Oil Conspiracy?

Greg Denault sent along a chapter re oil prices from a recent book. Below in an excerpt which I can add here rather than actually work. If you are interessted, the chapter is HERE.

Of course there is always a conspiracy where big money is at play. Last night, I heard that Soros was saying the price of oil will rise greatly and how awful this is, at which point I was sure that he was in on it. His gig is to depress currencies, a key to the price rise. Of course, if he gives a nickel to some charity or party he can sway, he is a hero.

While it is sad the Congress, et. al., can't even understand how they were used to create the foreign exchange run-up and how the people's interest is misdirected to bread and elections, a conspiracy remains an artificial construct.

If, as reported, there is a surplus of oil even those jumping onto the price train will have to sell eventually. Once that starts the pull-back would be rapid followed by the moans of the slow footed. Anyone who took an anti-gravity price curve as reality will be hurt badly. If you buy into this and like a quick profit, watch the futures exchange and discern when the big guys are distributing (selling to suckers) their shares. Then, buy puts.

Here is a newspaper summary: HERE

A quote from the article:

ICE, ICE, Baby

One piece of legislation is why the price of everything is going through the roof

Special to the Star-Telegram

...Professor Michael Greenberger of the University of Maryland, a former board member of the Commodities Futures Trading Commission, testified in front of the House Committee on Energy and Commerce on December 14 of last year. Under discussion that day was the manipulation of the energy markets and prices, but Professor Greenberger added these comments: "Three, four months from now, you’re going to have a hearing on the subprime meltdown, and you’re going to find that the very same legislation [deregulating energy] deregulated something called collateralized debt obligations, CDOs." That legislation, friends, directly ties the mortgage meltdown to the high price of energy today.

It was called H.R. 5660, the Commodities Futures Modernization Act of 2000. At first this bill went nowhere in the House, not even up for debate. Then, a few months later, late one night a 242-page bill written by Wall Street lawyers, with the exact same name as the former House bill, was quietly added to an 11,000-page appropriations bill, and the Enron loophole was created. The power behind that bill was one Texas Senator, one Texas Congressman and their wives.

Here is the excerpt

PERHAPS 60% OF TODAY'S OIL
PRICE IS PURE SPECULATION
by F. William Engdahl
May 2, 2008

...

Hedge Funds and Banks driving oil prices

In the most recent sustained run-up in energy prices, large financial institutions, hedge funds, pension funds, and other investors have been pouring billions of dollars into the energy commodities markets to try to take advantage of price changes or hedge against them. Most of this additional investment has not come from producers or consumers of these commodities, but from speculators seeking to take advantage of these price changes. The CFTC defines a speculator as a person who “does not produce or use the commodity, but risks his or her own capital trading futures in that commodity in hopes of making a profit on price changes.”

The large purchases of crude oil futures contracts by speculators have, in effect, created an additional demand for oil, driving up the price of oil for future delivery in the same manner that additional demand for contracts for the delivery of a physical barrel today drives up the price for oil on the spot market. As far as the market is concerned, the demand for a barrel of oil that results from the purchase of a futures contract by a speculator is just as real as the demand for a barrel that results from the purchase of a futures contract by a refiner or other user of petroleum.

Perhaps 60% of oil prices today pure speculation

Goldman Sachs and Morgan Stanley today are the two leading energy trading firms in the United States. Citigroup and JP Morgan Chase are major players and fund numerous hedge funds as well who speculate.

In June 2006, oil traded in futures markets at some $60 a barrel and the Senate investigation estimated that some $25 of that was due to pure financial speculation. One analyst estimated in August 2005 that US oil inventory levels suggested WTI crude prices should be around $25 a barrel, and not $60.

That would mean today that at least $50 to $60 or more of today’s $115 a barrel price is due to pure hedge fund and financial institution speculation. However, given the unchanged equilibrium in global oil supply and demand over recent months amid the explosive rise in oil futures prices traded on Nymex and ICE exchanges in New York and London it is more likely that as much as 60% of the today oil price is pure speculation. No one knows officially except the tiny handful of energy trading banks in New York and London and they certainly aren’t talking.

