based on supply and demand fundamentals, crude-oil prices should not be above $60 per barrel.” Futures trading in London has not been a major factor in rising oil prices, testified Sir Bob Reid, chairman of the Chairman of London-based ICE Futures Europe. Rising prices are largely a function of fundamental supply and demand, not manipulation or speculation, he said.
“Energy speculation has become a growth industry and it is time for the government to intervene,” said Rep. John Dingell, D-Mich., chairman of the full committee. “We need to consider a full range of options to counter this rapacious speculation.” It was Dingell’s strongest statement yet on the role of speculators.
I don’t believe a word of this, but it’s definitely worth a try.
No apology needed. OK I agree there is speculators out there, always have, always will be. I think proposals like this are draconian and will harm the vast majority of companies, farmers, and organizations which hedge commodity prices of all kinds. The extra costs will be passed onto consumers.
For example, the fine folk at Rigid Tool. Not only do they make fine calendars, they also make and sell tools. So they publish a catalog of tools and prices for 2009 in say October 2008. They have too choices to fix the price of a hammer (after taking into account manufacturing costs):
1. Stockpile steel and copper? That costs a fortune.
2. Hedge steel and copper prices with futures contracts.
So tell me how this scheme benefits them? Or a farmer putting into his spring wheat crop? Or the orange juice producer in Florida? Or the airline trying to manage costs? The vast majority of futures contracts are like this, not speculators. Something like a 25% investment in futures contracts with hard assets will remove vast amounts of capital from the markets making borrowing more expensive and drive up the cost of consumer goods and services.
Things are starting to get interesting. I believe Charles Dickens said,”When you see a situation that you cannot understand, look for the financial interest.” It seems to me that western world mass marketing (in the sweet name of profit) has lured the entire world to desire the USA lifestyle and the consumption to go along with it. Remember the footage of 1970’s China under Mao? Millions biking about the country in plain black garb. Well now with almost everything being produced there (and every other ecologically low impact country) the “have nots” now have the means to aquire the trappings of 1st world development – including autos. So, when you fillup at the pump, (or go food shopping)you are in a bidding war with your fellow consumer/competitors. Welcome to the downside of globalization.
#33 I think you’re hitting the nail on the head
#33 Actually, welcome to the world of government regulation stopping the free market from implementing existing alternatives to crude oil. Big oil paying the gov’t to regulate & infiltrating the eco nut groups to back up the gov regulation.
#35, Patrick,
welcome to the world of government regulation stopping the free market from implementing existing alternatives to crude oil.
How is government regulation stopping the free market from implementing alternatives to oil?
I can think of 3 “government regulations” stopping the free market from implementing alternatives to oil.
#1 – Federal gov’t placed a $.50 per gal. tax on imported ethanol. Some countries produce ethanol from sugar cane (even use the cane stalks to distill the ethanol, but taxpayers subsidize domestic production of corn instead.
#2 – MI state govt. has just announced planned construction of a plant to convert wood to fuel (govt. subsidized of course). In my rural area, 19% of home owners heat with wood – with a subsidized demand for wood what do you think will happen to prices?
#3 – WI state govt. Local Green Bay TV station ran story last year about a local guy picking up waste cooking oil and after processing it, used it to power his crusty old VW rabbit diesel. Upset with this example of “implementing alternatives to oil” govt. fines him the road tax AND a bogus inspection fee to boot! According to the news reports govt. stated the reason for the crackdown on the guy is they were responding to complaints…
Wow, 38 comments and everyone missed the real problem. Still, yet, some more…
Has not anyone noticed that our dollar is in collapse? The VALUE of oil is going up gradually, due to both increasing demand sans substantially increasing supply.
The PRICE of oil is rising so rapidly because the Dollar is losing VALUE as quickly as the politicians and the Fed can make that happen. It is caused both by spending money we don’t have (called the national debt) and by the Fed creating new money to bail out the banks e.g. Bear Stearns.
It’s called inflation, but the RATE of price increases shows we are already into hyperinflation.
See me at http://morality101.net/blog/ and surf for some reality!
#39–Striker==very good point. The declining value of the dollar is first felt in exchange rates and price of commodities imported. I’ve looked at several charts about the revenue stream from a barrel of oil and speculation is not included. Every article I have read about speculation says it increases the price of oil but the amount varies from 2% to 33%-just as if no one knows what they are talking about?
I don’t understand the futures market. If oil is selling on the market right now for $140–what is the direct purchase price at the well-head in Saudi? Seems the difference would be transportation costs and middlemen along the way or does the speculation price get all the way back to the well-head?
Big Finance==big mystery. Makes me feel like a pawn. And so I am.
The reason speculation isn’t linked to the price is that when someone buys a future contract then they are “locking” in their price.
For example, a wheat farmer in spring looks at the price of wheat for an October futures contract and likes the price at $5.00 per bushel. He’ll buy 5 futures October contracts (I forget the size of wheat contracts) that are roughly equal to his total crop (say 25000 bushels) and purchases long (buy) contracts.
When is crop is coming in October he will buy 5 offsetting short (sell) contracts. If the October wheat contract is now $4.00 then he has made a dollar per bushel and covered his losses on his actual crop. If wheat has risen to $6.00 then he makes the extra on his crop to offset his losses on the market.
Either way he is guaranteed a price in the spring when puts his crop in. He can “go to the bank” with that contract. The offsetting contracts guarantee a price in the future.
Yes, it’s confusing. However it covers risk for the farmers and the buyers of the wheat. Speculators add liquidity to the market so someone will take the opposite side of the contract. Speculators take the risk, while the producers and consumers of commodities avoid risk.
Ha, yes it is confusing. I just re-read what I wrote and realized the contracts backwards. A farmer would go short not long in spring. It’s been a few years since I’ve been in commodities. Or maybe I’ve just lost my chops… 😉
#42–QB==the wheat futures market is always brought up to justify oil futures, but I see a difference. Farmers plant and sew months before the sell. Not so with oil. Now, I can see a limited market for those who want to lock-in a price for next winter but my main question goes unanswered.
If I go to a wheat field and try to buy a bushel–the farmer will say it won’t be ready until 6 months from now and I have already sold all my wheat at $X, so even if I had some, I couldn’t sell it.
Is that the same for oil pumped out of the ground right now? Common sense tells me if I don’t want to pay the speculation price, then I go to the source, but my gut tells me that probably wouldn’t work.
So, barrel of oil is selling for $140, if I go to the well head and have to pay $140 for it, how did speculation raise my price? And if speculation does raise the price, why can’t I pay $140 less X?
I will accept a lie if it makes sense.
Bobbo, I’ve worked with airlines who lock in their fuel prices so they can control their costs for the next 6-12 months. This lets them set their ticket prices in advance and not have their profits eaten up by fuel. One reason Southwest is weathering the current price spikes better than their competition is because they have an aggressive hedging strategy.
Manufacturing, transportation sector (e.g. trucking), and even farmers are subject to fuel prices.
Companies that market/store gas, oil, ng’s and liquids all hedge. If you have a 150 million cubic feet of gas in storage you can bet you’re hedging.
Interesting how a year changes everything…