The accusers point to the link between the volume of transactions on the futures markets and the price of oil. Since 2004 the near tripling of trading in oil on the New York Mercantile Exchange (NYMEX), the world’s biggest market for the stuff, has neatly coincided with a tripling in the price.

What is more, investing in oil has become something of a fad. Commodities traders and hedge funds with long experience have been joined by less expert sorts, including pension funds and individuals. All this, the theory runs, is contributing to a bubble in commodities. The rush of punters betting on higher prices is begetting a self-fulfilling prophecy: it is the tide of new investment, rather than inadequate supply or irrepressible demand, that is pushing the price of oil ever higher.
Follow the oil, not the futures

This reasoning holds obvious appeal for those looking for a scapegoat. But there is little evidence to support it. For one thing, the surge in investment in oil futures is not that large relative to the global trade in oil. Barclays Capital, an investment bank, calculates that “index funds”, which have especially exercised the politicians because they always bet on rising prices, account for only 12% of the outstanding contracts on NYMEX and have a value equivalent to just 2% of the world’s yearly oil consumption.

More importantly, neither index funds nor other speculators ever buy any physical oil. Instead, they buy futures and options which they settle with a cash payment when they fall due. In essence, these are bets on which way the oil price will move. Since the real currency of such contracts is cash, rather than barrels of crude, there is no limit to the number of bets that can be made. And since no oil is ever held back from the market, these bets do not affect the price of oil any more than bets on a football match affect the result.

The market for nickel provides a good illustration of this. Speculative investment in the metal has been growing steadily over the past year, yet its price has fallen by half. By the same token, the prices of several commodities that are not traded on any exchanges, such as iron ore and rice, have been rising almost as fast as that of oil.

Speculators do play an important role in setting the price of oil and other raw materials. But they do so based on their expectations of future trends in supply and demand, not on whims. If they had somehow managed to push prices to unjustified heights, then demand would contract, leaving unsold pools of oil.

The futures market does sometimes signal that prices are likely to rise, which might prompt speculators to hoard oil in anticipation. But it is not signalling that at the moment, and there is no sign of hoarding. In the absence of rising stocks, it is hard to argue that the oil markets have lost their grip on reality.

Some claim that oil producers are in effect hoarding oil below the ground. But there is also little sign of that, either among companies or countries: all big exporters bar Saudi Arabia are pumping as fast as they can.
It takes two to contango

Despite their dismal reputation, the oil speculators provide a vital service. They help airlines and other big oil consumers to hedge against rising prices, and so to reduce risk—a massive boon amid the economic turmoil. By the same token, they provide oil producers with more predictable future revenues, and so allow them to expand more confidently and borrow more cheaply. That, in turn, should help to lower the price of oil in the long run. Any attempt to curtail speculation, by contrast, is likely to make life harder for firms and oil more expensive.

The oil price | Don’t blame the speculators | Economist.com

Given this history, and the fact that recent years have seen a huge flood of speculative money entering the commodity markets—assets in commodity indexes, by some calculations, increased twentyfold between 2003 and the spring of this year—it’s not unreasonable to wonder if there might be something nefarious behind the sharp run-up in oil prices. But there’s little convincing evidence that the oil market is being significantly manipulated. Whatever chicanery is occurring—and we can assume there is some—has only a marginal effect on prices at the pump.

Congress is not, though, just attacking illegal market manipulation; it’s also taking aim at perfectly legal speculation, namely the buying and selling of futures contracts, which are effectively bets that oil prices will go up (or down). Futures contracts can be used by oil sellers (like OPEC ) or oil buyers (like the airlines) to hedge their risks by agreeing to sell or buy oil in the future at a set price. Speculators, by contrast, mostly use futures contracts to gamble on oil prices, and have no interest in buying or selling real barrels of oil. These gambles can be tremendously lucrative, but they don’t directly determine the real (or “spot”) price of oil. That’s set by the people who are buying and selling actual barrels of petroleum. Although speculators could directly distort oil prices by turning their futures contracts into oil and then taking it off the market to drive up prices, a look at oil inventories shows no sign that this is happening.

If speculators aren’t at fault, why have oil prices spiked so high? Fundamental reasons aren’t hard to find. Between 2000 and 2007, world demand for petroleum rose by nearly nine million barrels a day, but OPEC has been consistently unable, or unwilling, to significantly increase supply, and production by non-OPEC members has risen by just four million barrels a day. The prospect of military action against Iran, which would disrupt global supply, seems greater than it did a few years ago. And the plunging value of the dollar has meant that the cost of oil has jumped more in the U.S. in the past year than it has in countries with healthier currencies.

But there’s also something else at work, which the oil guru Daniel Yergin calls a “shortage psychology.” The price of oil—more than that of many other commodities—isn’t based solely on current supply and demand. It’s also based on people’s expectations about future supply and demand, because those expectations determine whether it makes sense for oil producers to sell their oil now or leave it in the ground and sell it later. Currently, the market is assuming that oil will become scarcer, and that global demand will keep rising, especially in rapidly developing countries like China and India. As a result, producers are asking very high prices to pump their oil.

