[Reader-list] The real reason why oil prices are rising - M RVenkatesh (In Rediff)

[radhikarajen at vsnl.net]

 Ha, Ha, 

 and our Mr. Honest PM wants N-"deal" in national interest where in India will be buying  thru cartel in washington uranium for 4 % of energy needs with mortgage of future of our next generation of indians ? 

----- Original Message -----
From: Kshmendra Kaul <kshmendra2005 at yahoo.com>
Date: Wednesday, July 9, 2008 7:11 pm
Subject: [Reader-list] The real reason why oil prices are rising - M	RVenkatesh (In Rediff)
To: sarai list <reader-list at sarai.net>

>  
> An interesting perspective.
>  
> http://www.rediff.com/money/2008/jun/02mrv.htm
>  
> The real reason why oil prices are rising
> 
> M R Venkatesh | June 02, 2008 | 15:02 IST
> 
> 
> By now it is becoming too obvious that the United States is 
> playing the oil game all over again. And this is the desperate 
> gamble of a country whose economy is neck deep in trouble.
>  
> Given this scenario, managing prices of oil is central to the US 
> economic architecture. Expectedly, this gamble has been played in 
> a great alliance between the US government, US financial sector 
> and the media.
>  
> I have earlier written about:
> 
> The impending collapse of the US dollar on account of the inherent 
> weakness in the US economy caused by its structural weakness as 
> reflected in the sub-prime crisis; 
> The repeated softening of the interest rates in the US that has 
> the potency to kill the US dollar; and 
> How the fall in the US dollar suits the US corporate sector, 
> especially its omnipotent financial sector.
> 
> Naturally, since the past few years, the US financial sector has 
> begun to turn its attention from currency and stock markets to 
> commodity markets. According to The Economist, about $260 billion 
> has been invested into the commodity market -- up nearly 20 times 
> from what it was in 2003.
>  
> Coinciding with a weak dollar and this speculative interest of the 
> US financial sector, prices of commodities have soared globally.
>  
> And most of these investments are bets placed by hedge and pension 
> funds, always on the lookout for risky but high-yielding 
> investments. What is indeed interesting to note here is that 
> unlike margin requirements for stocks which are as high as 50 per 
> cent in many markets, the margin requirements for commodities is a 
> mere 5-7 per cent.
>  
> This implies that with an outlay of a mere $260 billion these 
> speculators would be able to take positions of approximately $5 
> trillion -- yes, $5 trillion! -- in the futures markets. It is 
> estimated that half of these are bets placed on oil.
>  
> 
> 
> Readers may note that oil is internationally traded in New York 
> and London and denominated in US dollar only. Naturally, it has 
> been opined by experts that since the advent of oil futures, oil 
> prices are no longer controlled by OPEC (Organization of Petroleum 
> Exporting Countries). Rather, it is now done by Wall Street.
>  
> This tectonic shift in the determination of international oil 
> prices from the hands of producers to the hands of speculators is 
> crucial to understanding the oil price rise.
>  
> Today's oil prices are believed to be determined by the four Anglo-
> American financial companies-turned-oil traders, viz., Goldman 
> Sachs, Citigroup, J P Morgan Chase, and Morgan Stanley. It is only 
> they who have any idea about who is entering into oil futures or 
> derivative contracts. It is also they who are placing bets on oil 
> prices and in the process ensuring that the prices of oil futures 
> go up by the day.
>  
> But how does the increase in the price of this oil in the futures 
> market determine the prices of oil in the spot markets? Crucially, 
> does speculation in oil influence and determine the prices of oil 
> in the spot markets? 
>  
> Answering these questions as to whether speculation has 
> supercharged the demand for oil The Economist, in its recent 
> issue, states: 'But that is plain wrong. Such speculators do not 
> own real oil. Every barrel they buy in the futures markets they 
> sell back again before the contract ends. That may raise the price 
> of 'paper barrels,' but not of the black stuff refiners turn into 
> petrol. It is true that high futures prices could lead someone to 
> hoard oil today in the hope of a higher price tomorrow. But 
> inventories are not especially full just now and there are few 
> signs of hoarding.' 
>  
> On both counts -- that speculation in oil is not pushing up oil 
> prices, as well as on the issue of the build-up of inventories -- 
> the venerable Economist is wrong.
>  
> The finding of US Senate Committee in 2006
>  
> In June 2006, when the oil price in the futures markets was about 
> $60 a barrel, a Senate Committee in the US probed the role of 
> market speculation in oil and gas prices. The report points out 
> that large purchase of crude oil futures contracts by speculators 
> has, in effect, created additional demand for oil and in the 
> process driven up the future prices of oil.
> The report further stated that it was 'difficult to quantify the 
> effect of speculation on prices,' but concluded that 'there is 
> substantial evidence that the large amount of speculation in the 
> current market has significantly increased prices.'
>  
> The report further estimated that speculative purchases of oil 
