Thanks GM. I'm beginning to understand, I think.

I believe you are right about the need to keep in mind how much work can be done with oil -- and how cheap it is.

How many men would it take to push a Hummer up to the top of Pike's peak? And how much would you have to pay them to do it?

'In the later stages of a bubble you can also expect to see big gains in inventory.'

You mean, like the 30,000,000 barrels of oil sitting in the Persian Gulf in tankers that the Iranian President is begging someone to purchase?

Thanks, GT. This site (TOD) is absolutely the most mind-clearing experience available at the present time. Do you suppose that Congress knows this-- and they just don't let on?

Also, as Morgan Stanley is getting into oil storage in a huge way,

it needs to be pointed out that the markets are not paying for
oil storage.

"Morgan Stanley said the fact that he was caught before he could cause even bigger losses, a la Mr. Kerviel, was a testament to its strong risk-control procedures.

Indeed, that loss may have been peanuts compared with the amount of money the firm’s electricity traders zapped into oblivion. It is not clear how much money those traders lost, but the firm’s chief financial officer, Colm Kelleher, told analysts on a conference call that the firm brought in 67 percent less money in the second quarter from commodity trading compared with the first quarter.

With the billions of dollars pouring into the commodities market, this was Morgan Stanley’s chance to shine, because it has been in the game longer than many of the newbies chasing the market.

But it seems to have fumbled the ball. While the firm said it made money trading commodities in the second quarter, it also said that a wrong-way bet on electricity prices caused a loss, which dampened the profits made in trading other commodities. Again, it is not clear how much the firm lost on electricity as it will not break out the number, but it appears to be a lot."

http://dealbook.blogs.nytimes.com/2008/06/18/morgan-stanleys-scary-tradi...

If there is a will there is a way. Wall St bankers/brokers are very good at inventing schemes to manipulate markets, especially when assisted by the Fed, Treasury, CFTC, etc. In the not so distant past we can identify...dot.com...housing...LTCM...Enron...

CITI alone has over 2,000 trading operations and companies spread all over the world. Many of these are not even named in CITI disclosures. CITI is also joined at the hip to the Fed Reserve with a money feeding tube. Purpose of said tube is life support and, hopefully, recapitalization of CITI and other Wall St Banks.

Many of CITI's trading desks and companies are OTC operations that come under the scrutiny of no regulatory agency.

If the Fed Reserve can allow large Wall St Banks to hide assets in recently created LEVEL 3, without marking them to market or taking a write down on them, then the Fed, SEC and CFTC can certainly figure out a way to game the commodities markets.

I have still to hear an explanation of why Iran has 30,000,000 barrels of oil sitting in tankers in the Persian Gulf and cannot find buyers for it. The Iranian Pres pointed this out a couple of weeks ago but it seems to have become an inconvenient truth...at least for those that say there is a shortage of oil available for sale.

GoodTower...You do not know how much oil is in storage because you cannot trust the numbers that are provided by any government about anything.

Do you really believe that US inflation is only 4.5%?...just one example. We can see the inflation in our daily lives and we know that the 'offical inflation' and 'core inflation' numbers are gamed.

Have you been to every oil storage facility in the world, personally, and totaled up all the oil in storage? If not, you do not have any idea how much oil is in storage.

Krugman points out that trading futures has no direct impact on the price of oil. As GoodTower points out, it's only those transactions that deal with actual oil that can directly impact the price.

Imagine that Joe Shmoe and Harriet Who, neither of whom has any direct involvement in the production of oil, make a bet: Joe says oil is going to $150, Harriet says it won’t. What direct effect does this have on the spot price of oil — the actual price people pay to have a barrel of black gunk delivered?

The answer, surely, is none. Who cares what bets people not involved in buying or selling the stuff make? And if there are 10 million Joe Shmoes, it still doesn’t make any difference.

Well, a futures contract is a bet about the future price. It has no, zero, nada direct effect on the spot price. And that’s true no matter how many Joe Shmoes there are, that is, no matter how big the positions are.

http://krugman.blogs.nytimes.com/2008/06/23/speculative-nonsense-once-ag...

