Did Speculation Fuel Oil Price Swings?

60 Minutes: Speculation Affected Oil Price Swings More Than Supply And Demand

(CBS)  About the only economic break most Americans have gotten in the last six months has been the drastic drop in the price of oil, which has fallen even more precipitously than it rose. In a year's time, a commodity that was theoretically priced according to supply and demand doubled from $69 a barrel to nearly $150, and then, in a period of just three months, crashed along with the stock market.

So what happened? It's a complicated question, and there are lots of theories. But as correspondent Steve Kroft reports, many people believe it was a speculative bubble, not unlike the one that caused the housing crisis, and that it had more to do with traders and speculators on Wall Street than with oil company executives or sheiks in Saudi Arabia.

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To understand what happened to the price of oil, you first have to understand the way it's traded. For years it has been bought and sold on something called the commodities futures market. At the New York Mercantile Exchange, it's traded alongside cotton and coffee, copper and steel by brokers who buy and sell contracts to deliver those goods at a certain price at some date in the future.

It was created so that farmers could gauge what their unharvested crops would be worth months in advance, so that factories could lock in the best price for raw materials, and airlines could manage their fuel costs. But more than a year ago those markets started to behave erratically. And when oil doubled to more than $147 a barrel, no one was more suspicious than Dan Gilligan.

As the president of the Petroleum Marketers Association, he represents more than 8,000 retail and wholesale suppliers, everyone from home heating oil companies to gas station owners.

When 60 Minutes talked to him last summer, his members were getting blamed for gouging the public, even though their costs had also gone through the roof. He told Kroft the problem was in the commodities markets, which had been invaded by a new breed of investor.

"Approximately 60 to 70 percent of the oil contracts in the futures markets are now held by speculative entities. Not by companies that need oil, not by the airlines, not by the oil companies. But by investors that are looking to make money from their speculative positions," Gilligan explained.

Gilligan said these investors don't actually take delivery of the oil. "All they do is buy the paper, and hope that they can sell it for more than they paid for it. Before they have to take delivery."

"They're trying to make money on the market for oil?" Kroft asked.

"Absolutely," Gilligan replied. "On the volatility that exists in the market. They make it going up and down."

He says his members in the home heating oil business, like Sean Cota of Bellows Falls, Vt., were the first to notice the effects a few years ago when prices seemed to disconnect from the basic fundamentals of supply and demand. Cota says there was plenty of product at the supply terminals, but the prices kept going up and up.

"We've had three price changes during the day where we pick up products, actually don't know what we paid for it and we'll go out and we'll sell that to the retail customer guessing at what the price was," Cota remembered. "The volatility is being driven by the huge amounts of money and the huge amounts of leverage that is going in to these markets."

About the same time, hedge fund manager Michael Masters reached the same conclusion. Masters' expertise is in tracking the flow of investments into and out of financial markets and he noticed huge amounts of money leaving stocks for commodities and oil futures, most of it going into index funds, betting the price of oil was going to go up.

Asked who was buying this "paper oil," Masters told Kroft, "The California pension fund. Harvard Endowment. Lots of large institutional investors. And, by the way, other investors, hedge funds, Wall Street trading desks were following right behind them, putting money - sovereign wealth funds were putting money in the futures markets as well. So you had all these investors putting money in the futures markets. And that was driving the price up."

In a five year period, Masters said the amount of money institutional investors, hedge funds, and the big Wall Street banks had placed in the commodities markets went from $13 billion to $300 billion. Last year, 27 barrels of crude were being traded every day on the New York Mercantile Exchange for every one barrel of oil that was actually being consumed in the United States.

"We talked to the largest physical trader of crude oil. And they told us that compared to the size of the investment inflows - and remember, this is the largest physical crude oil trader in the United States - they said that we are basically a flea on an elephant, that that's how big these flows were," Masters remembered.

Yet when Congress began holding hearings last summer and asked Wall Street banker Lawrence Eagles of J.P. Morgan what role excessive speculation played in rising oil prices, the answer was little to none. "We believe that high energy prices are fundamentally a result of supply and demand," he said in his testimony.

[likeitis5050]

And what will be done about it? We see from the article that the criminals simply moved up the ladder to continue their brand of extorsion. So when does the shoe fall and when does it fall on the those responsible....once and for all? Where is the justice? There won''t be any because crime pays.

