Three on Oil

Three interesting posts on the current price of Oil and the forces behind it. First, from the Econobrowser:

Oil spike
Why did oil breach $138?

One key impetus certainly came from news about U.S. interest rates and the dollar. European Central Bank President Jean-Claude Trichet Thursday cautioned that the ECB may raise interest rates next month in order to contain inflation, while Friday's U.S. unemployment numbers may have put further U.S. rate cuts back on the table. The twin developments sent the dollar plunging 1.1% against the euro and the dollar price of many commodities soaring. Gold was up 2.6% and the Commodity Research Bureau Index up 3.5% (numbers from ino.com). Still, oil's 7.5% rise was clearly the Homecoming Queen.

The post goes on to talk about two leading factors:

In terms of news specific to the oil market, this story out of Saudi Arabia could be significant:

Saudi Arabia's Shura council (parliament) will hold a series of meetings over the next two weeks to discuss a controversial proposal by a key member to curb oil production to save reserves for better prices.

And this one:

Also noteworthy is an increasing likelihood of military conflict involving Iran:

An Israeli deputy prime minister on Friday warned that Iran would face attack if it pursues what he said was its nuclear weapons programme.

So it's not just the dollar weakening against other currencies. This post in the Econobrowser makes it very plain with this chart:
Click for full size.

Figure 1: Price per barrel of oil (WTI), in USD (blue),
in SDR (red), and in EUR (green).
Squares indicate values for June 6.
NBER defined recession dates shaded gray.
Sources: St. Louis Fed FREDII;
IMF International Financial Statistics;
Pacific Exchange Services;
and author's calculations. Finally, this post at The Centre for Research on Globalization:

Perhaps 60% of today�s oil price is pure speculation
The price of crude oil today is not made according to any traditional relation of supply to demand. It�s controlled by an elaborate financial market system as well as by the four major Anglo-American oil companies. As much as 60% of today�s crude oil price is pure speculation driven by large trader banks and hedge funds. It has nothing to do with the convenient myths of Peak Oil. It has to do with control of oil and its price. How?

First, the crucial role of the international oil exchanges in London and New York is crucial to the game. Nymex in New York and the ICE Futures in London today control global benchmark oil prices which in turn set most of the freely traded oil cargo. They do so via oil futures contracts on two grades of crude oil�West Texas Intermediate and North Sea Brent.

A third rather new oil exchange, the Dubai Mercantile Exchange (DME), trading Dubai crude, is more or less a daughter of Nymex, with Nymex President, James Newsome, sitting on the board of DME and most key personnel British or American citizens.

And the Money Quote (literally):

Since the advent of oil futures trading and the two major London and New York oil futures contracts, control of oil prices has left OPEC and gone to Wall Street. It is a classic case of the �tail that wags the dog.�

A June 2006 US Senate Permanent Subcommittee on Investigations report on �The Role of Market Speculation in rising oil and gas prices,� noted, ��there is substantial evidence supporting the conclusion that the large amount of speculation in the current market has significantly increased prices.�

What the Senate committee staff documented in the report was a gaping loophole in US Government regulation of oil derivatives trading so huge a herd of elephants could walk through it. That seems precisely what they have been doing in ramping oil prices through the roof in recent months.

The Senate report was ignored in the media and in the Congress.

The report can be found here (53 page PDF): Senate Report