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Mon 9 Jun, 2008 06:09 pm
Posted on Monday, June 9, 2008
These steps could lower oil prices, but nobody'll take them
By Kevin G. Hall | McClatchy Newspapers
WASHINGTON ?- As gasoline prices soar to new records, America's president ?- and the two men who hope to succeed him ?- are offering only partial or long-term solutions and ignoring three steps that many experts say could bring some relief now.
Americans began this workweek by crossing a dismal threshold, paying a once-unthinkable nationwide record average of $4.02 per gallon Monday for unleaded gasoline, with the prospect of even higher prices in months ahead.
On Monday, President Bush said one answer is to increase oil drilling in Alaska and offshore. Presumptive Republican presidential nominee John McCain's chief economic adviser renewed McCain's call to suspend the 18.4 cent-per-gallon federal gasoline tax. Presumptive Democratic nominee Barack Obama called for a windfall profits tax on oil companies.
Independent experts, however, said that government could take at least three other steps that could force oil and gasoline prices down immediately. Neither Bush nor McCain nor Obama endorse any of them.
Perhaps the quickest action, the experts said, would be ordering curbs on financial speculation. Financial industry heavyweights have acknowledged in recent testimony before Congress that such speculation is driving oil prices higher.
Pension funds, endowments and other big institutional investors are pumping big money into index funds linked to commodities, including oil, driving up demand ?- and prices. The popular Goldman Sachs Commodities Index attracted $260 billion in investment last year, compared to $13 billion five years earlier.
Complicating any effort to harness that, about 30 percent of the trading in crude oil is done in "dark areas" ?- markets in London and Dubai ?- that aren't regulated by the U.S. Commodity Futures Trading Commission (CFTC).
President Bush could order the CFTC to regulate U.S. investments in those markets with a snap of his fingers, said Michael Greenberger, a law professor at the University of Maryland and a former director of trading for the CFTC.
"Essentially this could be ended this afternoon if the Bush administration had the stomach to do it," he said. "Those abdications of responsibility and allowing these exchanges to trade in 'dark' markets ... provides an environment for speculators to thrive."
The CFTC is investigating the link between speculation and oil prices but hasn't scheduled any action.
A second partial solution would be to boost the supply of oil available on the market by releasing as much as 1 million barrels a day of oil now held in the nation's Strategic Petroleum Reserve. That step is being pushed by, among others, the Center for American Progress, a Democratic think tank run by several former Clinton administration officials.
Do that for 90 days ?- through the summer driving season when consumer demand for gasoline is highest ?- and the reserve would lose less than 15 percent of the oil held in case of national emergency.
"Put that on the market, and the price of oil will fall," said Daniel J. Weiss, a senior fellow at the center.
It's not entirely clear that U.S. refineries could handle all that extra oil, but it would signal to traders of oil contracts that the U.S. market is adequately supplied.
Finally, the Federal Reserve could act to boost the weak dollar, which has led oil producers to demand higher prices for oil, because oil generally is traded in dollars. Oil producers want higher prices to offset the cost of converting dollars into euros and other currencies that have grown stronger against the dollar.
The best way to bolster a currency is to boost interest rates, but the Federal Reserve has been reluctant to do that with America teetering on the brink of recession. The central bank in Europe, where growth is more robust, is poised to raise rates, however. That could weaken the dollar further, and drive oil prices even higher.
Senate Democrats on Tuesday will try to muster 60 votes to allow a vote on legislation that could significantly affect the oil industry and oil prices. The legislation would, among other things, instruct CFTC regulators to require investors to plunk down more of their own money if they want to speculate in oil markets.
Instead, Douglas Holtz-Eakin, McCain's chief economic adviser, told McClatchy that a "holiday from the 18.4 cent per gallon federal gasoline tax has lowered prices every time it's been tried "and it is felt all through the economy."
The idea of a gas-tax holiday has little traction in the Democratic Congress, however, and many economists oppose it as likely to spur consumption and make things worse.
Speaking in Raleigh, N.C., Obama on Monday repeated his call for a tax on high oil company profits to fund aid programs for the poorest Americans.
"I'll make oil companies like Exxon pay a tax on their windfall profits, and we'll use the money to help families pay for their skyrocketing energy costs and other bills," he said.
Longer term though, Obama said, the only answers are to increase use of alternative energy ?- solar, wind, biodiesel, clean-coal technology ?- and to increase fuel-mileage standards for vehicles and develop hybrid-electric cars, which will take time.
McCain's longer-term answers turn more toward increasing production of oil from offshore and from oil-shale deposits in the mountain West.
Are speculators driving up oil and gasoline prices?
Posted on Thursday, May 29, 2008
Are speculators driving up oil and gasoline prices?
By Kevin G. Hall | McClatchy Newspapers
WASHINGTON ?- A key federal regulator said Thursday that it's been probing whether speculators are manipulating the price of oil and gasoline and announced a series of measures to make the opaque world of oil trading more transparent.
In a surprise announcement, the Commodity Futures Trading Commission (CFTC) confirmed that since last December it's been investigating the trading of contracts for future deliveries of oil, commonly called futures contracts.
