Oil Price Manipulation: What President Obama Doesn't Understand About Oil

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If you think gasoline prices are volatile now, stay tuned. President Obama's plan to clamp down on oil speculators is going to make things worse.

I'm sure you've seen the news by now.

The president wants to clamp down on so-called "oil price manipulation" and has proposed a $52 billion plan to increase federal supervision of oil markets.

What the president doesn't understand is that the oil markets already have this function built in.

Speaking from the Rose Garden last Tuesday, President Obama noted specifically that we can't afford to have "speculators artificially manipulating markets buy buying up oil, creating the perception of a shortage and driving prices higher – only to flip the oil for a quick profit."

Evidently, the president hasn't passed Econ 101.

If he had he would know that prices on everything from eggs to houses are by their very definition self regulating.

Speculation, as opposed to manipulation, is a vital part of the markets – they are not the same thing despite the fact that the president is interchanging the terms.

If prices are too high, people stop buying. If prices are too low, they stop selling. By authorizing $52 billion in oversight, he's chasing a ghost that he'll never catch.

The Real Problem with Oil Prices

The real problem is that the United States consumes 20% of the world's crude but only produces 2%.

It comes a time when oil demand is expected to rise more than 25% (to 105 million barrels a day) by 2015, according to a new report titled Oil and Gas: A Global Outlook by Global Industry Analysts, Inc.

If you want the biggest piece of the pie from the deli, you have to pay a premium.

There is no hocus pocus and there's no additional oversight necessary. Rather, we need to enforce the laws we already have on the books.

Sure the $10 million fines he's jawboning about (up from $1 million) sound great but they're really a non-starter. In fact, given that Exxon Mobil Corporation (NYSE: XOM) alone generated an average of $1.33 billion a day in 2011, they're little more than an acceptable cost of doing business. Nice try.

Take gasoline, for example.

Prices have jumped 78.2% since the p resident took office and that doesn't sit well with the party faithful who are convinced that evil oil price speculators are responsible.

They are distraught that traders put hundreds of billions of dollars into energy every month because that may cause prices to rise.

This is not complicated. Any time there are more buyers than sellers, prices go up. Any time there is more demand than supply, prices go up.

Contrast what's going on in the oil markets with what's happening in natural gas.

Prices for natural gas are at ten- year lows. Demand has risen but supply has risen faster. There are more suppliers than buyers. So natural gas prices drop.

Natural gas, by the way, is traded by many of the same traders who trade oil.

Oil Price Manipulation, Gas Prices and the Free Market

Gasoline prices at the pump have never been proven to be a direct consequence of oil price manipulation. But it's widely conjectured.

Believe me, I hate paying more just as much as the next person, but get over it.

Geopolitical tensions, supply constrictions, war, tyrants with spigots and other buyers are the real factors at work and they always have been. When risks go up, so do prices – that's the way free markets work.

Apple didn't produce nearly 115 million iPhones and iPads in 2011 for kicks. They did it because there's huge demand for their products and they can make big bucks.

Things are just more critical now because we've failed to develop a comprehensive energy policy over the past 50 years at a time when global demand is increasing rapidly in absolute terms.

The president wants votes in an election year; this is pure political pandering.

For example, China's per capital oil consumption has increased by 350% since the early 1980s.

The International Energy Agency estimates that China alone will account for 42% of global oil demand by 2015. And they're one of the slow growers with consumption rising a mere 100% in the last ten years.

Other countries like Malaysia have seen per capita usage quadruple since the 1960s. Brazil and Thailand have seen oil demand double to 5.7 barrels/year and 4.8 barrels/year per capita.

And don't forget the weak dollar. Because oil is generally priced in dollars, Bernanke's weak zero interest rate policies are helping drive prices higher. Producers have to compensate with higher prices to make up the reduction in margin being forced upon them by greenbacks that have diminished purchasing power.

Speaking of which, the Beltway Boys, in their infinite wisdom have got it in their heads that margined trading – meaning you can borrow money to control more of the underlying asset – gives too much power to financial investors aka the speculators.

