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Did Wall Street speculators drive oil prices sky high?


Guest markham51

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Guest markham51

There is no doubt in my mind that greedy Wall Street Investment banks were behind driving up oil prices which had a crippling effect on the economy last year. One of he most illuminating tidbits of information was the amount of oil storage facilities that Morgan Stanley controls. What a great way to manipulate market prices! Morgan Stanley is/was to oil ... as Enron was to manipulating electricity rates.

 

I sure hope the new administration makes the trading of oil futures more transparent so at least we can see who is screwing with the system and the economy for their own greed.

 

http://www.cbsnews.com/stories/2009/01/08/...in4707770.shtml

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Just curious...

 

If the speculators drove the price up - and I agree they did - who was left holding expensive futures when the price fell? Speculators.

 

One thing people tend to forget is, who are these speculators? Some are individuals, but most are institutions. Institutions in which most people who have retirement accounts are invested. Some prospered, some didn't. Pretty much like any other arena of investing.

 

It is nice to have a "bad guy" to point the finger at, though.

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Just curious...

 

If the speculators drove the price up - and I agree they did - who was left holding expensive futures when the price fell? Speculators.

 

One thing people tend to forget is, who are these speculators? Some are individuals, but most are institutions. Institutions in which most people who have retirement accounts are invested. Some prospered, some didn't. Pretty much like any other arena of investing.

 

It is nice to have a "bad guy" to point the finger at, though.

 

 

The public pays. Investor A buys a contract for an amount of oil on Monday for say 50 dollars per barrel. On Wednesday he sells that oil to investor B for 60. On Friday investor B sells to investor C the oil at 70 dollars per b. Two weeks later the tanker with the contracted oil shows up off shore and the oil gets delivered to an oil refinery who buys the oil for 75 dollars (the current value) and passes on the cost to the consumer at the pumps. So who pays?...you do.

 

Now when prices decline, the reverse is true. Some of the speculators (if they are still in the market) will have some losses to offset some of their earlier profits BUT...you still paid those stupid high prices for many months and they made hay while the sun was shining!

 

Most of these investors are Wall Street fat cats and wealthy investor hedge funds.... NOT your typical middle class investor. How many of you have 401ks with commodity trading authorization? The answer...nobody, they are too risky and rarely ever show up in a balanced portfolio. Hedge funds aren't even available to most folks. Often you have to be deemed a "sophisticated investor" by law. The entry fee can be hundreds of thousands of dollars just to get to play. These funds trade billions of dollars amassed by executives of large companies and investment banks. They often borrow the funds to make these investments from the money you and i have on deposit. They invent these "scams", spend big and get out after the damage has been done. During the time they are screwing/exploiting the system they make so much money that any penalty they take for holding on too long is easy for them to absorb. The average Joe never sees any of this money and pays for it at the pump.

 

Many years ago the system was simple and fair. Now the rich get richer. There is a new scam every few weeks. Many of them result in higher prices to the consumer and the guys who get rich just trade paper and pad their bank accounts. Then when they get caught with their pants down....we bail them out..why? Cause ultimately we cant afford for them to fail because they have our money too!

 

The house of cards has come crashing down but I dont know anyone who made it big who is suffering. Their money is already out...

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Just curious...

 

If the speculators drove the price up - and I agree they did - who was left holding expensive futures when the price fell? Speculators.

 

One thing people tend to forget is, who are these speculators? Some are individuals, but most are institutions. Institutions in which most people who have retirement accounts are invested. Some prospered, some didn't. Pretty much like any other arena of investing.

 

It is nice to have a "bad guy" to point the finger at, though.

 

True, but wouldn't those with retirement accounts that would be speculating in commodities have chosen a riskier portfolio to begin with? Mind you, I am not a financial genius in any sense of the word, but I have a choice of several portfolios from which to choose according to the degree of risk I'm willing to accept.