By purchasing large numbers of futures contracts, and thereby pushing up futures prices to even higher levels than current prices, speculators have provided a financial incentive for oil companies to buy even more oil and place it in storage. A refiner will purchase extra oil today, even if it costs $115 per barrel, if the futures price is even higher.

As a result, over the past two years crude oil inventories have been steadily growing, resulting in US crude oil inventories that are now higher than at any time in the previous eight years. The large influx of speculative investment into oil futures has led to a situation where we have both high supplies of crude oil and high crude oil prices.

Compelling evidence also suggests that the oft-cited geopolitical, economic, and natural factors do not explain the recent rise in energy prices can be seen in the actual data on crude oil supply and demand. Although demand has significantly increased over the past few years, so have supplies.

Over the past couple of years global crude oil production has increased along with the increases in demand; in fact, during this period global supplies have exceeded demand, according to the US Department of Energy. The US Department of Energy’s Energy Information Administration (EIA) recently forecast that in the next few years global surplus production capacity will continue to grow to between 3 and 5 million barrels per day by 2010, thereby “substantially thickening the surplus capacity cushion.” (See Here re EIN's data re oil imports - Gene.)

Dollar and oil link

A common speculation strategy amid a declining USA economy and a falling US dollar is for speculators and ordinary investment funds desperate for more profitable investments amid the US securitization disaster, to take futures positions selling the dollar “short” and oil “long.”

For huge US or EU pension funds or banks desperate to get profits following the collapse in earnings since August 2007 and the US real estate crisis, oil is one of the best ways to get huge speculative gains. The backdrop that supports the current oil price bubble is continued unrest in the Middle East, in Sudan, in Venezuela and Pakistan and firm oil demand in China and most of the world outside the US. Speculators trade on rumor, not fact.

In turn, once major oil companies and refiners in North America and EU countries begin to hoard oil, supplies appear even tighter lending background support to present prices.

Because the over-the-counter (OTC) and London ICE Futures energy markets are unregulated, there are no precise or reliable figures as to the total dollar value of recent spending on investments in energy commodities, but the estimates are consistently in the range of tens of billions of dollars.

The increased speculative interest in commodities is also seen in the increasing popularity of commodity index funds, which are funds whose price is tied to the price of a basket of various commodity futures. Goldman Sachs estimates that pension funds and mutual funds have invested a total of approximately $85 billion in commodity index funds, and that investments in its own index, the Goldman Sachs Commodity Index (GSCI), has tripled over the past few years. Notable is the fact that the US Treasury Secretary, Henry Paulson, is former Chairman of Goldman Sachs.

F. William Engdahl is the author of A Century of War: Anglo-American Oil Politics and the New World Order (Pluto Press) and Seeds of Destruction: The Hidden Agenda of Genetic Manipulation, www.globalresearch.ca. The present series is adapted from his new book, now in writing, The Rise and Fall of the American Century: Money and Empire in Our Era. He may be contacted through his website, www.engdahl.oilgeopolitics.net.

Maize sucré

I keep hearing that Brazilians all seem to be driving around with ethanol cars. This is a mass delusion fostered in the U.S. by dopes.
No, Brazil has been weaned from gasoline. Indeed, it is an oil producing country with big plans to attract more investment to pull up some that bubblin' crude.

I did a little homework and picked off from a Yale site:

As Brazil Fills Up on Ethanol, It Weans Off Energy Imports

David Luhnow

Geraldo Samor

The Wall Street Journal, 16 January 2006

RIO DE JANEIRO, Brazil -- After nearly three decades of work, Brazil has succeeded where much of the industrialized world has failed: It has developed a cost-effective alternative to gasoline. Along with new offshore oil discoveries, that's a big reason Brazil expects to become energy independent this year.

To see how, take a look at Gildo Ferreira, a 39-year-old real-estate executive, who pulled his VW Fox into a filling station one recent afternoon. Instead of reaching for the gasoline, he spent $29 to fill up his car on ethanol made from sugar cane, an option that's available at 29,000 gas stations from Rio to the Amazon. A comparable tank of gasoline would have cost him $36. "It's cheaper and it's made here in Brazil," Mr. Ferreira says of ethanol. If the price of oil stays at current levels, he can expect to save about $350 a year.

