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downwithmonstercable
January 12, 2009 9:35 PM
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Awesome post Ben! I love this kind of stuff. Now if I wasn't at work, I could watch the video...

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kathyl
January 12, 2009 10:02 PM
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@Ben Popken: Well now, that is just full service. Insta-transcript! :)

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wagenejm
January 13, 2009 3:40 PM
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@kathyl: I can't afford full service! That's an extra 50 cent a gallon!

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gqcarrick
January 12, 2009 9:37 PM
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Wow, what a bunch of jackasses. Lets all get rich while the average Joe has to pay $4 a gallon. Oh don't worry, those average joes will just bail us out if we get caught doing it! All those speculators and anyone from Enron should be dropped from a plane with no parachute.

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im.thatoneguy
January 13, 2009 6:53 AM
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@Oranges w/ Cheese:
Wait one second... are you suggesting we *couldn't* have just drilled in ANWR and dropped prices? That increasing global supply by 0.5% would have reduced prices by 200%!?


I feel so used... and misled... :(


Surely there was no way any of us could have seen this outcome coming!
;)

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BlackMage is doing the Time Warp agaaaaaaain!!!
January 13, 2009 1:12 PM
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@BlackMage is doing the Time Warp agaaaaaaain!!!: Damn, we need a DELETE OR EDIT POST BUTTON!!!

Anyway back on topic. You are completely wrong. The answer to the \"oil problem\" is drilling in the Gulf of Mexico. Nevermind that it's one of the most treacherous places to drill due to hurricanes, oil companies lose millions every year from sinking drilling platforms, and the pitiful influx of oil would be roughly equivalent to destroying wildlife sanctuaries in Alaska.

McSame, I mean, McInsane, I mean McCrap, you know who I mean... He said it would work so why not believe an \"expert\" such as McCain (damn, I got it wrong)?!

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Tiber
January 13, 2009 6:01 PM
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@BlackMage is doing the Time Warp agaaaaaaain!!!: But what about the magic construction processes that allow offshore rigs to be built faster the more people talk about drilling?

(I hope I got the right episode. I can't be 100% without sound. Also, skip to about 2:20 or so.)

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huadpe
January 12, 2009 9:38 PM
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Yeah, also here on being stuck re: video. But doesn't this make a point that the speculators were incredibly dumb on a macro scale? Intentionally making a speculative bubble is a fantastic way to go bankrupt. And they did go bankrupt.

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tomok97
January 12, 2009 9:42 PM
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@huadpe: But if you know you're creating one, doesn't that mean you can bail at just the right time?

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failurate
January 12, 2009 9:46 PM
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@tomok97: It wasn't their money filling that bubble. The players still got their bonuses and salaries and commissions and what not.

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wagenejm
January 13, 2009 3:46 PM
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@failurate: Just remember, soap bubbles wash you clean, and when they pop the soap goes down the drain, and you're still left clean.

A bubble of investors still pays you real money, and when the bubble pops, the investors go down the drain and you're still left with their money.

Enron executives didn't care if their company or anyone else went bankrupt, because the individuals making the money still made the money regardless. It was the perfect end to a perfect ride, because you can then just say it was the company's fault, not yours.

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Dullboy30
January 13, 2009 1:18 PM
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@failurate:
That is the main problem with the business models used by the IBs; it is all geared toward rewards for for 1-year performance, screw the long-term implications.

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dangermike
January 12, 2009 9:43 PM
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eh, they didn't really do a very good job in their report. Check out this link for a little more detail:

[www.ritholtz.com]

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Oranges w/ Cheese hates what Christmas has become
January 12, 2009 9:44 PM
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Yay de-regulation and Enron in the same sentence. Woohoo Capitalism failures! Woo!

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sebadoh128
January 12, 2009 9:48 PM
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Speculators, the parasites of capitalism.

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Notsewfast
January 12, 2009 9:57 PM
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@sebadoh128:

I think that is unfair, businesses are financed and the entire stock market runs on speculation. If everyone only spent money on sure things, their profit would be zero. Speculation is what makes capitalism capitalism. If all demand was assured to be met by exact quantities of supply, that would, in fact be socialism.