Oily Speculations: Financial Page: The New Yorker: Its Not the Speculators

President Bush and Vice President Dick Cheney have rejected findings from U.S. intelligence agencies that Iran has halted a clandestine effort to build a nuclear bomb and "do not want to leave Iran in place with a nuclear program," Hersh said.

"They believe that their mission is to make sure that before they get out of office next year, either Iran is attacked or it stops its weapons program," Hersh said. null

Report: Kicking the no-good president out of office

Thursday morning, Moscow time, four Russian government officials came to the office of my English-language newspaper, the Exile, and conducted an "unplanned audit" of our editorial content. They are carrying out an inspection of my paper's articles to see, in their words, if we have committed "violations." And they specifically asked to question me, since I'm officially listed as the founding editor-in-chief.nullnullnullnull

Fresh Intelligence : Radar Online : Press Freedom in Russia

I'm calling in an urgent request for reinforcements, before we're overrun. The eXile, my HQ since I started this column, has been sucker-punched by a bunch of squeamish bureaucrats and anonymous complainers. You know the type, the kind of people who'll poison your dog but don't have the guts to come to your door. Looks like this Fifth Column is winning, and we'll be forced to retreat from Moscow. And you know how messy retreats from Moscow can get. Ask the Little Corporal; he left the Kremlin with half a million men and came home with about enough for a high-school marching band.

THE EXILE - Save The eXile: The War Nerd Calls Mayday - By Gary Brecher - Editorial

From its very inception, The eXile has been under constant siege, always pushed to the brink of collapse by a nefarious alliance of Russian bureaucrats, aggrieved small-business owners, thick-ankled American women, thin-skinned Russian celebrities, seething Western journalists and politicians, and even members of our own staff, people whom we thought we could trust. Everyone, it seems, learns to hate us at one time or another, leaving only a small rump core to keep the flame of hatred burning. Is there a lesson to be learned in that? Yes there is: everyone but us is a worthless piece of shit. But if you’ve been reading our newspaper, you already knew that, didn’t you—you worthless piece of shit.

THE EXILE - Eleven Years of Threats: The eXile's Incredible Journey - By (Anonymous) - Feature Story

The eXile, the Moscow-based alternative paper founded by Mark Ames and Matt Taibbi — and which has been home these past few years to occasional TAC contributor Gary Brecher, the War Nerd — has been shut down by Russian authorities. The website is still up (note: some racy content, which goes for most of the links that follow, too), though, and is fighting to survive. Ames has been blogging the story of the crackdown for Radar. (More here.) And here’s the War Nerd’s plea for help.

As I said on my own blog, the eXile is as much samizdat for the West as it is for Russia. And funnily enough, a Kremlin lickspittle who recently debated Ames on air had nothing but good things to say about the Iraq War and the Western media’s failure to raise serious questions about the adventure before it began. As Ames blogs for Radar,

Those bastards!

The American Conservative -- Save the War Nerd

This is a set of dramatic high resolution photos of what is going down in Iowa.

Holy crap these people are so screwed.

Photos of the Iowa cataclysm

Oil, and the price, supply, and demand thereof, is all in the news today, thanks mainly to Bush's declaration that the US should lift its moratorium on outer shelf drilling. This has led to a groundswell of talk about oil and gasoline prices, American dependence on foreign oil (note polling methodology used), alternative fuels, and all sorts of other things.

The problem is that virtually all of this talk is rearranging deck chairs on the Titanic. Unless you're one of those crazy people who believes in the abiogenic theory of oil origin (which asserts that the Earth contains secret, unlimited supplies of hydrocarbons if you just drill deep enough; while it may be the case that some subcrustal hydrocarbons are of nonbiological origin, that fact will not somehow make their supply limitless), there's no way of escaping the fact that the amount of available oil on the planet is either fixed or increasing very slowly, and that we're drawing down that finite supply at an alarming rate. A 2007 report puts world reserves of crude oil at between 1119 and 1317 billion barrels. Meanwhile, the world consumption of oil (per OPEC in 2006) was 78.3 million barrels a day, or 28.6 billion barrels a year. That means we have between 39 and 46 years of oil left at our current consumption rate, after which we will be out.

Nonbovine Ruminations: Oil: How will we ever do without it?

So who do “the people” trust to give them economic relief? By a margin of 50 percent to 44 percent, it’s Sen. Barack Obama, according to a CNN/Opinion Research poll conducted June 3-4,

Then again, in a poll published May 30, voters said they trusted McCain over Obama on economic stewardship 47 percent to 41 percent.

How can public opinion swing so quickly?

The people are nothing if not fickle. Its a pickle!

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