Here is a transcript.
Here's the money-graph:
"Who was responsible for deregulating the oil future market?" Kroft asked Michael Greenberger."You'd have to say Enron," he replied. "This was something they desperately wanted, and they got."
Asked why they wanted a deregulated market in oil futures, Greenberger said, "Because they wanted to establish their own little energy futures exchange through computerized trading. They knew that if they could get this trading engine established without the controls that had been placed on speculators, they would have the ability to drive the price of energy products in any way they wanted to take it."
"When Enron failed, we learned that Enron, and its conspirators who used their trading engine, were able to drive the price of electricity up, some say, by as much as 300 percent on the West Coast," he added.
"Is the same thing going on right now in the oil business?" Kroft asked.
"Every Enron trader, who knew how to do these manipulations, became the most valuable employee on Wall Street," Greenberger said.
But some of them may now be looking for work. The oil bubble began to deflate early last fall when Congress threatened new regulations and federal agencies announced they were beginning major investigations. It finally popped with the bankruptcy of Lehman Brothers and the near collapse of AIG, who were both heavily invested in the oil markets. With hedge funds and investment houses facing margin calls, the speculators headed for the exits.
"From July 15th until the end of November, roughly $70 billion came out of commodities futures from these index funds," Masters explained. "In fact, gasoline demand went down by roughly five percent over that same period of time. Yet the price of crude oil dropped more than $100 a barrel. It dropped 75 percent."
Asked how he explains that, Masters said, "By looking at investors, that's the only way you can explain it."
Did Speculation Fuel Oil Price Swings? [60 Minutes] (Thanks to Chris Schiffner!)
]]>A commodity as volatile as crude oil and petroleum refining should be regulated government. Leave it to the hands of greedy American financial insitutions and you're guranteed a clusterf**k.
]]>Is anyone taking bets on whether Skilling will be pardoned or sentence commuted before W turns out the lights at the White House?
]]>@BytheSea: And now we will hear more about "we need to move on" rather than what can be done to not let this happen again.
]]>Not quite. Think of the government as the Walmart manager and employees who somehow failed to foresee the flood of crazy walmart shoppers and thus failed to regulate them beforehand or stop them during their rush, and the average consumer paying $4/gallon as the one dude at the door.
]]>(I hope I got the right episode. I can't be 100% without sound. Also, skip to about 2:20 or so.)
]]>Commodity prices fluctuate not just on current conditions, but on peoples' expectations of future conditions. When everyone thought that China and India were going to use a ton more oil in the near future, futures prices rose. Now that everyone is worried about global economic growth and is anticipating lower oil demand in the future, oil prices are lower. Shocking, I know. Not as exciting as an improbable conspiracy, but far more useful as a tool for understanding what moves commodity prices in real life.
The statement by the one guy that demand fell during this period is patently false. Maybe the EIA numbers showed that, but if they did, they were certainly the only statistics showing a decline in demand.
We need to stop buying into this stuff so "news" programs will be forced to do some real homework rather than pandering.
]]>A bubble of investors still pays you real money, and when the bubble pops, the investors go down the drain and you're still left with their money.
Enron executives didn't care if their company or anyone else went bankrupt, because the individuals making the money still made the money regardless. It was the perfect end to a perfect ride, because you can then just say it was the company's fault, not yours.
]]>Here are his essential points:
"1. Oil is priced in US Dollars. Since 2001, the Dollar fell 40% (from 120 to 72); Oil rise nearly 5 fold over the same period. And Oil's collapse occurred over a period when the dollar formed a short term bottom.
2. Over the same period that Oil prices were rising, the US was fighting two major wars in the Middle East, Iraq and Afghanistan. These impact prices via psychology and risk of supply disruption - especially at a time when producers were running flat out.
3. Energy prices rose during a global economic expansion (fueled by low rates and cheap money); Oil fell during a period that marked the beginning of the US recession and the start of a global slowdown.
4. Since 2001, Commodities of all sorts rose significantly: Steel, aluminum, cement, cotton, soy, livestocks, foodstuffs, precious metals, etc. Were they all driven by speculation, or was something else going on?
5. Since the 1% Fed funds rate of 2002-03, inflation has had a dramatic impact on ALL prices - from medical costs to insurance to education to health care to transportation to housing to food and energy.
6. Throughout the 1990s and 2000s, cars were increasingly replaced with SUVs and trucks in the United States. Not only did these get appreciably worse gas mileage, that fleet transition took place as the total US miles driven rose. Over the past 20 years, people have lived increasingly further away from their jobs. Hence, increased US demand for energy accompanied (and increased prices).
7. Since gas prices hit $4 a gallon and the recession began, total US miles driven fell significantly, by several billion miles. As expected, the drop in driving was followed by a fall in prices.
8. 60 Minutes interviewed Mike Masters, a hedge fund manager who had testified before Congress that speculation was driving prices. They omitted to mention he was talking his book. His holdings in energy sensitive stocks - with large positions, the vast majority in call options, in AMR Corp (AMR), the parent of American Airlines, Delta Air Lines (DAL), General Motors (GM), UAL Corp (UAUA) and US Airways (LCC) - were responsible for his fund losing 35% of its value before the Fall 2008 market collapse..
9. China boomed~! More and more global manufacturing outsourcing saw factories being built throughout China. They also went through a wild process building out the nation in preparation for the 2008 Olympics held there. Oh, and China, like the US, also began filling its Strategic Petroleum Reserves. Another small country, India, was booming over this period also.