Entrepreneurs speculate when they spend money on a business in hopes that demand for their products will rise.

While leveraged speculation may be stupid, its just a more extreme version of what normal market participants do every day.

Look at it this way: the speculators made bets and bought at extremely risky prices that were obviously unrealistic and they were rewarded with a crash in the market. Order was restored and their returns matched their risk.

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mac-phisto
January 13, 2009 12:11 AM
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@Secret Agent Man: i tend to agree with you - speculation as a whole isn't a bad thing (the 18-yr old that dabbles in penny stocks is speculating, isn't s/he?).

the problem as i see it is primarily with these swap dealers that were trading outside of the regulated marketplace, where no one was watching. i wish i could remember the exact statistics...something like 4 out of every 5 contracts was held by one of a small group of swap dealers & at the peak, 4 dealers held 30-40% of the contracts on the marketplace.

there are controls within the marketplace to stop this concentration of power, but when most trading is occurring outside this marketplace, how can you hope to keep it regulated?

kill the swap markets or place them under the authority of the CFTC. & then put some people in charge of the CFTC that are actually going to do their job.

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sebadoh128
January 12, 2009 10:21 PM
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@Secret Agent Man:


Okay. How about:


Leveraged speculators, the parasites of capitalism?

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Notsewfast
January 12, 2009 10:43 PM
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@sebadoh128:

I'll go with you on that one, with the rare exception here or there.

@Oranges w/ Cheese: Trust me, nobody hates the bank bailouts more than me. I think depositors assets should be protected, but company names, buildings, and executives should be left for the wolves. The problem is that our legislators have mistaken 'preserving confidence' for 'preserving our friends'.

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Oranges w/ Cheese hates what Christmas has become
January 12, 2009 10:04 PM
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@Secret Agent Man: Oh and also, most of their \"risk\" is now nil as they're getting forkloads of money from the government (IE, our tax money. Yay)

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Oranges w/ Cheese hates what Christmas has become
January 12, 2009 10:03 PM
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@Secret Agent Man: Aha, I see you hit the nail on the head:

...the entire stock market runs on speculation. If everyone only spent money on sure things, their profit would be zero...

Now, maybe if Capitalism != Greed we'd get somewhere.

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Super Moose
January 12, 2009 9:57 PM
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My paper at the end of last semester in one of my classes Economics 310- Money and Banking, was basically the same report. A lot of people had been yelling about this for years and no one listened.

I'm all for Capitalism %110 but Colbert said it best \"If we have Rational Self Interest then why do we need traffic signs?\"

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dangermike
January 12, 2009 11:15 PM
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@Super_Moose: Organization. Our rational self interest tells us to obey those signs.

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wagenejm
January 13, 2009 3:52 PM
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@TechnoDestructo: Agreed, the point is that our rational self interest should tell us to not drive like maniacs. Traffic signs are literally seen as what we can get away with doing without repercussions. That's why when the speed limit sign raises the limit from 35 to 45, everyone floors it to get to 50 as fast as they can.

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dumblonde
January 12, 2009 10:01 PM
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Oh I love these situations. When I just get to rub it in people's faces that what I've been telling them for a year is right.
It's so obvious it was speculation and the oil bubble had to burst at one point or another. But now prices are below market so expect them to stabilize by going much higher than they are but still well under $100.

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Oranges w/ Cheese hates what Christmas has become
January 12, 2009 10:28 PM
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@dumblonde: Don't worry, somehow they'll manage to make gas prices go above $3 with oil under $30 a gallon.

So far its working. $2 prices here, lowest oil prices in decades.

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RurouniX
January 12, 2009 10:02 PM
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Great video...very informative. Thanks!

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nighttrain2007
January 12, 2009 10:05 PM
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Because 60 Minutes is the end all answer to everything. Let's blame it on capitalism...woohoo!! OTOH, we could look at actual reasons as explained by Austrian economics, for example [mises.org] or [mises.org]

But heck let's stick with the answer from the lot who advocates Keynesian spending to get us out the current depression, that's much wiser....

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David Brodbeck
January 12, 2009 10:35 PM
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@nighttrain2007: Economics is as bad as religion. For every group of economists that says one thing, you can find another that says the exact opposite. The Dismal Science, indeed.

