Sunday, May 31, 2009

Speculation

There is a bright side to almost everything, even recession.

Demand for energy, especially for oil, generally drops during an economic downturn and this one has been no exception. David R. Baker of the San Francisco Chronicle reported on May 24 that Americans used 2.7 per cent less gasoline in the previous four weeks than in the corresponding period in 2008. Prices for a barrel of oil sold on the New York Mercantile Exchange briefly dropped to below $34 in December and January and demand, reported McClatchy newspapers on May 23, has fallen to a 10-year low while inventories are at their highest levels in almost twenty years.

And yet.... as of May 20, crude oil prices had risen more than 70 per cent since mid- January with the average price of regular gasoline at the pump costing $2.33, 28 cents a gallon more than a month earlier. And in the past eleven days, they've gone higher. The oil companies are doing their share at keeping prices up, operating refineries at below 85 per cent of capacity while "an estimated 100 million barrels worldwide are sitting in tanker ships, which companies have been using as floating storage bins." But oil companies are not the major culprits, as McClatchy explained:

This time, Wall Street speculators — some of them recipients of billions of dollars in taxpayers’ bailout money — may be to blame.

Big Wall Street banks such as Goldman Sachs & Co., Morgan Stanley and others are able to sidestep the regulations that limit investments in commodities such as oil, and they’re investing on behalf of pension funds, endowments, hedge funds and other big institutional investors, in part as a hedge against rising inflation.

These investors now far outnumber big fuel consumers such as airlines and trucking companies, which try to protect themselves against price swings. The big investors are betting that the economy eventually will rebound, that the Obama administration’s spending policies and Federal Reserve actions will trigger inflation and that oil prices will rise.

“They’re buying because they think it will diversify their portfolio, and they think it will diversify their portfolio against inflation, and maybe they think the economy will turn around,” said Michael Masters, a hedge-fund manager who testified before Congress last year about the consequences of what are called exchange-traded funds.

Oil contracts are traded mostly in U.S. dollars, and inflation would erode the value of oil earnings, stocks or any other asset denominated in U.S. currency. Many investors are pouring money into oil futures — contracts for future deliveries of oil at specified prices — in the belief that oil prices will rise as inflation erodes the dollar’s value.


This has not gone unnoticed in the halls of Congress. Noting the impact of speculation on energy prices, Representative Bart Stupak (D.-Mich.) observes

We are in the middle of a recession, supply is at a 20-year-high, demand is at a 10-year low, yet oil prices are up 70 percent since the beginning of the year. This cannot be explained by simple supply and demand.

And so he has inserted into the climate bill wending its way through Congress

provisions that would ban some types of oil trades and regulate others that don't take place on a formal market. Limits on the number of oil contracts a speculator can hold would be extended to cover those trades as well as trading on electronic exchanges and overseas markets.

We now are six days beyond the observance of Memorial Day and one day beyond the traditional Memorial Day and have given thanks for the freedom in this land and the sacrifices which have helped safeguard it. Let us be thankful also that there are a few legislators who recognize our need to be protected from the greed and machinations of corporations which have fed at the trough of the American taxpayer and are only too willing to fuel an inflationary spiral they're betting on.

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