No solution to $137 oil until there is agreement on the problem
All the jawboning about the “real cause” of the high price of oil points out one of the common pitfalls of decision making: the use of information. On the front end of a decision, information is useful to help define the issue and frame the problem. Later, information is needed to determine the costs and difference between the alternatives and to assess the uncertainties (information you don’t have).
On the front end, there is no such thing as objective data. There is data and there is the lens you view it through. For example, according to a recent piece in the Seattle Times, one side says the problem with oil prices is financial speculators.
And the reason?
Since September 2003, traders holding crude-oil futures contracts jumped from 714 contracts traded to more than 3 million contracts traded in May 2008, said Rep. Bart Stupak, D-Mich., who chairs the House Energy and Commerce Subcommittee on Oversight and Investigation. His panel held its second hearing on energy speculation Monday.
Speculators now account for 71 percent of the oil-futures market, up from 29 percent in 2000, he said, citing data from the CFTC. Overall, commodity index speculation has jumped from $13 billion in 2003 to some $260 billion today.
So what’s going on then . . .
In fact, recent industry statistics show demand both within the United States and globally for petroleum has actually been falling and inventories have been rising as consumers, faced with escalating prices at the pump, use less fuel, said David Edwards, president and portfolio manager at Heron Capital Management.
But it doesn’t seem to have any effect on the direction of prices. “The price pattern looks much like the Internet stocks index in late 1999, early 2000,” he said.
On the supply side, Evans noted the Organization of Petroleum Exporting Countries pumped an average of 32.24 million barrels per day of crude oil in May, an increase of 370,000 from April.
So if you follow the logic, the volume of contracts and the dollars associated with those contracts have piled into the market at the same time that supply has risen and demand has fallen. The money wouldn’t be flowing in if investors didn’t see a financial win. So add all that up–rising supply, falling demand, riding prices– and this side of the argument says, in effect, “What other conclusion is there?”
The other side sees it differently . . .
Treasury Secretary Henry Paulson and many financial-industry analysts say prices are still set by the fundamentals of supply and demand.
“There’s no evidence of speculative influence. Speculators are not contributing to the demand for physical oil as they almost always roll positions prior to delivery,” says Craig Pirrong, a professor of finance at the University of Houston and a member of the CFTC energy markets advisory committee.
“Speculators are not the cause of high oil prices,” said Representative Joe Barton of Texas, the senior Republican on the committee. Prices are driven by the lack of supply, he said.
Energy Secretary Samuel Bodman said June 21, while attending a meeting of oil producers and consumers in Saudi Arabia, there is “no evidence that speculators are driving prices.”
The article I’ve referenced doesn’t offer data to support the contra point of view, so we’re left with data to support the “speculators are the problem” thesis, and orthodoxy and assertion by people with obvious ties to Big Oil holding down the other chair. The third argument, that the issue is “uncertainty about credit and geopolitics” is a good talking point but doesn’t hold up based on the apparent facts about the current state of supply and demand. But to return to my point, coming to an agreement on the definition of a problem requires a common understanding about what’s actually going on. The people in the big seats don’t seem to agree.
Tags: oil, gas prices, Masters Capital Management, Heron Capital Management, OPEC, Henry Paulson, Samuel Bodman, decision making