Issue link: https://read.dmtmag.com/i/43031
WORLD FENCE NEWS • OCTOBER 2011 • 61 I am often asked to talk about the fluctuating world price of oil and how it affects prices at the pump. I often discuss supply and demand and how oil is traded as a commodity. Well there is a lot more to that story – a whole lot more. CBS-TV's program "60 Minutes" has been a reliable and informative show for decades, giving in-depth re- ports on a variety of topics. In a seg- ment aired a couple of years ago, CBS correspondent Steve Kroft showed that commodity traders – and not oil sup- ply or market demand – were respon- sible for sharp climbs in fuel prices. The broadcast was revealing and sur- prising. Over a one year period the price of oil went from $69 per barrel to nearly $150 and then in just three months col- lapsed with the stock market. Kroft re- ported, "Many people believe it was a speculative bubble, not unlike the one that caused the housing crisis, and that it had more to do with traders and speculators on Wall Street than with oil company executives or sheiks in Saudi Arabia." Kroft explained, "To understand what happened to the price of oil, you first have to understand the way it's traded. For years it has been bought and sold on the commodities futures market. At the New York Mercantile Ask the Fuel Expert BY JACK LEE, PRESIDENT/CEO, 4REFUEL INC. Exchange, it's traded alongside cotton and coffee, copper and steel by brokers who buy and sell contracts to deliver those goods at a certain price at some date in the future." Dan Gilligan is the president of the Petroleum Marketers Association, which represents more than 8,000 re- tail and wholesale suppliers, everyone from home heating oil companies to gas station owners. When 60 Minutes talked to him, Gilligan said his members were get- ting blamed for gouging the public, even though their costs had also gone through the roof. He told Kroft the problem was in the commodities mar- kets, which had been invaded by a new breed of investor. Gilligan said these investors don't actually take delivery of the oil. "All they do is buy the paper, and hope that they can sell it for more than they paid for it. The volatility is being driven by the huge amounts of money and the huge amounts of leverage that is going into these markets." About the same time, hedge fund manager Michael Masters reached the same conclusion. Masters' expertise is in tracking the flow of investments into and out of financial markets and he no- ticed huge amounts of money leaving stocks for commodities and oil futures, most of it going into index funds, bet- ting the price of oil was going to go up. When 60 Minutes asked who was buying this "paper oil," Masters told Kroft, "The California pension fund. Harvard Endowment. Lots of large in- stitutional investors. And, by the way, other investors – hedge funds, Wall Street trading desks, sovereign wealth funds – were following right behind them, putting more money in the fu- tures markets as well. And that was driving the price up." In a five-year period, Masters said the amount of money institutional in- vestors, hedge funds, and the big Wall Street banks had placed in the com- modities markets went from $13 bil- lion to $300 billion. In 2010, 27 barrels of crude were being traded every day on the New York Mercantile Exchange for every one barrel of oil that was actually being consumed in the United States! CBS News points out, "A recent report out of MIT, analyzing world oil production and consumption, also con- cluded that the basic fundamentals of supply and demand could not have been responsible for large run-ups in oil prices. And Masters says the U.S. Department of Energy's own statistics show that if the markets are working properly, the price of oil should re- cently have been going down, not up. "From quarter four of '07 until the second quarter of '08 the EIA – the Energy Information Administration – said that worldwide supply went up. And worldwide demand went down," he said. "So you have supply going up and demand going down, which generally means the price is going down," Mas- ters told Kroft. "So you had the largest price increase in history during a time when actual demand was going down and actual supply was going up during the same period. However, the only thing that makes sense that lifted the price was investor demand." Is there price manipulation by these huge investors? Gilligan told Kroft, "I can't say. And the reason I can't say is because nobody knows. Our federal regulators don't have access to the data. 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