What they don't realize is that:

  • Even if you tighten up margin requirements, traders will shift to derivatives like options, swaps and other so-called exotics.
  • Higher margin requirements lead to less liquidity which, in turn, actually exacerbates the speculative volatility they're trying to control.

Think about it.

Futures markets like those which drive oil and gas prices are a function of two groups of market participants – hedgers and speculators. Those, incidentally are the CFTC's terms so don't confuse them with the politically charged versions the p resident is using.

Hedgers are farmers, importers, exporters and manufacturers who depend on consistent pricing to make, sell or otherwise produce something using oil. They participate in the markets in order to keep prices stable to protect against pricing risk. But they can only buy or sell so much. They are actually interested in delivery of the oil or gas they need.

For example, McDonald's wants to hedge against rising potato costs that could affect the profitability of its world famous f rench fries. The farmer who sells them potatoes normally wants to hedge against falling potato prices so as to maximize crop prices and his profit margin.

The position is much the same for Starbucks and coffee just as it used to be for dentists and the silver they used for fillings, for example.

Speculators, on the other hand, are those who profit from the price changes against which hedgers are trying to protect themselves. They are not interested in taking delivery.

Speculators serve a very important function in that they bridge the gap between higher and lower prices often buying and selling when hedgers can't or won't.

If speculators are taken out of the picture, prices become less liquid and more jumpy.

Instead of moving smoothly from $100 to $120 a barrel, for instance, oil prices might simply gap higher because hedgers will be forced to trade directly with each other or through intermediaries who have effectively got their financial hands tied.

This would back all the way through the gasoline refinery process to the pump.

And investors who are dumfounded by the price increases we've seen so far, may be absolutely gob fobbed when things jump $1 or more at a time. Then there really would be a link.

Shutting down speculators would be like banning ice cream delivery trucks in July.

The President is Chasing a Ghost He Can't Catch

To think that oil companies will not shift to other pricing mechanisms is naïve. If U.S. markets are restricted, traders will simply shift to London or Shanghai and conduct business as usual using new contracts structured specifically to avoid additional U.S. regulation.

They will also create trading entities that act as a proxy for the "speculators" the White House has targeted in this latest gambit.

This is exactly what many did with credit d efault s waps after the United States clamped down on them.

Why do you think funds shunted to London are at the heart of the MF Global fiasco or Goldman's most aggressive traders are located there? Because money goes where it's treated best. There are more accommodative regulations in the land of crumpets.

We don't need more regulation. We need to enforce what we have. This is another misguided political con job drawn from the well of bad ideas.

The p resident says he wants cheap gas, yet he kills the Keystone Pipeline, stymies drilling and allows the Fed to engineer a bailout of that put trillions into the system over the past four years – every dollar of which makes gas more expensive.

He says he wants to rein in speculators while not drawing a line between what constitutes legitimate speculation (as a function of free markets) and already illegal manipulation.
If anything, the f ederal government is the biggest manipulator in the history of manipulators.

Quantitative easing has done more damage to gas prices and the wallets of millions of consumers than a few speculators ever could. Frankly, it's a miracle prices aren't $10 a gallon at the pump by now.

I say let the markets work. Prosecute the true oil price manipulators but otherwise quit meddling. Piling on more regulation will only detract from economic activity, not create it.

Oh…and by the way, investors need to stay long energy especially in growing economies using more fuel.

Higher oil prices mean higher oil profits and there is a link between rising fuel consumption and GDP growth.
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About the Author

Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs The Geiger Index, a reliable, emotion-free guide to making big money and avoiding losses, and Strike Force, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.

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  1. Gary Bell | April 20, 2012

    Thanks for telling it like it is.
    It would be easy to write a new article every day about
    what President Obama doesn't know about the US Economy
    or how to be President.

    Thank You,
    Gary Bell

  2. michaelsusi@msn.com | April 20, 2012

    Thought you mik this.

  3. Clark Brozowski | April 20, 2012

    This artical should be sent to the White House staff and all Obamas advisors
    Tell them to take the basic series 3 course and they would understand how2 markets and the economy really work
    Damm Dummys

  4. James | April 20, 2012

    Right on target. The presidents liberal agenda and egotism (a sign of total immatutity to be president) gets in the way of the truth.

