Thursday, May 26, 2011

Wikileaks: Saudis Warned About Oil Speculators in 2007 and 2008

Kevin Hall of McClatchy wrote about Wikileaks releases showing that the Saudis were concerned about oil market speculation leading to unduly high prices in 2007 and 2008. In 2008, we wrote that the Saudis said they did not see tightness in the market, and they also warned that prices were excessive. The Wikileaks thus confirm that these statements were not just PR, to shift blame from them as the historical swing producer, but were consistent with their private communications. It was quite frustrating in 2008 to see economics commentators reject statements by numerous oil market participants that supplies were more than adequate, that the price rise was driven by speculators.

Paul Jay of the Real News Network interviewed Kevin Hall (hat tip reader Philip Pilkington):


More at The Real News

Topics: Commodities, Energy markets, Free markets and their discontents, The dismal science

Email This Post Email This Post Posted by Yves Smith at 11:32 pm

47 Comments » Links to this post

47 Comments:

  • Tao Jonesing says:
    May 26, 2011 at 11:45 pm

    Why are we talking about oil speculation that allegedly occurred in 2007 and 2008?

    The current crisis is all about deadbeat debtors who lived beyond their means and, thus, brought the economy to a standstill.

    Nothing to see here (except for those beneath us that caused all this; pay careful attention to the color of their skin and/or the fact that they have no money, which makes them total losers excommunicated from the church of neoliberalism). (Otherwise) Move along.

    • Francois T says:
      May 27, 2011 at 12:01 am

      Will assume your post was written tongue-in-cheek.

    • mock turtle says:
      May 27, 2011 at 1:05 am

      Yves

      please sanction the commenter whom im responding to

      the author appears racist and a simpleton who cant tell the difference in severity between a drug (credit) addict and the drug dealer (loan originator)… not to mention the grower that produces the heroine, the lab in Marseilles that processes it, the cartel that moves it across an ocean or continent and the gangs that control distribution…just substitute credit, for drugs and add banks, dealers in derivatives, especially swaps, etc at the appropriate places and the analogy is nearly complete.

      i realize you dont ban people for stupidity but the reference to skin color hopefully is sufficient grounds.

    • Don says:
      May 27, 2011 at 7:30 am

      Right!, And nothing to worry about Enron’s maniputlating California energy and electrical prices either. Rank speculation and screwing consumers is the best way for our large corporations to make profits!

  • Francois T says:
    May 27, 2011 at 12:00 am

    Since when the US political elites would care about the suffering brought by rapacious speculators…as long as said speculators remember to pay their dues to the politic fundraising-industrial complex, of course.

  • EmilianoZ says:
    May 27, 2011 at 12:11 am

    This is off-topic but wasn’t Wikileaks supposed to release some files about a major US bank? Assange said it would happen at the beginning of this year and we’re approaching mid-year. Is this bank more scary than the Department of State?

  • readerOfTeaLeaves says:
    May 27, 2011 at 12:25 am

    Thanks for highlighting this, Yves.
    Yet another symptom of the need for new economic thinking.

    Matt Taibbi is on this topic, as well: http://www.rollingstone.com/politics/blogs/taibblog/wikileaks-cables-show-speculators-behind-oil-bubble-20110526

  • M.G. in Progress says:
    May 27, 2011 at 1:40 am

    Well well, then you have Nobel Prize Paul Krugman that in 2008 wrote that:
    “This tells us that the rise in oil prices isn’t the result of runaway speculation; it’s the result of fundamental factors, mainly the growing difficulty of finding oil and the rapid growth of emerging economies like China. The rise in oil prices these past few years had to happen to keep demand growth from exceeding supply growth”.
    http://www.nytimes.com/2008/05/12/opinion/12krugman.html?ex=1368244800&en=c899176fff63fce4&ei=5124&partner=permalink&exprod=permalink
    http://krugman.blogs.nytimes.com/2008/05/13/more-on-oil-and-speculation/
    The Economist agreed, summing up its views with a pithy phrase, “Speculation does not drive the oil price. Driving does.”
    Few years later the question again: “Is There A Scam Behind The Rise In Oil And Food Prices?”
    In 2010 Krugman wrote:
    “Oil prices did spike to triple-digit levels in early 2008, then drop sharply. But think about the fact that right now, with the world economy still seriously depressed, oil is at $80 a barrel. This suggests to me that high oil prices are largely caused by fundamentals”. http://krugman.blogs.nytimes.com/2010/02/22/the-oil-bubble-controversy-revisited/
    Then in late 2010 and early 2011: “The increase in global demand for food and energy is likely to outpace any increase in supply”. Krugman argues “What the commodity markets are telling us is that we’re living in a finite world, in which the rapid growth of emerging economies is placing pressure on limited supplies of raw materials, pushing up their prices”.
    http://www.nytimes.com/2010/12/27/opinion/27krugman.html
    I wonder what interest would have Krugman to state the exact opposite of what oil producers themselves would admit…
    And we have not yet discussed here the clear implication of oil being priced in US$, which I believe would add more arguments to oil price set by speculators (including currency).

