View Full Version : Why oil prices have skyrocketed
06-10-2008, 09:03 AM
Excellent article; it points to speculation and deregulation of oil futures trading by the US as the reasons for the doubling of a barrel of Oil in less than 2 years.
06-10-2008, 12:04 PM
The article seemed kinda interesting until I scrolled down and read the "about the author" section.
F. William Engdahl is a leading analyst of the New World Order, author of the best-selling book on oil and geopolitics, A Century of War: Anglo-American Politics and the New World Order,’ His writings have been translated into more than a dozen languages.
Anyone who uses the phrase "New World Order" with a straight face probably buys a lot of tinfoil ..... if you know what I mean.
06-10-2008, 01:02 PM
...and he conveniently ignores that futures contracts and speculation are both a normal response to a significant increase in demand and one or more falling currencies.
Companies and nations want to lock up supplies when they are available. Sometimes this leads to cash rich nations (China for example) paying a premium to guarantee a petroleum supply.
Speculation is a symptom (some might call it an opportunity) to a problem, not a cause of the problem itself. If a situation arises where people can make money, they will try to do so. Speculators also lose their shirts when demand suddenly drops. The best way to end speculation is by increasing supply (thereby making a commodity much less expensive) or by decreasing demand, forcing suppliers to reduce prices to increase sales volumes.
The petroleum supply (and refinining capacity) aren't going to increase soon, so reducing demand is the only option.
However, to do so we need to stop running a negative balance of trade with China, allowing our dollars to buy more oil for themselves.
06-17-2008, 05:08 AM
Another article I've read recently about this, very informative.
The problem with speculation is that (as I understand), since the commodities market became deregulated a few years ago, banks/companies/investors have been pumping money into the commodities market to make their massive profits. It gets worse since they're trying to recoup money from the current mortgage bubble bursting.
It's not just oil going up, even things like Coffee, Soy, Corn, and Cotton. For example, Cotton is being speculated about which is driving up prices, yet there is a massive amount of stockpiled cotton and farmers can't even sell what they have from previous years.
The problem is people trading on futures when they don't intend on actually taking delivery of what they're trading; more is traded simply on paper in a market that was based on real physical goods. They need to bring back regulation into staple commodities, so that people won't starve to death due to rampant speculation and price increases due to profiteering.
06-17-2008, 05:23 AM
It is a good article but read it carefully. The problem with speculation is that it has more to do with companies and countries locking up supplies than just the notion that people are speculating to run up prices.
To ensure a supply of petroleum, Chinese and other buyers are willing to pay a premium for crude oil to be delivered in 3 months, 6 months, etc. If the US, Japan and Europe want to ensure future supplies they have to follow suit. If they are unwilling to match Chinese prices they won't get futures contracts and risk having no oil delivered.
How disasterous would that be ?? The alternative is to pay high prices for future oil deliveries set by the Chinese and other groups with money to burn.
Note that the article claims that 60% of the runup in prices, not 60% of the total price is attributed to speculation. If you figure the base price before the latest price spiral was $65, this means that 60% of $75 or $45 is due to speculation or 45/140 = 32% of the total price.
I wouldn't disagree with this, but my own guess is 25-30% is due speculation or $35-42 per barrel. that still puts oil at around $100 per barrel.
Note that speculation isn't all about manipulating price to make profit, it's also manipulating the market to ensure supply. The problem with pointing the finger at speculators, especially the Chinese is they aren't making anything off this but putting money into the pockets of oil producers and costing the US and Europe more.
My question is where did the Chinese get all those dollars to pay for oil ??
06-17-2008, 05:55 AM
I agree and understand that speculation is a necessary part of the commodities market and the futures contracts, but the problem seems to be rampant speculation that is artificially inflating commodity prices. Oil would normally never jump up $10 in one day, but it did that last week for no apparent reason, just due to pure speculation on Iran/Israel. There have to be strict regulations on important commodities, or maybe all, so that people can't just play with them and use them for a source of profit. From everything I'm reading, the commodities market seems to be the new hot banking product for quick returns. Do you disagree with this?
Regarding China, I'm almost positive the U.S. is in severely in debt to China, I remember reading about that a while back. So that's where the money comes from. I read this recently on Forbes:
It seems that China is keeping their price of gas at about $2.49/gallon by using vast amounts of money to subsidize their internally growing economy and energy market and fight their over 8% inflation rate.
So...money goes from the U.S. to China to pay debt, the Chinese use that money to buy a lot of Oil and sell at a loss to their citizens (competing against the rest of the World to secure Oil for their booming economy), the money goes back to the Saudi's. The U.S. has to then borrow more money to maintain the peace/wage war in the middle east, in turn cheapening the U.S. dollar, raising the price of Oil again. It looks like a never ending cycle where the Saudi's will continually get richer on behalf of the rest of the world.
06-17-2008, 08:04 AM
Phosphite, you got it... The trade deficit puts dollars in the hands of those who can use them against us, drive up the price of oil and further devalue the dollar.
If you start with a price of $60 per barrel for oil and factor in a drop of about 60% in the value of the dollar that puts the price around $95. If you then factor in another 30% for competition in the commodities market by china who keeps pushing up prices to be first in line that gets us to $125 per barrel. The remaining $15 is probably driven by speculation for profit.
So we have a problem on the order of $15 per barrel. It sounds like we should be more concerned with the other $65 first and get our balance of trade and value of the dollar straightened out.
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