 

Personally, I don't believe that any critical commodity should be allowed to be speculated upon.

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The public pays. Investor A buys a contract for an amount of oil on Monday for say 50 dollars per barrel. On Wednesday he sells that oil to investor B for 60. On Friday investor B sells to investor C the oil at 70 dollars per b. Two weeks later the tanker with the contracted oil shows up off shore and the oil gets delivered to an oil refinery who buys the oil for 75 dollars (the current value) and passes on the cost to the consumer at the pumps. So who pays?...you do.

 

Now when prices decline, the reverse is true. Some of the speculators (if they are still in the market) will have some losses to offset some of their earlier profits BUT...you still paid those stupid high prices for many months and they made hay while the sun was shining!

 

Most of these investors are Wall Street fat cats and wealthy investor hedge funds.... NOT your typical middle class investor. How many of you have 401ks with commodity trading authorization? The answer...nobody, they are too risky and rarely ever show up in a balanced portfolio. Hedge funds aren't even available to most folks. Often you have to be deemed a "sophisticated investor" by law. The entry fee can be hundreds of thousands of dollars just to get to play. These funds trade billions of dollars amassed by executives of large companies and investment banks. They often borrow the funds to make these investments from the money you and i have on deposit. They invent these "scams", spend big and get out after the damage has been done. During the time they are screwing/exploiting the system they make so much money that any penalty they take for holding on too long is easy for them to absorb. The average Joe never sees any of this money and pays for it at the pump.

 

Many years ago the system was simple and fair. Now the rich get richer. There is a new scam every few weeks. Many of them result in higher prices to the consumer and the guys who get rich just trade paper and pad their bank accounts. Then when they get caught with their pants down....we bail them out..why? Cause ultimately we cant afford for them to fail because they have our money too!

 

The house of cards has come crashing down but I dont know anyone who made it big who is suffering. Their money is already out...

 

I still say that there were those who lost on the speculation when the price was high. In your example, Investor C bought at 70 and was able to sell at 75, as it was the current price. What if investor C bought at 75 and the current price was 70. What about the investor who bought at 174 with three weeks until delivery and holding the bag, not be able to find another buyer, and come delivery time, the current price was 110?

 

I'll save you the time. I also understand about short selling. And I'll grant that there are unscrupulous people who will do anything to make a buck. It happens at all levels of all industries (or commodities). I also agree with the concept of transparent transactions.

 

I'm just pointing out that it's easy to say "those evil speculators" when there were speculators who lost as much as others gained. What's lacking is the actual prosecution of those who break laws while chasing the almighty buck. That's when the adage "It's not what you know, but who you know" is proven to be true.

 

I'm playing devil's advocate in a couple of threads today, mainly trying to get some debate going that doesn't resort to name calling. Nothing bad can come from discussing differing views with respect.

 

The cynical side of me has been taught not to take one news source as the end-all be-all on any given subject. In my book, CBS News has a credibility issue. I'd like to see the same subject written about in the WSJ as well as Investors Business Daily. Then compare all three and find the truth somewhere in the middle.

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Guest markham51
True, but wouldn't those with retirement accounts that would be speculating in commodities have chosen a riskier portfolio to begin with? Mind you, I am not a financial genius in any sense of the word, but I have a choice of several portfolios from which to choose according to the degree of risk I'm willing to accept.

 

Personally, I don't believe that any critical commodity should be allowed to be speculated upon.

 

At the very least there needs to be a system of adeqate disclosure.

 

Right now... because there is no requirement for disclosure, you and I could trade a contract back and forth all day long, increasing the price each time... in an attempt to drive up prices. At the same time I can own storage tanks to hold oil as prices climb. At the same time I can infleuence analysts (those who make price predictions) because they are employed by me.

 

It is a system that works for the insider...simple as that. When the Enron scandal was uncovered, the system should have been changed. It was not. We put some people in jail and let a new generation take over where they left off.