    • M.G. in Progress says:
      May 27, 2011 at 1:47 am

      I forgot to point to the usual Krugman’s chart to explain us that there are no signatures of speculation…
      http://krugman.blogs.nytimes.com/2011/02/07/signatures-of-speculation/
      Aren’t they cute those usual charts? Naive and wonkish…

      • Philip Pilkington says:
        May 27, 2011 at 7:35 am

        Ugh… Krugman’s graph makes me feel more than a little queasy.

        Don’t get me wrong, I often throw graphs around this comment section — but they’re almost always empirical (i.e. actually have data inputted onto them).

        Making your argument by supplying a basic supply and demand model from an undergraduate textbook is… I dunno… sort of crass. It highlights, in fact, the problem I — and I think many others — have with Krugman more generally: he’s overly confident in his own theoretical models and seems to feel it as beneath him to rub them against the facts from time to time.

        He did something similar in his commentary on Japan during the 90s and early 00s — and he basically got everything wrong. While I’m pretty sure he went back on most of that, he doesn’t seem to have learned his lesson. I guess that’s what happens when you give someone a Nobel Prize (even if it’s not a real one), their ego inflates — or, at the very least, fails to disinflate.

        The day Krugman is replaced by another ‘progressive’ economic voice will be a good day indeed — unless, of course, it turns out to be someone like deLong, who seems to have attended the same school as Krugman.

        *Breathes out* Ahhhhhh! Always feel better after a good anti-Krugman rant. Thank you Naked Capitalism for allowing me to maintain my emotional balance for the rest of the day.

        • Up the Ante says:
          May 27, 2011 at 9:20 am

          “I guess that’s what happens when you give someone a Nobel Prize (even if it’s not a real one), their ego inflates — or, at the very least, fails to disinflate.

          *Breathes out* Ahhhhhh! Always feel better after a good anti-Krugman rant. Thank you Naked Capitalism ..”

          And thank you.

          lol

    • Yves Smith says:
      May 27, 2011 at 1:48 am

      Yes, Krugman and I have a long-running row on this topic (I should be flattered that he deigns to tangle with me). It’s very clear on oil that speculation does play a role and you can explain pretty readily why the simple proofs Krugman and his ilk rely upon (inventory levels) aren’t a valid guide.

      I have not studied the mechanisms in other commodity markets to do the same job of debunking. However, in many commodity markets, hoarding can and does take place in lots of places other than official inventories. There is no centralized reporting of who holds what where, so economists’ confidence in their data is this arena is very much misplaced.

    • larry says:
      May 27, 2011 at 7:36 am

      MG in Progress:

      Here is Krugman on his graphs. I don’t know what to think about this.
      **************

      February 6, 2011, 9:25 pm New York Times
      Graph Meta

      I get questions on and off about graphs on this blog, together with suggestions and/or demands that I do something fancier.

      What you need to know is that the blog is an unpaid gig, something I do for fun and to add some backup to the columns. My support staff consists of two housecats. So I’m not going to do anything that involves hard work on appearance.

      Currently, what I mainly do is import data into Excel, use the graphing wizard to make very simple plots, resize them by eye, then snip the graphs directly as pictures I can upload. Considering how quick and dirty the procedure is, I think it comes out fairly well.

