Oil price bubble bursts

July 17, 2008

Oil prices on the international spot market which in turn is run via futures contracts on west Texas intermediate oil and north Sea Brent oil as well as oil futures on the Dubai exchange fell by more than $10 dollars a barrel over the past two days. This fall while not a guarantee suggest that the bubble has burst and we can expect somewhat lower   oil prices over the coming weeks or at least until some sort of event involving Middle eastern stability shocks traders and causes prices to rise.
In the absence of that this fall is likely to continue and with any luck in a few weeks or months oil prices should fall below $100 again.

One needs to understand that oil prices are driven by the speculative futures markets many of which operate without any regulatory oversight and involve big players from the global financial houses and banks.

A 2006 US Senate report made this point crystal clear in explaining that a substantial portion of the run up in prices was due to this speculation .
" Until recently US energy futures were traded exclusively on regulated exchanges within the United States`like the NYMEX(New York Mercantile Exchange) which are subject to extensive oversight by the CFTC,( the U.S. Commodity Futures Trading Commission) including ongoing monitoring to detect and prevent price manipulation or fraud. In recent years , however, there has been a tremendous growth in the trading of contracts that look and are structured just like futures contracts but which are traded on unregulated OTC(over the counter) electronic markets.``

This exemption ws introduced for large firms like ENRON in the Commodity Futures Modernization Act of 2000 passed by the 106th Congress.

Whereas regulated markets are set up so regulators can guage speculation and detect   , prevent and prosecute price manipulation no such oversight exists in these OTC markets. " In contrast to trades conducted on NYMEX, traders on unregulated OTC electronic exchanges are not required to keep records or file Large Trader reports with the CFTC, and these trades are exempt from routine CFTC oversight. In contrast to trades conducted on regulated futures exchanges, there is no limit on the number of contracts a speculator may hold on an unregistered OTC electronic exchange, no monitoring of trading by the exchange itself and no reporting of the amount of outstanding contracts at the end of the day. " ( United States Senate Permanent sub-committee on Investigations, 109th Congress 2nd Session, The Role of Market Speculation in Rising Oil and Gas prices:A Need to Put a Cop on the Beat; Staff Report, prepared by the Permanent sub-committee on Investigations of the Committee on Homeland Security and GovernmentalAffairs, United States Senate, Washington D.C. June 27, 2006.p.3 cited in F. William Engdahl,`"Perhaps 60 % of today's oil price is pure speculation" Global Research, May 2, 2008 www.globalresearch.ca)

What this means is that we can expect wide swings in the price level driven by headline news as speculative traders move to enhance or protect their positions.What goes up dramatically can just as easily fall down dramatically.Remember not so long ago oil was trading at under $50
a barrel. The annual average price for oil was under 51 $ a barrel in 2005 and less than 26 $ a barrel in 2004. It rose to 58 $ a barrel in 2006 and averaged 64 $ a barrel in 2007.( see the historical data at Inflationdata.com)

However, that does not mean we can abandon the effort to reduce our consumption of oil and improve the efficiency of our use of this product. There will continue to be a need for more conservation, alternative forms of energy including wind, solar and hydro generated electric power as well as major investments in improving and expanding public transportation.

Hopefully this lower trajectory for oil prices will convince monetary authorities to avoid interest rate hikes and concentrate on extracting the US   from its   current dilemma by more effective means.

In Canada, it may mean a small reduction in activity in the tar sands areas but overall one doesn't need $100 a barrel oil to make most of   these profitable. Fifty dollars a barrel will work just fine.

Perhaps the Bank of Canada will also come to accept that there is little or no risk of inflation outside the cartelized speculatively driven oil industry either now or in the near future.