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The cynical side of me has been taught not to take one news source as the end-all be-all on any given subject. In my book, CBS News has a credibility issue. I'd like to see the same subject written about in the WSJ as well as Investors Business Daily. Then compare all three and find the truth somewhere in the middle.

 

Again, not a financial person, but wouldn't this be like reporting on their own corruption?

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Guest markham51
I still say that there were those who lost on the speculation when the price was high. In your example, Investor C bought at 70 and was able to sell at 75, as it was the current price. What if investor C bought at 75 and the current price was 70. What about the investor who bought at 174 with three weeks until delivery and holding the bag, not be able to find another buyer, and come delivery time, the current price was 110?

 

I'll save you the time. I also understand about short selling. And I'll grant that there are unscrupulous people who will do anything to make a buck. It happens at all levels of all industries (or commodities). I also agree with the concept of transparent transactions.

 

I'm just pointing out that it's easy to say "those evil speculators" when there were speculators who lost as much as others gained. What's lacking is the actual prosecution of those who break laws while chasing the almighty buck. That's when the adage "It's not what you know, but who you know" is proven to be true.

 

I'm playing devil's advocate in a couple of threads today, mainly trying to get some debate going that doesn't resort to name calling. Nothing bad can come from discussing differing views with respect.

 

The cynical side of me has been taught not to take one news source as the end-all be-all on any given subject. In my book, CBS News has a credibility issue. I'd like to see the same subject written about in the WSJ as well as Investors Business Daily. Then compare all three and find the truth somewhere in the middle.

 

My comments are meant to project the concept. Of course there can be winners and losers. My point is this....investors didnt pay for most of the 4 dollars per gallon gas...you did.

 

Markets are not perfect. It is governments responsibility to regulate in the interest of the general public. In my view the market has been allowed to have a free rein for too long.

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My comments are meant to project the concept. Of course there can be winners and losers. My point is this....investors didnt pay for most of the 4 dollars per gallon gas...you did.

 

Markets are not perfect. It is governments responsibility to regulate in the interest of the general public. In my view the market has been allowed to have a free reign for too long.

 

OK. I'm with you so far.

 

But can you name a time when government has regulated in the interest of the general public only? There are always ulterior motives, usually with political supporters in mind. For example, watch how the "carbon credit" industry fares in the next four years. You can say it is in the best interest of the general public, but we all know who the carbon credit crowd supported. Two birds, one stone.

 

The base of my point is that those in power will regulate to benefit their friends. Always have, always will - no matter what type of social/political ideology winds up in power.

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OK. I'm with you so far.

 

But can you name a time when government has regulated in the interest of the general public only? There are always ulterior motives, usually with political supporters in mind. For example, watch how the "carbon credit" industry fares in the next four years. You can say it is in the best interest of the general public, but we all know who the carbon credit crowd supported. Two birds, one stone.

 

The base of my point is that those in power will regulate to benefit their friends. Always have, always will - no matter what type of social/political ideology winds up in power.

 

This is not about politics, this is about the institution and principles.

 

The stock market was created to serve the public. Whether you are rich or just the average guy, there should be a level playing field. It was created based on principles which have been allowed to erode over time. If rich scheming wall street bankers get to invent the financial products and at the same time argue there shouldn't be any accountability....the little guy WILL get screwed. They could care less about fairness, it is greed on an unprecidented scale. Trust me, I know how these people think, I see it first hand. The foxes are in the coup...

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This is not about politics, this is about the institution and principles.

 

The stock market was created to serve the public. Whether you are rich or just the average guy, there should be a level playing field. It was created based on principles which have been allowed to erode over time. If rich scheming wall street bankers get to invent the financial products and at the same time argue there shouldn't be any accountability....the little guy WILL get screwed. They could care less about fairness, it is greed on an unprecidented scale. Trust me, I know how these people think, I see it first hand. The foxes are in the coup...