    • Prof. Clyde DeVore | April 20, 2012

      What is the difference between President Obama's 50 billion dollar solar photovoltaic power scam and Madoff Ponzi Scam? POLITICS

  5. Jim | April 20, 2012

    I disagree with the author. The commodities markets are mostly unregulated. I traded briefly with a group called American Atlantic. I had a broker, whose sole goal in life was to get me to give him as much money as he could extract and then ignore my buy sell orders. When I complained to the CFTC I was basically told that they could not do anything about it. I asked if there were other complaints against Atlantic and the broker. I was told there were none. Since then, Atlantic has apparently been shut down and the broker barred from trading. I contacted the group as a result of an ad in a legitimate financial newsletter just like this. The publication later told me that it did nothing to vet its advertisers. Did I do anything to stabilize the market? Hardly, I was out to make a dollar and traded in heating oil, gasoline, and gold. I lost thousands thanks to the broker who ignored my phone calls and orders. I find it interesting that this article says there is no market manipulation when there is currently running an article in Money Morning on massive manipulation of the silver market through short selling that is largely ignored and unregulated by the CFTC.

  6. Bill | April 20, 2012

    Just wondering if Kieth ever reads Dr. Kent Moors articles. I recall Dr. Moors writing at the time the Ketystone pipeline was turned down that the reason was an impossible deadline that had been imposed by the political opposition. Supposedly they knew that the required environmental considerations that were necessary in order to comply with the law, could not be completed, thus ensuring a Presidential veto. Dr. Moors also has stated that when completed (and Keystone WILL happen) it will actually add the the price of gasoline, I think Keith has been reading too many Republican ads.

    I think most people, not in the business, think of speculators as being bad, investors as good. Personally I think of speculators as being a necessary evil in order to provide liquidity.

    • Steve | April 20, 2012

      "Personally I think of speculators as being a necessary evil in order to provide liquidity."

      Now there's some three dimensional thinking! Nicely analyzed.

    • Joan Carleton | April 25, 2012

      I was wondering the same thing about whether Keith reads Kent Moors articles.

  7. zino | April 20, 2012

    Obama and Biden are the 2 most useless president & vice president to ever have been elected… Great article

  8. David | April 20, 2012

    You allege that Obama is a stupid man and doesn't understand Econ 101 about supply and demand. I think he understands Econ 101 very well.
    But then you go on to absolve him of that charge and say his words are "pure political pandering" which probably is closer to the truth. I think the President is under great pressure by the public to "do something" about gasoline pump prices. (Personally, I think this president and all presidents should stay out of this altogether.) His response to attempt to reign in oil speculators is one response he can give for public consumption. And while it may be pandering, that in no way leads to a conclusion that he doesn't understand simple economics. Like all politicians, he is not immune from public pressure.

  9. CP | April 20, 2012

    Actually, this allows the government to manipulate it, instead of the markets being allowed to "price" it. More government control of everything around us. This has to stop. This is nothing less than formation of "price controls" through the back door.

  10. fallingman | April 20, 2012

    Well said…and, taking nothing away from the article itself, what makes you think the President doesn't understand? These people aren't that stupid or ignorant. They get boatloads of money, and, uh, advice from Goldman, the Stamford hedgies, and the rest of the financial insiders who really run the government. Oh, they understand. They're just venal manipulators….con artists. As you pointed out yourself, this is pure posturing for votes.

    Attacking "speculators" is just one way you capture the moron vote and build a bigger and more powerful state. Sadly … it's probably a winning strategy.

  11. mosso09914 | April 20, 2012

    Of all the brilliant minds in this Country WHY are all the elected officials in the same camp, dah ?
    I can still see our former dah leader bush going through a check out line buying a pair of socks
    and being AMAZED about the SCANNING they used. Where had he been, dah ? As a former
    boss, I thought we had to know a little about everything ? Gov 'troffers' are seriously lacking
    but do know about THEIR paychecks. Let's hope more VOTERS WAKE UP IN NOV!

