Before you read me, please read Tom Kloza, who is a real authority:
Image by DayLove via Flickr
Have you ever noticed that the anchors and analysts on CNBC talk very fast. Especially the 'money bunnies', Maria Bartiromo and Erin Burnett, they talk really fast. One reason for this rapid repartee is that they have no idea what they are talking about, and they don't want you to notice.
While this can be forgiven when applied to a financial news anchor, it is unforgivable when dished up by a sector analyst. Specifically, the energy sector experts on CNBC should be beaten with a pipe.
A horrible lie is being circulated (via CNBC in particular), stating that the current price of crude oil could be due to any number of factors; it is just not known precisely what is causing the constant rise in the price of oil. Some analysts featured by CNBC say demand is the cause, some say speculation; they are both correct, but the role that speculation via crude futures trading plays in the price of crude is being deliberately hidden from public discussion, until now. I will enlighten you.
While there is no doubt that demand has played its part, we are seeing a new dynamic in the old commodity trader's bag of dirty tricks - this is the trading of 'dry contracts'.
Are you familiar with commodities exchanges like NYMEX and CBOT? There are a lot of guys and gals standing around shouting and waving their hands. It's called 'open outcry' trading. The floor traders make a lot of dough, sometimes the companies that they work for lose money, too. In the last year, the price of a gallon of regular gasoline has increased by over one dollar, and the traders in the NYMEX pit can't make a bad trade on oil futures contracts due to several reasons: (not always part of the trader's guarantee of olde): (As I edit this David Kreutzer, Senior Bastard Liar for the Heritage Foundation, is on CNBC, saying that there is no added price premium due to speculation - will someone please slap him?)
- The folks in the trading pit are bidding on dry contracts. Let me explain: They are placing orders for crude without the requirement or ability to take delivery of the actual product. This was a perfectly acceptable practice to help wheat farmers insure liquidity, and as market lubrication for other types of seasonal agricultural commodities, with a caveat: The trader must be required to back the contract with a margin requirement (some credit worthy instrument that ensures that the trader is not just playing with funny money). If a market for corn or hogs is made, the contact holder has to pay up if they can't resell the contract at the time of expiry. The crude folks are not doing this, they are placing bets, paying nothing, and never holding the asset. wouldn't you like to do that?
What is happening now is that the regulatory branch of our government that oversees commodities trading (CFTC), is not enforcing margin requirements for traders in the NYMEX. These suits are in tight with the Bush and Cheney families, who are involved in market manipulation via straw buyers (both families), and they have twisted arms at the CFTC to overlook the fact that most traders in the pit are placing orders with no (or insufficient) credit to back-up their trades. They started a war, they sent in their friends to provide logistics, and then they had their buddies at the CFTC halt all margin requirements enforcement. What a horror.
So there is one reason why gas is so expensive - if it costs nothing to bid on a oil futures contract, there is no reason not to bid it up all you want. If you don't have to take delivery, you can buy all the contracts you want for near zero investment.
- Oh yeah, the dry part. If you can bid with no margin requirement and no need to take delivery (it's all paper or electronic) there is no limit to the amount of demand on the buy side. There will always be a buyer for the contract, until one or more domestic refiners go belly up, because they can't make a profit after distillation of the product. You will then see such outrage from our legislators who, until now, have sat on their hands and done nothing about this sad situation, all on their watch. Just like the sub-prime mess and Ethanol subsidies (we could be buying Brazilian Ethanol for 2.25 or so a gallon if not for these incompetent politicians).
- We are being screwed to the wall, and we don't have a hope to remedy the situation other than a violent political upheaval. Fat chance. Where are those tough New Englanders, the Green Mountain boys, the Farmers from Concord and Lexington?
- Traders in Crude oil futures should be required to have the ability to take delivery into storage of every drop they hold a contract on. Barring that, they should have a stringent margin requirement of at least 50% of the contract value in hard currency. Come with me to the NYMEX with clubs and let us smash some kneecaps.
We, you and I, have a more reasonable way to screw these NYMEX pit bulls and the institutional investors that give them marching orders - and it's so simple - just cut your gasoline usage by 20%. This effort of conservation will back up the supply chain, and the a-holes who are bidding up these dry contracts will have to PAY THE CONTRACT at time of expiry. It would drive them out of business, and hurt them badly.
Don't so this for any misplaced sense of environmental conscienceless, do it for spite and lower gas prices. If every commuter took public transport one day per week or more, rather than driving and sitting in traffic, or conserved in other ways, the price of gasoline would return to around $3.00 / gal.
Furthermore, the scare this would put into the NYMEX pit would be so alarming, they would virtually eliminate dry contract speculation in fear of having to cash out contracts against margin. It's in your hands, America.