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theodicey
January 12, 2009 10:58 PM
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@David Brodbeck: For every group of economists that says one thing, you can find another that says the exact opposite.

True, but there's no-one more fundamentalist and cultlike than Austrian school devotees. Keynesians usually just say that he was an extremely bright and original thinker. Austrian worshippers on the Internet believe Hayek, von Mises and RON PAUL! are true gods among men.

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nighttrain2007
January 13, 2009 2:18 PM
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@theodicey: No we just don't take the word of men whose policies have been proven time and again NOT to work (see Keynes' great experiment during the 1930s...)

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QADude
January 12, 2009 10:05 PM
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Wow - what a video. It pretty much verifies what I had believed for a long time.

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Applekid
January 12, 2009 10:07 PM
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But but but... I thought it was Bush's fault!

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Dethzilla
January 12, 2009 10:10 PM
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It makes so much sense now...


Since our Government failed to protect us... Should we all get a per car rebate back on the gas we purchased during that time since prices were illegally raised...


...or was it technically legal?

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Bill Blasky
January 12, 2009 10:49 PM
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@Dethzilla: there is nothing illegal about it, it's called economics, supply and demand caused the prices to rise. However the prices were not based on oil, which was in high supply and low demand; the prices were based on pieces of paper that represented oil, which people went crazy over (to put it in the most simplest terms)

think along the lines of crazy christmas walmart shoppers in NY and the government is the one dude at the door

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Robert Stevens
January 13, 2009 6:19 PM
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@Bill Blasky:

Not quite. Think of the government as the Walmart manager and employees who somehow failed to foresee the flood of crazy walmart shoppers and thus failed to regulate them beforehand or stop them during their rush, and the average consumer paying $4/gallon as the one dude at the door.

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theutopian
January 12, 2009 10:10 PM
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This explanation makes my head hurt.

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sega8800
January 12, 2009 10:14 PM
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ok, now we know that we, the people around the world were fooled, is there anything in the work that can refund us? if not, this does nothing, only made me even more angry.

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Saboth
January 12, 2009 10:17 PM
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I'm not even that savvy, but this exactly what I suspected was happening. Demand was down, supply was up, and prices kept rising insanely.

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Robert 'Rc' Hall
January 12, 2009 10:20 PM
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you just got to love how they will jack prices up to make large profits but as soon as they crash its the people theyve ripped off that they want to give them a bail out

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lodleader
January 12, 2009 10:25 PM
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congrats CBS on sitting on this story for over a year!

Stay classy!

/s

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razremytuxbuddy
January 12, 2009 10:37 PM
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Steve Kroft has no credibility with me.


Semgroup is an example of a speculator who went bankrupt in July, which in effect, sucker-punched the midcontinent oil and gas producers, employees and local economies even before the oil and stock market prices collapsed. Semgroup's official explanation was that their hedging strategy failed. They were betting that prices were going to fall, but couldn't hold onto their position quite long enough to see it happen. The problem with this explanation is that it's not \"hedging\" when you bet the company on it, as Semgroup did. Furthermore, Semgroup was gambling with other peoples' money. The SemGroup debt numbers are staggering, and the creditors range from individual mom & pop landowners who are owed a few thousand dollars each, to $159 million owed to BP.


[www.semgrouplp.com]

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bohemian
January 12, 2009 10:38 PM
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I would like to see the people who were heavily involved in doing this to be rounded up in Central Park or the plaza in DC so we can all throw rocks at them.

I have been saying it was speculation for a long time, glad to be right.

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ALP5050
March 10, 2010 2:44 AM
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It wasn't speculation. It was supply and demand.

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Anonymous
January 12, 2009 10:52 PM
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I still say the biggest crooks are the judges and lawyers. Have they got it made, they can lie and cheat and steal all they want to right in court and the government never does anything about it.

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dallasmay
January 12, 2009 10:52 PM
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I still don't believe that the market fixed the price over 240% above value. Wait and see. When this economic downturn relaxes -and it will relax, and manufacturing and construction pick up again- and they will pick up again, then the demand for oil will rise again, once again raising the price toward $150. The price was not fixed, we are actually using less fuel right now.