> futures had added as much as $20-25 per barrel to the then 
> prevailing price of $60 per barrel. In today's prices of 
> approximately $130 per barrel, this means that approximately $100 
> per barrel could be attributed to speculation!
>  
> But the report found a serious loophole in the US regulation of 
> oil derivatives trading, which according to experts could allow 
> even a 'herd of elephants to walk to through it.' The report 
> pointed out that US energy futures were traded on regulated 
> exchanges within the US and subjected to extensive oversight by 
> the Commodities Future Trading Commission (CFTC) -- the US 
> regulator for commodity futures market. 
>  
> In recent years, the report however pointed out to the tremendous 
> growth in the trading of contracts which were traded on 
> unregulated OTC (over-the-counter) electronic markets. 
> Interestingly, the report pointed out that 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 into the Commodity Futures Modernization Act in 2000.
>  
> The report concludes that consequential impact on account of lack 
> of market oversight has been 'substantial.'
>  
> NYMEX (New York Mercantile Exchange) traders are required to keep 
> records of all trades and report large trades to the CFTC enabling 
> it to gauge the extent of speculation in the markets and to 
> detect, prevent, and prosecute price manipulation. In contrast, 
> however, traders on unregulated OTC electronic exchanges are not 
> required to keep records or file any information with the CFTC as 
> these trades are exempt from its oversight.
>  
> Consequently, as there is no monitoring of such trading by the 
> oversight body, the committee believes that it allows speculators 
> to indulge in price manipulation.
>  
> Finally, the report concludes that to a certain extent, whether or 
> not any level of speculation is 'excessive' lies entirely in the 
> eye of the beholder. In the absence of data, however, it is 
> impossible to begin the analysis or engage in an informed debate 
> over whether our energy markets are functioning properly or are in 
> the midst of a speculative bubble.
>  
> That was two years back. And much water has flown in the 
> Mississippi since then.
>  
>  
> The link to the spot markets
>  
> Now to answer the second leg of the question: how speculators are 
> able to translate the future prices into spot prices.
>  
> The answer to this question is fairly simple. After all, oil price 
> is highly inelastic -- i.e. even a substantial increase in price 
> does not alter the consumption pattern. No wonder, a mere 3-4 per 
> cent annual global growth has translated into more than a 40 per 
> cent annual increase in prices for the past three or four years.
>  
> But there is more to it. One may note that the world supply and 
> demand is evenly matched at about 85 million barrels every day. 
> Only if supplies exceed demand by a substantial margin can any 
> downward pressure on oil prices be created. In contrast, if 
> someone with deep pockets picks up even a small quantity of oil, 
> it dramatically alters the delicate global demand-supply gap, 
> creating enormous upward pressure on prices.
>  
> What is interesting to note is that the US strategic oil reserves 
> were at approximately 350 million barrels for a decade till 2006. 
> However, for the past year and a half these reserves have doubled 
> to more than 700 million barrels. Naturally, this build-up of 
> strategic oil reserves by the US (of 350 million barrels) is 
> adding enormous pressure on the oil demand and consequently its 
> prices. 
> Do the oil speculators know of this reserves build-up by the US 
> and are indulging in rampant speculation? Are they acting in 
> tandem with the US government? Worse still, are they bordering on 
> recklessness knowing fully well that if the oil prices fall the US 
> government will be forced to a?'Bears Stearns' on them and bail 
> them out? One is not sure. 
>  
> But who foots bill at such high prices? At an average price of 
> even $100 per barrel, the entire cost for the purchase of this 
> additional 350 million barrels by the US works out to a mere $35 
> billion. Needless to emphasise, this can be funded by the US by 
> allowing it currency printing presses to work overtime. After all, 
> it has a currency that is acceptable globally and people worldwide 
> are willing to exchange it for precious oil.
>  
> No wonder?Goldman Sachs predicts that oil will touch $200 to a 
> barrel shortly, knowing fully well that the US government will 
> back its prediction.
>  
> And, in the past three years alone the world has paid an estimated 
> additional $3 trillion for its oil purchases. Oil speculators (and 
> not oil producers) are the biggest beneficiaries of this price 
> increase. 
> In the process, the US has been able to keep the value of the US 
> dollar afloat -- perhaps at an extra cost of a mere $35 billion to 
> its exchequer!
>  
> The global crude oil price rise is complex, sinister and beyond 
> innocent economic theories of demand and supply. It is 
> speculation, geopolitics and much more. Obviously, there is a 
> symbiotic link between the US, the US dollar and the oil prices. 
> And unless this truth is understood and the link broken, oil 
> prices cannot be controlled.
>  
> 
> 
>      
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