Another 2Cts Opin on Oil Prices...

[motordavid]

A pretty good read to support the falling USD theory...Otoh, with
this seemingly speculative price, maybe the bubble will burst. Or,
maybe not.
BR,mD

Market MakerA Peek Behind the Price at the Pump

By NELSON D. SCHWARTZ
Published: May 11, 2008

FROM Capitol Hill to Wall Street to the campaign trail, the recent surge in oil prices is quickly threatening to supplant the mortgage crisis as the country’s leading economic issue. Last week, prices for crude set another record, finishing at $125.96 a barrel on Friday, while gasoline prices closed in on $4 a gallon.

Multimedia

Graphic Weaker Dollar, Higher Cost




But even as the presidential candidates debate whether to cut federal gas taxes this summer and legislators look at other ways to ease prices at the pump, a harder-to-control factor is emerging as a main reason behind the increase in energy costs: the sinking dollar.


While no one disputes that China and other emerging economies are craving more crude, the stunning rise of oil from $62 a year ago is hard to explain as only a matter of supply and demand. After all, analysts have noted adequate inventories.

Over the same period, the dollar has declined nearly 15 percent against the euro, and the jump in oil prices “is very much driven by the dollar,” says Roger Diwan, a managing director at PFC Energy, a consulting firm in Washington.

Simply put, buying oil has become a way for hedge funds, pension funds and other institutional investors to offset their exposure to dollar-based assets like United States stocks and bonds, Mr. Diwan says. And many traders have followed the market’s momentum, aggravating the trend.

“The problem is that the market for dollar-denominated assets is orders of magnitude bigger than the oil market,” Mr. Diwan says, so this hedging can have a disproportionate effect on oil prices. “It’s like a lake and a pond, and the lake is overflowing into the pond.”

While it’s hard to pinpoint the impact, it’s clear that money has been pouring into commodities over the last five years. In the first quarter of 2008 alone, commodity assets under management rose $30 billion, to $225 billion, according to estimates by Barclays Capital.

Much of that increase can be attributed to simple price appreciation, but five years ago, total commodity assets under management equaled just $20 billion, according to Barclays.

The dollar’s weakness isn’t affecting just oil. Other commodities that are priced in dollars — like wheat, rice and other foodstuffs — are also soaring, with ramifications felt worldwide.

“I don’t think there’s any doubt that the devaluation of the dollar is having an impact on all global commodities, including oil,” says James E. Newsome, president of the New York Mercantile Exchange, where energy and metals are traded.

While critics say that short-term investors — some would call them “speculators” — drive up prices unfairly or manipulate the market, Mr. Newsome doesn’t buy it. “The dollar has become a fundamental,” he says.

“And the floor of the exchange is littered with former funds and traders who tried to bet against fundamentals and failed.”

Based on more traditional fundamentals like the cost of finding, producing and shipping crude, oil should be in the mid-$60s, says William H. Brown III, an independent energy consultant in Chappaqua, N.Y., who monitors investment flows in the energy sector. “I’m not blaming anyone,” he says, “but this price is hard to justify.”

In Washington, however, the blame game has begun. In a speech on May 1, Senator Jeff Bingaman, the New Mexico Democrat who is chairman of the Energy and Natural Resources Committee, cited the weak dollar, as well as the role of “speculators” on commodity exchanges.

And last Wednesday, Senate Democrats proposed legislation that, among other things, would impose substantially higher margin requirements on oil traders, in an effort to dampen speculation.

That might take some air out of the overblown oil market — and help drivers more than a gas-tax holiday would this summer. But it faces fierce opposition from industry advocates like Mr. Newsome, who formerly led the Commodity Futures Trading Commission, which regulates the Nymex and other exchanges.

“The margin issue is one I’m very emotional about because it has absolutely nothing to do with the price of oil,” says Mr. Newsome, previewing arguments that are likely to dominate the debate over links between Wall Street and energy prices in the next few months.

The argument over whether traders are to blame for high energy prices has lasted for years, but it has intensified of late. Raising margin requirements — even temporarily — might be worth a try and might at least settle this dispute.

[Wagner]

"Yay Fed lower the Interest Rate......" People seem to forget that crushes the USD value...

[Quicksilver]

Everybody seems to have an answer about what the cause is. One things for sure if it keeps going up i believe people are going to make a move to relieve themselves of the burden. On the news today...... all transit systems are seeing an increase in ridership. But beyond that if people can't afford to buy gas then IMO the bubble will burst. More on my fuzzy logic later. Time for me to DRIVE to my dental appointment......