  12. Steve | April 20, 2012

    "This artical (sic) should be sent to the White House staff and all Obamas (sic) advisors"

    Gingrich has already told the White House and voters.

    A somewhat abrasive radio commentator known for artless candor identified the liberal thought pattern as a mental disorder. Unfortunately, the voting majority, insane as usual, will re-elect this arrogant despot and give him his majority in both houses. They will do this because his opponent chosen by those with the same disorder is also arrogant, out of touch, and worse yet, vapid beyond Carter and Bush 43. Most of us are destined to see this once great nation reduced to ashes from which no Phoenix can rise.

    America's demise was destined the instant voters elected leadership professing that we should become like the rest of the world.

    The best chance for America is to break into three separate geographic segments, each with its own coast and government. The middle can derive its revenue solely from exacting duty from East and West coast trade, travel and communication. The irony that East and West coast occupants should pay handsomely for the exchange of ideas now freely expressed and acted upon at the expense of the fly over people absolutely delights me. It is now completely possible for mid america to stand independent and participate in world trade because the Panama Canal is no longer under Washington control. The irony!

  13. C. Freitag | April 20, 2012

    Post onFacebook.

  14. William | April 20, 2012

    So you want me to believe the price of oil dropped from 147 to 30 in 2008 because the demand dropped dramatically? The traders had nothing to do with it? Sorry, I just don't buy it. The traders had their credit lines cut and couldn't play their game and the price plummeted. Get real.

  15. Tom Gleason | April 20, 2012

    Kieth:
    Thank you for your latest knowledgeable and thoughtful article. Another factor that affects the supply / demand equation is that, thanks to the "Green Weenies" we have fewer refineries than twenty years ago and the refineries that are left, are shut down 20% of the time due to the mandated, seasonal gasoline formula changes now required by law.

    Thank you,

    Tom

  16. Robert in Canada | April 20, 2012

    Socialists who read this article will dismiss it as right wing nonsense.

    When they add 2 plus 2 they do not get 4.

    They simply get whatever number they want to get, and they will dream up the "facts" to support it.

  17. neil | April 20, 2012

    What we really need is a more transparent market where in truck drivers and soccer moms everywhere can share the pain they feel at the pump with the perps hiding in their offices. Obama is just the only visable link they have to vent their pain. Give consumers the names and addresses of the bozos that just jumped the price of the next available barrel of oil and then let the market forces work….

  18. eric taylor | April 20, 2012

    Exxon, and others, closing down refineries, because they are not profitable, affects the price of
    gas at the pump more than speculators.

    The solar bankruptcies are because of excess competition and the cyclical nature of European
    based subsidized supply and demand. Germany's program has been more than successful, and they
    are cutting back subsidies in electric panels for for more efficient wind and thermal electric solar.
    The U.S. should only have subsidized the build out of utilities, like the German's did, not subsidizing
    loans to highly speculative venture capital firms like Solyndra.

    Better to leave oil to the markets and not chase the speculators.

  19. Scott | April 20, 2012

    A Republican must have wrote this stuff, get real, We don't believe anything you say anyway!

    • fallingman | April 23, 2012

      The word would be "written" Scott.

      It generally helps to have mastered English grammar before posting comments on the internet. It's your native language, right?

      See my comment on capturing the moron vote above.

  20. Tom | April 20, 2012

    Not only do we need the Keystone XL line last year, but why not expand the Mandan, ND refinery or add a second refinery in Williston and send refined, not crude, oil products through the line and other lines crossing ND to US markets?
    That would also guarantee a certain vote by a politician in congress from New Jersey.
    It would lead to greater energy independence.

  21. Elias | April 21, 2012

    I always read Keith's articles with great interest and respect, and in general agree with his analysis. I just have a question for him: where do you get your data on oil production? You rightly state that the US consumes 20% of the world's crude oil but only produces 2%. The US, according to the EIA and many other sources, produces some 10 million BPD, which represents about 11% of the total 87 million BPD being produced by the entire world. Am I missing something in your analysis?

  22. H Craig Bradley | April 21, 2012

    PAIN OR GAIN?