      • M.G. in Progress says:
        May 27, 2011 at 8:55 am

        Yes academic style: naive, wonkish and undergraduate…The point is when he says: look at the chart? You look at the chart and you do not see what he have concluded but just the assumption or his hypothesis. That’s a funny way to present economic arguments…

        • ambrit says:
          May 28, 2011 at 1:57 am

          Dear Hearts;
          Perhaps the cats are doing the graphing. Besides, most graphs are like most polls, only as good as their design. I wonder if there is such an animal as a “push graph?”

  • Doly says:
    May 27, 2011 at 3:00 am

    Same debate again…

    Obviously, oil prices are not driven exclusively by fundamentals or speculation, rather, they are two factors in the equation. Why don’t we put the discussion on rational levels, and discuss which percentage of oil prices each person believes is the speculation premium? Then we can see what is the average view on how much the fundamental price has risen.

    I’m assuming that everybody here knows the fundamental price must have risen, just because oil production in the last few years has been flat while demand went up, prices shoot to the sky, and still there wasn’t extra production.

    • Rex says:
      May 27, 2011 at 3:51 am

      Doly?

      New name to me. Have we ever heard you here before? What made you slide in on (pun intended) the Oil theme?

      Why don’t we put the discussion on rational levels — of why such a slug of defensive ideas for “discussion” might appear?

      • Doly says:
        May 27, 2011 at 5:05 am

        I’m a long, long time fan of Yves and frequent lurker. I can prove it: I came to see her when she got stranded in London last year when last year’s Icelandic volcanic ash paralysed flights, and she said she’d be in a pub in the City to meet her readers. She was sitting outside on something that I’m sure has a name but I don’t know it, it’s like a cane with a seat on top.

        I don’t often comment because I don’t think I have a lot to say that’s valuable. But I have been following the subject of oil prices for a long, long time, so I decided to chip in. And yes, I’m a peak oil believer and proud of it. In fact, that’s what drove me to start reading econ blogs.

        • Rex says:
          May 27, 2011 at 5:41 am

          OK, sorry, I mis-read your intent.

          Sounded to me like justification for speculation not necessarily being a current problem.

          I also can find no fault with peak oil being an inevitable issue, but as the post below states, “Peak Oil is to speculation as the Big Bang is to a very large — and premeditated — terrorist explosion that kills thousands of innocent people.”

        • nonclassical says:
          May 28, 2011 at 12:04 am

          It’s not “peak oil”-July 2004, Gretchen Morgenson documented
          NYTimes busniess editorial (Sundays) Goldman-Sachs owned 13.8%
          of total world oil “futures” market-JP Morgan and Leyman owned
          circa 7%, and other “investment banks” (deregulated-see ENRON-
          Texas Sentor Phil Gramm-wife Wendy) owned portions. Goldman
          sold off 1/3 of their total, that July-the others blinked-Goldman stated they would be buying back in, in “blended” or biodiesel…instead, in August, they sold off another 1/3. This panicked all-all sold off..just in time for November 2004 Bushit reelection..oil came down to around $2.00 a gallon..manipulated all the way.

          What these banks were doing was selling “futures” back and forth to one another, raising the price each time-this has been done since 1800′s in variety of substances-read “Wall $treet-A History”, by Geisst, who documents back to that time-also, interesting article can be perused on “Norman Goldman Show”-podcasting free, from today’s program on speculation…

          My guess is rather than driving oil prices down, as they did to help Bushit, they are driving them UP to destroy Obama-he doesn’t reelection after breaking virtually all campaign promises anyway…Russ Feingold please…

          • ambrit says:
            May 28, 2011 at 2:06 am

            On a totally revisionist note; does anyone remember the two fellows from I believe the Univ. of Montana, (or maybe the Montana School of Mines) who basically posited that the underlying (pun alert!) geology of oil bearing features were mis analyzed, and there was three or four times as much oil “down there” as had previously been deduced? Something to do with oil domes really being big waves or ripples. Some test drilling using their theory bought in new wells in previously “played out” formations I believe.
            Until someone develops an accurate way to image oil bearing formations Peak Oil Theory is going to be just that, theory.

          • petrov says:
            May 28, 2011 at 2:14 am

            Ambrit, you can be sure that if there were 3-4x as much oil down there, it wouldn’t be buried in a study done in Montana, and everyone would know about it. There wouldn’t be any development of tar sands and oil shales in Canada. And, defunct oil industries like the ones in the U.S. and Azerbajan would be pumping oil like the days of old.

