|
Every
time you read the newspaper or listen to the TV or
radio, you are being deceived. Every time you put
gasoline into your car, you might be a victim of a
global 1-2-3 swindle. Every time you nod your head in
agreement that oil prices are supposed to be this high,
a small group may be laughing all the way to the bank
with your money.
We are
repeatedly told that China is the reason oil prices are
high. Yes, consumption in China and India has increased.
However, with a few exceptions, consumption has dropped
worldwide.
In what
year did the Philippines consume the most crude oil? The
answer is 1998, when we used 381,000 barrels per day
(bpd). In 2007, the Philippines consumed 336,000 bpd.
And we are not the only country which has passed peak
demand. Here is a list of the peak crude-oil consumption
year for various nations; Japan-1996, Germany-1998,
Italy-1995, Thailand-2005, Malaysia-2004, USA-2005,
France-1980, United Kingdom-1996, Russia-1992. (US
Energy Information Administration, EIA)
Since
2006, China’s consumption of crude was up by about
400,000 bpd. Yet in April 2008, US consumption dropped
by a massive 4.3 percent, over 800,000 bpd (Reuters,
June 30). In fact, this drop is almost enough to offset
the total worldwide growth in oil consumption from 2006
to 2007 (990,000 bpd; BP Statistical Review 2008). This
one-month drop in US consumption is equal to two years
of consumption growth in China, and the April drop wiped
out one year’s worth of growth from China (325,000 bpd),
Saudi Arabia (149,000 bpd) and India (168,000 bpd)
combined. Additionally, Chinese demand is falling. From
Reuters: “A decline in China’s oil imports in April
raised questions over demand. China’s April crude-oil
imports fell by 3.9 percent from a year ago, official
Chinese data showed.”
If
excess demand is not the problem, then perhaps there is
a shortage of supply, driving prices higher. Except,
world oil production has never been any higher than in
the first quarter of 2008. Further, supply is expected
to grow from the current 86 million bpd to over 120
million bpd by 2030, according to the EIA. But forget
about 2030. What about 2008?
There is
some disagreement that the demand/supply equation is in
balance. But even with the occasional supply disruption
for political (Nigeria, Iraq), weather (hurricanes in
the Gulf of Mexico) or other reasons, there is no
shortage of crude oil. Common sense says that if there
is too little crude oil, why hasn’t there been a single
case of consumers not being able to buy the gasoline and
other products they want? If demand is outstripping
supply, where are the pictures of people standing in
line around the world trying to buy gas, as we saw for
rice and bread?
And read
this from Reuters on June 11, 2008: “Kuwait and Iran on
Wednesday joined Saudi Arabia in slashing the price of
their heavy crude exports to the deepest discounts in at
least nine years. Kuwait cut the official selling price
of its crude by 40 cents a barrel to a discount of $4.20
a barrel, the deepest since at least late 1998.”
Now to
the “dark side” of oil prices, literally. When you read
something like this, “US government regulators have
found no wrongdoing in the oil futures market,” you are
being misled.
The
commodity-futures market is a valuable tool that helps
keep both prices and supply stable. Producers (farmers)
sell at a guaranteed price and buyers (bakeries) can
take delivery of the commodity (wheat) at that price.
The contract can be settled in cash, but in every
transaction, there is a set amount of the physical
commodity that backs the trade. If you buy the wheat
contract, you could take physical delivery, and if you
sell that contract, you may have to deliver the physical
wheat. Because of this factor and government regulation,
the amount of pure speculative investing is kept in
check. Not necessarily true for the oil market.
More
than 45 percent of all crude-oil futures transactions
take place on the semi-regulated Intercontinental
Exchange, which operates outside of the complete
oversight and regulation of the US Commodity Futures
Trading Commission (CFTC) (Fortune magazine, July 2008).
The trading may be legitimate, but the reporting
requirements for the trading participants, particularly
of what is called “large trade reports” and “speculative
transactions,” are not fully regulated.
Imagine
you and I find a stock trading at 10. We buy and sell
back and forth to each other until we reach 20. A
similar process could be taking place in oil-futures
contracts.
The 1936
Commodity Futures Exchange Act and subsequent laws
curtailed excessive speculation by placing position
limits on traders who were first clearly defined as
“speculators.” Speculators could only have a limited
amount of open positions, and laws limited the total
amount of open “speculative” positions on CFTC-
regulated exchanges. Not so on these less-regulated
electronic exchanges. Speculators, not producers and
end-users, can control the market.
If
overall oil supply and demand is reasonably balanced,
and demand is dropping as it should in response to high
prices, then why do oil prices continue to increase? Is
unregulated speculation jacking up prices in a pure
market-price play? Price movement, inconsistent with
underlying intrinsic value, results from excessive
market speculation and causes price bubbles.
Speculative price bubbles cannot continue forever. Oil
prices will plunge. This type of disproportionate
speculation borders on price manipulation. Manipulative
fraud cannot continue indefinitely. Oil prices will
plunge. World consumer demand is contracting daily. Oil
prices will plunge.
E-mail comments to mangun@email.com. |
