Jun
27
An Answer for the Oil Speculators
June 27, 2008 | 3 Comments
Surfing the net has some rewards. Depending on your economic condition and your views about energy and fuels the observations that follow offer cause for fear or just fun. But reality will bite all but the most wealthy soon, and they have the most to lose. They’ll get on board when the economic shrink gets to them. High oil prices in a world without lines and rationing have to make even the most non-economically minded notice after a while.
Lots of news about speculators, all buying oil for tomorrow’s money to be delivered tomorrow in hopes the price will go higher when they can sell their contract to another for a higher price of tomorrow’s dollars. There aren’t many if any sellers of tomorrow’s oil for tomorrow’s dollars hoping that they can buy back the oil at cheaper oil prices tomorrow. The problem is that anyone with $10,000 can get control of 1,000 barrels of crude oil worth $137,000 today. That’s a 13.7 ratio of cash to benefit if you can stand the risk, which works the other way around, too.
Lots of people are playing. Ben Stein says he’s visited a room full of ex Enron traders, the guys who drove California’s electricity market to unheard of highs and left 38 million Californians holding the mega multibillion dollar bag. The business press reports an astonishing $1.3 billion dollars has been moving into commodity trading advisors each month this year, $700 million per month into commodity exchange traded funds so far in 2008. That doesn’t count the hedge funds and pension funds, real oil companies, and a wide array of businesses that need the market to level and predict costs. All that money is holding 2.6 million contracts of 1,000 barrels of just one kind of crude oil or some 2,600,000,000 barrels of West Texas Intermediate crude. I’m falling out of the chair with the fantastic aspect of that. I’m wondering how many years (decades) it takes to come up with that amount of West Texas Intermediate crude.
If that’s not strange enough, if only half of the monthly new $2 billion going in to the CTAs and CETFs is used, it would be enough to go buy another 100,000 contracts per month or the market would grow about 50% per year from this money alone. That’s where the $200 barrel oil price will come from.
There is a disaster in slow motion right now. The U.S is going through 21 million barrels of oil a day at $137 each or more than a $1 trillion per year.
That’s 15% of the U.S. Taxpayers take home pay of $6.8 trillion.
At $200 per barrel that goes to $1.5 trillion or 22% of take home pay.
That doesn’t include natural gas or coal.
The U.S. will go broke and everyone else will follow.
Not convinced?
In the past 12 months the U.S. saved in savings, CDs, money markets and mutual funds some $744 billion, about 2/3s of the oil bill and would be only half if oil gets to $200. The savings inflow for April through June of 2008 was only $35 billion down from $61 billion for the same period in 2007, down 43%. Much more oil price increase and the whole economy will go into an operating deficit that will try to draw saved money back out. Imagine what that will do to your money markets and mutual funds.
The daily Treasury Statement, the wages of all U.S. workers on payrolls were unchanged on a year to year basis during the past two weeks and rose only 1.1% annualized for the past four weeks. That compares to the 2.8% annualized rate from May. The U.S. is armpit deep into an economic contraction. As long as oil stays over $100 to $120 the economy will slow. Real wages are falling, jobs are being lost, fuels are up across the board and home prices across the nation are falling about 1% per month. That’s a lot for an economy to handle.
Is there a quick fix? Yes, just increase the margin requirements. If you have a stock trading account, you know what that is. You get to buy a stock for a percentage of the market value – the rest loaned by the broker. So if the regulators raise the margin requirement from the current 7% or so to 25% and on up as needed to drive off the flood of new money, the oil price will fall to reflect consumer demand and producer production. But, the exchanges and brokers will scream beyond belief, out in view and behind closed doors as they are just cleaning up now with all that new money and huge increase in volume.
It’s a case of who can scream loudest. I’ll bet that the oil consumers can out scream the exchanges and brokers once they figure this out. This is the guy – Walter Lukken, Acting Chairman of the U.S. Commodity Futures and Trading Commission.
Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street, NW
Washington, DC 20581
Direct line, 202-418-5014 Administration
202-418-5000
202-418-5521, fax
In addition, call and cc your member of the House of Representatives and both members of the Senate.
It’s just nuts for the economy and all of us in it to go broke in various degrees while oil traders and the OPEC and Axis of Oil thugs make incredible fortunes. Please make the calls. A few million calls and emails will leave the right impression.
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The bad news is that these index fund managers are risking money from big pension funds. If the oil bubble bursts, the pension funds are gone. Fund managers will then go crying to Uncle Sam to bail them out.
Taxpayers and consumers always pay in the end, for the fun and games of investment bankers and big money brokers. The next plane that flies into an investment house building may be piloted by an American taxpayer/consumer.
(that was a joke in very poor taste, and so is this)
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