The Global Oil Scam: 50 Times Bigger than Madoff

My thread on the same subject.

I know the oil issue is very complex as I have been studying the oil market and the impact on world economy. My current understanding is

1. The producers are indeed manipulating the market through the production quota system of OPEC.

2. It is highly likely that the major futures traders are also manipulating the market.

But since both of the above are largely out of US jurisdiction, I don't see what we can do other than reduce reliance on imported oil.

kamalktk said: article: scam makes $50 billion a month. GS is responsible for 60% of this since 60% of the funds involved are GS funds.

GS: $12 billion in revenue (not profit) per month according to Nasdaq.

That's proof it's a scam, because the actual profits are hidden!

Goldman Sachs is doing a great job running our legislature and executive... that they would commit crimes is preposterous.

jkimcpa said: All they need to do is reduce the reserve requirements to remove "excess speculation." 100-1 futures leverage can only lead to bubbles. That's the futures game, your suggestion would totally castrate it...Overvalued sometime, undervalued the rest... There's no way to get cheap gas, so the American public can keep dreaming/whining. If brokers want to allow their customers to leverage why not let them? Or you think brokerages need more protection?

JTFH said: Goldman Sachs is doing a great job running our legislature and executive... that they would commit crimes is preposterous.

jkimcpa said: All they need to do is reduce the reserve requirements to remove "excess speculation." 100-1 futures leverage can only lead to bubbles. That's the futures game, your suggestion would totally castrate it...Overvalued sometime, undervalued the rest... There's no way to get cheap gas, so the American public can keep dreaming/whining. If brokers want to allow their customers to leverage why not let them? Or you think brokerages need more protection?

Hey I'm all for freedom, I was just giving a suggestion on how to reduce the speculation without over-regulating and/or killing liquidity.

*I also meant increase reserve req/reduce leverage.

if you think oil is overpriced i invite you to go short it in the futures market

tante said: blueiedgod said: China is making its own natural gas out of coalhuh? how do you make natural gas out of coal? You can find natural gas in coal seams but you can't turn coal into natural gas as far as I know.Look up gasification, methanation, and liquefaction.

kamalktk said: article: scam makes $50 billion a month. GS is responsible for 60% of this since 60% of the funds involved are GS funds.

GS: $12 billion in revenue (not profit) per month according to Nasdaq.

Help me out here: I don't see where the $50 billion is from. I get the $12billion revenue.

JTFH said: Goldman Sachs is doing a great job running our legislature and executive... that they would commit crimes is preposterous.

I hope you are trying to be very sarcastic...

tante said: blueiedgod said:

China is making its own natural gas out of coal

huh? how do you make natural gas out of coal? You can find natural gas in coal seams but you can't turn coal into natural gas as far as I know.

Coal Gasification....

We just built, yet another plant for them... we have built 0 (ZERO) plants in the US!!!!

Xnarg said: blueiedgod said: ...But, we should be looking at other sources. Ethanol from switchgrass, biodiesel from soy...Biofuels cannot replace oil as a primary fuel source.

We don't have that much arable land, cheap labor, or fresh water.

Brazil is the posterchild for biofuels, and even with everything going for them - year-round growing season, cheap labor, equatorial climate, plenty of water, etc., they only offset only about 15% of their petroleum needs. They use 2MBBL petroleum per day and produce only .3MBBL, or 15% of that in ethanol.

Furthermore, the UN is on record as saying that the current push to biofuels is causing starvation throughout poor regions of the world. People are dying today because of the West's selfish indulgence with biofuels.

Some people want you to believe that it's an all or nothing.

Biofuels do not need to REPLACE Fossil fuels. Rather, it's a good start to begin offsetting the demand for Fossil fuels.

