$6 Gas by Summer?

posted at 2:15 pm on April 21, 2011 by Rovin

Some of the very same financial institutions that participated in the housing market crash of 2008 (when credit default swaps were the rage), are now directly making billions in profit an the backs of the American public. Even though there is no real shortage of world reserves, unregulated speculators, (and major financial institutions), are cashing in with the shear volume of participation. To make matters even worse, lobbyist for these banks and profiteers are providing “equitable” campaign contributions to your United States Representatives to look the other way. Outrageous accusations you say? Perhaps, but Charles Wallace at Daily Finance introduces a thirty year oil market speculator who makes a strong case:

“Have you ever wondered why when you go to the gas station to fill up the family car, the price of gas at the pump has just jumped 25 cents a gallon over the past three days?

Perhaps you thought the oil companies were just being greedy. Or you believed the nightly news pundit who said that gas prices went up because the crisis in Libya was affecting supplies of oil. One professional oil trader says that you’d be wrong on both counts.

Dan Dicker, who has spent nearly three decades in the oil market, has a profoundly disturbing explanation of why the price of oil, and the gasoline that comes from the crude product, has risen so dramatically in recent months. It turns out, Dicker says, that the price has nothing to do with supply and demand for oil. It’s the financial market for oil, filled with both professional speculators and amateur investors betting on poorly understood oil exchange-traded funds, who have ratcheted up the price of gas to such sky high levels.

“There is no supply issue going on here – what you have is the perception of the possibility of a supply issue,” Dicker says. “A whole bunch of people are pouring money into an oil market trying to take advantage of what they perceive to be a real risk in supply. It’s a marketplace that I argue should not be allowed to be wagered on like a stock or bond.”

But turmoil in the Middle East is hardly effecting supply. Only the speculation that it might effect supply is this imaginary 800 pound gorilla in the room:

“Dicker notes that Libya produces only 1.3 million barrels of oil a day, just a tiny fraction of the world oil market. Even if Libyan crude were lost to the world market in the current turmoil, and there is no sign that it is, Saudi Arabia has 5 million barrels a day to use in case of an emergency.”

For the record, Wallace’s story is mostly based on Daniel Dicker’s book Oil’s Endless Bid: Taming The Price of Oil To Secure Our Economy. Sources I’ve found also show Dicker as a Senior Contributor to The Street (a financial online site), which supplies some of his bio here.  Dicker insist that if regulations were imposed on only the oil commodity market, the price of a barrel could fall by 50% overnight.  Dicker makes the case for stronger regulation based in part by the influx of traders entering the market, and facilitated by the introduction of a new high speed computer system that has compounded the problem:

“The move was made easier by the arrival in 2006 of electronic trading of oil futures. The formerly cumbersome process of trading oil with a floor trader at the New York Mercantile Exchange was suddenly replaced by a streamlined process requiring only a few keystrokes on Chicago Mercantile Exchange’s Globex computer platform.

From a few thousand trades an hour at the old NYMEX, traders now process millions of trades an hour by computer. Dicker estimates the financial market for oil is 15 times greater than the amount of actual oil being traded, with 75 types of futures being sold on exchanges. That doesn’t even include all the private, over the counter transactions that take place.

“The amount of money pouring into hard assets, particularly oil, is outsized because it’s new and fresh, so you get these outsized moves from $68 a barrel in the summer of 2010 to $100 now,” Dicker says.”

But none of these factors can be realized without money getting invested—and tons of it.

“Why does all this trading drive up the price, when buyers and sellers should theoretically cancel each other out? Dicker says that is primarily because almost all oil investments being sold by the big investment banks are long trades – bets that the price will go up. While it’s also possible to short oil ETFs, no one does. So that’s heads ever skyward.

Among the biggest winners of the new oil markets are investment banks like Goldman Sachs (GS) and Morgan Stanley (MS), which create new products for clients and then use that information to trade on the products. In 2004 and 2005, Goldman Sachs made $1.5 billion a year trading oil, Dicker says. In the first half of 2009 alone, the firm made $3.4 billion oil trading profits. Firms like Goldman are not taking bets that oil will move lower or higher. Trading simply means naming a spread of buy and sell prices from which they can eke out tiny but regular profits, a business without risk.”

Which brings us to those dreaded lobbyist. In this case, the lobbyist are paid to convince your legislators to ignore any thought of regulating the oil markets based on actual supply and demand policies. And we all know lobbyist rarely convince legislators without greasing some one’s pocket.

“So if gas prices would come down sharply with minimal regulation, why doesn’t the government step in and impose limitations as it has done recently for other derivatives, forcing most firms to conduct their trading on exchanges? Dicker believes it is largely because large financial firms with a direct interest in oil trading have made so much money with oil that they can afford to lobby Congress to block any significant reforms.”