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Oranges w/ Cheese hates what Christmas has become
January 13, 2009 3:24 AM
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@dallasmay: What you described *is* actual demand. Where was all that this past summer when oil was $150? Hmm?

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Russ Savage
January 12, 2009 11:19 PM
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I say we kill em!
Yeah!
I say we hang em, *then* we kill em!
Yeah!
I say we stomp em! Then we tattoo em! Then we hang em! ...And then we kill em!
YEAH!!!!!!!!!!!!!

I say we let em go.
NNNNOOOOOOO!!!!!!!

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Mr-Mr
January 12, 2009 11:48 PM
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Just what I suspected all along. But, government agencies, designed to protect the consumers, failed us by allowing it to happen. Just like they did with mortgages and Maddoff, they did it here, look the other way while the crime is happening.

I always argue with those who bought the argument D.C. talking heads, we've assigned to look out for us, claimed that \"because of China's and India's demand, the price of crude has gone up.\" Holy crap, did these two countries find a way to burn so much gas in a matter of months? How is that even possible.

But, in true government agency, they've failed us. The only thing Washington is good is at taxing, policing, and abusing Americans. That, they've 100% effective at. Everything else, who cares.

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mannyv
January 13, 2009 12:19 AM
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\"There's no news in the truth, and there's no truth in the news\"
- Russian proverb that sounds better in Russian

Remember kids, the news only tells you part of the story. News sources rely on sources, and every source has their own agenda.

Were the run up in oil prices due to speculation? Well, yes, partially. Is there any direct relationship between the cost of a barrel of oil and the cost of a gallon of gasoline? Well, not really.

For more reading, there's a congressional report on gasoline pricing that you can google for.

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TheRealAbsurdist
January 13, 2009 12:42 AM
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@mannyv: That Russian proverb made a lot more sense in the Soviet Union, where the only two official newspapers were:
Pravda - News
Izvestia - Truth

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EllenRose
January 13, 2009 12:30 AM
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Well, I sure hope that the IRS adjusts per-mile rates for business travel to take account of the costly gasoline. I have a few thousand miles worth, and every bit helps.

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BytheSea
January 13, 2009 1:08 AM
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It'd be great if we heard about these things WHILE THEY WERE HAPPENING instead of months later. People knew about it, and were opposed to it, but were too scared to speak out until the heat died down.

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angryhippo
January 13, 2009 6:25 PM
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@BytheSea: And now we will hear more about \"we need to move on\" rather than what can be done to not let this happen again.

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chrisjames
January 13, 2009 7:20 AM
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@BytheSea: You only ever get blame after the fact, because while no one ever really knows who or what to blame, they at least get to use the end result of a crisis to bolster their own platforms and beliefs.

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Sollus
January 13, 2009 1:58 AM
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I am Jack's complete lack of surprise.

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Papercutninja
January 13, 2009 2:34 PM
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Hmm. And a year or two, i complained that it was probably speculators that was causing this whole problem, and some shitstain commenter tried to justify it by saying that he was simply being an astute investor. I wonder where he is now? Hopefully he and his family are shivering somewhere under a bridge.

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Heebert
January 13, 2009 3:01 PM
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I watched the 60 mins special on oil speculators and found that they missed the boat for the most part. While what they were saying isn't necessarily incorrect, they just failed to address very large parts of the functioning. This was best summarized by a post made by Barry Ritholtz on his website: [www.ritholtz.com]

Here are his essential points:
\"1. Oil is priced in US Dollars. Since 2001, the Dollar fell 40% (from 120 to 72); Oil rise nearly 5 fold over the same period. And Oil's collapse occurred over a period when the dollar formed a short term bottom.

2. Over the same period that Oil prices were rising, the US was fighting two major wars in the Middle East, Iraq and Afghanistan. These impact prices via psychology and risk of supply disruption - especially at a time when producers were running flat out.

3. Energy prices rose during a global economic expansion (fueled by low rates and cheap money); Oil fell during a period that marked the beginning of the US recession and the start of a global slowdown.

4. Since 2001, Commodities of all sorts rose significantly: Steel, aluminum, cement, cotton, soy, livestocks, foodstuffs, precious metals, etc. Were they all driven by speculation, or was something else going on?

