CONFESSIONS OF AN OIL SPECULATOR (WELL, A TRIVIAL SPECULATOR)

Oil is trading at $142.46 per barrel as the Author writes this post. Gas tops $4.00 per gallon. Fingers point. Our Leaders feign shock and surprise. Average folks get squeezed. And economists debate.

At whom do the fingers point? At ourselves, at others, or at both? Uninformed and demagogic right wingers point to environmentalists that seek to preserve ANWR and American beaches from despoliation. They naively believe that the grant of drilling rights for oil that is 10 years way from the pipeline will be the magic snap of the fingers that will bring oil back to $2 per gallon and bring the gas guzzlers out of garages.

The mean estimate of 7.7 billion barrels recoverable in ANWR would have some future effect on supply, and by implication price, if it did come into production. But Chinese and Indian drivers would also share in the potential supply. Oil is a global commodity.

Many on the left blame price gouging by the oil companies. Evidence is always scant to support these charges in commodity markets where there are many market participants. It is the claim that always sounds but never rings true.

Smart minds recognize that that there is no one to blame but ourselves, gluttonous Americans that consume about 25% of the world’s oil yet control only 3% of its reserves. When Europe and Japan were adjusting to new energy realities in the wake of the 1973 oil crisis, Americans resumed and expanded upon their energy guzzling ways.

DON’T BLAME YOU. DON’T BLAME ME. BLAME THE SPECULATORS BEHIND THE TREE. (Apologies to the late Senator Russell Long.)

Recent testimony before the US Congress by hedge fund manager Michael Masters raised the issue that speculators could be behind the dramatic oil price increases. Masters claimed (while stocking up on short oil positions) that if Congress passed laws restricting speculation, oil would soon fall by half. Geese would lay Golden Eggs and the lamb would lie down with the lion.

Many are skeptical of whether speculation in the oil futures market could drive prices to these apparently stratospheric levels. Paul Krugman, a liberal economist that writes an op-ed column for the New York Times, is skeptical of pinning the tail on speculators.

From today’s column “Fuels on the Hill” Krugman writes:

Congress has always had a soft spot for “experts” who tell members what they want to hear, whether it’s supply-side economists declaring that tax cuts increase revenue or climate-change skeptics insisting that global warming is a myth.

Right now, the welcome mat is out for analysts who claim that out-of-control speculators are responsible for $4-a-gallon gas.

WHY BLAME THE MAN BEHIND THE TREE? IT BUYS POLITICIANS TIME TO FIND SOMEONE ELSE TO BLAME BEFORE THEY ARE UP FOR REELECTION.

Why are politicians so eager to pin the blame for oil prices on speculators? Because it lets them believe that we don’t have to adapt to a world of expensive gas.

Indeed, this past Monday Mr. Masters assured a House subcommittee that a return to the days of cheap oil is more or less there for the asking. If Congress passed legislation restricting speculation, he said, gasoline prices would fall almost 50 percent in a matter of weeks.

The Author has been wondering whether oil price speculation, in the form of the purchase of futures contracts, could cause this sudden rise on oil prices. His gut reaction was that speculation in physical commodities requires the ability to store (hoard) the commodity, or some other method to artificially withhold supply. There is little evidence that this is occurring in the oil market. And aside from leaving it in the ground, oil is expensive to store.

Many economists share this view. A few don’t. Krugman’s op-ed piece links to discussions on his blog. Many of the commentators are economists, sophisticated futures traders, and generally inquiring minds.

OH, YEAH. ABOUT THAT CONFESSION.

The Author is a small scale oil speculator. He owns shares in USO, United States Oil Fund, an exchange-traded fund. USO tracks the spot price of West Texas Intermediate Crude Oil. It has done well for the Author. He has bought and sold it several times in the last couple of years. And every time the Author fills his gas tank, he gets a little perverse pleasure in the fact that at least his meager oil stake lessens the blow of $3.86 gas (in Albuquerque, NM).

It is kind of like betting against your favorite team in the big game. If they win, you are happy and only out some money. If they lose, you at least have money to pay for beer cry in.

THE DESERT OF THE REAL IS AN ENERGY CONSERVATION AND MARKET SPECULATION ZONE!

IMPORTANT DISCLAIMER: This blog is offered for informational purposes only. Sources of information provided are believed to be reliable, but are not guaranteed to be complete or without error. Opinions and suggestions are provided with the understanding that readers acting on information contained herein assume all risks involved. The author may or may not buy or sell securities discussed in this newsletter.