Monday, June 2, 2008


The events surrounding the Enron fiasco and its lessons appear to have been forgotten by many of us, including Congress. Very intelligent, calculating minds had created complicated financial derivative structures, and cultivated massively leveraged speculation in pursuit of unregulated markets. The teachings, however, were very well understood by some who currently manage vast and rapidly growing pools of capital. Though we may feel very connected to our skyrocketing cost of driving our kids to school, the Enron trials of 2004 have morphed to a faded culpability attributed to reprehensible, greedy or corrupt individuals.

An important part of the resource speculation game is the management of effective PR. The length of the game and the extent of the proceeds, are directly proportional to the impact and manipulation of public consciousness. Contrary to what we have been fed by most media and self-styled experts, price of oil has not been driven by demand. The drop in demand by oil’s primary market, the U.S., or the drop in the dollar’s value does not explain the 100% price rise of the past year. It is also not consistent with Asian demand, which though increasing, is not surging, as claimed.

The idea floated in some media, that we are nudging Peak Oil, is a canard sent against the stream of a reality that includes the substantial new finds being discovered.

The excessive greed that has been driving oil prices went out of control, and consumers have made some serious behavior modifications that are impacting consumption. This change will continue to cut use of oil and suppress price increases. The economic slowdown across America, and the rest of the oil-consuming world, will accentuate that downward pressure on demand. Suppliers, enjoying a perfect storm of revenue, will continue to reduce their production to limit the speed of the bubble’s escaping gas, as supply continues to outpace the dropping demand, particularly from oil’s biggest market.

Congress faces a challenge in its search to understand what happened, as it questions the likes of the Commodity Futures Trading Commission, (CFTC). We should not expect useful insight to be forthcoming. Oil moves and trades on the high seas in unknown quantities, and too much volume in oil futures speculation occurs offshore beyond prying eyes and oversight. Reports to and from Congress will be incomplete, and make examination and monitoring of the speculation intractable. Congress should lead the charge, and require that margin requirements be increased for commodities to that required on stocks.

Goldman Sachs recently predicted $150 to $200 per barrel prices for crude. Really? What is the purpose of this PR posit? It remains that it’s time to listen for the hissing sounds, which will be evidence of a leak in the bubble, and the eminent burst. Then $75 to $80 here we come.

1 comment:

  1. Interesting observations. Assuming that you are correct, here is my subsequent question. If Exxon Mobil is predicting $75/barrel crude as things stabilize, where is the real menace in the current landscape? Are the energy vendors/brokers making as many bucks as they can before the election?
    McCain will go after them with all he has, if he suspects unfair gouging. Obama, assuming he survives the barrage of homicidal nut cases out there, would be more of a push over - but is still very much a wild card. Exxon is all about high ROI, extreme profit (as they should be). Perhaps they are filling their war chest for leaner days ahead. Perhaps if we nudge $4.60 or $4.80 per gallon for gas, we will resolve the hydrogen powered car debate.
    My hope is that the new administration will heavily invest in our country's future. New technologies (and the pursuit of the same) create entire new industries and desirable jobs. We just have to remind the public that, like space exploration, we are putting federal money to use, not burning it. Turns of dollars could be a key ingredient in the begin of an economic turn around. This is where the Obama rhetoric is useful.
    If only Fred Thompson had stayed out of the race - my man Huckabee might still be swinging.