 

You are correct. It is about the institution and principles. It is also about politics. Regulation = Government = Politics.

 

Sad, but true.

 

Oh, and let me know if you find one of those level playing fields sometime. I'm pretty sure they don't exist.

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This story would have been a lot more appropriate last June but I'm glad to see some new reporting here. I also hope Jeffisheretoo reads the story. My main concern is the incessant need to blame everything on an institution. Last June it was the oil companies - remember the perp line-up in Congress? CBS certainly did and led with that picture on their nightly news program.

 

Now it's Wall Street. Let's blame everybody but ourselves or the sacrosanct individual in America. It is never my (his) fault. What am I getting at? Did you lock in your home heating oil prices last June because you were afraid that the prices would continue to rise? If you did, congratulations, you speculated. Well maybe I shouldn't say congratulations because you made a bet and this time, you lost. It was a speculation however. People speculate all the time. There are many members here who are speculating that the intrinsic value of their GT500s will increase sometime in the future. I haven't read the "I thought this was a 2007 2008 car" thread but I imagine there are a few people who are complaining that something has altered the supply of GT500s that they weren't expecting. We all do it. Don't you wait for a sale to buy things? Did you re-finance when interest rates were low? You were placing a bet - speculating.

 

There were many other companies besides Wall Street who were scrambling because the rise was endangering a commodity that they needed. Airlines come to mind. Was it wrong for them to buy futures or collars? Are you going to tell them that because they contributed to the speculative rise over the spring and summer, you or your representatives (Government) are not going to allow them to do this in the future and they will just have to be at the mercy of the commodity price? In a way futures are a form of insurance and are not inherently evil.

 

Finally, to say that the people had to pay for this speculative boom is misleading because booms are always followed by a bust that lowers the price artificially. In the end, it is very often a wash. These very low prices right now are partially a result of the speculators taking a drubbing and unloading their positions. Demand alone would not have caused the price to fall this much. These contracts will continue to unwind with a diminishing effect until next August adding a downward pressure on the price until then.

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Guest markham51
This story would have been a lot more appropriate last June but I'm glad to see some new reporting here. I also hope Jeffisheretoo reads the story. My main concern is the incessant need to blame everything on an institution,. Last June it was the oil companies - remember the perp line-up in Congress?

 

Last June the bubble had not burst exposing the speculators. I for one argued speculators were in the market big time.

 

Now it's Wall Street. Let's blame everybody but ourselves or the sacrosanct individual in America. It is never my (his) fault. What am I getting at? Did you lock in your home heating oil prices last June because you were afraid that the prices would continue to rise? If you did, congratulations, you speculated. Well maybe I shouldn't say congratulations because you made a bet and this time, you lost. It was a speculation however. People speculate all the time. There are many members here who are speculating that the intrinsic value of their GT500s will increase sometime in the future. I haven't read the "I thought this was a 2007 2008 car" thread but I imagine there are a few people who are complaining that something has altered the supply of GT500s that they weren't expecting. We all do it. Don't you wait for a sale to buy things? Did you re-finance when interest rates were low? You were placing a bet - speculating.

 

There is nothing wrong with speculation perse. If however certain individuals conspire to move markets illegally there is currently no way to detect this without adequate reporting. That needs to change.

 

There were many other companies besides Wall Street who were scrambling because the rise was endangering a commodity that they needed. Airlines come to mind. Was it wrong for them to buy futures or collars? Are you going to tell them that because they contributed to the speculative rise over the spring and summer, you or your representatives (Government) are not going to allow them to do this in the future and they will just have to be at the mercy of the commodity price? In a way futures are a form of insurance and are not inherently evil.

 

Commodity markets were created to allow for producers and consumers to secure markets/suppy not to facilitate price manipulation. When supply/demand fluctuates... the trading in futures allows for an orderly transition to new levels. If however, certain investment banks (Enron clones) are colluding to drive up prices then....in my opinion the markets are not functioning as designed. The only way to expose collusion is to ensure adequate disclosure from buyers and sellers.