Originally Posted by motordavid

A pretty good read to support the falling USD theory...Otoh, with this seemingly speculative price, maybe the bubble will burst. Or, maybe not.

[Wagner]

Yeah I've noticed even around my way, less cars on the road and the train yard down the way runs 5 times more then it did before all of this rise went down.


I wonder how the economic bashing in the US is effecting real long term growth in India & China.......

[Tainui]

lots of mopeds in my town already too.

[AzNMpower32]

Originally Posted by Wagner

"Yay Fed lower the Interest Rate......" People seem to forget that crushes the USD value...

. Folks can be so narrow-sighted. A lot of folks don't understand that there's more than just one consequence of the Fed's actions.

[Wagner]

Yup, it is sorta simple if you break it down to what it really is. Everyone wants to blame some kind of bad oil man for the cost of oil. Try this.

- USD gets lowered be cause of Fed cuts do to poor lending practices in the USA.

- BBL of Oil is traded on the market in USD currency.

- Given the unstable housing market crushing lending institutions in the states, futures traders lean to commodities.

- At the same time, the Federal Reserve cuts rates even deeper to save the floundering US economy and what is left of the real estate market.

- Now BBL value must go up, because it is USD and USD is plummeting against the Euro and even falling against the Yen.

- BBL of oil value goes up USD wise to keep up with both an unstable US economy and poor exchange value.

- Now couple in last summers push by the US congress to have 10% Ethanol as an additive instead of MTBE.

- Now corn crops become very expense.

- As a direct result, crops/livestock become expensive, and thanks to oil prices, shipping product becomes expensive.

What do you have? Not just rich old oil men, but a generally Fd up situation that is very hard to simply 'clean up'.


And we aren't done yet, this summer congress mandates a raise in minimum wage. Take that into account with escalating food and fuel costs, you'll see a huge increase in mom & pop and even chain restaurants going under. Consumers are spending less, and all their costs are going up.....not a good scenario. Somehow this doesn't stop democrats from talking about massive social programs.....


Wagner's quick hits:

- Stop funding reconstruction in Iraq. Fund the troops all you like but all building should be paid for at least 90% with Iraqi funds including their ever expanding oil revenue reserve that they aren't touching.

- Monetary donation in the form of hundreds of millions of dollars to food aid programs are temporarily halted.

- Any home appraisal done prior to August 2006 must be honored by a lending institution that wrote the appraisal in terms of refinancing a loan. And all future loans written as of August 2008 fall under the same guidelines. Makes the real estate industry a self-cleaning oven.

- Barrel of oil is traded in the more stable Euro.

- Alaska begins getting drilled for oil.

- Congress mandates that oil industry surplus revenue greater then the industry average for the last 24 months will be used to build new refineries and infrastructure within the United States. The EPA would be forced to take a temporary back seat.

- Maximize coal utility for general power in the United States.

- Begin a course to utilize US rail systems for mass shipping needs, not truck freight carried farther then 600 miles one way.

- Begin process to create communities that create energy, via solar panels, wind, water, doesn't matter but they must give energy back at a percentage of what they consume.

- Grants for companies to come up with methods that do not use petroleum to build roads/tar/rubber.

- and the only inquiry in to price gouging congress would be doing is to why in the last 5 years, diesel fuel surpassed gasoline in cost and increases at a greater rate.

...........to be continued.............

[Tainui]

Originally Posted by Wagner

why in the last 5 years, diesel fuel surpassed gasoline in cost and increases at a greater rate.

My take on this is that when producing gasoline you produce diesel. Since gasoline production has been cut by 10% and replaced with ethanol and there was nothing to cut the diesel, the diesel market tightened up even further.

Is that right?

[Wagner]

Still if that were true, it is percentage based. What would cause the escalation to surpass gas prices, then escalate at a higher rate then gasoline?

[JCL]

Originally Posted by Wagner

Still if that were true, it is percentage based. What would cause the escalation to surpass gas prices, then escalate at a higher rate then gasoline?

Well, it could be that the basics of supply and demand are at work, meaning that production is down (since diesel production is a fixed % of gasoline for a given refinery), while demand is up. Add to that all the refinery investments to convert to low sulphur diesel in North America. It will require a step change in refinery design and construction to get a higher % of diesel per barrel of oil, which means that the sale of diesel passenger car vehicles is likely to cause further refinery revisions, with corresponding price increases. Expect diesel to continue to outpace gasoline for the next few years.