Butanol is a better alternative to ethanol. I never understood the push for ethanol unless it was to drive people to buy new cars. Butanol burns in a gasoline engine with no modification required. You can burn butanol in a 20 year old gasoline engine and it will run fine. There are some disadvantages to producing butanol vs. ethanol from the same source material, BUT the process to make butanol requires less energy and the bacterial process will still produce butanol with lower quality stock. For example, you could probably use the so called "yard waste" stream that's collected separately in many towns as a start for producing butanol. Just like any other process, once you can get it profitable, the producers will start to pump more money into making it even more efficient.

With biodiesel, you don't need to divert soy beans for the source oil. Rather, I think many academics have shown that algae is the way to go. Again, you don't need to replace the entire deisel supply overnight. Rather, since biodiesel has temperature related issues anyway, start with the supply in the southern most states.

This all or nothing attitude needs to be broken. We also need to break this mindset that new fuels require new technologies. With fuels such as butanol and biodiesel, they can be blended with existing fuel supplies and existing distribution systems. The transition can be transparent to the consumer even.

Over the last 10 years, I saw a grassroots movement of people who learned how to make biodiesel themselves, run diesel engines on straight vegetable oil, etc... I then saw changes in the laws of many states that appeared to be directed at little more than stopping them from eating into the profits of larger corporations.

tante said: blueiedgod said:

China is making its own natural gas out of coal

huh? how do you make natural gas out of coal? You can find natural gas in coal seams but you can't turn coal into natural gas as far as I know.

http://en.wikipedia.org/wiki/Fischer-Tropsch

There are reasons why African countries have trouble making a living farming. Zimbabwe has a unique one in that is run away hyper inflation.

Essentially the current construct of the world food program is a problem. The UN takes its free food stockpiles and instead of effectively distributing it to poor people of Africa. They end up either giving it to corrupt groups, warlords, corrupt bureaucrats, etc. and the food ends up on the black market at extremely low prices(as it is all profit). The farmers can't compete with those prices so they stop.

This addressed when a highly accredited person from I believe Kenya came to the UN to detail the damage that the world food program had done to there agriculture industry. Since then the world food program has tried to correct this by purchasing more food from local farmers. Trust me this wont largely work because they are picking winners and losers.

Also there is no property rights in Africa, no established law to provide security in transactions, nothing to enforce contracts, etc.

blueiedgod said:
If the people in the "poor" regions stopped making 15-20 kids per family and spent that time farming, maybe they wouldn't have been starving?

How is it that when the Zimbabweans kicked out the "occupier" farmers, all over sudden their land has become infertile? I have hard time believing that it is infertile.

If the Israelis can grow crops in the desert, I am fairly certain if the "impoverished" stopped making tons of kids and started farming, they would not have been so dependent on the hand outs from the west.

Stop making excuses for the lazy.

Either this is a good parody of certain less tactful (and even less educated) opinion shows, or this is perhaps one of the most ignorant posts I've ever read on here.

~X~

bfreeman80 said: blueiedgod said: How is it that when the Zimbabweans kicked out the "occupier" farmers, all over sudden their land has become infertile? I have hard time believing that it is infertile...
Stop making excuses for the lazy.

As someone who has started a business in a poor, developing country in Africa I can guarantee it is not laziness. If I gave you a million dollars and a thousand acres you would still fail.
Ok, maybe it's not laziness, but blue's got a valid point that the white run farms in Zimbabwe produced a lot of food effectively and the squatters who took over produce pretty much nothing. Maybe it's laziness, maybe it's incompetence, or maybe it's lack of skill, but in any case it was a pretty bone-headed decision by Mugabe and now people are starving when they didn't have to be. Of course he kept himself in charge, so what if the people he doesn't like are robbed, killed, or starve... that's just taking care of business in those parts.

Because the white farmers knew how to run a business. They had the scale that they needed to provide: A) Cost effective model for production, B) Stability and security to there foreign buyers

Mugabe took those lands diced them up(mistake one) and gave them to people that didn't know what they were doing(mistake two).