[tawpdawg111]

"It is now evident that speculators in the energy futures markets play a much larger role than previously thought, and it is now even harder to accept the agency''s laughable assertion that excessive speculation has not contributed to rising energy prices," said Rep. John D. Dingell (D-Mich.). He added that it was "difficult to comprehend how the CFTC would allow a trader" to acquire such a large oil inventory "and not scrutinize this position any sooner."

Here is all you need to know.....

http://www.washingtonpost.com/wp-dyn/content/article/2008/08/20/AR2008082003898.html

[tawpdawg111]

Sadly, you are correct, 5050.....crime DOES pay.

[tx2democrats]

aaaahhhh....DUH!!!!!!!

We''ve known all along, this is old news.

[ramos937]

Were the oil speculators responsible for the over $150 per BBL price? Simple answer. When prices were high, there was frantic oil speculation. Oil prices are now way down. Where are the oil speculators? If they are no longer around, then they were responsible.

[jamster31]

I would hope the government would prosecute the ones reponsible but of course they''re probably Bush''s buddies. I''ll bet Cheney made plenty somehow...he knows the ropes.

[shanev137]

He pretty much nailed the decline right on the head with the collapse of the credit market and the margin calls...further proving that $150 oil never had anything to do with supply and demand.

All it was, was a huge money grab that the media got most Americans to buy off on....hook, line, and sinker.

[brannigon]

Did Speculation Fuel Oil Price Swings? No, dishonesty and lies as usual! Bend over and crack a smile America!

[rickstas]

Gilligan says no one can tell whether speculators manipulated the oil futures market because part of the market was deregulated eight years ago--

Guess what administration was responsible.

[bobnjersey]

[Why was the oil futures market deregulated? Michael Greenberger, former director of trading at the Commodity Futures Trading Commission, says it was because of the influence of Enron. The once high-flying energy company went bankrupt and was accused of manipulating electricity prices. They were able to do so, says Greenberger, because controls on speculators were lifted. "When Enron failed, we learned that Enron and their conspirators who used their trading engine were able to drive the price of electricity up, some say by as much as 300 percent, on the West Coast," he tells Kroft. ]

then why weren''t these holes in the regulatory guidlines plugged when enron collapsed?

if this is true ... there''s a major failure of the system that allowed conditions that promoted one of the biggest scams of the 20th century to stand ... and just another example of how the representative process is terribly broken.

a nice indication of what''s to come as a result of the most recent abuses of the financial systems ... nothing at all!

[debinok1]

Put the regulations back in place. The players have proven that they cannot regulate themselves. Someone else will have to. This lesson better be remembered for a long long time.

[swami545]

"Gilligan says no one can tell whether speculators manipulated the oil futures market because part of the market was deregulated eight years ago--

Guess what administration was responsible. "

Over 8 years ago - that means Clinton was still in office.

[swami545]

"It is a scam by the rich eleite to screw the people of the world and we need to find these a$shole and shoot the bassturds kill them all!
-Posted by libsuck1 "


If the liberals want to get back at the rich oil men, they should stop driving their cars.

[omega40]

Duh!! It took the American corporate lackey press long enough to catch up. The Asia times ran a series of articles on this in April of last year.

[jediservant]

Part 3

It is stunning to realize that more than three years since we pulled out of the Gaza Strip, evacuated our soldiers, and erased any sign of the small Jewish settlements there, we are still regarded as the aggressive occupiers! For three years the people of Gaza have been left to rule themselves, rebuild their city, and create better lives with no interference. In this time, the world community has poured millions of dollars and Euros into Gaza to establish services like education, health, welfare, commerce, and industry. This great three year opportunity has been wasted, for nothing has been accomplished except producing weapons, smuggling arms, training militants, and, most of all, shooting thousands of missiles at us. Did the international community ever demand that these terrorists stop? Did it ever demand a report of what has been done with the millions contributed to Gaza? No! When hypocrisy is the name of the game, this is what results.
I can understand the average person being unaware of the Israeli withdrawal from Gaza three years ago and of the fact that there is no justification to fire missiles at us. But for state leaders worldwide to fail to understand that it is time to stand strong against terror is nothing but stupidity and a clear expression of their weakness. They are inviting terrorism to their own countries, because if there is one thing that terrorism is capable of identifying, it is weakness in the leadership of its victims.

