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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.
gasoline will never ever be 2 something dollars again.
“gasoline will never ever be 2 something dollars again.”
Of course it will… Once everyone stops using it for fuel.
DUH
The futures market is just people betting on the price of oil. Maybe having this is equalizing current and future prices a little, but I don’t buy it.
The only thing that makes this hard to throw out entirely is that half the price sounds right when you compare with gold prices.
Do it! These leaches that are playing the oil futures market are messing up our economy. We can transition to other fuel sources and curtail dependence on Venezuelan and Saudi oil, but that’s not going to be of any help if the economy tanks in the short term. It’s a world issue but as Americans we must think about the larger issue.
I’ve been watching this for awhile, a economic calamity is upon us – for years our US economy has been strangely driven by consumers charging everything on credit cards. Well, by shipping all available work out of the country to the lowest cost producers the wealthy can rejoice They did it – killed our economy and built up Asia at the same time. Countries who produce goods will exchange same for the energy and raw materials they need – but what will become of our “Service Economy”. Hyperinflation due to the world shedding itself of the US dollar that’s what!
W will save you. Right ?
Go out a buy a mini oil futures contract. Then you can smile when oil goes up.
Just remember to get out when the bubble bursts.
There’s a fact to keep in mind in this conversation: 90% to 95% of oil future traders cannot execute the contracts they buy, and can only sell them again. These are the speculators.
That means the other 5% to 10% are able to, and indeed are, executing the contracts at the given prices.
That 5% to 10% will start to default once there isn’t enough money to back the contracts. When that happens the bubble bursts and we’ll go back down to $2.75 to $3.00.
If Obama’s elected that will be the point the economy is “healed”.
If McCain’s elected that will be the point people go back to bitching about China’s buying power.
Funny how conservatives won the argument about how to manage money in the 90’s, and liberals dictate the new conversation. Shame on both sides.
“gasoline will never ever be 2 something dollars again.”
Huh? So, not even $2.99? Where I am, the price of regular is between $3.90 and $4.10 a gallon. A drop to $2.99 would only be a drop of about 25%. That is far from impossible and, in actuality, is likely a near certainty.
We should easily see a drop of 25% by mid-Fall when the demand of summer driving subsides as well as when the refineries go back to the cheaper non-summer blend of gasoline (it is much simpler to produce three varieties of gas instead of 27 with myriads of special additives).
This kind of price drop happens every year at the end of summer like clockwork. People have very short memories these days. Either that or people just like to whip up a bunch of doom & gloom for political purposes.
Until the EPA and/or Congress repeals the silly “summer blend” requirements for gasoline, we will ALWAYS see prices drastically jump at the start of every summer. The jump in fuel costs is the price you pay so that we don’t have so many of those “lazy, hazy days of summer”.
Actually James, less than 2% of contracts traded on Nymex actaully get physically executed. The majority of the futures contracts are bought/sold by traders representing institutional clients (mainly companies but also guys like the US military) who are hedging their price exposure.
For example, airlines like Southwest will hedge energy futures to lock down their jet fuel prices or Esso retail will lock down their near month prices.
The “speculators” that everyone is complaining about are mostly these guys. Certainly the traders are trying to make a buck but when there is more volatility, there is more hedging. There are more people these days engaged in arbitrage and similar strategies, but that’s because there is volatility.
And that’s the key. They don’t care if the price goes up and down, as long as it’s volatile. You think there is speculation going on in energy futures, take a look at corn, oats, and rice. They are plain nuts. Same thing with coffee and orange juice a couple of years ago.
I talked with a couple of friends who are still market and trade for large partners and they say there is moderate speculation these days in energy, but not as much as two years ago. The subprime mess in the US knocked a lot of financial capital out of all markets. One guy I know who trades natural gas (> 500 mcf/day) said “Americans (and Canadians too) just aren’t used to paying market prices for gas like the rest of the world.”
Dipstick ideas like regulation of open markets will only add more volatility to the mix. More energy trading and marketing will move out of NY to London and Singapore. And (and a big and) more deals will be cut in Euros and Pounds meaning more dumping of the US dollar.