10. The rise of extremist terrorist groups like al-Quada, the hostility of Iran towards the West, supply and political disruptions in places like Nigeria, and overt hostility to the US by oil producers like Venezuela President Hugo Chavez also contributed to drive prices up. The political factors were also omitted."
I wish I could come up with that myself, but sadly cannot. However, his points are still valid.
]]>Anyway back on topic. You are completely wrong. The answer to the "oil problem" is drilling in the Gulf of Mexico. Nevermind that it's one of the most treacherous places to drill due to hurricanes, oil companies lose millions every year from sinking drilling platforms, and the pitiful influx of oil would be roughly equivalent to destroying wildlife sanctuaries in Alaska.
McSame, I mean, McInsane, I mean McCrap, you know who I mean... He said it would work so why not believe an "expert" such as McCain (damn, I got it wrong)?!
]]>@Oranges w/ Cheese:
Wait one second... are you suggesting we *couldn't* have just drilled in ANWR and dropped prices? That increasing global supply by 0.5% would have reduced prices by 200%!?
I feel so used... and misled... :(
Surely there was no way any of us could have seen this outcome coming!
;)
@mannyv: so tell us something useful
]]>Remember kids, the news only tells you part of the story. News sources rely on sources, and every source has their own agenda.
Were the run up in oil prices due to speculation? Well, yes, partially. Is there any direct relationship between the cost of a barrel of oil and the cost of a gallon of gasoline? Well, not really.
For more reading, there's a congressional report on gasoline pricing that you can google for.
]]>Point, missed.
]]>the problem as i see it is primarily with these swap dealers that were trading outside of the regulated marketplace, where no one was watching. i wish i could remember the exact statistics...something like 4 out of every 5 contracts was held by one of a small group of swap dealers & at the peak, 4 dealers held 30-40% of the contracts on the marketplace.
there are controls within the marketplace to stop this concentration of power, but when most trading is occurring outside this marketplace, how can you hope to keep it regulated?
kill the swap markets or place them under the authority of the CFTC. & then put some people in charge of the CFTC that are actually going to do their job.
]]>I always argue with those who bought the argument D.C. talking heads, we've assigned to look out for us, claimed that "because of China's and India's demand, the price of crude has gone up." Holy crap, did these two countries find a way to burn so much gas in a matter of months? How is that even possible.
But, in true government agency, they've failed us. The only thing Washington is good is at taxing, policing, and abusing Americans. That, they've 100% effective at. Everything else, who cares.
]]>I say we let em go.
NNNNOOOOOOO!!!!!!!
True, but there's no-one more fundamentalist and cultlike than Austrian school devotees. Keynesians usually just say that he was an extremely bright and original thinker. Austrian worshippers on the Internet believe Hayek, von Mises and RON PAUL! are true gods among men.
]]>think along the lines of crazy christmas walmart shoppers in NY and the government is the one dude at the door
]]>I'll go with you on that one, with the rare exception here or there.
@Oranges w/ Cheese: Trust me, nobody hates the bank bailouts more than me. I think depositors assets should be protected, but company names, buildings, and executives should be left for the wolves. The problem is that our legislators have mistaken 'preserving confidence' for 'preserving our friends'.
]]>I have been saying it was speculation for a long time, glad to be right.
]]>Steve Kroft has no credibility with me.
Semgroup is an example of a speculator who went bankrupt in July, which in effect, sucker-punched the midcontinent oil and gas producers, employees and local economies even before the oil and stock market prices collapsed. Semgroup's official explanation was that their hedging strategy failed. They were betting that prices were going to fall, but couldn't hold onto their position quite long enough to see it happen. The problem with this explanation is that it's not "hedging" when you bet the company on it, as Semgroup did. Furthermore, Semgroup was gambling with other peoples' money. The SemGroup debt numbers are staggering, and the creditors range from individual mom & pop landowners who are owed a few thousand dollars each, to $159 million owed to BP.
@Ben Popken: youdaman
]]>So far its working. $2 prices here, lowest oil prices in decades.
]]>Stay classy!
/s
]]>Okay. How about:
Leveraged speculators, the parasites of capitalism?
]]>It makes so much sense now...
Since our Government failed to protect us... Should we all get a per car rebate back on the gas we purchased during that time since prices were illegally raised...
...or was it technically legal?
]]>But but but... I thought it was Bush's fault!
]]>But heck let's stick with the answer from the lot who advocates Keynesian spending to get us out the current depression, that's much wiser....
]]>...the entire stock market runs on speculation. If everyone only spent money on sure things, their profit would be zero...
Now, maybe if Capitalism != Greed we'd get somewhere.
]]>I'm all for Capitalism %110 but Colbert said it best "If we have Rational Self Interest then why do we need traffic signs?"
]]>I think that is unfair, businesses are financed and the entire stock market runs on speculation. If everyone only spent money on sure things, their profit would be zero. Speculation is what makes capitalism capitalism. If all demand was assured to be met by exact quantities of supply, that would, in fact be socialism.
Entrepreneurs speculate when they spend money on a business in hopes that demand for their products will rise.
While leveraged speculation may be stupid, its just a more extreme version of what normal market participants do every day.
Look at it this way: the speculators made bets and bought at extremely risky prices that were obviously unrealistic and they were rewarded with a crash in the market. Order was restored and their returns matched their risk.
]]>Speculators, the parasites of capitalism.
]]>Wow, what a bunch of jackasses. Lets all get rich while the average Joe has to pay $4 a gallon. Oh don't worry, those average joes will just bail us out if we get caught doing it! All those speculators and anyone from Enron should be dropped from a plane with no parachute.
]]>Awesome post Ben! I love this kind of stuff. Now if I wasn't at work, I could watch the video...
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