Above are historical tables of oil and gold prices. I have emphasized the years from 2001-2008 to illustrate the trends since the Bush Administration took office. The price of oil has risen from $23/B to $131/B, an increase of 500+ percent. Since January, 2008 the price has doubled. Gold has increased over 200% during that same period.
If the market prices of both commodities were based purely on demand, the implicit increases in consumption of oil and gold since 2001 would be 500+ percent and 200 percent respectively. The increase in the price of oil for 2008 would indicate a 100 percent increase in consumption. The actual increase in consumption of both have been nowhere near the dramatic increases in price. Both oil and gold are natural resources with diminishing reserves. Oil, however, is more vital to the industrial economy which may be the cause of the more dramatic increase. But, as is true with all commodities traded in the futures market, speculation and manipulation affects the prices dramatically more than consumption. We learned that lesson in 2001 and 2002 with the Enron scandal when the price of electricity was manipulated and caused the bankruptcy of the California utility companies.
There is no doubt that OPEC and the oil companies have been manipulating the price of oil in the futures market. Oil has no other value than its commercial use while gold has a recognized worldwide monetary value whose prices would increase primarily in relationship to the value of the dollar decline. The case has been clearly made from the above information that instability in the oil rich countries has a direct affect on the futures market.
The securitization of energy has been the greatest cause of oil increase having little to do with immediate increases in consumption. It is painfully obvious that the futures market is the place where oil prices are most sensitive. That is why it is important to take some action that would really reduce the price of oil now. Futures markets can be dramatically affected by fear on a daily basis. The increase of oil prices from $64 to $131 in 2008 alone reflects what Alan Greenspan called "irrational exuberance." In futures market terms it is called "irrational fear." That is why a long term view of reducing oil reliance will not decrease oil prices. Neither will asking OPEC to increase production.
The real answer to reducing prices now is to convince the manipulators and speculators in the futures market to fear that all prices will go down dramatically. That is why a dramatic announcement by Obama about investing hundreds of billions of dollars per year to advance proven alternate energy technology would decrease the price of oil dramatically in the short term. In financial markets it is a fundamental principle that panic selling reduces prices faster than panic buying increases prices. That is why the NASDAQ index dropped in 2000 from 5,000 to less than 2,000 in less than 1 year and 8 years later is still less than half of its all time high.
The funding of this project whose urgency is at least as great as the Manhattan Project in 1942 could be paid for by a dramatic increase in the windfall profits taxes. A 25% incremental tax on Exxon/Mobil would yield $10 Billion dollars per year.With the likelihood of a Democratic victory in 2008, that kind of announcement could create turmoil in the futures market and prices might go tumbling down. In addition, Obama could announce as Eisenhower did in 1952 when he said that he would go to Korea, that he would go to Iraq to end the war. This announcement now would also dramatically reduce the price of oil by creating a perception of increasing stability in the Middle East. I suggest that the policy makers in the Obama campaign seriously look at making this kind of announcement. That would insure his election in 2008 as it did for Eisenhower in 1952.
novamradio.com
Sheldon Drobny was the co-founder of Nova M radio and Air America Radio. He has supported many philanthropic causes and is currently involved in purchasing radio stations for liberal talk radio with his new company, Nova M Radio, Inc. Mr. Drobny specializes in business and tax matters and is admitted to practice before the U.S. Tax Court as a non-attorney. Less than 200 non-attorneys have been admitted to practice before the U.S. Tax Court since its inception in 1942. Mr. Drobny received a Bachelor of Science Degree in accounting from Roosevelt University in Chicago and is a member of Beta Gamma Sigma, an honorary fraternity recognizing acadamic achievement in colleges of business administration.
"As detailed in an earlier article, a conservative calculation is that at least 60% of today’s $128 per barrel price of crude oil comes from unregulated futures speculation by hedge funds, banks and financial groups using the London ICE Futures and New York NYMEX futures exchanges and uncontrolled inter-bank or Over-The-Counter trading to avoid scrutiny. US margin rules of the government’s Commodity Futures Trading Commission allow speculators to buy a crude oil futures contract on the Nymex, by having to pay only 6% of the value of the contract. At today's price of $128 per barrel, that means a futures trader only has to put up about $8 for every barrel. He borrows the other $120. This extreme "leverage" of 16 to 1 helps drive prices to wildly unrealistic levels and offset bank losses in sub-prime and other disasters at the expense of the overall population. "
FYI, the Dubai Mercantile Exchange (DMEX) was set up by NYMEX on June 1, 2007, when oil was 60 dollars a barrel. Today it is at 135 dollars a barrel, as the world heads into a recession which projects to decrease demand.
Consider this.
click here prices at a record high above $135 a barrel are rising due to market sentiment rather than a shortage of supply, Royal Dutch Shell's chief executive said on Thursday.
U.S. crude oil hit an all-time peak on Thursday, climbing to $135.09, lifted by concern about long-term supply and a host of predictions of further rises from influential investment banks and investors.
"What we say and what we see is there are no physical shortages," Shell's Jeroen van der Veer told Reuters television. He runs the world's second-largest fully publicly traded oil firm by market value.