#11 – I didn’t want to go that deep in to the pool: I wanted to show how many traders are just speculating in that they can’t execute the contract.
That being said, you’re right on. That’s why I’m thinking the lowest gas can go down to is $2.75: The bubble bursting creates volatility, and while it may kill some others will still get in and play the game, slowing the fall.
I have good reason to believe #11 is right.
I have been studying Peak Oil over at theoildrum.com for a year now. While we have not reached “Peak Oil” yet, we have reached “Peak Exports”. The remaining exporting countries (the number drops every year) are using more of their own oil (ironically because they are getting filthy rich) and holding it off the market.
Fewer exports = higher prices.
People are putting the blame everywhere: Speculators, oil companies, OPEC, environmentalists, etc. The real blame lies in the American public that uses 20 million barrels of oil a day, 23% of what is produced a day. If you want the price to go down, start conserving more.
#13 That’s very kind of you to say, but I’m often wrong.
There is lots of oil in the world and refining capacity can be brought on line. Net new (not known reserves) that are coming on line now where first explored 8-12 years ago. Oil was in the $12-18/barrel range then. Needless to say, not a lot of new capacity was developed.
We’re a little faster now so with the spike in oil prices new production, refining, and transportation will come on line in 3-5 years (assuming that companies started ramping up 2 years ago).
So adding a lack on new capacity coming on line from lousy prices 5-15 years ago coupled with a huge worldwide jump in demand and you get: ridiculous oil prices. Political upheaval and war in the middle east and Africa doesn’t help either.
It’s just going to take time to adjust. Sucks but that’s life.
It’s become clear:
This isn’t a lack of supply problem.
It’s a lack of regulation problem.
Once again, the Conservatives’ blind obsession with deregulation has screwed the average American and made the rich richer.
15
Please don’t make me defend the conservatives..but in this case..they are pretty much right. It’s funny to hear it coming from them..but..it’s one world. It might give you a warm fuzzy feeling to talk about “curbing the speculators”, but where do you get off thinking all the speculators are in the US? Playing games with US law to try and curb international markets is…well..as stupid as a conservative talking about just saying no…^_^
More regulation won’t help worth snot. Providing a floor price for oil (e.g. $30 when oil was $15) would have spurned investment and development in new capacity.
For example, the Alberta Tar Sands was a research project until oil hit $28/barrel. At $40 investment and development really took off. Oil will stay above $80 forever so new capacity will eventually happen.
I think it’s a good opportunity for the US and Canada to do what they do best. Innovate and develop new alternatives. Internal combustion and turbine engines are Victorian technologies and increasingly a dead end.
By the way, the MarketWatch link is broken. It just says
http:///
This is what happens when you have unregulated markets. The Bush Regime has effectively told business that it can do whatever it wants, the government and its regulatory agencies will simply stand down.
The result is our out of control mortgage crisis, oil prices, the mutual fund scandals (bet you forgot about that one), and credit card companies operating like rogue pirate ships in the financial world.
As for the “Arm / Leg / Both” sign in this post, see also Wired magazine’s winners of the “What Are You Paying for Gas” picture contest at
http://blog.wired.com/cars/2008/03/the-winner-of-1.html
it really is simple, supply and demand at work. Speculators are only a reflection of fear. US uses 25% of oil supply for 300M people, the world is 6B people. Over the last 8 years we have reached pumping at close to maximum capacity worldwide. US imports just under 400mB a year. You don’t have to be a genius to understand that a slight increase in demand for the 5.7 billion others can have a big effect. If each person in the world just uses 3 more gallons of oil a year we have added another United States to consumption! We need a comprehensive energy plan to solve this Drill, renewable, efficiency and nuclear. the bubble will burst when our leaders stop being so laughable like when they say oil companies are sitting on 64m acres and intentionally not drilling so that they won’t make money. A simple 2o year plan to be energy independent and make it independent of constant politics. from both parties.
I was watching a news segment on TV and they mentioned that the oil futures contracts were $10-11 billion ten years ago. This year its something like $310-330 billion.
