Blame High Oil Prices on Speculators and Bernanke

[n2doc]

It's no secret that speculators are driving up fuel prices. The surprise? It's the Fed's fault, writes Ed Wallace

By Ed Wallace

Watching traffic around Dallas and Fort Worth, you'd never know the U.S. was experiencing any kind of gasoline crisis. Many drivers on the freeways apparently think Texas has already approved the proposed 85 mph speed limit.

Most don't realize that driving a vehicle that's rated at 30 mpg on the road at 85 miles an hour will cut its fuel efficiency by around 35 percent. That makes the gas they are currently paying $3.79 for cost $5.11 in reality. It's reasonable to assume, too, that if we really cared about the cost of gas, we would do everything we could to mitigate that cost. We don't. We complain about prices but seem unwilling to do anything about them.

Americans think they know whom to blame for high gas prices. The usual culprits are people who drive too fast, inefficient engines, OPEC, and even China. Sure, those are all factors, but that's like blaming the housing bubble on the lumber industry or a surfeit of carpenters. It's no great mystery who is responsible for higher gas prices. As I and others have written in the past, the biggest culprits are the speculators gaming the futures markets to line their own pockets. We know all that. What might come as a shock is that they are being enabled by the Federal Reserve.

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http://www.businessweek.com/investor/content/apr2011/pi20110419_786652.htm

[KelleyKramer]

1. In 2008 when credit dried up, gas prices dropped like a rock

Yes it's the speculators, and most of it is done on margin (ie credit). Just look back at when the banks melted down, there was no credit and gas dropped from $4 gallon down to something like a buck sixty in a matter of weeks!

[bhikkhu]

8. ...because of supply and demand, the same as why they went up

Oil consumption tracks economic activity; the credit crisis and high energy prices pretty much guaranteed recession, which is a big dip in economic activity. A drop in oil consumption leads pretty immediately to more supply than demand, lowering prices.

On the other hand, once recovery was under way, demand once again began to outstrip supply and prices have gone back up. Probably we'll wind up in recession again, and the whole process will repeat.

Why this is the case, and why it is different from the past century or so, has nothing to do with the markets or the players on the markets themselves, but with the geological limits of the planet - the oil extraction rate has found its limit and can't increase to satisfy demand anymore, so there is only high prices and recession left to balance things in the short term.

[KelleyKramer]

13. DemaDemand did NOT skyrocket during the 1st year of the Great Recession!

Sorry, but that's hogwash that demand caused gas prices to skyrocket during the summer of 2008.

It was traders manipulating the market price, and when those traders ran out of credit, it dropped like a rock

[bhikkhu]

29. Demand didn't have to skyrocket

it only had to get to the point where there was no practical "spare capacity" and demand was only just being met. Then the market does the rest - once demand meets supply, every little bump in the road (someone in Iran says something scary, some pipeline somewhere is shut down for maintenance, etc) threatens to shut out buyers who aren't well positioned.

Its probably true that lack of credit shut down speculation, but its hard to say whether that was a greater cause than the onset of recession, which reduced demand and projected demand sharply.

[Kip Humphrey]

25. While speculators are partially responsible for higher prices, supply is still in surplus which

tends to dampen speculation. Saudi Arabia is cutting production (announced this week) due to surplus supply. The largest portion of price rise we are seeing is due to the value of the dollar dropping. Oil, as a global commodity, is still traded in dollars ("petrodollars"). So, when we go to the pump, we are primarily witnessing the erosion of our wealth.

[bhikkhu]

30. That's mostly based on trusting that the Saudi's always tell the truth

...keeping in mind that they said the same in July '08. As prices were setting new records and they were called on to ramp up their claimed 3 mbpd of spare capacity to calm the markets, instead they said the markets were well supplied and they weren't getting involved. Since then it has become more and more likely that they have no spare capacity, and that they have been producing flat-out since 2005 or so, with only a brief let-up in late 2008/09 during the recession.

Current best estimates are that supply is 88.7 mbpd or so, and demand is 90.2 mbpd.

http://omrpublic.iea.org/

[orwell]

2. +1000...

The recent price rises in all commodities is directly linked to Fed-fueled zero interest liquidity.