[claydowner]

The problems with hedge funds and other financial institutions speculating in the oil markets is simply all the more reason to eliminate oil from our economy. Relying on OPEC oil in the 21st century when we are probably at or near Peak oil is absurd. Countries like Sweden, Japan, Germany and other European countries are working hard to reduce their dependence on oil by conservation and renewable energy sources. Brazil has almost entirely eliminated oil imports with sugar cane ethanol and flex fuel vehicles. China and India are rapidly industrializing with 800 million cars today in the world expanding to one billion cars by 2020. Americans should not be burning 25% of the world''s oil everyday. Almost 75% of the Pentagon''s budget of $600 billion is in support of Middle East operations in some manner. This expense combined with many hundreds of billions spent on oil commodities means that we are hemorrhaging nearly a trillion dollars every year for direct and indirect costs of oil.

The countries with green technologies will rule the economic world. Oil will be up again to $100 per barrel. The Iraq war will cost $3 trillion. We need a huge program to get off of oil completely. Write your Congressman to support the Pickens plan or a green alternative. If Iran and Israel go to war of nukes expect oil to hit $200 plus per barrel if we can even get oil out of the Middle East without another war.

[newsjunky5]

"Over 8 years ago - that means Clinton was still in office. "
-------------------
The Congress makes regulatory law. They were Republicans at that time. The President can only regulate when regulation is mandated by Congress.

[newsjunky5]

Say, what ever happened to that Neocon rumor that ethanol takes more fuel to produce than it provides?
Gee, with all the ethanol we''re producing now, no wonder we''re in bad shape.

[claydowner]

There must be high standards for regulation in our country. The derivatives and hedge funds markets should be run with total transparency and accountability with records for all transactions available to government officials. All of these markets need to be controlled in a manner similar to the FDIC with capital reserves and fees assessed on every transaction and put into an insurance pool. The insurance fund would be make the financial players pay for their own bailout. Regular audits and stiff regulation is the only solution to this problem.

I am sick and tired of the Republican deregulation philosophy of the markets that started under the Reagan years. All we get from deregulation is a few at the very top making all the profits and the taxpayers get to assume all of the risk. The supply side economic theory has totally failed. Many Wall Street investment bank CEO''s need federal prison time for fraud and insider trading abuses.

[bm6005]

Say, what ever happened to that Neocon rumor that ethanol takes more fuel to produce than it provides?
Gee, with all the ethanol we''''''''re producing now, no wonder we''''''''re in bad shape.
Posted by newsjunky5

Sorry guys, some ethanol plants are closed/closing. Also, it''s true about negative energy to create ethanol from CORN. There are other, better alternatives than to mess with our food supply. Untended grasslands are much cheaper than oil intense CORN. Diesel, fertilizer, labor can all be much lower than presently. I am not a neocon, quite the contrary. My carbon footprint is very small. You have to optimize any process to make it as economically attractive as possible.

[newsjunky5]

Some ethanol plants will close because oil is down, and corn is up. And true, corn is not a good crop for this, just one which is established (harvesting equipment, seed supplies, etc.) But I''m still not convinced it''s a negative return.

[newsjunky5]

The SECRET energy policy had something to do with it also.
Posted by rharrin1

The cheney meetings??
-------------------------
Good point. The Sierra Club sued and lost to gain the transcripts of those meetings. But with further evidence of wrongdoing and the oil price spike, maybe it''s time to try again.
Rightbehind - love that name.

[newsjunky5]

The real question here is how much runaway speculation on oil was funded by the oil companies.
No wait, the real question here is can we even catch the oilmen who did this. They are unlikely to reside in this country if this comes to light.

[combatvet03]

Ya think huh, I am amazed at the attitude of AMERICANS that think it''s good to make money on the backs of other Americans.

[susanhelit]

Ummm - duh!

It''s obvious now - but people were saying it before - including the oil producing nations who showed that they were producing plenty to meet demand - but it''s so much easier to blame OPEC - than to realize it''s our prized market economy being manipulated.

It was obvious then too - when prices swing without any changes in oil production, at any excuse in the news - it''s clear that the prices are not based on supply and demand any longer.

[pat1967-2009]

newsjunky5

The thermodynamic equation of ethanol production is not up to political debate. The fact is that ethanol takes more energy to produce than you get from it because heat is rejected in the distillation process. That is not to say that it may not be economically and environmentally feasible. If solar energy production capacity were to be expanded to the point where its economy of scale makes it cheap, then we could use that energy to produce low cost ethanol. As I%u2019m sure you know, ethanol use is a closed carbon loop, thus being a zero sum gain for atmospheric CO2.