So, almost a third of a trillion dollars for oil futures contracts, if you don’t think that is having an impact on oil prices, then you are wrong. You apparently only have to put up $6-7 of real cash to purchase $100 of oil futures. The solution is to make them pay $25 per $100 of oil futures. Good luck to the hedge funds trying to get their hands on billions of dollars to pay for those contracts, they would be rushing for the door to get out of the oil speculation business. If oil doesn’t drop as much as you want, then mandate $50 cash per every $100 oil futures contact. The market is being distorted by hedge funds and speculators (George Soros made $2.9 billion last year in his games like this). Wheat and other commodities are also being distorted in the same manner and can be fixed by making the speculators put up more cash when purchasing futures contracts.
I liked the other photo better:
Regular LOL
Plus OMG
Super WTF
But as motorists bend over for the oil companies to insert the nozzle (and rip off you nuts), isn’t it about time to consider NATIONALIZING THE OIL COMPANIES ???
#22 “I was watching a news segment on TV and they mentioned that the oil futures contracts were $10-11 billion ten years ago.” Oh my aching ass. If the market had 10 billion in it then the price would have been frozen, not enough liquidity. The small trading floor I worked on then did more than that in natural gas.
“You apparently only have to put up $6-7 of real cash to purchase $100 of oil futures.” It’s called an option.
sounds like people from the real estate market are getting into the gas buiz. Because it ( or at least this article does ) reads just like the super speculation of real estate that I saw in the 90’s and 00’s
#19 “This is what happens when you have unregulated markets.”
Actually, it’s what happens when energy is regulated.
Let’s inject some numbers here. Physical contracts (future contracts that are actually delivered) are less than 2% of the total contracts in any healthy commodities market. That means the contract is not sold before the delivery month date and the holder of the contract is responsible for physically fulfilling the commodity. For example, 10,000 barrels of oil physically going somewhere like NY harbour.
Look at US consumption. In 1995 the US consumed 14.5 million barrels per day with a base price of $16 per barrel. To support that level (per day with rounding) would mean about $11 billion in activity (remember to multiply by 50).
Today the US consumes around 21.5 million per day. At a price of $140 you will need close to $150 billion to support that activity. Break out your spreadsheet and work it out for yourself.
To elaborate on the amount of money needed to buy a futures contract, speculators often use options as leverage. You can purchase an actual futures contract for a fraction of the price if you have enough pledged collateral and a sufficient margin account to cover intraday losses. It’s a trading exchange, not a bank.
Not one of you buttheads above watched the House Commerce and Energy hearings (CSPAN June 24) to see the damage that the greedhead oil futures speculators are doing to the Nation….essentially their greed is destroying the USA. The British who are very happy to see their former colony tow their line are at the helm the oil futures fiasco( ICE). One of the panel members at the hearings Mike W. Masters said that there is no “bubble” in the oil futures trading, rather he described it as a “tumor” that will eventually destroy its’ host, and everyone on the panel agreed with his description of the oil future market. The greedheads need to be regulated and some need to go to prison. When the common man gets wind of this crime tar and feathers will be back in fashion.
#24, QB,
And it was the options that have been the impetus to the Great Depression and several other recessions and downturns over the past 80 years.
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Requiring a healthy down payment (25% ?) and a bond for the rest would go a long way to curb foolish speculation. Since the bond holders would be on the hook, they would exercise more oversight than government regulation would. I would not allow the bonds to be sold or traded.
The government could also regulate the amount of deposit, the same as the FED does in controlling interest rates.
#29 Really? How did that happen. Most exchanges didn’t trade options and derivatives until 1973.
Sure, 25% would be a disincentive. Freezing that amount of market capital would mean doubling your mortgage rates overnight. That would be so cool…
#30, QB,
Maybe the word “margin” would have been more apt. My apologies.
In finance, a margin is collateral that the holder of a position in securities, options, or futures contracts has to deposit to cover the credit risk of his counterparty (most often his broker). This risk can arise if the holder has done any of the following:
borrowed cash from the counterparty to buy securities or options,
sold securities or options short, or
entered into a futures contract.
The collateral can be in the form of cash or securities, and it is deposited in a margin account. On U.S. futures exchanges, “margin” was formally called performance bond.
In short, they are all forms of gambling where the purchaser thinks (or hopes) he is smarter than everyone else.