But that's okay, the sheeple would rather rail against the 'gubmint and the "Democrat" party that take a look at their sainted "free market."

Keep payin' the piper people.

A mind is a terrible thing to waste...

[Cali_Democrat]

3. And of course poor and middle class Americans are the ones hurt the most by Ben's policy

It's just another version of trickle down economics.

Flood the market with printed dollars, driving up asset prices. Hope and pray to the free market "gods" that more jobs will be created and money will flow down to the middle class and poor Americans.

Of course rising food and energy prices hurt poor and middle class Americas the most and very few jobs have been created.

[upi402]

4. sure would be nice to have someone on our side

with more than words

[dawg]

6. Well, if you ask me, Bernanke is that guy.

Doing the right thing and receiving universal condemnation for it.

[upi402]

9. Being in the reasonable middle DOES draw fire from all sides

But I disagree with the assertion that he's doing the right thing - if one has the perspective of the bottom 95% of American earners.

[dawg]

10. Why do you think keeping interest rates low hurts them?

They aren't rich pensioners living off interest checks. Most of them are debtors, and the lower interest rates help them afford their payments.

As for inflation running up the prices they pay for food and necessities, I'm not convinced the Fed has had anything to do with that, either. I read Paul Krugman's blog all the time, and to a lesser extent, Brad DeLong's, and it seems to me that inflation fears are largely all hype at this point.

In fact, i believe the real danger lies in hiking rates prematurely. Adjustable mortgage payments would go up, and small businesses (like mine) would have to pay more on their lines-of-credit. That would suck and would not help create jobs.

But the plutocrats don't really care about jobs.

[Cali_Democrat]

15. So you don't think low interests rates and money printing have any drawbacks?

You don't think Benny's money printing policies lead to distorted asset prices?

If that's the case, why don't poor countries just print their way to prosperity?

[dawg]

16. Not now.

In a better economy, a tight money policy would make sense. With true unemployment probably at 15% and borrowing costs below 4% on government debt, no, I don't see a downside.

As for poor countries printing their way to prosperity, that isn't what we are doing. If and when the core inflation rate goes over 4 or 5%, the Fed will rightly slam on the brakes. This isn't an attempt to inflate the debt away (like a poor country might try). It's just keeping interest rates low so as to not strangle the recovery in it's cradle.

Also, poor countries can't get outside investors to buy their long-term bonds for 3%. We not only can get them to do that, they MUST continue to do that unless they want their currencies to rise relative to the dollar.

[Cali_Democrat]

20. Core inflation doesn't take into account food and energy prices

Food and energy make up a large portion of the average person's budget. The average person can't eat electronics or put silly putty in their gas tank. The Fed may not consider rising food and energy prices real inflation, but the average person sure as hell does. You don't think printing money leads to distorted asset prices?

Also, you can bet on the fact that Benny will be slow to react to rising inflation just like he was slow to react to the sub prime mortgage crisis. He said sub prime was contained. What a sad joke. He can't be trusted IMO.

BTW, you can bet that Treasury yields will increase over the next few years and the US will no longer be able to sell treasuries at 3% yield. Bond prices will collapse and yields will rise soon enough and Benny is helping along the process.

[dawg]

21. I think energy and food prices are reacting to real world shortages.

No amount of tight-money policy is going to put more oil in the ground or more grain in the silos.

As for Bernanke being slow to respond, that's not true either. Rates were cut (effectively to zero) very quickly. Yes, along with everyone else, he said a lot of things about subprime being contained. But he was closer to right than the folks who think we need to raise rates right now.

And, not meaning to be all that confrontational or anything, but if you really believe what you say, you should take a significant portion of your assets and go short treasuries. When the rates rise dramatically, the value of those treasuries will plummet. You'll be able to cover your shorts and make lots of money.

Have you read much about Japan's experience over the last two decades? S&P has already downgraded their bonds. Their debt situation is significantly worse than ours, and, of course, the Yen is not the world's reserve currency. This is what their bond yields look like:

[Cali_Democrat]

23. Easy money policies lead to speculation and rising asset prices

Bernanke himself said that the goal of QE was rising asset prices, specifically equities. He's a firm believer in trickle down economics and the "wealth effect"....

http://www.washingtonpost.com/wp-dyn/content/article/2010/11/03/AR2010110307372.html

"higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion."