These problems would have eventually have probably still taken care of themselves if he didn't also erode a stable rule of law, didn't erode practically all of there property rights, and created hyper inflation so that nobody even wants to do business with Zimbabwe businesses.

Don't get me wrong when I say that it probably would have taken care of itself, I don't mean to say that what he did was okay. I do quite literally think that dictator should have had his d*ck cut off, killed and put on display for what he did to those people(and for what he still does). But if all he did was took the land from the white landowners and gave it to the blacks, the blacks would have just sold it back to white landowners or third parties if he didn't mess with the laws, incentives, etc. to get them to not do that.

While article appears well-researched, and parts of the conclusions could be true, here are some major points that article misses:

1. A lot of the trades on ICE is for hedging purposes: for options, for cracks, and spreads.

I think most of the people on this board know what an option is. To add to that: an options trader (either a broker who is hedging customer trades, or a speculator aka a "prop trader") often hedges the underlying aka Delta. E.g., customer buys from broker-dealer 100 options on the 3rd month oil futures contract, at the money. The broker-dealer sells this contract, and immediately hedges the Delta, which is equal to 50%, or 50 contracts. 100 contracts is a small size, and 100 contracts equals 100,000 barrels. Most of these do not result in delivery.

The option traders are consumers (airlines), producers (either corporations or countries -- most traders in oil know of a large country that routinely hedges their production), and speculators.

Cracks are contracts that are long a product or distillate (gasoline, heating oil, jet fuel, you name it), and short the crude. Cracks are an important hedging and speculative instruments. E.g., if gasoline cracks are too expensive, i.e., gasoline is priced higher relative to oil, then gasoline producers might sell their future production, locking in higher prices. In this manner, the price will come down.

Spreads refer to the temporal spreads of the same commodity. E.g., buy Dec'09 crude oil, sell Jan'10 crude. This is known the Dec-Jan spread. These are used to roll positions forward, to hedge and speculate on mis-pricings, etc.

Between options hedges, crack trades, and spreads, a huge amount of trading happens, which eventually nets out. Whether this is a good thing or a bad thing, remains to be seen. But rest assured that a lot of the trades on ICE for crude are not phantom trades: they do serve a purpose.

BTW, every crude, product, distillate and options trader has an ICE terminal, and they can instantaneously trade the most liquid instruments right on the screen.

2. Phantom trades can rarely have price impact. However, what can add price impact is assets flowing into oil. Case in point: ETFs. You have USO, DBO, DIG, DUG, etc. Some of these funds have massive AUM (assets under management), and those assets are all "contributing" to the commodities speculation. Guess what invests in those ETFs? The retail investors and the lower-end speculators. Big-time players just get an account with ICE, and trade directly on the screen. BTW, both the long and short (and their ultra versions) create trades. It does not matter that DIG and DUG are opposites. Most likely, they each have to be hedged separately, i.e., more "phantom" trades on ICE or wherever.

Also, it is now in-vogue to allocate part of assets to commodities in a long-term asset allocation framework. If, let's say, 5-10% assets are allocated to commodities, and oil gets half of it, that could add quite a bit of contracts on oil that are never delivered.

Let's say global asset-allocated funds are at 100 trillion. Increase in allocation to oil of just 1% results in 1T of funds going into oil. That, ladies and gents, WILL move the price.

So if you don't want oil prices to go up, don't buy USO, don't buy dig, don't buy commodities funds.

3. OPEC is real and OPECs pricing can have impact. Nothing can do about it. However, in the long term, OPECs aggressive pricing and supply control will hurt OPEC. It has in the past, and it will in the future.

4. Finally, folks: get real and consume less oil. It is good for you, your wallet, your environment, etc.

xerty said: Where were the cries of manipulation when all the commodity investors lost their shirts last year as oil fell from $140 to $40?You can go to my thread and look at the chart that has both oil price and total speculative long position. You can see the increase and reduction of speculative long positions proceeded the price moves consistently. Speculators in aggregate made money on both up and down trends. A huge amount of money.

