Friday, June 27, 2008

Dick Cheney Was Right!

From June 20th:

Today the chair of the House Energy and Commerce subcommittee stated, "speculators now control 71% of oil on the market." He added that "only 29% of traders control the physical oil being traded."

History lesson:

In 2000, 61% of the market trading was for physical oil and only 39% trading in futures. Then, Texas Senator Phil Graham and his wife Wendy helped create several loopholes in the Commodity Futures Modernization Act of 2000 that allowed a high volume of futures trading to go unmonitored. As a result, Wendy Graham was rewarded handsomely with a fat position on the Enron Board. Phil had already gotten his reward by way of copious Enron campaign contributions.

In Spring of 2001, Dick Cheney heralded Enron's business model as "the future of energy."

Now in 2008, Arab oil supplies and world demand only effect 29% of the market price. Dick Cheney and his Energy Task Force speculator buddies control the other 71%.

Dick Cheney sure was right!

Mr. Birger is Naive

I sent this comment to CNN in response Jon Birger's article "Don't Blame the Oil Speculators!":

Mr. Birger is naive. Twenty-five years in the private sector (six of them in the mortgage industry) have taught me that the marketplace in the U.S. is not about “supply and demand”, rather it is about “creating a demand”. Supply side economics talk belongs in an Econ 101 classroom. The real market place is much more complex than supply side models imply and it is riddled with fraud and profiteering and violation of anit-trust laws at almost every level.

What is the best way for a trader to insure that the futures he purchases today are profitable when he goes to sell tomorrow? If he can, he drives up the price at the marketplace in between. He creates a demand. If he pushes up the price today, he is guaranteed to make money on the futures he purchased yesterday when he sells them. That's why they don't trade in the open. These traders are looking to cash in on a sure thing whenever possible. They don’t want to gamble, they want a steady flow of cash. They want to drive the price up periodically to insure a maximum return on the futures that they purchased in the past. If futures trading were really a zero sum game, who would play?

How much do you think the futures purchased in 2001 are worth now? A bundle. That’s right, futures traders are cashing in today on the futures they have purchased over the past eight plus years. Yes Mr. Birger, long and short positions alike. Obviously, they will have to keep pushing the price up in order to milk the market and insure that their profits continue. And, much like the listing agents, land developers and lenders who fraudulently inflated property values and lied about risk exposure during the housing boom, this much easy money is just too good to refuse. However, also like the housing boom, the secondary market will catch up to the speculators eventually and whether or not Mr. Birger likes it, the bubble will burst.

Rational Agency?

Assuming rational agency makes an ass out of all of us. The speculators don't care what they do to the market. They are the same kind of vultures that made a bundle on sub-prime hedge funds at the cost of the housing industry and the U.S. economy. They know it's all going to hit they fan when G.W. steps down. Dick Cheney and his Energy Task Force buddies just want a good run at the teet before the cash cow dies. Don't be fooled by smoke and mirrors. Unregulated speculating has the potential to create a two stage collapse in the oil market over the next several years. It is strange how conservatives seem to have little or no ability to predict and/or analyze paradigm shifts in the marketplace.