When people sell their bonds to the Fed, what do you think those investors do with the printed money they recieve? They put them into assets such as commodities and equities. Bernanke said himself that he wants them to put it into equities, but there's nothing to prevent them from putting into commodities and that's what's happening.

Just look at the rise in commodities prices since late last year....




You think there has been a 30% increase in world demand in less than 6 months? How are these commodities prices going up? Benny's printed money is flowing directly into commodities and other assets.

[dawg]

24. It doesn't take a 30% increase in demand to raise prices 30%.

Is the supply of a good (say....petroleum) is inelastic, then only a small increase in demand can send prices skyrocketing. You should look really hard at who, exactly, is pushing for Bernanke to raise rates. That fact alone would tell you far more than I ever could.

[Cali_Democrat]

26. You should look at who supports QE

http://news.markets247.com/goldman-sachs-supports-the-decision-of-the-fed-for-further-quantitative-easing-793

[upi402]

28. Goldman Sachs Supports the Decision of the Fed for Further Quantitative Easing

That tile says it all, IMHO

I know enough to know I exist on the opposite side of that very tall fence. And straddling it would be a hazardous position to be in if you look at the polls.

[dawg]

5. I think this is mostly wrong.

The plutocrats hate Bernanke and want our currently low interest rates raised as soon as possible. They are concerned about inflation eating away at their debt and not so much concerned with whether the economy produces jobs for workers.

That being said, speculators can move oil prices but they cannot move them indefinitely. Futures contracts have dates, and at some point someone has to take physical delivery. If a speculative bubble builds in oil futures, it will inevitably end with someone sitting on a shitload of oil that they cannot sell for the money they have invested.

OTOH, if it is actual demand that is moving oil prices, including demand from the resurgent BRIC countries, then the U.S. fed funds rate has less than nothing to do with it.

And if we have actually passed peak oil (a real possibility), then Katie bar the door.

[Cali_Democrat]

14. So where are the jobs?

Benny's been keeping interests rates low and printing money like there's no tomorrow, but we've seen very little job creation?

Consumers are seeing rapidly rising food and energy costs, but no jobs.

If the objective of Benny was to create jobs, he has utterly failed.

[dawg]

17. :)

Of course, more needs to be done.

And Obama should have pushed for a larger stimulus.

And all this austerity and budget-cutting stuff is nonsense.

And for more recent months:

[Cali_Democrat]

18. Considering how many jobs we lost in the Great Recession....

We're still in a TREMENDOUS hole. We are growing jobs at a snail's pace. We need to create a massive amount of jobs just to make up for the jobs lost.

Also, I'm sure your aware that many folks have left the labor force entirely because they are discouraged. The unemployment rate is higher now than it was at the start of the Great Recession.

I agree that austerity and budget cutting are stupid. Taxes need to be raised on corporations and wealthy people to make up the budget shortfall and fund any additional stimulus projects.

[girl gone mad]

19. Plutocrats do not want high interest rates.

They borrow and speculate far more than the lower classes. They need the low rates to keep the casino going.

[dawg]

22. That's only one of their strategies.

We've been in a low interest rate environment for so long, you think that is the entire nature of what they do. They have different strategies for rising rate environments - so, no, they are not hooked into low rates.

OTOH, they are fabulously wealthy. This makes them fear inflation - sometimes somewhat irrationally. They want higher rates right now because they prefer that to the possibility of what used to be called a "price-wage spiral". If a couple million more peasants have to do without work, no biggie.

[AndyTiedye]

7. Going to a Tight Money Policy (High Interest Rates) Now Would Make Lots of Jobs Go Away

Jacking up interest rates would sink the economy deeper into recession.

[dawg]

12. Amen.

Fiscal austerity and monetary tightening. Here's what I think of that agenda:

[Imagevision]

11. Exactly! wait until the hurricane season hits and watch pump prices

[chaska]

27. Make no mistake, speculation is inextricably linked to scarcity....

Peak oil is a reality now.