April 29, 2006

SO WE WON'T NEED TO FEEL ANY SYMPATHY WHEN THE BUBBLE BURSTS:

Trading Frenzy Adding to Rise in Price of Oil (JAD MOUAWAD and HEATHER TIMMONS, 4/29/06, NY Times)

In the latest round of furious buying, hedge funds and other investors have helped propel crude oil prices from around $50 a barrel at the end of 2005 to a record of $75.17 on the New York Mercantile Exchange last week. Back in January 2002, oil was at $18 a barrel. [...]

"Clearly the big attraction of commodity markets like oil is that they've been going up," said Marc Stern, the chief investment officer at Bessemer Trust, a New York wealth manager with $45 billion in assets. "Rising prices create interest."

This year alone, oil prices have gained 18 percent; they were up 45 percent in 2005 and 28 percent in 2004, a performance far superior to the Standard & Poor's 500-stock index, whose gains in these years have been in the single digits. And to some extent, the rising price of oil feeds on itself, by encouraging many investors to bet that it is likely to continue doing so.

"The hedge funds have come roaring into the commodities market, and they are willing to take risks," said Brad Hintz, an analyst with Sanford C. Bernstein & Company, an investment firm in New York.


Posted by Orrin Judd at April 29, 2006 12:00 AM
Comments

So what does the govt do? Speculative frenzies in other physical commodities (gold, silver) don't have as direct impact on everyday consumers and the economy as oil does. But you don't want the govt regulating the financial markets to prevent market forces from working.

The only thing I can see is to take actions to prick the speculative bubble through reducing projected demand (alternative sources) or increased projected supply (ANWR). Also a year ago the Iraq situation was being used to push prices higher, now it is the Iran situation - some resolution of that would help bring prices down also.

Posted by: AWW at April 29, 2006 9:46 AM

Just announce you're releasing the entire Strategic Preserve and the bubble would burst.

Posted by: oj at April 29, 2006 9:55 AM

Why not raise the amount of money needed to secure futures contracts so that speculators couldn't tie up so much oil with so little cash. Currently $3k in cash can purchase $67k in oil futures. The linked article explains that this has been done before.

http://www.foxnews.com/story/0,2933,166038,00.html

Posted by: Patrick H at April 29, 2006 12:30 PM

Everytime in the past that oil has spiked in price and alternative energy sources have looked more economical, the price of oil declines. Why, one reason is that a cartel controls a good percentage of the market and can set prices and outputs. When it looks like oil demand will fall as a result then the cartel lowers its prices again or pumps more oil and then again there is no incentive to pursue alternative energy strategies.

This cycle has and will repeat itself until there is the political will to break it. Brazil uses only ethanol (home grown) to fuel its fleets of internal combustion engines. It realized that if it was entirely dependent on Venezuela for oil that Brazil's economy would soon go bankrupt.

Speculators will always be with us and are a part of any commodity market. Sometimes they win and sometimes they lose and lose big.

Posted by: morry at April 29, 2006 1:17 PM

Yes and the way to take control of the cycle and flatten it is via taxes on the sale at the pump.

Posted by: oj at April 29, 2006 1:21 PM
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