Am I getting this Oil thing right?

[renterclint]

I have heard a lot about how we need more domestic drilling & oil refineries. I am sure that demand & lack of supply has the largest impact on the price of oil, but it seems like speculation also plays a very large role in the rising prices. I have read many of the piggington folks say speculation has no significant impact on oil price.

From what I know it seems like rampant speculation really could significantly impact oil prices. I’ll put it in laymen’s terms:

The way I understand it, the original basic point behind an oil future (or forward contract) is to provide a means for which a company can hedge or mitigate risk of rising supply prices.

For example: ABC Auto Supply wants to buy oil and the price today is $100/barrel. ABC knows they will need oil this month & next month. ABC is afraid the price will go up to $150 next month, so they buy a future contract to buy half of the oil they will need next month for $125. If the price actually does go to $150 next month, ABC will not incur an increase of $50/barrel. Because of this hedge, they only incur $25/barrel increase.

This hedge is effective as long as ABC (& other companies) hedging activity works independent of the market. To ensure this activity does not grow so large that it artificially impacts market prices, The Commodity Futures Trading Commission used to regulate this activity.

Regulation on this sort of activity was lifted a few years ago. Now, instead of the bulk of oil futures being purchased by oil-related industries who are trying to mitigate risk, these oil futures are being purchase in huge volumes by large institutional investors. I read recently that there are large blocks of forward contracts outstanding for coming months at $200/barrel.

Doesn’t it make sense that as more & more of these deep-pocket large institutional investors offer to buy oil at even higher prices in the future, that this will put upward pressure on the price of oil? The former director of the Trading & Markets for the Commodities Future Trading Commission, Michael Greenberger, testified before the Senate saying that oil prices would drop 25-50% virtually overnight if we were to regulate this activity again.

[an]

Speculation can work both way. Speculation just amplify the supply & demand imbalance. Right, people think demand will out strip supply, so they bet that price will go up. However, if the imbalance swing the other way, where supply is suspected to dramatically increase or if demand is expected to dramatically decrease, price would drop through the floor, well pass the “fundamental” price. So, instead of trying to patch the problem by going after “speculators”, why not fix the root cause of the problem, which is supply & demand imbalance.

[an]

Speculation can work both way. Speculation just amplify the supply & demand imbalance. Right, people think demand will out strip supply, so they bet that price will go up. However, if the imbalance swing the other way, where supply is suspected to dramatically increase or if demand is expected to dramatically decrease, price would drop through the floor, well pass the “fundamental” price. So, instead of trying to patch the problem by going after “speculators”, why not fix the root cause of the problem, which is supply & demand imbalance.

[an]

Speculation can work both way. Speculation just amplify the supply & demand imbalance. Right, people think demand will out strip supply, so they bet that price will go up. However, if the imbalance swing the other way, where supply is suspected to dramatically increase or if demand is expected to dramatically decrease, price would drop through the floor, well pass the “fundamental” price. So, instead of trying to patch the problem by going after “speculators”, why not fix the root cause of the problem, which is supply & demand imbalance.

[an]

Speculation can work both way. Speculation just amplify the supply & demand imbalance. Right, people think demand will out strip supply, so they bet that price will go up. However, if the imbalance swing the other way, where supply is suspected to dramatically increase or if demand is expected to dramatically decrease, price would drop through the floor, well pass the “fundamental” price. So, instead of trying to patch the problem by going after “speculators”, why not fix the root cause of the problem, which is supply & demand imbalance.

[an]

Speculation can work both way. Speculation just amplify the supply & demand imbalance. Right, people think demand will out strip supply, so they bet that price will go up. However, if the imbalance swing the other way, where supply is suspected to dramatically increase or if demand is expected to dramatically decrease, price would drop through the floor, well pass the “fundamental” price. So, instead of trying to patch the problem by going after “speculators”, why not fix the root cause of the problem, which is supply & demand imbalance.

[renterclint]

Thanks for the input asianautica. That’s interesting about the impact in both directions. I hadn’t thought of that.

Even if addressing the problem re: excess speculation is a “patch” it seems like an easy fix to at least stabilize things in the near term.

I am not against opening refineries or more drilling, but those are more long-term solutions as I understand it.

[renterclint]

Thanks for the input asianautica. That’s interesting about the impact in both directions. I hadn’t thought of that.

Even if addressing the problem re: excess speculation is a “patch” it seems like an easy fix to at least stabilize things in the near term.

I am not against opening refineries or more drilling, but those are more long-term solutions as I understand it.

[renterclint]

Thanks for the input asianautica. That’s interesting about the impact in both directions. I hadn’t thought of that.

Even if addressing the problem re: excess speculation is a “patch” it seems like an easy fix to at least stabilize things in the near term.

I am not against opening refineries or more drilling, but those are more long-term solutions as I understand it.

[renterclint]

Thanks for the input asianautica. That’s interesting about the impact in both directions. I hadn’t thought of that.

Even if addressing the problem re: excess speculation is a “patch” it seems like an easy fix to at least stabilize things in the near term.

I am not against opening refineries or more drilling, but those are more long-term solutions as I understand it.

[renterclint]

Thanks for the input asianautica. That’s interesting about the impact in both directions. I hadn’t thought of that.

Even if addressing the problem re: excess speculation is a “patch” it seems like an easy fix to at least stabilize things in the near term.

I am not against opening refineries or more drilling, but those are more long-term solutions as I understand it.

[an]

I agree that more drilling and refineries will be a long-term solution. But I don’t like “patch” solution for short term. I would rather them put a massive tax to reduce the demand by 20-30%. That would cause price to swing the other way. The extra tax $ can be put to use in drilling/refining/ and alternative fuel research.

[an]

I agree that more drilling and refineries will be a long-term solution. But I don’t like “patch” solution for short term. I would rather them put a massive tax to reduce the demand by 20-30%. That would cause price to swing the other way. The extra tax $ can be put to use in drilling/refining/ and alternative fuel research.

[an]

I agree that more drilling and refineries will be a long-term solution. But I don’t like “patch” solution for short term. I would rather them put a massive tax to reduce the demand by 20-30%. That would cause price to swing the other way. The extra tax $ can be put to use in drilling/refining/ and alternative fuel research.

[an]

I agree that more drilling and refineries will be a long-term solution. But I don’t like “patch” solution for short term. I would rather them put a massive tax to reduce the demand by 20-30%. That would cause price to swing the other way. The extra tax $ can be put to use in drilling/refining/ and alternative fuel research.

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