Oil's Spike: Fueled By Speculation?
As the price of crude oil keeps jumping, so has the amount of finger-pointing at factors in the seemingly relentless rise.
What's behind it? Have the law of supply and demand and other usual economic forces given way to speculators bidding up the price for personal gain?
The Early Show explored the issue Tuesday.
Josh Landis and Mitch Butler of The Fast Draw narrated the tale of "Gus" -- a gallon of gas -- in a brief animation portraying crude oil's journey from the ground to your car's tank.
The animation traces Gus' travels across the sea to the United States, explaining how his initial five-cent -- that's right -- five-cent value grows through -- speculation -- and the law of supply and demand. Add the cost of refining and delivering the product, not to mention taxes, marketing, and your local gas station's cut, and Gus goes from five-cents to $4.
"We were most surprised," Landis later told co-anchor Harry Smith, by the fact that, before the oil even reaches the shores here, speculators and the law of supply and demand have already priced the final price up to within 80 percent of its final amount. ... (And local gas stations only) make pennies on each gallon."
Smith then spoke to an oil trader and a consumer watchdog about just who trades oil in financial markets and how much impact that activity has on the price of crude and, by extension, gas.
Ray Carbone, an oil trader and broker at Paramount Options, told Smith, "We buy and sell oil. I trade options on the oil futures market. We're watching the price and all of the components that go into making that price up."
How is it, Smith asked, that the price of crude has shot up from the $30-$35 levels it seemed to hover at for so long -- not that long ago?
"Look at the trajectory of the downward fall in the dollar from 2003, on," Carbone suggested. "If we look at the price of oil, it mirrors that. So, the price of the Euro, the price of gas goes up. Demand. Geopolitical concerns. We've got an Israeli minister talking about attacking Iran on Friday. All of these go into the price of oil. Geopolitical concerns, the dollar, and strong, strong demand.
And, Smith inquired, who are these so-called speculators who seem to be contributing so much to the price of oil?
"People trade oil," Carbone replied. "There are industry players that trade oil. There are banks that trade oil. Many players in the oil market, as in all commodity markets -- gold, silver, grains -- everyone's trading commodities. And (oil) is just ... an asset class now, and we have to look at it that way."
Smith observed that, "There's so much cash out there, and there are so many people who were in the stock market looking for places to invest. They've gone to commodities, including oil. If we want to find a bad guy, who is it in all of this?"
"The bad guy," asserted Mark Cooper of the Consumer Federation of America, "is the deregulation of oil and energy commodities. There's a huge quantity of trading that takes place without any regulation. That started in 2000, the famous 'Enron loophole,' which created all kinds of problems in electricity, now in energies.
"There's been a huge influx of cash into this market, because we made it too easy to trade in these commodities. ... The (collateral) requirements (for funds used to trade oil) are very low. So, you can buy ten times as much oil for a dollar that you put on the table as you buy for stocks. It's just too easy.
"And we didn't need this kind of trading. The market worked perfectly well without this huge, hundreds of billions of dollars rushing in. We have too much money chasing too few goods in these markets. We can fix it if we want to, as a matter of policy."
The bottom line: Is it a bubble, and will the bubble burst?
"To me," Carbone said, "it's a demand-driven market. We look at the emerging markets, we look at Saudi Arabia, we look at the newer economies, China and India, we have 3 billion consumers consuming oil that never were players in the oil market before. What do you do with three billion consumers needing gasoline?"