    • Max424 says:
      May 27, 2011 at 4:26 am

      Good point. Here’s my take:

      Oil, today, is at $101 per barrel (rounded off). I have supply and demand accounting for 100 dollars of that, and speculation … 1 dollar.

      But I do believe, if the speculators get the right conditions, they can drive the price of oil up to $200, and possibly much higher (250? 300?), and do it in a very short time frame (8 to 15 months).

      In other words, if things go their way, speculators could easily reprise the 07-08 spike, only this time, the oil price jump-off position is sitting at a nasty 100 dollars per barrel, as opposed to the relatively benign, 55 dpb jump-off, we saw back in 07.

      The speculators (GOLDMAN!) are dastardly, and dangerous, and they need to be stopped (and thrown in jail!); but, in my opinion, our primary focus, as a reasonably intelligent species, should always be first and foremost … on the oil price jump-off position.

      We don’t want to miss the forest for the trees. In geologic time, Peak Oil is to speculation as the Big Bang is to a very large — and premeditated — terrorist explosion that kills thousands of innocent people.

    • Foppe says:
      May 27, 2011 at 6:54 am

      “I’m assuming that everybody here knows the fundamental price must have risen, just because oil production in the last few years has been flat while demand went up, prices shoot to the sky, and still there wasn’t extra production.”

      Afaik demand/consumption has been flat ever since the start of the crisis, while the prices have been bouncing all over the place.

      • nonclassical says:
        May 28, 2011 at 12:09 am

        Foppe,

        prior to Clinton there were 12 or so major oil companies. They merged several, several times, closing refineries with each closure, laying off technicians. They CREATED shortages-monopolies. Government allowed it. But it wasn’t till financial sector deregulation things quadrupled, from the circa $1.00 a gallon under Clinton..

    • JasonRines says:
      May 27, 2011 at 10:37 am

      Doly, good question on A benchmark for speculation. Back in 2008 Washington was looking into this percentage. I advised President Bush to have Chairman Bernake dry up the discount window for Primary Dealers (big investment banks) for a month to determine a benchmark. Well, Bernanke did so but only for a week. The data sample was weak with so short a duration and was 17%. Oil dropped $9 from a $100 to $91 back in March. Your welcome :)

      Washington and NYC is the cause of oil and gas speculation. It is unspoken indirect tax policy. I have heard in certain circles that this form
      of taxation while unpalatable does provide the citizen more choice than direct taxation.

      Consider that in almost all nations leaders are not forbidden to trade or own stock. The Saudi leadership did there own ‘speculating’ through ICE
      in 2008. I am not sure about now but doubt anything has changed much.

      The CFTC was ordered in 2006 to investigate commodities speculation
      and if needed, reign it in. Don’t you find it odd there really wasn’t any conclusion after five years of investigation?

    • Anonymous Jones says:
      May 27, 2011 at 4:03 pm

      Doly! Two factors in the equation! I resent your contemptible suggestion that this may be more subtle than utterly dependent upon one easily identifiable factor! What you suggest is simply impossible! Anyone who suggests that this issue isn’t obvious or simple is a hack *and* a devious liar! You disgust me!

  • Anchard says:
    May 27, 2011 at 8:42 am

    Not sure whether Yves has posted this before, but I wanted to point out that Congress held hearings into the role of speculators in both the oil/gas price spike in 2006 and the food price spike in 2007/2008. They released no findings from the food hearings (which included the famous testimony by Masters) but did conclude after the 2006 hearing that speculators had played a significant role in producing energy prices.

  • Hugh says:
    May 27, 2011 at 12:26 pm

    I’m not the Saudis but I was warning about excessive speculation in the same time frame. The games that were being then are being played now. We were both preceded by this 2006 Senate report on excessive speculation:

    http://levin.senate.gov/newsroom/supporting/2006/PSI.gasandoilspec.062606.pdf

    You can also see it for yourself. Here is a link to historical futures prices:

    http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=RCLC1&f=D

    Look at the year over year changes. Overlay big drivers for price changes: hurricanes, wars, threats of war, supply-demand, etc. What you will see is an upward movement in prices over and beyond these. Indeed for any of these drivers, you should expect that when pressure from them eases, a return to the prior baseline price. Doesn’t happen.