[daveya11]

How many politicians own stock in the oil companies?

[shanev137]

No wait, the real question here is can we even catch the oilmen who did this.

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The people who worked for companies like Morgan Stanley and Goldman Sachs did this. Read the article.

[shanev137]

companies like Morgan Stanley and Goldman Sachs did this.

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It''s the same people who just got the $800 Billion bailout.


Man, it''s so unbelieveable that the majority of our population can''t connect the dots.

[runningralph]

From what I read, the deregulation happened in 1992 and 1998. But regulated or deregulated, commodities futures trading is bound to run the price up on every commodity. Commodities traders are the middle men between the producers and the consumers.

[rudy6543]

Jail the speculators!!!

[beewitchy1]

the worlds going to hel*if the rich arent schemeing at a way to take it from us,the poor(lazy BASTAR**)are taking it from our homes.get prepared to live in a world like it was in the old days.especially if your not rich or poor but stuck in that ever loving hardworking middle.cant afford gas,electric,food or rent.ill stick with the rent first,go hunting and garden for my food,heat my house with wood and walk if i have to.and noone rich or poor are going to take anything from me or mine.remeber the saying that history repeats itself?well i think all of us in the middle are about to get a big kick in the as*.better be prepared.

[bobc1493]

THIS IS THE REASON WE MUST NATIONALIZE VITAL COMMODITES LIKE OIL, NATURAL GAS AND ELECTRICITY

The free market capitalizm therory only works if you can keep GREED out of it.

Since greed is inhearent human nature the free market will not work.

[hdc77494]

California had rolling blackouts because they won''t let power companies build the plants necessary to produce what they use. Enron took advantage, but California created the problem.
I thought speculation had something to do with oil prices. People always blame the oil companies, but they buy most of their oil and can''t control the price. Politicians get power by telling the public "it''s so and so''s fault", and then telling people if you''ll just give me a little authority, I can fix it for you. Hitler was very good at it. We''ll see if Obama can be as convincing. Shame on CBS for implying there was a conspircy by Wall Street.

[william_lerd]

California had rolling blackouts because they won''''t let power companies build the plants necessary to produce what they use. Enron took advantage, but California created the problem.
I thought speculation had something to do with oil prices. People always blame the oil companies, but they buy most of their oil and can''''t control the price. Politicians get power by telling the public "it''''s so and so''''s fault", and then telling people if you''''ll just give me a little authority, I can fix it for you. Hitler was very good at it. We''''ll see if Obama can be as convincing. Shame on CBS for implying there was a conspircy by Wall Street.


--------------------------------------------------------------------------------

Posted by hdc77494
========================
California had rolling blackouts because Enron played pirate with the power lines. If it had been what you say, then they would have still had rolling blackouts after Enrons fall.

[william_lerd]

Ofcourse it was. People were fleeing the falling dollar and getting into commodities like oil and gold. Was there some gold shortage that made gold go over $1,000 an ounce that no one talked about?

[impeach_o]

well its true..as a matter of fact..cbs is speculating RIGHT NOW!

[laurieleemoo]

I have been screaming about this issue to my senators for the State of Florida...both Neslson and Martinez.

I am surprised this article is just now coming out.
Bits and pieces have been coming out over since last July about this issue.

Even the Saudis came out and said that something was wrong--that based on supply and demand the price should have been @ $70.0 per barrel...and that was when the price had jumped to almost $150.0 per barrel.

Oh and by the way....do you know who deregulated Oil just before Bush came in office in 2000......THE DEMOCRATS.

I have been saying since then that the Democrats were setting up the Republicans for a bad economy.

Yes...those Dems knew exactly what they were doing I''m pretty sure. They knew that deregulation would send prices skyrocketing from trading speculation in futures.

You don''t have to be a rocket scientist...just a good and informed observant to see whats been going on.

[laurieleemoo]

Under regulation.....the price can only go up/down so much in a day..

The hedgefund investors I''m pretty sure are all probably friends of the democrats.

Anyway...when Obama says he wants a big windfall tax on the oil companies...really that tax should go to the hedgefund investors.

They were the real cause of the outrageous prices of gas for the past few years.....not the Oil Companies making record profits as the liberal media and Obama keep trying to make the world believe.

Yes...the big huge profits have been issued to the hedgefund investors and that is where most of the profit went.

[laurieleemoo]

and I am also wondering how much of the Loss claimed by the banks as defaulted mortgages was really also partly losses on hedgefund investments once oil prices started going down.