Can you explain to me why the following hypothetical sequence of market effects could not take place?
A savvy speculator concludes that there is a coming shortage of oil, that prices are going to go up a lot.. Speculator buys oil futures on that basis. Seller of oil looks at the rise of the futures prices and says to current buyer, I want to sell at a higher price because, well, look at what I could get if I held out. Current buyer figures the demand he's reselling into is strong enough to accept the higher price, so he pays the higher price. This is speculation raising the price of oil. It works without storing oil. It works because the higher price is coming and people will still buy at that higher price. The speculator in a sense does not cause the higher price, just displaces it in time.

Correct.

Everyone has an opinion. Does anyone know or care to tell me what per cent of KSA crude production is light/sweet vs heavy/sour? If most of KSA production is heavy/sour why is the US demanding more production from them?

Here is another opinion:

...snip...'Now consider the situation today in oil markets: the Gulf, according to Mr Rothman, is crammed with supertankers chartered by oil-producing governments to hold the inventories of oil they are pumping but cannot sell. That physical oil is in excess supply at today's prices does not mean that producers are somehow cheating by storing their oil in tankers or keeping it in the ground. All it suggests is that there are few buyers for physical oil cargoes at today's prices, but there are plenty of buyers for pieces of paper linked to the price of oil next month and next year. This situation is exactly analogous to the bubble in credit markets a year ago, where nobody wanted to buy sub-prime mortgage bonds, but there was plenty of demand for “financial derivatives” that allowed investors to bet on the future value of these bonds.

In short, the standard economic assumption that supply and demand drive prices is only a starting point for understanding financial markets. In boom-bust cycles, the textbook theory is not just slightly inaccurate but totally wrong. This is the main argument made by George Soros in his fascinating book on the credit crunch, The New Paradigm for Financial Markets, launched at an LSE lecture last night. In this book Mr Soros explains how financial bubbles always start with some genuine economic transformation - the invention of the internet, the deregulation of credit or the rise of China as a commodity consumer.'...snip...

http://www.timesonline.co.uk/tol/comment/columnists/anatole_kaletsky/art...

BT-- I have no opinion, as I know nothing. But I can imagine that at $65, Congress would expect to have to exclude India, China, Western Europe, etc. By force, if necessary.

The posters on this site over the last couple of years have produced an incredibly coherent, logical explanation of the price of things. And they have refined their explanations to the point that even a total outsider can understand it with only minimal effort.

There is, of course, that minimal effort -- which many in this country seem unwilling to make.

We have seen that the demand for oil is highly inelastic, so shouldn't we assume that also applies as the price goes down?

The media focus has been on the people who bought close to the real estate peak with very little money down and were almost instantaneously underwater on their mortgages in the the first year of property value declines.

I haven't seen much media discussion about a potential second wave of pain for the people who bought 5, 4, 3 years before the real estate peak and then boosted their spending through home equity loans/home equity lines of credit.

What's going on now with the banks that bet heavily on second mortgages?

you would need to strategically and secretively acquire millions of barrels DAILY and place them somewhere (just as there were hundreds of thousands of speculative housing units continually being planned, financed, and built

Hmm. Hundreds of thousands of excess houses on hand, and storage for millions of barrels of oils needed. Does anyone else sense a business opportunity here?

The article "The Big lie" that Half Empty cites is in my opinion about the most succinct and sensable thing writen about this speculation business I recomend you read it. I quote more below with my emphasis:

"There is only one thing we can do to reduce our cost of energy and that is to stop using so much of it. In the end either the market or the government will make sure that happens since you can’t have what you can’t pay for unless you steal it without getting caught.

I will say it again: The Saudi oil ministers and OPEC are taking the opportunity divert attention from their refusal to raise output by blaming speculators for the price rise. The Saudis intend to keep the price rising because either they can’t raise production due to depletion, or won’t because their oil won’t last forever. In the end it doesn’t really matter because there is not an infinite supply of oil and we are using it like it was water."