Oil

There is no shortage of opinion regarding the high gas prices in the US. I'm no economist, but it seems pretty obvious to me that there is a major element of opportunism among commodity speculators and oil companies to take advantage of the current geo-political situation for their own gain. Some folks disagree. This article tries to imply that commodity trading speculators are not the cause of high oil prices: If speculators aren’t at fault, why have oil prices spiked so high? Fundamental reasons aren’t hard to find. Between 2000 and 2007, world demand for petroleum rose by nearly nine million barrels a day, but OPEC has been consistently unable, or unwilling, to significantly increase supply, and production by non-OPEC members has risen by just four million barrels a day. The prospect of military action against Iran, which would disrupt global supply, seems greater than it did a few years ago. And the plunging value of the dollar has meant that the cost of oil has jumped more in the U.S. in the past year than it has in countries with healthier currencies. ...The price of oil—more than that of many other commodities—isn’t based solely on current supply and demand. It’s also based on people’s expectations about future supply and demand, because those expectations determine whether it makes sense for oil producers to sell their oil now or leave it in the ground and sell it later. Currently, the market is assuming that oil will become scarcer, and that global demand will keep rising, especially in rapidly developing countries like China and India. As a result, producers are asking very high prices to pump their oil. Now, it could be that these assumptions are all wrong—that the supply of oil will not be constricted going forward, that concerns about the Middle East are exaggerated, and that higher prices will lead people to cut back on energy consumption, shrinking demand. In that case, oil would turn out to have been hugely overpriced. But that won’t be because of sinister speculators; it will be because oil producers and oil users collectively misread the future. All right, I think this says that oil price explosion is not the fault of speculators, but rather the fault of people who "misread the future". Afraid that I was loosing my grip on the English language, I looked up "speculator" at dictionary.com: a person who is engaged in commercial or financial speculation Duh... someone who risks losses for the possibility of considerable gains Like any investor... a person who trades (i.e. derivatives, commodities, bonds, equities or currencies) with a higher-than-average risk, in return for a higher-than-average profit potential. Speculators take large risks, especially with respect to anticipating future price movements, or gambling, in the hopes of making quick, large gains. Wow, so it seems like speculators are attempting to read the future... do they ever "misread" it? Speculators are typically sophisticated, high risk-taking investors with expertise in the market(s) to which they are trading and will usually use highly leveraged investments such as futures and options A person who is willing to take large risks and sacrifice the safety of principal in return for potentially large gains. According to this, the above article argues that it's not the speculators fault, it's the fault of ... speculators. These are all people who are trying to read the future - correctly or not is irrelevant - and invest accordingly. These people are speculators by definition. High volume futures buying will raise the price of any commodity. It is no surprise that some people are trying to manipulate the commodity market to increase the value of their futures. That's what speculators do. Increased global demand, coupled with a weak dollar, can certainly explain some of the rise in oil prices. The rest of it is easily traced to opportunistic futures traders that are bringing home the proverbial bacon. this is borne out in market analysis itself. This article reports that, while Exxon-Mobil reported $10.9B in 1st quarter profits, their stock actually went down in value - indicating that those in the financial know think that the company should have done better given the high price of oil: ...weak production volumes and low refining margins blunted the impact of record-high crude prices. Weak production volumes? I thought we were operating at full capacity, and demand was simply outpacing supply. Quotes from investor-types don't seem to reassuring: It makes the future seem kind of dire, because this quarter they really got bailed out by high oil prices ... Oil companies apparently are not running very efficiently. The company has been criticized by analysts and investors for laying back on capital spending while going full bore on share buybacks..."It seems that they are more of a share buyback machine that also happens to produce energy"... Boo hoo... oil exploration is so expensive and requires so much capital, but we would rather buy back stock in a short-term profit-taking strategy rather than invest in long term sustainability. Just make sure you keep sending those government subsidies. After all, more subsidies lead to more production, right? The company said its production shortfall resulted in part from production-sharing contracts that give host countries a larger share of oil and gas produced as commodity prices rise. The decline of older fields and the loss of operations that were nationalized by Venezuela last year also hurt. Oh, business is so hard, and other country's governments are making life horrible! Thank God the US Government is working on oil's behalf: A group of American advisers led by a small State Department team played an integral part in drawing up contracts between the Iraqi government and five major Western oil companies to develop some of the largest fields in Iraq, American officials say. The disclosure, coming on the eve of the contracts’ announcement, is the first confirmation of direct involvement by the Bush administration in deals to open Iraq’s oil to commercial development and is likely to stoke criticism. At a time of spiraling oil prices, the no-bid contracts, in a country with some of the world’s largest untapped fields and potential for vast profits, are a rare prize to the industry. The contracts are expected to be awarded Monday to Exxon Mobil, Shell, BP, Total and Chevron, as well as to several smaller oil companies. Exxon-Mobil, eh? Well, what do you know...