I have not heard much about those losses...but I know they have got to be huge....

do you think we also partly bailed out the banks for
those losses to?

[laurieleemoo]

Anyway...don''t you think its highly suspicious that so many democrats voted to deregulate oil in 2000....

I mean usually it is the Democrats who always want regulation is it not?....So then....of all things to vote for deregulating...I find it highly suspicious that so many democrats agreed to de-regulate. Not normal behavior for a dem.

[jedmorey]

The alternative press picked up on a Long Island Press story and published a comprehensive piece in the fall detailing the reasons and the people behind the shocking increase felt over the summer. You can access the original piece at
www.longislandpress.com/articles/CoverStory/84/
This piece identifies the real architects of the scheme as only the alternative press can do.

[tripster101]

When gas prices were climbing to their highest back in the fall of last year, I suspected that speculation on Wall Street might be a factor. Now this. It''s about time that this was exposed! This kind of activity needs to be regulated aggressively. But I wonder if people are going to pay much attention.

[hotwitch]

Don''t believe it. Nice conspiracy theory to help the dummies feel indignant and wallow in self pity. If the speculators get the blame when prices go up, should they not get the credit when prices go down? At worst (best) the hedge funds were trend following and if they drove the price up, who drove it down? Apparently they (Lehman, AIG, et al) had a net loss so again, who walked away with the money? Skull and Bones Society?

[claydowner]

I want to see more regulation of the the activities of speculators such as Goldman Sachs and other institutional investors in the oil commodities market. Congress needs to regulate and enforce these regulations to discourage speculators from driving up the price.

This being said, the US needs to adopt the strict new California environmental standards into the Federal Code. We also need to adopt the Pickens'' energy plan and make it part of the stimulus package in Congress today. All American cars built need to get 50 MPG or be plug-in electric hybrids. Trucks need to be run on natural gas. We must recycle everything. All buildings need to be highly insulated and energy efficient. Solar, wind and geothermal power backed up by natural gas is the blue print for a green energy policy in the 21st century.

[kaptainess]

Okay Folks...Now we KNOW fer sure that Big Business doesn''t have our best interests in mind/heart. Now we know that they could care less if they send our jobs overseas and leave us in the bread lines and homeless. My question is this: What do WE plan on doing about it? And don''t give me the stupid answer that the Politicians will do something about it - The Politicians could care even less!! They are put in office to serve - themselves!! I am one angry citizen, especially when I hear that some of those dogs in Washington think its foolish to help the average Joe and we should fend for ourselves. I don''t know how long the American Public will stand by and let those Jokers in Washington live large while we starve to death. Reelecting the same ones over and over again - some can hardly stand straight and they are voted in for 30 years and never did what they promised??? I think there should be a cap on how many years members of the House and Senators can serve as we do the President. Get elected, do what you promised for the American Public and get OUT! Unless we press this issue, the same jokers will be comfy in their office with high pay, the best healthcare, and all the perks while they tell us to go to h*ll.

[kaptainess]

One more thing - WHY wasn''t the Oil Prices investigated??

[flsunjnky]

I am going to watch 60 minutes tonight. I would like to see the live broadcast about all of this. I also speculated last summer, when the gas prices were so high, that there might be a connection with speculators on the market. Now, bring it to light! I think we all want to know just who is responsible. I also think that this should very much be an issue of national security interest.

[dettiedoll]

and we gave them a bailout? they really have these politicians under their thumbs. who is looking out for us, the average joes, then?

[dixbutler]

What''s left out of your analysis is the fact that the U.S. dollar was hitting record lows at the time oil and nearly every other commodities was hitting record highs. If it were only oil hitting record highs I could see your point that speculation was driving the run up. Since, however, steel, copper, corn, and other commodities were hitting price levels seldom if ever seen, it seems rational that the reduced spending power of the dollar was driving the price increase. Giving further weight to my theory, is the steep fall of oil and other commodities with the strong recovery of the dollar.
Little discussion is had on the tremendous fall in the value of the dollar, and it''s effects. In my oppinion the collapse of the dollar and the steep increase of commodities (especially oil) caused the worldwide inflation that has led to the worldwide economic downturn. Luckily for us the dollar recovered and commodities came down just in time to keep our economy from shattering. The problem will come when the tremendous influx of faux money just injected into the economy further devalues the dollar. We will eventually see another collapse of the dollar along with commodity inflation from this unbacked money being injected into the economy.