Video: Oil Speculators To Blame For Record Gas Prices After All
If you thought oil speculators as the reason behind the historic gas prices spikes of this summer was debunked, think again. From '07 to when the price of oil collapsed, supply increased and demand dropped. According to basic economic theory, this should've meant the price went down. But all of a sudden an influx of capital, an infusion that brought the total at play from $13 billion to $300 billion, brought to market by large investment bankers, exploiting de-regulation and trading in black box private exchanges made possible by Enron, drove the price of oil from $69 to almost $150. A new 60 Minutes report explores the issue. Video inside.
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!)
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Comments:
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.
Yeah, also here on being stuck re: video. But doesn't this make a point that the speculators were incredibly dumb on a macro scale? Intentionally making a speculative bubble is a fantastic way to go bankrupt. And they did go bankrupt.
@huadpe: But if you know you're creating one, doesn't that mean you can bail at just the right time?
eh, they didn't really do a very good job in their report. Check out this link for a little more detail:
Yay de-regulation and Enron in the same sentence. Woohoo Capitalism failures! Woo!
@tomok97: It wasn't their money filling that bubble. The players still got their bonuses and salaries and commissions and what not.
Speculators, the parasites of capitalism.
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.
My paper at the end of last semester in one of my classes Economics 310- Money and Banking, was basically the same report. A lot of people had been yelling about this for years and no one listened.
I'm all for Capitalism %110 but Colbert said it best "If we have Rational Self Interest then why do we need traffic signs?"
Oh I love these situations. When I just get to rub it in people's faces that what I've been telling them for a year is right.
It's so obvious it was speculation and the oil bubble had to burst at one point or another. But now prices are below market so expect them to stabilize by going much higher than they are but still well under $100.
Great video...very informative. Thanks!
@Secret Agent Man: Aha, I see you hit the nail on the head:
...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.
@Secret Agent Man: Oh and also, most of their "risk" is now nil as they're getting forkloads of money from the government (IE, our tax money. Yay)
Because 60 Minutes is the end all answer to everything. Let's blame it on capitalism...woohoo!! OTOH, we could look at actual reasons as explained by Austrian economics, for example [mises.org] or [mises.org]
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....
Wow - what a video. It pretty much verifies what I had believed for a long time.
But but but... I thought it was Bush's fault!
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?
This explanation makes my head hurt.
ok, now we know that we, the people around the world were fooled, is there anything in the work that can refund us? if not, this does nothing, only made me even more angry.
I'm not even that savvy, but this exactly what I suspected was happening. Demand was down, supply was up, and prices kept rising insanely.
you just got to love how they will jack prices up to make large profits but as soon as they crash its the people theyve ripped off that they want to give them a bail out
congrats CBS on sitting on this story for over a year!
Stay classy!
/s
@dumblonde: Don't worry, somehow they'll manage to make gas prices go above $3 with oil under $30 a gallon.
So far its working. $2 prices here, lowest oil prices in decades.
@nighttrain2007: Economics is as bad as religion. For every group of economists that says one thing, you can find another that says the exact opposite. The Dismal Science, indeed.
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.
I would like to see the people who were heavily involved in doing this to be rounded up in Central Park or the plaza in DC so we can all throw rocks at them.
I have been saying it was speculation for a long time, glad to be right.
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'.
@Dethzilla: there is nothing illegal about it, it's called economics, supply and demand caused the prices to rise. However the prices were not based on oil, which was in high supply and low demand; the prices were based on pieces of paper that represented oil, which people went crazy over (to put it in the most simplest terms)
think along the lines of crazy christmas walmart shoppers in NY and the government is the one dude at the door
I still say the biggest crooks are the judges and lawyers. Have they got it made, they can lie and cheat and steal all they want to right in court and the government never does anything about it.
I still don't believe that the market fixed the price over 240% above value. Wait and see. When this economic downturn relaxes -and it will relax, and manufacturing and construction pick up again- and they will pick up again, then the demand for oil will rise again, once again raising the price toward $150. The price was not fixed, we are actually using less fuel right now.
@David Brodbeck: For every group of economists that says one thing, you can find another that says the exact opposite.
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.
I say we kill em!
Yeah!
I say we hang em, *then* we kill em!
Yeah!
I say we stomp em! Then we tattoo em! Then we hang em! ...And then we kill em!
YEAH!!!!!!!!!!!!!
I say we let em go.
NNNNOOOOOOO!!!!!!!
Just what I suspected all along. But, government agencies, designed to protect the consumers, failed us by allowing it to happen. Just like they did with mortgages and Maddoff, they did it here, look the other way while the crime is happening.
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.
@Secret Agent Man: i tend to agree with you - speculation as a whole isn't a bad thing (the 18-yr old that dabbles in penny stocks is speculating, isn't s/he?).
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.
"There's no news in the truth, and there's no truth in the news"
- Russian proverb that sounds better in Russian
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.
Well, I sure hope that the IRS adjusts per-mile rates for business travel to take account of the costly gasoline. I have a few thousand miles worth, and every bit helps.
@mannyv: That Russian proverb made a lot more sense in the Soviet Union, where the only two official newspapers were:
Pravda - News
Izvestia - Truth
It'd be great if we heard about these things WHILE THEY WERE HAPPENING instead of months later. People knew about it, and were opposed to it, but were too scared to speak out until the heat died down.
I am Jack's complete lack of surprise.
@dallasmay: What you described *is* actual demand. Where was all that this past summer when oil was $150? Hmm?
@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!
;)
Awesome post Ben! I love this kind of stuff. Now if I wasn't at work, I could watch the video...