"Although the commission ordinarily conducts enforcement investigations on a confidential basis, the commission is taking the extraordinary step of disclosing this investigation because of today's unprecedented market conditions," the statement said. "The specifics of the ongoing investigation remain confidential. All commission enforcement inquiries are focused on ensuring that the markets are properly policed for manipulation and abusive practices."
Although disclosing the investigation helps give the impression that Washington is acting to curb abuses that may be helping to drive up energy prices, it also could tip off those who are being investigated. Commission spokesman R. David Gary told McClatchy "given the prevailing market conditions and that they are of unprecedented nature," the disclosure was necessary.
"While these investigations are time- and resource-intensive, obviously a considerable amount of time has elapsed since the investigation" began, he said.
The acknowledgement of the probe seemed to suggest that there might be some truth to rumors of market manipulation. Normally, probes are kept quiet to avoid damaging reputations if no wrongdoing is uncovered.
If speculators are running up oil prices, the obvious next question is by how much?
Former Federal Reserve chairman Alan Greenspan has guessed that speculators may add at least $10 to the price of a barrel of oil. Other analysts have put the figure as high as $20.
A barrel of crude oil contains 42 gallons of oil, but a $1 rise in per-barrel costs doesn't translate an equal increase in the cost of gasoline. According to the American Petroleum Institute, crude oil costs about $1.09 more per gallon since Jan. 1, while gasoline has risen about 70 cents per gallon.
It's hard to say how much speculation has contributed to higher energy prices because growing global demand for energy and shrinking oil production have prompted fears of supply disruptions. Traders factor in a so-called risk premium into the price.
The unusual CFTC announcement followed several congressional hearings, the latest on May 20, where a prominent hedge fund manager testified that speculators in commodities markets are running up the price that ordinary Americans pay for gasoline and food.
"You have asked the question, 'Are institutional investors contributing to food and energy price inflation?' And my unequivocal answer is 'YES,' " Michael Masters, a portfolio manager for Masters Capital Management, said in prepared testimony.
Masters runs a hedge fund that invests pools of money on behalf of wealthy investors, and he told senators that the prices of most major commodities such as wheat, corn and oil have doubled and in some cases tripled over the past five years while supplies of them are adequate. The reason, he said, "is a demand shock coming from a new category of participant in the commodities futures markets: institutional investors."
Commodities markets have always attracted speculators who try to make fortunes by betting on the shifting prices of everything from pork bellies to oil. But today's commodities markets are flooded with money from deep-pocketed investors such as corporate and government pension funds, university endowments and foreign-owned investment vehicles called sovereign wealth funds.
These players, called index speculators, far outnumber the investors who plan to take delivery of a barrel of oil or a bushel of corn. Index speculators tend to distribute their money across an index of two dozen or so major commodities and essentially bet that prices will go up. In industry parlance, they "go long."
In the stock market, this strategy of buying and holding is normal. But trading in most commodities happens on a much smaller scale, so these indexed investments are overwhelming trading.
"You cannot throw this much 'long' money into a relatively small market without the ability to have a supply response and prices not go up," said Howard Simons, the president of Rosewood Trading, an economic research firm in Glenview, Ill. "It has to go up."
Speculators will be here or overseas. Personally I like them on this side of the pond as much as possible. Some dem proposals to limit futures trading will gut a very profitable and regulated industry and send it overseas, for puny political gain. Typical.
Releasing the reserve would do something, but not much. 5-10 cents on four bucks isn't worth it imo.
The dollar will come back a lot faster without trying to jump start it.....remember interest rates are part of inflation too.
Oil is high primarily because it is the best way to supply motive energy. This too will pass, because we will adapt, and the market will adjust as well. Want to get serious, give poor people money to buy fuel just as they get food stamps.
paull wrote:Oil is high primarily because it is the best way to supply motive energy. This too will pass, because we will adapt, and the market will adjust as well. Want to get serious, give poor people money to buy fuel just as they get food stamps.
I agree with this on two counts. High prices change behavior in two ways: On the supply side, oil companies are going to start investing in better ways to reclaim more oil from exisiting fields and new techniques to find new reserves. On the demand side, it encourages conservation and high density developement. Of course, it is also a huge hammer to the poor who see prices rising for not only gas, but everything that has a transportation component in the price. Taxing gas but giving it back to the poor in the form of a fuel allowance would be one way to balance that.
"Perhaps the quickest action, the experts said, would be ordering curbs on financial speculation. Financial industry heavyweights have acknowledged in recent testimony before Congress that such speculation is driving oil prices higher. "
I would agree with this and acknowledge that neither candidate would understand how this works.
"A second partial solution would be to boost the supply of oil available on the market by releasing as much as 1 million barrels a day of oil now held in the nation's Strategic Petroleum Reserve. That step is being pushed by, among others, the Center for American Progress, a Democratic think tank run by several former Clinton administration officials. "
Would not agree as this is only a short term plug that would have a minimal impact.
"The best way to bolster a currency is to boost interest rates, but the Federal Reserve has been reluctant to do that with America teetering on the brink of recession. The central bank in Europe, where growth is more robust, is poised to raise rates, however. That could weaken the dollar further, and drive oil prices even higher."
Timing is all wrong but would generally agree.
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