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An excellent article!
The sudden crash in oil prices might be the smoking gun that shows speculation, rather than supply and demand, drove the huge run-up in oil futures last year.
Daniel Fine of the New Mexico Institute of Mining and Technology's Center for Energy Policy told participants at a forum in Albuquerque Jan. 16 that massive, speculative trading by investment banks like Lehman Brothers, hedge funds and others is what drove oil above $140 per barrel.
It created a "colossal energy price bubble," said Fine, a former MIT research associate and contributing editor on natural resources for BusinessWeek.
"Like real estate, the energy bubble was based on excessive, open credit that allowed big investment firms to instantly arrange contracts without putting anything up," Fine said. "No deposit or letter of credit was needed."
After Lehman Brothers folded in September, investigators found it held 10,000 oil contracts of 1,000 barrels each, Fine said.
Once speculative borrowing ended, oil prices plummeted to below $35 per barrel, which Fine said can't be explained by supply and demand.
"At this point, total world demand for crude has fallen just two percent," Fine said. "U.S. demand since the peak is down less than five percent. I say it's not supply or demand, it's fall out of speculation and the relative absence of credit from the financial services industry."
Bob Gallagher, president of the New Mexico Oil and Gas Association, agreed that speculation played a major role, but said current prices are too low.
"Nearly $150 per barrel was ridiculous, but so is $35 per barrel," Gallagher said. "We've got to get the speculators out and find the fine line between supply and demand. I believe the real price would be between $75 and $80 per barrel."
Forecasts vary, but Fine said most market analysts expect prices to slowly climb over the next two years to somewhere between $60 and $80 per barrel.
To minimize speculation, Fine called for tighter regulations, such as greater transparency on domestic and foreign commodity exchanges and higher margin requirements for contract deposits.
U.S. Sen. Jeff Bingaman, D-NM, supported such policies last year as chair of the Senate Committee on Energy and Natural Resources.
Bingaman spokesperson Jude McCartin said the senator will introduce new regulatory proposals this year.
"He will soon unveil energy legislation that includes measures to protect against speculation," McCartin said.
http://albuquerque.bizjournals...
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