    Maybe President Obama wants to indirectly give Republican Candidate an unintended Handicap in this Nov. election by making consumers suffer more pain at the pump. Are they just dumb animals like a horse feeling the spur but not knowing WHY?? We'll find out this Fall.

    Anyway, any attempt to tamp-down speculators in commodity trading is futile in a global market. China is going to directly compete in futures markets with their very own commodity exchange. Doubtful the global price of anything will be held down by ANY American politican or financial organization. America is in decline and therefore, has less influence on the price of anything.

  23. YABRUDY | April 21, 2012

    I always read Keith's articles with great interest and respect, and in general agree with his analysis. I just have a question for him: where do you get your data on oil production? You rightly state that the US consumes 20% of the world's crude oil but only produces 2%. The US, according to the EIA and many other sources, produces some 10 million BPD, which represents about 11% of the total 87 million BPD being produced by the entire world. Am I missing something in your analysis?

  24. Gerry Straatemeier | April 22, 2012

    Drilling for oil does not assure the US increased supply and lower prices. We export more oil than we import, and we already drill far more than during the Bush years. Oil is traded on an international market, and the US does not set oil prices.

    Speculators DO add to the price of oil by hoarding it until they can sell it for more, and everyone knows it.

    Stop making this a political issue, and about the President.

  25. James A. Osmond | April 22, 2012

    Why is it out of a population of nearly 300 million ,you in the USA always with a couple of
    exceptions over the last hundred plus years, vote in a deadleg for president.?
    You will never get the right person, until a cap is placed on the amount of money that can be spent on canvassing as in the UK.

    James April 21, 2012

  26. Gashog | April 22, 2012

    Sorry but the U.S. today is a net exporter of refined products i.e. gasoline. This disproves the supply and demand theory. Gasoline is being exported because there is not enough demand for it in the U.S. and yet the price remains at near all-time highs. Drilling and producing more crude will not change the equation. The oil and gas industries continue to receive a humungous amount of government welfare. Most of the price increase in oil products is due to the shrinking dollar. Check out what Ron Paul has to say about it.

  27. Benton H Marder | April 22, 2012

    Washington firmly holds to one principle: Never let the facts get in the way of pre-conceived notions. Never, ever. Facts don't signify, period "In a world of insanity, only the insane are truly sane."

  28. Chris Wisbar | April 23, 2012

    I think Obama knows exactly what he's doing. He's just pandering for votes by taking on Big Oil. He's passing the blame for high pump prices to them and the stupid public applaud him. The average voter in this country is stupid, he knows that, and is using it to his advantage just like he did four years ago. How else would someone who had zero political experience get elected to the highest office in the country?

  29. Average Joe | April 27, 2012

    I hope somebody sends this to a mainstream TV or radio news source so the truth can get out and we can educate this president.

  30. Kevin Beck | May 6, 2012

    You have a great sense of humor, to point out that "government is the biggest price manipulator" of them all, and then to suggest that "the true oil price manipulators need to be prosecuted."

    Pot, meet Kettle.

    The agents of corruption will never prosecute their own. The history of government proves it.

  31. Jerry | June 8, 2012

    At least Obama's doing something about this. I hope the writer of this Article doesn't have a lot of oil stocks in his hand. He doesn't seem to mind paying higher gas prices. I wonder why?

  32. Frank | June 26, 2012

    So how is this working out? Oil near 18 month lows…

  33. Charles | July 15, 2012

    Is this more red meat for the Obama haters? Keith, are you a hater?

  34. william T. Owens Jr. | December 29, 2013

    I think Kieth's article is well done and informative.

    However; What he seems not to perceive or speak with authority on is a top down view of a system where natural resources (energy included) are diminishing while populations are expanding and the natives not satisfied to be RESTLESS but actively war prone.

    Our world is changing and we must determine what changes must take place to acomodate those changes.

    I don't like (as a saver) having my retirement income jerked out from under me and what I do have left shrink in value because we are printing money with just a hope and a prayer it remains accepted. It Does and will for many reasons. Obama and in fact Bernanke have done a good job of saving our asses so far. We would be further along if it were not for obstructionist Republicans. Our position today shows Keith to be off target at the time of his article. Our economy is still out of balance but improving.

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