[Saving at the Pump]

At current prices, Brazil can make ethanol for about $1 a gallon, according to the World Bank. That compares with the international price of gasoline of about $1.50 a gallon. Even though ethanol gets less mileage than gasoline, in Brazil it's still cheaper per mile driven. As a result, ethanol now accounts for as much as 20% of Brazil's transport fuel market. The country's use of gasoline has actually declined since the late 1970s. The use of alternative fuels in the rest of the world is a scant 1%.

The critical thing to note is ethanol is "as much as 20% of Brazil's transport fuel market." That is great, but not to be confused with 100%.

But, wait, there is more. Brazil is a major oil producer.

"Brazil is on its way to becoming one of the main international poles for the exploration and production of petroleum," the World Petroleum Council projected in April 2002. "According to data supplied by Brazil's National Oil Industry Organisation (Onip), over the coming ten years the domestic petroleum industry ought to take a significant share of the sector's international investments, or roughly US$ 100 billion, 85 per cent of which [is] to be applied in the oil segment."

Some of the green crowd cannot see the reality. Ethanol is helping and the economy is very much oil based. Indeed, the local oil production helps keep the gas prices down, which helps the farmers make sugar. Things are always more complicated than we want.

Word is that there is an energy problem, now, in Brazil which the country seems to be thinking is caused by a non-market approach to distributing resources, especially electricity.

To highlight how Brazil is not a sugar cane nation, Here is a BBC report from 2000, see photo above.

The state oil company in Brazil, Petrobras, says it has contained a massive oil spill that has polluted the southern Iguacu River.

On Sunday, four million litres of crude oil escaped from a burst pipeline into the river making it the biggest oil spill in 25 years.

A Petrobras statement said the spillage was brought under control by installing a number of floating barriers and other equipment at eight key points on the river....

One of Brazil's advantages in the creation of ethanol is the use of sugar as the carbohydrate base, a lower wage base, and not much interest in the environment. As some in the U.S. are finally coming to understand, there is no way corn can be an option, unless every farm acre in the U.S. is dedicated to car corn. Right now, it costs us $6.50 a gallon to make ethanol, thanks to taxpayer subsidies.

I guess the point is we need to stop making believe there is a magic bullet avilable somethwere else. We need to do the hard work. Sorry.

Oil Buisiness For Idiots

Every so often the nightly, local news will tell us where most of the money paid for gasoline goes. The punch line is always something like - "So, don't hit your gas dealer, the government is driving up the price."

The illustration on the right from the US DOE is a fairly recent break down of where the money goes. Stop to think about it for a second, the governments, which do zero to produce anything, charge you 18% of your gasoline bill. 18%. So, do you think they really care about driving down the pump price?

The "Crude Oil" part is 56%. When winding up to rail at an oil company, you have to figure out what that oil company does. If it not producing the oil, it does not participate in the crude part. If it does, you need to see how much cost is required to produce the oil.

As noted on the left, investment in production and exploration in the U.S. has doubled from 2002 to 2006. Thus, not all the recent rise in revenue has gone to President Bush and his oil barons, as the dim bulbs complain. The theory is - if a price is spiking ,then you want to find more of the product to sell. If you are fast, you will make a quick hit. The magic of the free market is everyone tries to do the same thing, thereby relieving the upside pressure - increasing supply.

A good way to look at the oil business is to compare it with the profit margins of other industries. On the right, you can see the oil industry was under 10 percent in 2006, 3rd Quarter. This is very high for the industry.

As the graph clearly implies the O & G business' ROI is much less than other industries. Sure, sure, I know - all the numbers are a conspiracy. For now, however, lets assume that not everyone on the planet is lying and oil moguls can't buy off the IRS, the SEC, the financial media, banks, the shareholders, and employees.