The Drudge Report cites a CNBC report that gas prices are rising because the dollar is still plummeting (thanks to the Fed printing dollars like there’s no tomorrow), which certainly lends a credible argument for what’s driving the price of fuel.  And one financial strategist presents “the perfect storm” that could drive gas prices through the roof this summer:

“All we have to have is a couple badly placed hurricanes which could constrain some of the refinery output capacity in some key locations,” says Richard Hastings, strategist at Global Hunter Securities in Charlotte, N.C. “If you get weakness in the dollar concurrent with the strong driving season concurrent with the impact of one or two hurricanes in the wrong place, prices could go up in a quasi-exponential manner.”  Hastings sees gasoline having “no problem” getting to $6.50 a gallon over the summer after increased demand and storm disruptions come into play.

Talk about classic speculation.  Funny how Mr. Hastings’ “strategy” is devoid of the idea that our government might do something right for a change by returning market principals based on real supply and demand. I expect some major “finger-pointing” from our legislators as the price of fuel rips the guts out of consumer confidence along with draining our pocketbooks. And Dicker doesn’t think Congress will act responsibly as long as the money flows their way.

At this posting, I tend to agree with Dicker.

This post was promoted from GreenRoom to HotAir.com.
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Comment pages: 1 2

The economy collapsed when gas went over $4 in 2008.

The general fiscal situation is weaker, now, so this level is unsustainable already.

Look for another collapse if this unrealistic, overvalued oil pricing lunacy continues.

profitsbeard on April 21, 2011 at 6:14 PM

Local radio new station had on some a**hat expert who said it’s all because of speculation…criminal acts.

He scoffed at the inflationary impact of Obama policies.

Looks like Obama’s going to go after the market.

joeindc44 on April 21, 2011 at 6:29 PM

Let’s put Barney Frank and Chris Dodd in charge of regulating oil markets, and let Van Jones handle the media blitz!/

Unfortunately that train has sailed.
fossten on April 21, 2011 at 3:39 PM

But has the ship left the station?

Buy Danish on April 21, 2011 at 6:34 PM

The CNBC article claims that Oil has a -.9 correlation with the dollar index. If that’s the case, speculation is just a leftist bogeyman and this is entirely a monetary and fiscal problem.

jhffmn on April 21, 2011 at 6:35 PM

Obama says new task force will examine gas prices

RENO, Nev. — President Barack Obama says the Justice Department is assembling a team to investigate fraud or manipulation in the oil markets.

President Obama,

No one has manipulated the oil markets more than you sir. Your refusal to open up our vast reserves is the single largest reason we are heading for $6 fuel prices this summer. Further, your direct policies by your administration to not allow exploration and production is not only manipulation, it’s becoming a national threat to our financial security. Your Justice Department should not have to look far to realize it is your direct failure in this issue that maintains our dependency on foreign oil. No single person in the world is more responsible for this impending disaster than yourself.

Rovin on April 21, 2011 at 7:36 PM

BOR is going to be on fire over this tonight, over something which he is completely incapable of fully understanding and will completely refuse to receive an education on.

slickwillie2001 on April 21, 2011 at 7:49 PM

Rovin – It’s way simpler than all the posturing you’re doing. Simple concept here:
Trash the Dollar, Oil prices rise.
Karl has hit it on the head (look at his graph showing the high correlation).

SkinnerVic on April 21, 2011 at 7:57 PM

BOR is going to be on fire over this tonight, over something which he is completely incapable of fully understanding and will completely refuse to receive an education on.

slickwillie2001 on April 21, 2011 at 7:49 PM

Couldn’t agree more willie

SkinnerVic on April 21, 2011 at 7:57 PM

Again agree and understand these principles, but I would contend it’s the policies of this administration that are not only driving the dollar down, but also the restrictions Obama and the Democrats have put on our production capabilities. I will read your link in a bit, and thanks.

Rovin on April 21, 2011 at 8:05 PM

Obama Directs Holder To Indict Obama And Bernanke

Too funny and dead on!

Rovin on April 21, 2011 at 8:20 PM

It is not speculation to trade commodities, it is insurance against run away dollar devaluation and high government debt.

EliTheBean on April 21, 2011 at 2:32 PM

The CNBC article claims that Oil has a -.9 correlation with the dollar index. If that’s the case, speculation is just a leftist bogeyman and this is entirely a monetary and fiscal problem.

jhffmn on April 21, 2011 at 6:35 PM

Simple concept here:
Trash the Dollar, Oil prices rise.
Karl has hit it on the head (look at his graph showing the high correlation).

SkinnerVic on April 21, 2011 at 7:57 PM

I agree that dollar devaluation, both realized and unrealized, has more to do with the oil market than anything else.