Here is how the oil market works:

1. Producers collude to control production (but they don't set price);
2. Speculators set prices and create multi-year trends
3. Consumers get ripped off by high prices and high price volatilities.

You compare oil with other commodities market, you see speculators are not unique to oil. What is unique is the producers' cartel.

So far all the above are facts. Now comes the real conspiracy theory: what if the producers are also the speculators in the futures, huh? People and countries do what is best for themselves. So if you are a big oil producer country who understands the trending nature of commodities, what would you do? Think about it.

nycll said: You can see the increase and reduction of speculative long positions proceeded the price moves consistently.I took a close look at the graph you cite and speculators were exiting in early '08 ahead of the peak (missing out on profits) and also started jumping back in towards the end of '08 well ahead of the bottom (losing money as the price kept falling). I don't think in aggregate the non-commercial traders here doing so hot on market timing. In general, just because speculative long positions drop as the price falls doesn't mean they made money. That's like saying that speculative stock investors made money last year as the price fell and people fled from equities. Most likely they took a loss and bailed out.

Speculators in aggregate made money on both up and down trends. A huge amount of money.Well remember that on every futures trade there is a winner and a loser, and for every long futures contract there is a short futures contract. When the price moves up, the longs win exactly the same amount of money as the shorts lost and vis versa. So of course someone made lots of money when the oil price fell 75% but someone also lost the same large amount.

I'm not sure if there's any reasonable way for us to arbitrarily assign the label "speculator" to the parties on both sides of a trade, certainly not with what we know as outside observers. With apologies to Ambrose Bierce, perhaps I can suggest a more pragmatic definition of speculator:

SPECULATOR, n. - someone who's right about the price movement of a stock at the same time you're wrong. One who attempts to bring reason to an irrational market by risking his own money. A popular target of misguided public animosity and political regulation.

xerty said: nycll said: You can see the increase and reduction of speculative long positions proceeded the price moves consistently.I took a close look at the graph you cite and speculators were exiting in early '08 ahead of the peak (missing out on profits) and also started jumping back in towards the end of '08 well ahead of the bottom (losing money as the price kept falling). I don't think in aggregate the non-commercial traders here doing so hot on market timing. In general, just because speculative long positions drop as the price falls doesn't mean they made money. That's like saying that speculative stock investors made money last year as the price fell and people fled from equities. Most likely they took a loss and bailed out. Their exit in early 08 only made them miss the last $20 of upside, which is far smaller from the amount of money they make on the way down. In late 08 early 09 speculative longs were built back up while market continued to go down. What happened they did end up taking delivery of the oil in a contango market and stored the oil in tankers. So they made money too.

The different between what happened in oil and your stock analogy is in stocks people sold after the crash, while in oil the speculative positions were able to get up before the crash.

Well remember that on every futures trade there is a winner and a loser, and for every long futures contract there is a short futures contract. When the price moves up, the longs win exactly the same amount of money as the shorts lost and vis versa. So of course someone made lots of money when the oil price fell 75% but someone also lost the same large amount.

I'm not sure if there's any reasonable way for us to arbitrarily assign the label "speculator" to the parties on both sides of a trade, certainly not with what we know as outside observers. With apologies to Ambrose Bierce, perhaps I can suggest a more pragmatic definition of speculator:

SPECULATOR, n. - someone who's right about the price movement of a stock at the same time you're wrong. One who attempts to bring reason to an irrational market by risking his own money. A popular target of misguided public animosity and political regulation. I agree with you that speculators are often used as a convenient scapegoat in politics. In my last post, I pointed out that the real unique situation with oil market is the anti competitive suppliers cartel. But just to address your points, although there is a fuzzy line in theory, but the commodities exchanges characterize traders as either speculators or hedgers. To to answer your question, money typically move from hedgers to speculators.