5. Since the 1% Fed funds rate of 2002-03, inflation has had a dramatic impact on ALL prices - from medical costs to insurance to education to health care to transportation to housing to food and energy.

6. Throughout the 1990s and 2000s, cars were increasingly replaced with SUVs and trucks in the United States. Not only did these get appreciably worse gas mileage, that fleet transition took place as the total US miles driven rose. Over the past 20 years, people have lived increasingly further away from their jobs. Hence, increased US demand for energy accompanied (and increased prices).

7. Since gas prices hit $4 a gallon and the recession began, total US miles driven fell significantly, by several billion miles. As expected, the drop in driving was followed by a fall in prices.

8. 60 Minutes interviewed Mike Masters, a hedge fund manager who had testified before Congress that speculation was driving prices. They omitted to mention he was talking his book. His holdings in energy sensitive stocks - with large positions, the vast majority in call options, in AMR Corp (AMR), the parent of American Airlines, Delta Air Lines (DAL), General Motors (GM), UAL Corp (UAUA) and US Airways (LCC) - were responsible for his fund losing 35% of its value before the Fall 2008 market collapse..

9. China boomed~! More and more global manufacturing outsourcing saw factories being built throughout China. They also went through a wild process building out the nation in preparation for the 2008 Olympics held there. Oh, and China, like the US, also began filling its Strategic Petroleum Reserves. Another small country, India, was booming over this period also.

10. The rise of extremist terrorist groups like al-Quada, the hostility of Iran towards the West, supply and political disruptions in places like Nigeria, and overt hostility to the US by oil producers like Venezuela President Hugo Chavez also contributed to drive prices up. The political factors were also omitted.\"

I wish I could come up with that myself, but sadly cannot. However, his points are still valid.

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Anonymous
January 13, 2009 5:16 PM
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This is absurd. Very early in the video, they plainly state that speculators take delivery of exactly zero barrels of oil at the end of each month, so how exactly can they drive the price higher? If this were true, all someone like a heating oil vendor would need to do is wait until the end of the month when speculators had all of their oil contracts, but no desire to have messy barrels of oil delivered to their pretty offices, and then laugh at them as they had to sell their oil contracts to you at a huge loss. That never happened because there was real demand for oil, even when it came time for physical delivery to real oil usersl.

Commodity prices fluctuate not just on current conditions, but on peoples' expectations of future conditions. When everyone thought that China and India were going to use a ton more oil in the near future, futures prices rose. Now that everyone is worried about global economic growth and is anticipating lower oil demand in the future, oil prices are lower. Shocking, I know. Not as exciting as an improbable conspiracy, but far more useful as a tool for understanding what moves commodity prices in real life.

The statement by the one guy that demand fell during this period is patently false. Maybe the EIA numbers showed that, but if they did, they were certainly the only statistics showing a decline in demand.

We need to stop buying into this stuff so \"news\" programs will be forced to do some real homework rather than pandering.

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meechybee
January 13, 2009 6:55 PM
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I watched \"Enron: The Smartest Guys in the Room\" again over the weekend (available on iTunes, yeah!). I was thinking how everyone has probably forgotten about the collapse, and then -- BAM -- the 60-Minute piece aired.

Is anyone taking bets on whether Skilling will be pardoned or sentence commuted before W turns out the lights at the White House?

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bobacus
January 13, 2009 7:25 PM
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This has been going on for years. I work in a trading firm and Black boxes pretty much run the stock market. Watch oil the past 2 months. It has gone down around $2 almost everyday. This is not a coincidence. This is a calculated margin a computer has set. The same goes for the stock market. It is trading on certain margin set by a computer. It is a mathematical model set up by some smart mathematicians and computer engineers. It is the biggest secret Wallstreet has. This market should be under 6500. The BIG trading firms are keeping it inflated with there black boxes. I have seen our little firm rolled over by them time and again.

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BMRFILE
January 14, 2009 5:08 AM
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A commodity as volatile as crude oil and petroleum refining should be regulated government. Leave it to the hands of greedy American financial insitutions and you're guranteed a clusterf**k.

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Crazytree
January 14, 2009 5:42 AM
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I hate being right all the time.^_^

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