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Is it oil speculators?

By Dennis T. Avery
web posted April 30, 2012

U.S. President Barack Obama stands in the Rose Garden and pledged to prosecute "oil speculators." Bill O'Reilly goes on TV night after night and blames "speculators" for gas pump prices, while guest after guest tell him he's wrong. My wife asks" "What's an oil speculator?"

Most of the speculators are common folk who buy futures contracts for oil to be delivered at some later date. The speculators actually have a lot in common with the rest of us who buy and sell stock when the price and product are attractive. If you want to play, go on line and find a futures broker. You'll have to buy in big units -- 1000 barrels per contract -- but you pay only about 10 percent of that value up front. Thus you have a lot of leverage. A small price change could yield a lot of profit. Know, however, that your position will be "marked to market" thru the life of the contract, so be prepared for "margin calls" demanding more of your cash if the market moves against you.

If the buying price is $90 per barrel, you'll be hoping it goes to $92 or $95. If the price drops instead, you'll think seriously about selling out before you lose more of your money.

Believe it or not, your speculation is good for the economy. You've assumed some of the inherent price risk in owning oil during volatile times. You've bought that risk from the oil producer or refiner, who just wants to process the stuff for his normal margin without risking huge losses on the value of the commodity itself. You take on that risk, using "spare" cash, hoping to win.

Right now, your fellow oil speculators are betting the price will rise because of President Obama. He's shut down every oil production facility in America where he can deny a permit. He made it very clear during his election campaign that he wants oil prices to rise so we'll use less. We know he is dragging his feet on the pipe line and all new oil drilling opportunities. He's also just unleashed the EPA to suppress the coal burning that provides half of our electricity, thereby ensuring that other fuel prices will rise.

I spent eight years as a federal regulator with the U.S. Commodity Futures Trading Commission, which oversees oil (and other commodity) speculators. What keeps the futures markets honest is the threat of delivery. If you still hold your oil futures contract at the delivery date, you suddenly get physical possession of 42,000 gallons of oil! You'd better have a very big storage tank, or you'll have to sell the oil back to the industry at whatever price you can get. Mostly, speculators settle their contracts before they incur the big expense of taking delivery.

But not always. The oil-rich Hunt Brothers decided in 1977 that soybeans would be in short supply, and they bought (with other family members) 22 million bushels of soybeans for fall delivery. As it happened, the South American soybean crops were bigger than expected, and the price of soybeans went down instead. The Hunts took delivery on 600,000 tons of soybeans, delivered in Toledo as the St. Lawrence Seaway was freezing for the winter! They had to pay massive storage charges and then sell the beans at a loss in the spring.

In another famous attempt to corner the silver futures market, the Hunts lost a reported $1.5 billion. They bet they could control the silver market by buying huge amounts of futures contracts, hoping industrial demand for silver in computers and photo film would drive up the price. In a counter-move, the sellers bought huge amounts of silver jewelry from village women in India, had it refined, and dumped it at the Hunt's feet -- within a few weeks.

The President's energy policies are still tied to the environmental movement's belief that humans have to give up most of our current energy, live in high-rises so we can walk to work, or alternatively live on a farm and plough our land with horses.

I wrote after Obama came into office that "Only a fool would try to limit greenhouse emissions during a recession and while global temperatures are falling. But the grand green dream of a small human population living sparsely is dying hard. ESR

Dennis T. Avery, a senior fellow for the Hudson Institute in Washington, D.C., is an environmental economist. He was formerly a senior analyst for the Department of State. He is co-author, with S. Fred Singer, of Unstoppable Global Warming Every 1500 Years. Readers may write to him at PO Box 202 Churchville, VA 2442; email to cgfi@hughes.net. Visit our website at www.cgfi.org





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