If you are betting on future oil prices and you have good reason to expect a 30%-50% devaluation of the dollar, what kind of bet would YOU place????

landlines on April 21, 2011 at 8:38 PM

Barry has a flow chart on the wall in his private area of he WH… It shows that his plan is right on schedule. Gas at $7 by 2012… then he’ll rescue US by getting it down to $3.50 by the election.
-
The boobs in the MSM/press will blame the spike on everyone but Barry, and yet he will get all the credit for the inevitable retreat in price.
-

RalphyBoy on April 21, 2011 at 9:27 PM

I heard in passing that BarryO is siccing Holder’s DOJ to investigate something or other in the oil industry. Has BarryO considered that his pathetic monetary and energy policies have quite a bit more impact on the price of oil? What a demagogic showboat?

onlineanalyst on April 21, 2011 at 9:36 PM

Uhh…

Regulation proposals generally should make one suspicious.

Perhaps we should ask the question: Why does everyone always bet on higher oil prices? If they are incorrect, and oil is overvalued, then they are going to lose a lot of money when the bubble bursts- so you have to assume everyone is stupid.

If they are correct that oil prices will rise, then regulation will under-price oil, and we will have shortages and gas lines, just like the last time we tried to regulate fuel prices.

Now I’m not saying there isn’t speculation, but this is almost all driven by the weak dollar and the threat of inflation.

People are looking for somewhere safe to stick their money that can also make some returns.

Gold is of course a common pick. Oil also makes sense, because oil will be needed for the near future- so there is a floor beyond which oil will not drop. So perhaps oil is over-valued, but more likely, this presages a massive general inflation- meaning the “speculators” that think oil prices will rise are correct. Oil is worth more in dollars, not because supply of oil is endangered, but because there is too large a supply of dollars.

This makes more sense then some conspiracy theory by speculators to all go broke by overvaluing the price of oil.

By the way, the fact that Dicker believes stocks are a “wager” demonstrates he lacks the insight as to what purchasing stocks are fundamentally about. You shouldn’t “wager” on stock any more then you do on oil. But the reason you should wager your money on these things is because if you approach investment from the “wager” perspective you are likely to lose a lot of money. So do we regulate stocks to prevent the idiots for wagering their money on stocks? No. Because it is a self-correcting error.

Is there possibly a “bubble” in oil prices? I suppose there is. But more likely this the result of the “dollar bubble” slowly letting out the air.

Sackett on April 21, 2011 at 10:27 PM

That should be “shouldn’t wager” up above, not “should wager”.

Sorry about that.

Sackett on April 21, 2011 at 10:28 PM

Drill here, drill now, build refineries, all of the above.

How hard is this to understand?

And why in the h3ll are we subsidizing Columbia and Brazil with THEIR offshore drilling? WTF????

karenhasfreedom on April 21, 2011 at 2:48 PM

Yeah, but who can tell private companies to build more refineries? That’s there call, otherwise it’s Socialism.

Why would they want to build more refineries if they’re making profits as it is now? First they have the expense (including financing and subsequent debt) of building them, then staffing them, insuring them and so on. And, if they build more and put more gas on the market, then prices would go down. How does that help a company unless demand goes up appreciably to make it worth their while?

And like I keep saying, once they get that oil, it’s their oil (those who drill/sell it, the traders, and finally the fuel companies) not ours, and they can sell to whomever they want to at what ever price they want to.

Dr. ZhivBlago on April 21, 2011 at 10:44 PM

Who put this simpleton into the WH? He has odd ideas about cause and effect.
http://thehill.com/blogs/e2-wire/677-e2-wire/157263-obama-trade-in-your-suvs-for-more-fuel-efficient-vehicles

onlineanalyst on April 21, 2011 at 11:05 PM

All these trade instruments Wall Street comes up with seem designed to cloud the market rather than make it transparent. Combine that with the millions of trades these computers can make instantly, and the little guys is boxed out, yet they take his money and ensure he loses on either side of the trade.

Iblis on April 22, 2011 at 12:21 AM

I thought the headline first read “$6 Gas by Schumer”

Heh. it still would hve been true.

Jones Zemkophill on April 22, 2011 at 2:57 AM

Rovin – It’s way simpler than all the posturing you’re doing. Simple concept here:
Trash the Dollar, Oil prices rise.
Karl has hit it on the head (look at his graph showing the high correlation).

SkinnerVic on April 21, 2011 at 7:57 PM

This. Nice to see so many people reading Karl. Wake up folks! Taxing the richest won’t help our deficit, put putting some of them in jail would. Don’t get me wrong, I believe in productive people keeping their wealth. But when they bribe politicians with campaign money for favors to the industry, they need to go to jail. As Karl says, I’ll believe true change is upon us when I see handcuffs.

riverrat10k on April 22, 2011 at 10:29 AM

When Bush opened up offshore drilling prices plummeted.

Obama deceitfully pretended he was going to do the same until BP occurred, then he restricted things even further.

scotash on April 22, 2011 at 2:35 PM

Welcome to Zimbabwe, ladies and gentlemen. I hope you enjoy the ride.

{+_+}

herself on April 22, 2011 at 4:39 PM

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