 

Finally, to say that the people had to pay for this speculative boom is misleading because booms are always followed by a bust that lowers the price artificially. In the end, it is very often a wash. These very low prices right now a partially a result of the speculators taking a drubbing and unloading their positions. Demand alone would not have caused the price to fall this much. These contracts will continue to unwind with a diminishing effect until next August adding a downward pressure on the price until then.

 

Investment banks collapsed and had to take their money out of commodities for liquidity reasons. The high oil prices clearly helped drive the country into/further into recession as consumers spent more on transportation and less on consumer goods and housing. The high oil prices caused the car companies to quickly cut back prduction of light trucks and suvs causing them major pain. No... I dont buy that it is misleading to say we didnt pay the price for all of this!

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That is simply so wrong Markham51! The oil boom-bust did not cause this recession and in fact, has had only a very minor impact on it negative at first and now positive.

 

The real reason was the collapse of the financial institutions as a result of the sub-prime meltdown.

 

Banks and investment firms were simply looking for something to put their subprime loan backed bundled money into when they were liquidating those investments. They saw oil going up and said "maybe we can reduce some of these loses by investing in oil" It was actually a good strategy until the oil market collapsed.

 

The subprime mess that put us into this drastic financial shape is a great arguement in a weird way against regulation. In this case, the goal of providing and opportunity for SOME people who were not eligible to buy a home within the existing market rules caused the Government to change the regulations and require that a portion of the government backed mortgage money go to these individuals. I think it was a noble goal and a good regulation but like so many well - intentioned laws and regulations when enacted, caused unforseen consequences. It initiated the housing boom by introducing more demand which meant that when the inevitable foreclosures occured, they were easily paid for by the rising home values. This led the government backed agencies - Fannie Mae & Freddie Mac to expand these loans from SOME to MANY which led to more demand and more rising home prices.

 

Because regulations also depend on human behavior just like the activities they were meant to modify, they are subject to the same errors and at this point in the sub-prime story takes a bizzare twist. The number of sub-prime loans were exploding and the house prices were surging and this alarmed some people. Some proposed legislation to change the behaviour of the governmnet backed mortgage agencies. In a strange twist, the regulators (Congress ultimately) refused to regulate. The role of contributions by the agencies to the regulators should be carefully examined but never will be. In the mean time, the agencies realized that they could create derivitives backed by these mortgages and sell them to other investors. Everything was fine until the house prices slowed. They didn't have to fall, just slow enough so that they no longer covered the foreclosure expenses. From there, everything snowballed. The derivatives meant that our financial institutions were leverged and that small loses would be magnified many times. We were all ready deep into this mess when the investors fled from the mortgage securities into oil. The fate of many of the financial institutions was already sealed. And it all started with a regulation that modified a market.

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That is simply so wrong Markham51! The oil boom-bust did not cause this recession and in fact, has had only a very minor impact on it negative at first and now positive.

 

The real reason was the collapse of the financial institutions as a result of the sub-prime meltdown.

 

Banks and investment firms were simply looking for something to put their subprime loan backed bundled money into when they were liquidating those investments. They saw oil going up and said "maybe we can reduce some of these loses by investing in oil" It was actually a good strategy until the oil market collapsed.

 

The subprime mess that put us into this drastic financial shape is a great arguement in a weird way against regulation. In this case, the goal of providing and opportunity for SOME people who were not eligible to buy a home within the existing market rules caused the Government to change the regulations and require that a portion of the government backed mortgage money go to these individuals. I think it was a noble goal and a good regulation but like so many well - intentioned laws and regulations when enacted, caused unforseen consequences. It initiated the housing boom by introducing more demand which meant that when the inevitable foreclosures occured, they were easily paid for by the rising home values. This led the government backed agencies - Fannie Mae & Freddie Mac to expand these loans from SOME to MANY which led to more demand and more rising home prices.

