Friday, July 25, 2008

Hedging for Crude Oil: An Unfair Leverage?

Even though the latest peak price for crude oil is still a tad under $150 before retreating a bit, this wild price swing has already done its damage to the global economy. The question now is; is the blame – like the crude – still plentiful to go around?

By: Vanessa Uy

Many factors are supposedly blamed for our current middle of 2008 high price of crude oil. From simple supply depletion (we are using up our “known” oil reserves at a rate of 8% annually at our current rate of consumption), to the “supposedly” increased demand from newly emerging economic powerhouses like China and India. Add to that the perennial issue of Geopolitical Instability thus making all of us eternally gullible to the excuses of the crude oil conglomerates’ reasons for jacking-up their prices once again. As of late, economists around the world seem to have reached a consensus that at least 60% of our current price of crude oil is due to unregulated futures speculation by hedge funds, banks, and other financial institutions. Which Capitol Hill counters yet again with a counter blame pointed squarely at OPEC and our present “Geopolitical Instability” - courtesy of the Bush Administrations’ Neo-Conservatives, Halliburton, and their ilk.

Speculation of commodities’ prices – especially crude oil – is not new. It’s been around since Wall Street opened for business. But it is always viewed by many with suspicion because it’s as far removed as a self-policing corporate entity with enlightened self-interests as it can get. Hedge funds are used in unregulated futures speculation by banks and other financial institutions using the London International Commodities Exchange (ICE) Futures and the New York Mercantile Exchange (NYMEX) futures exchanges. Add to that the uncontrolled inter-bank or “Over – the - Counter” trading to avoid regulatory scrutiny. Thus making the US margin rules of the government’s Commodity Futures Trading Commission that allows speculators – via a regulatory loophole – to buy a crude oil futures contract on the NYMEX by just having to pay 6% of the value of the contract. The “somewhat questionable” margin rules had recently fed the skyrocketing crude oil price frenzy, especially if you consider the unfair 16 –to- 1 leverage, which left us – the average consumer – holding the bag. Sadly, government regulators around the world are powerless to address the “apparent” injustice.

Luckily, this extremely large leverage of 16-to-1 that had driven our current crude oil prices to wildly unrealistic levels have been a “Godsend” to various petroleum companies and various financial institutions whether these firms admit it or not. As of late, high crude oil prices had become a valuable tool for these firms to offset financial losses incurred since the September 11, 2001 terrorist attacks and the more recent sub-prime mortgage debacle. Given the mainstream perception that “market forces” are inherently good and self-policing, does this mean that there is a “method” to this skyrocketing crude oil price “madness”? Meaning who among us in their right mind would easily assume that the multinational petroleum conglomerates would be inclined to practice corporate social responsibility every time these conglomerates’ profit margins go through the roof? - Definitely not me.

One “perceptual construct” of the GOP and oil lobbyists -run policymakers of Washington DC and also of the phobophobic mammon peddlers running Wall Street frequently used to justify our skyrocketing crude oil prices is the this “Hoax of Peak Oil”. The “Hoax of Peak Oil” is this perceptual construct of scant proof citing crude oil production has reached a point when more than half of all our global reserves have been used up. Thus forming a conclusion with no proof whatsoever that the world is already on the wrong side of the “Bell Curve” when it comes to plentiful and cheap crude. Not only is this idea been used to swindle the average consumer from our hard-earned cash but also sacrificed countless young men and women around the world in the prime of their lives in the name of “crude oil supply security”.

Many economists around the globe have now questioned the Industrial World’s inability to transition away from “petroleum incumbency”. More than half of them, are now weary that the recent speculative bubble in crude oil – which has gone asymptotic since January 2008 – is about to go pop. Sadly, crude oil might have to reach the $500 per barrel price before this bubble will burst or the “Industrialized West” embraces alternative energy – whichever comes first. Probably because of unscrupulous speculators and futures’ traders paroxysm (i.e. sudden violent emotion or action) against the increasingly rave reports on Fortune and The Economist about renewable energy – like wind and solar – receiving big time venture capital investments since 2005.

History has told us since the Exxon Valdez disaster of 1989 and the August 1990 invasion of Kuwait by Iraqi strongman Saddam Hussein that we must move on from our unsustainable “Petroleum Incumbent” transportation and energy systems with ever increasing urgency. Our crude oil addiction is just simply unsustainable. Not just in terms of preserving a healthy environment, a dynamic and equitable economy, but also of the high cost in human lives as well that the global crude oil conglomerates seem to continue to overlook.