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.

7 comments:

Viktor said...

Even though crude oil is now (August 6, 2008) a bit below 120 dollars per barrel, which means good news for the global economy still reeling in after being badly hit by the credit crunch. But does this mean that the commodities boom is now coming to an end? By the few months of 2008, gold reached over 1,000 dollars an ounce, now it's price just hovers below 900 dollars an ounce. Soybean, corn, and copper are now traded at a lower price compared to two months ago when crude oil reached it's record 147 dollars per barrel peak. The question now is, are the current low commodities prices good for the global economy or is just a symptom of a global economic downturn where the lower commodities prices are actually caused by falling demand?

Heidi Gail said...

Texas oil tycoon T. Boone Pickens has now showed concerns over the Bush Administration's inaction to solve America's addiction to imported crude oil. Maybe we should be asking the question whether the all-time high prices of crude oil two months ago is the crude oil conglomerates and commodities speculators' fear and panic reaction over increasing venture capital funds invested in renewable energy sources which seems to have drawn interests from the major financial magazines such as Fortune and Forbes.

Letiche said...

As of September 15, 2008 crude oil prices are firmly staying below the 100 US dollar per barrel mark. Economists around the globe pointed out that this "drastically" low price compared to Jully 2008 peak of 147 US dollars per barrel is due to the current global economic slowdown. In my opinion, crude oil has been increasingly maligned as an unsustainable energy source since the late 1980's. Not only because of it's negative side-effects to our environment during it's extraction and eventual use, but also it is not "Politically Correct" - to put it mildly - because ever increasing numbers of young men and women are used as cannon fodder just to maintain crude oil supply security. Do we have to build a "Crude Oil War Memorial Monument" before everyone of us decides to opt for sustainable energy? Or do we have to ask the Cabal at Halliburton on this.

Tallulah said...

In my opinion, we do need the Political will to move away from a crude oil-based economy. Why not used the profits earned during the July 2008 "Peak Oil" period to fund research into alternative sources of energy like more efficient and effective Photovoltaic cells and wind turbines. Or is the adverts of "Big Oil" companies like Chevron and Shell frequenting CNN and the "Beeb" (BBC) showing off their forays into alternative/renewable energy research just a load of hot air?

Sherry Rashad said...

As of November 12, 2008 crude oil prices are now below 60 US dollars per barrel. This decline is due to fall in demand due to the current global economic slowdown. Unlike back in July 2008 were speculators even resort to using everyone's pension funds and mutual funds to make crude oil prices artificially high. It did peak at 147 US dollars per barrel. The question now is, will crude prices reach 10 US dollars per barrel before the end of 2008?
P.S. Please check out my economics/finance/business related blog at http://thenoviceinvestor.blogspot.com

Gibson said...

Looks like existing Hedge Funds had failed in stabilizing crude oil trading prices. As winter season in the northern hemisphere nears, will the increased demand on heating oils for home furnaces make crude oil trading prices rise. Or is it the right time for heating fuel retailers to hedge their supplies.

Angel said...

Looks like our on-going global financial crisis eventually has the final say when it comes to crude oil prices. During the whole of February 2009, crude oil prices are staying on average three times cheaper than it used to be back in July 2008.
While gold prices seems to be very reluctant in reentering it's 2008 price peak of over 1,000 US Dollars an ounce. Many financial gurus are quite surprised about the recent strength of the US dollar.