    • Hugh says:
      May 27, 2011 at 12:30 pm

      I almost forgot. Whether you look at the Levin-Conrad report or do your own reasearch on historical futures prices what you will find is that this excessive speculation began in 2004. Housing wasn’t the only bubble being blown back then.

  • Schofield says:
    May 27, 2011 at 1:01 pm

    Gas prices remain high because three of the appointees on the five person committee overlooking the Commodity Futures Trading Commission operations are George W. Bush appointees and they are refusing to take investigative action on suspected speculative oil trading. Goldman Sachs recognising this are currently advising clients to go back into the market on the basis that oil prices will continue to rise.

    • Hugh says:
      May 27, 2011 at 1:09 pm

      A week before that I read that Goldman was warning investors to exit commodities because they were overpriced. The one truism about Goldman advice is that it’s primary and only purpose is to help Goldman.

      • nonclassical says:
        May 28, 2011 at 12:11 am

        Hugh,

        It is in the interest of “investment banks” to make it appear
        markets are “random”-they’re not..

  • Freude Bud says:
    May 27, 2011 at 5:45 pm

    The Saudis were likely uncomfortable with the role the banks had come to play in the markets, but this also does distract from a key indicator which was moving the markets and for which Riyadh was in part responsible–OPEC spare capacity, http://www.eia.gov/emeu/steo/pub/gifs/Fig11.gif .

    The financialization of the commodities market is likely a problem, but the hue and cry regarding speculators by interested parties, like the Saudis, should be taken with a grain of salt.

    Moreover, the role of index funds and etfs in the market has been explored, but it is not clear to me that an actor that is hedging against dollar risk is speculating, though it would be categorized as a non-commercial by the CFTC.

  • SqueekyFromm says:
    May 27, 2011 at 11:44 pm

    If you think about all this “Futures” market stuff, it is like the old Droit du Seigneur stuff they supposedly have in olden days. The Lord gets first right of refusal on the bride, unless the peasant pays a fee. Here is a quote about this:

    “One hundred and fifty years later, the text had been slightly altered: in the 1543 version, written by a successor of the first editor, one reads “… and when the wedding starts, the bridegroom shall allow the sergeant to lie with his bride for the first night, or he shall buy her off with 5 pounds and 4 pennies.” (STAZ C. I 2562, [1543 AD] cf. Wettlaufer 1999: 255).

    The amount of money mentioned in both texts was affordable for a peasant, and although customals generally reflect the lords’ claims about their rights over the people under their jurisdiction, these rights must nevertheless have been accepted by the peasants. Such texts were read aloud in front of the assembled village and everybody had to agree with them.”

    http://www.fibri.de/jus/arthbes.htm

    I guess us peasants are still agreeing to it.

    Squeeky Fromm
    Girl Reporter

  • daveinboca says:
    May 28, 2011 at 2:20 pm

    As a former International Editor of the Oil Daily, I find your juvenile class-warfare analysis of oil price surges ludicrous to a ridiculous extent. I have been to a dozen OPEC meetings and know Oil Minister Naimi since forever.

    The Saudis don’t want to get the political heat from their fellow OPEC members for raising production—they didn’t mind taking the heat from GWB in ’07 & ’08 because at that time GWB’s back was to the wall politically and King Abdullah disliked other parts of his US policies in the Middle East.

    I’ve known Prince Abdul-Aziz bin Salman Al Saud for twenty years and he’s always professes to be “worried” about high prices, while he and his family rake in immense profits chuckling under their breath. The Saudis are among the world’s champion finger pointers.

    Your observations about Wall Street speculators appears to be an attempt to make one small element of a complex situation into a conspiracy. I also know Guy Caruso at CSIS & don’t know if he fully subscribes to the latest attempt to demonize Wall Street by the socialist bomb throwers led by Elizabeth Warren.

    Taibbi is a third-rate hack who thinks he’s a muckraker, but is actually dealing with raw sewage.

    I’m glad Philip Pilkington realizes that Krugman’s phony Nobel was as well-deserved as Obama’s. Krugman’s cartoons show that the NYT Op-Ed page t least has retained its sense of humor.


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