There has been a lot of debate going on about whether or not speculation is driving up oil prices. I haven’t taken a position one way or the other. I am not an expert in the commodity markets and I have been impressed with the evidence on both sides of the argument. Paul Krugman has done some interesting analysis (see this post and follow-up posts throughout the month of June) on this issue ultimately arguing that speculation is not driving oil prices. He points to the lack of inventory build that would be present in a traditional speculative driven market resulting from owners holding product off the spot market to sell at higher future prices. On the other hand, some very smart investors and former regulators have been arguing that speculation has caused somewhere in the neighborhood of $50/barrel of the price increase in crude. Finally, there is the common sense issue. Financial markets fall apart, stocks and bonds become less attractive investments, the housing bubble bursts, and suddenly there is a sharp increase in the price of a commodity that just happens to be in a market that was partially deregulated several years ago. This last part sounds too familiar to me to be ignored.
Today, I was watching the testimony of Ben Bernanke before Congress when the subject of speculation in the energy markets was raised. It was clear that Congress is serious about passing some regulations to address margin requirements and possibly other issues in this market. Suddenly oil dropped $9.00 a barrel from around $145 to $136. That’s a 6% decline within minutes. Now, whether this price drop was caused by the congressional testimony or not is something I cannot determine. The CNBC commentators are saying the cause of the price drop is banks liquidating their energy positions to meet capital requirements. Isn’t that speculation? And look at this coincidence: the investment banks decided it was a good time to unwind their energy position right at the moment it became clear Congress is going to act on the issue of speculation in the oil markets. Do you believe in coincidences like these?
Rational economic arguments aside, the anecdotal evidence suggests that “speculation” is having a meaningful impact on oil prices.
Tuesday, July 15, 2008
Oil and Speculators – Anecdotal Evidence
Wednesday, June 4, 2008
Oil and Wall Street
I am in Seoul, South Korea on a teaching assignment. I have been here for a week and will be here for another. I haven’t had time to write anything useful, even though there is so much going on. Seoul is a great city and the people I meet here are very warm and kind. I also admire their willingness to stand up in protest as tens of thousands did last weekend in objection to the lifting of the import ban on US beef (which has now been delayed).
Although I don’t have time to write an analysis I wanted to publish a couple of links regarding the impact of speculation in the commodity markets on oil prices. There have been several hearings going on, and some hedge fund managers and others seem to be speaking out against certain trading strategies and deregulation dating back to Enron that could be causing significant upward pressure on energy prices. Here is a link to Michael Greenberger’s Congressional Testimony from this morning that I found stunning. He appeared today before the Senate Commerce Committee together with the well known hedge fund manager George Soros and others. It is not the easiest testimony to read but if you have 10 minutes I highly recommend you give it a go. You don’t need to follow all of the statutory references or read the entire document to get the drift of what he is saying so you can skip a lot of the detail and still get the message. Here is another link to some Congressional testimony by Michael Masters, a hedge fund manager, from May 20, 2008 that I think is also worth a read.
In a nutshell, some informed people believe that a large portion of the run-up in oil prices is a Wall Street phenomenon and federal regulators are simply looking the other way as US consumers are being separated from their savings. If Mr. Greenberger is correct then I believe this is an outrage of gigantic proportions and another monumental regulatory failure by our government. I hope our elected officials get to the bottom of this one quickly either way because the thought of paying $5.00 a gallon for heating oil next winter is bad enough, but to pay that much so that some investors can earn a nice return really twists my insides.