"There are no tankers waiting in the Middle East, there are no cars waiting at gasoline stations because they are out of stock. This has to do with psychology in the markets and you cannot forecast psychology".
Thats a Big Oil insider talking, and this implies financial speculators are manipulating the prices, and creating an Oil price bubble.
The following is from a William Engdahl article where he concluded 60% of oil price is determined by speculation. I lost the link, but google it, it's well worh reading the enture article.
"A June 2006 US Senate Permanent Subcommittee on Investigations report on "The Role of Market Speculation in rising oil and gas prices," noted, "there is substantial evidence supporting the conclusion that the large amount of speculation in the current market has significantly increased prices."
snip
The report pointed out that the Commodity Futures Trading Commission, a financial futures regulator, had been mandated by Congress to ensure that prices on the futures market reflect the laws of supply and demand rather than manipulative practices or excessive speculation. The US Commodity Exchange Act (CEA) states, "Excessive speculation in any commodity under contracts of sale of such commodity for future delivery . . . causing sudden or unreasonable fluctuations or unwarranted changes in the price of such commodity, is an undue and unnecessary burden on interstate commerce in such commodity."
Further, the CEA directs the CFTC to establish such trading limits "as the Commission finds are necessary to diminish, eliminate, or prevent such burden." Where is the CFTC now that we need such limits?
snip
Enron has the last laugh. As that US Senate report noted:
"Until recently, US energy futures were traded exclusively on regulated exchanges within the United States, like the NYMEX, which are subject to extensive oversight by the CFTC, including ongoing monitoring to detect and prevent price manipulation or fraud. In recent years, however, there has been a tremendous growth in the trading of contracts that look and are structured just like futures contracts, but which are traded on unregulated OTC electronic markets. Because of their similarity to futures contracts they are often called "futures look-alikes."
The only practical difference between futures look-alike contracts and futures contracts is that the look-alikes are traded in unregulated markets whereas futures are traded on regulated exchanges. The trading of energy commodities by large firms on OTC electronic exchanges was exempted from CFTC oversight by a provision inserted at the behest of Enron and other large energy traders into the Commodity Futures Modernization Act of 2000 in the waning hours of the 106th Congress.
The impact on market oversight has been substantial. NYMEX traders, for example, are required to keep records of all trades and report large trades to the CFTC. These Large Trader Reports, together with daily trading data providing price and volume information, are the CFTC's primary tools to gauge the extent of speculation in the markets and to detect, prevent, and prosecute price manipulation. CFTC Chairman Reuben Jeffrey recently stated: "The Commission's Large Trader information system is one of the cornerstones of our surveillance program and enables detection of concentrated and coordinated positions that might be used by one or more traders to attempt manipulation."
In contrast to trades conducted on the NYMEX, traders on unregulated OTC electronic exchanges are not required to keep records or file Large Trader Reports with the CFTC, and these trades are exempt from routine CFTC oversight. In contrast to trades conducted on regulated futures exchanges, there is no limit on the number of contracts a speculator may hold on an unregulated OTC electronic exchange, no monitoring of trading by the exchange itself, and no reporting of the amount of outstanding contracts ("open interest") at the end of each day."
Then, apparently to make sure the way was opened really wide to potential market oil price manipulation, in January 2006, the Bush Administration's CFTC permitted the Intercontinental Exchange (ICE), the leading operator of electronic energy exchanges, to use its trading terminals in the United States for the trading of US crude oil futures on the ICE futures exchange in London called "ICE Futures."
Previously, the ICE Futures exchange in London had traded only in European energy commodities Brent crude oil and United Kingdom natural gas. As a United Kingdom futures market, the ICE Futures exchange is regulated solely by the UK Financial Services Authority. In 1999, the London exchange obtained the CFTC's permission to install computer terminals in the United States to permit traders in New York and other US cities to trade European energy commodities through the ICE exchange.
Then, in January 2006, ICE Futures in London began trading a futures contract for West Texas Intermediate (WTI) crude oil, a type of crude oil that is produced and delivered in the United States. ICE Futures also notified the CFTC that it would be permitting traders in the United States to use ICE terminals in the United States to trade its new WTI contract on the ICE Futures London exchange. ICE Futures as well allowed traders in the United States to trade US gasoline and heating oil futures on the ICE Futures exchange in London.
Despite the use by US traders of trading terminals within the United States to trade US oil, gasoline, and heating oil futures contracts, the CFTC has until today refused to assert any jurisdiction over the trading of these contracts.
Persons within the United States seeking to trade key US energy commodities US crude oil, gasoline, and heating oil futures are able to avoid all US market oversight or reporting requirements by routing their trades through the ICE Futures exchange in London instead of the NYMEX in New York.
Is that not elegant? The US Government energy futures regulator, CFTC opened the way to the present unregulated and highly opaque oil futures speculation. It may just be coincidence that the present CEO of NYMEX, James Newsome, who also sits on the Dubai Exchange, is a former chairman of the US CFTC."
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pft (0 articles, 0 quicklinks, 0 diaries, 302 comments)
on Friday, May 23, 2008 at 9:09:45 PM