On a percentage basis, then, there is hardly an argument to be made for obscene profits. It cannot be denied that the oil industry profit margin is up from, say, the normal 5-6-7 percent region. A few years ago, the margin was very low - but no one suggested we subsidize the oil companies, which is the legitimate converse of extra high taxes when returns are 9%.
Here is a representation of the profits made by the oil and gas industry. The numbers are from 2000 - 2005 and show the combined return was 5.9%, slightly higher than ALL industries combined. When looking at this, be sure to glance up and look at the drug business for a comparison of the scope of profitability. That business is almost 4 times more profitable.

Most of us would not start a company knowing that our rate of return was 6%. For a mature company, that is not too bad, actually, but it is not attractive to fresh capital and dreams of wealth.

Another complaint made against the industry is that "it" takes advantage of a crises. Glossing over the nonsense of there being an "it," let us look at the gross numbers.

As you can see, the rate of growth of socialist programs far outstrip those of the sectors that produce a return on investment.

The "Medical Care' industry is essentially a monopoly protected by the government, the FDA, and AMA, so that would be an example of more governmental failure. If you think the FDA is looking out for you, rather than protecting the drug companies, start looking into the matter.

Oh, look down at gasoline. It has grown in cost at a rate less than food and housing, those bastard oil cartels. No, I don't know the difference between rent and housing. Keep this in mind: a gallon of gasoline costs less than a gallon of spring water.

So, the rate of growth does not reflect any outstripping of the economy. It is a small part of the inflation factors. Further, one can live without driving.

The feds did a study regarding the spike after Katrina, since they live and die by what the news media says is our opinion. The results showed no price gouging. Check the web site, but here is a summary:

The FTC report, released in May 2006, included these findings:

* No evidence that refiners manipulated prices by running refineries below full production capacity, restricting gasoline production or diverting gasoline from the U.S. market to less lucrative foreign markets.
* No evidence to suggest refinery expansion decisions over the past 20 years resulted from either unilateral or coordinated attempts to manipulate prices.
* No evidence to suggest companies reduced inventories to increase or manipulate prices or exacerbate price spikes.
* No situations that might allow one firm – or a small collusive group – to manipulate gasoline futures prices by using storage assets to restrict gasoline movements into New York Harbor, the key delivery point for gasoline.

The U.S. government has investigated gasoline prices about 30 times over the last 20 years but oil companies were never found to have “fixed” prices. [Yes, the Democrats found this to be true.]

A key problem in the US is the failure to build new refineries. It is stupid to import refined gas. It is this pinch in the pipeline, along with regional additive requirements, that can create seasonal spikes.

I recently tried to fill in the caverns in the knowledge of a compatriot regarding our need for gas refineries. I hit a wall when I let slip that the Democrats were the ones blocking the building of new refineries. If I had said it were the Republicans, I am sure I would have won over a convert. This technique works well. Re the GOP's 2005 attempt to build more refineries, a revealing comment:

The legislation is "socialism to help big oil," said Senator Barbara Boxer, a California Democrat.

"It is help to the cronies – that is what this is about," said Boxer, who raised concerns the legislation, if passed, would also have to be merged with a controversial refinery bill approved earlier this month by the House.

The pathological level of illness and rage of this comment forbids counter argument. To argue with a madwoman is to sound like a fool. She ought to see who the shareholders are of "big oil." If anyone doubts it is the Democrats who are blocking the new refineries, just do a simple Google search, unless you now think it is good idea.

The Dems also have blocked the building of new nuclear power plants. This is not entirely their fault as it was a KGB strategy in the 1960's to fund leftists and green organizations to block the plants, so that our economy would start to gyrate and be subject to foreign pressure. The leftists have taken control of the Democratic Party and convinced normal people that these anti-American schemes are somehow "liberal," which has a new meaning. The Russians are better long-term thinkers than we are. More on this, another day.

In President Bush's Energy Plan, yes he had one for years and, I know, you never read about it in the papers, he has been pushing for both more refineries and building of nuclear plants, as well as funding alternative fuel research. Oh, I should have said it was Boxer's plan. Then, you might have believed it was a good idea.

OK, I can't take anymore either.

Bye.