In the latest exercise in populism, senior Democrat Senators are pushing legislation to control futures market speculation. And commentators on the Right and Left are joining the bandwagon in a hurry. “It is insane to let gamblers magnify the effect of anticipated changes in supply and demand, that may not materialize, by buying and selling oil futures,” declared FOXNews contributor Dick Morris yesterday in an email blast. “Oil is just too important strategically and economically to allow that kind of speculation.”
This focus on speculators relies entirely on the exponential increase in volumes on the futures markets. Beyond that, few facts are in the public domain, and it is doubtful if Senators Chuck Schumer and Harry Reid had any comprehensive analysis of the futures exchanges in hand prior to proposing new laws. In fact, leaving aside speculators for a moment, nobody in Washington is actually aware, with an acceptable degree of precision, of how much oil is produced or consumed on a daily basis. While output numbers are hopelessly impaired due to the lack of quality international-level audits, consumption statistics from the developing world are seriously flawed. Furthermore, the true impact of deeply embedded oil-related subsidies, in countries like India and China, has been grossly underestimated.
Adding to the sorry absence of factual applications are a few other fundamental considerations. Firstly, lawmakers and self-styled oil experts in Washington are failing to recognize, and disclose to the American voter, the huge gap between the demand, for petrochemical products on one hand and the constraints imposed by existing refining capacity other. Secondly, it is quite apparent that nobody wants to study the balance sheets of private, listed and government-owned multinationals; the fine print in the financial statements will show that strategic issues like the timing of oil exploration and oil exploitation are resolved strictly within a corporate, i.e. capitalist, framework, without any allowances being made for public interest benchmarks. By conservative estimates, well in excess of 350 million acres of oil and gas concessions around the world are presently lying dormant; this figure does not include offshore licenses or the vast resource in the Siberian hinterland.
I personally am responsible for making ongoing prices on oil and gas derivatives, and I take into a few other facts when making determinations of future prices. I take into account the fact that the most strategic of geographical locations, the Straits of Hormuz, can turn into a war zone at short notice, at the whim of Iran. I do not ignore the fact that oil flows in Africa and Central Asia are directed by corrupt governments, not be commonsense or reason. I am aware that the heavily skewed distribution of oil wealth, in Saudi Arabia and Libya for example, has created the foundations for social upheavals at some point in forthcoming years. Lastly, the developing world’s economic powerhouses can alter the oil and gas matrix quite rapidly, by simply changing subsidy rates.
So, as I am asked every day, where are oil prices headed?
Remember that my organization is neither a producer nor a consumer. Our job is to speculate, daily; a job made easier by our knowledge that there is an abundance of empty rhetoric and a paucity of facts.
But we are unable to assess the price of oil if speculators like us are driven out of the marketplace. And nobody outside the speculative arena can present a credible assessment either. It is dangerous to pass legislation founded on unsubstantiated theory.
To conclude, people like me trade in a sea of ignorance, where boldness, and the willingness to take risks, is a more durable quality than engaging in either reckless blame games or armchair intellectualism.
All that said, there is an answer, a sustainable solution: the end of private capital altogether. That solution will not only sort out oil, but also food, and poverty and marginalization.
Tags: exchange, fox, futrures, morris, oil, speculator, trader