 

Because regulations also depend on human behavior just like the activities they were meant to modify, they are subject to the same errors and at this point in the sub-prime story takes a bizzare twist. The number of sub-prime loans were exploding and the house prices were surging and this alarmed some people. Some proposed legislation to change the behaviour of the governmnet backed mortgage agencies. In a strange twist, the regulators (Congress ultimately) refused to regulate. The role of contributions by the agencies to the regulators should be carefully examined but never will be. In the mean time, the agencies realized that they could create derivitives backed by these mortgages and sell them to other investors. Everything was fine until the house prices slowed. They didn't have to fall, just slow enough so that they no longer covered the foreclosure expenses. From there, everything snowballed. The derivatives meant that our financial institutions were leverged and that small loses would be magnified many times. We were all ready deep into this mess when the investors fled from the mortgage securities into oil. The fate of many of the financial institutions was already sealed. And it all started with a regulation that modified a market.

 

 

1. I didn't say it caused it...did I? The operative word I used was "helped"...not "caused". You implied that this spike didnt hurt anything...I disagree.

 

"The high oil prices clearly helped drive the country into/further into recession as consumers spent more on transportation and less on consumer goods and housing.

 

2. I disagree with respect to your comments on the need for new regulations.

 

At the time of the bank failures there were in excess of 470 TRILLION dollars of derivatives in play worldwide while the entire output of the world economy for a year in comparison was 47 trillion dollars. Also in comparison, the TOTAL value of world stock and bond markets was only 119 TRILLION dollars. This 470 trillion dollar market is largely unregulated. It is a modern phenomina and didnt exist in its current complex form 10 years ago. It needs to have new rules. Simple as that. No amount of conservatibe dogma/short sightedness could possibly make me believe we should simply ignore this problem after having spent 700 BILLION dollars (in the US alone) to maybe fix the problem.

 

3. I will not comment on Fannie Mae etc, as my topic related to speculation in oil markets and not the housing markets.

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2. I disagree with respect to your comments on the need for new regulations.

 

At the time of the bank failures there were in excess of 470 TRILLION dollars of derivatives in play worldwide while the entire output of the world economy for a year in comparison was 47 trillion dollars. Also in comparison, the TOTAL value of world stock and bond markets was only 119 TRILLION dollars. This 470 trillion dollar market is largely unregulated. It is a modern phenomina and didnt exist in its current complex form 10 years ago. It needs to have new rules. Simple as that. No amount of conservatibe dogma/short sightedness could possibly make me believe we should simply ignore this problem after having spent 700 BILLION dollars (in the US alone) to maybe fix the problem.

 

And no amount of shrill, liberal, politically correct sturm and drang will change Barney Franks words! As much as the left is trying to divert and re-write history, the plain fact is that when this explosion in derivatives was seen by Treasury and regulations were proposed they were defeated. Leading the charge to bury the bills were Barney, Chuck and Company.

 

These are the chairman of the committees now, as they have been for the last two years. If they couldn't pass the regulations during the previous six years because they were in the minority what was stopping them for the last two years? Their new-found concern has come late and at a terrible price. They are your ultimate regulators. Forgive me, but I don't feel safe.

 

Milton Friedman was right!

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And no amount of shrill, liberal, politically correct sturm and drang will change Barney Franks words! As much as the left is trying to divert and re-write history, the plain fact is that when this explosion in derivatives was seen by Treasury and regulations were proposed they were defeated. Leading the charge to bury the bills were Barney, Chuck and Company.

 

These are the chairman of the committees now, as they have been for the last two years. If they couldn't pass the regulations during the previous six years because they were in the minority what was stopping them for the last two years? Their new-found concern has come late and at a terrible price. They are your ultimate regulators. Forgive me, but I don't feel safe.

 

Milton Friedman was right!

 

:doh:

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