The widely read left-wing blog ThinkProgress (“TP”) makes several claims about US oil prices in a pair of companion articles about oil speculation. TP claims “a true driver of high prices: oil speculation” and that its own investigation revealed Koch Industries “is perhaps the most important player in distorting oil markets for private profit”. (http://thinkprogress.org/green/2011/06/06/237542/koch-oil-speculation/)
Unlike TP, I thought the key drivers were supply- including the distortions of the OPEC cartel- and demand- increasingly fueled by tens of millions of new automobiles in developing nations like China, Brazil, India and Turkey. In two posts, I will analyze TP’s serious charges for you.
Today, let’s look at TP’s first post by Lee Fang, which purports to prove oil ‘speculation’ is adding a huge premium to the price. The charge is an explosive answer to the controversial question what, if any, impact oil futures trading has on oil prices.
TP says, “Experts contacted by ThinkProgress pin the blame for sky-high prices and record volatility on excessive oil speculation.” Unfortunately, these “experts” are anonymous. We have no clue who TP’s “experts” are and what credibility, if any, they have. The one named source TP uses is Goldman Sachs, claiming “even Goldman Sachs concedes that at least $27 of the price of crude this year has been a result of rampant speculation, not supply and demand.” That is a tremendously large number- a quarter of the total price!
I found a terrific piece in PowerLine which ably traces back TP’s links and dissects the “Goldman” report about a $27 speculation premium. I will not reprint it at length but the PowerLine piece shows there is no such Goldman report and no basis for the $27 figure (see http://www.powerlineblog.com/archives/2011/06/029194.php). Thus, we must dismiss TP’s claim about a non-existent Goldman report.
TP then doubles down on the $27 number and says “Other experts contacted by ThinkProgress have said the number is closer to fifty dollars.” Again, TP uses unnamed “experts” to support this extraordinary claim that half of the price per barrel of oil is pure speculation. Without TP naming any names when making such a remarkable assertion, the claims lack credibility.
But a question I ask of TP or anyone who believes there is massive price manipulation in the oil market is this: why is the price per barrel of oil in the US market lower than in Europe?
The fact is West Texas Intermediate crude (“WTI”) has been running about $15-20 per barrel less than Brent Crude (London). As of Friday July 1, 2011, WTI crude ended at $95.24/bbl., whereas Brent Crude ended at $111.86. (http://www.bloomberg.com/markets/commodities/futures/)
Do the math and West Texas Intermediate crude was $16.62 (17.5%) lower than Brent Crude.
If the US crude oil price is driven higher by speculation as TP claims, wouldn’t the WTI price be higher?
Why is the European price higher? Are the mysterious oil speculators (Koch?) also involved in Europe and involved in an even bigger, even more mysterious plot to drive the European price so much higher than what they supposedly also did to the US price?
Wouldn’t the Europeans be far less likely to be victimized by an oil speculation conspiracy than the supposedly under-regulated Americans?
If you believe in TP’ $27/bbl. or $50/bbl. ‘speculation’ premiums on the price of oil in the United States, logically, you must think Brent Crude is subject to an even more massive ‘speculation premium’ of $44/bbl. ($27 speculation in the US price plus $17 higher price in Europe) or the even more fanciful $67 ‘premium’ if you believe TP’s unnamed ‘experts’.
In thinking about the price of oil, I understand people being concerned about movements in the price. It is frustrating for consumers to see the price at the pump go up because of events from afar- such as a civil war in Libya which disrupts supplies. But the TP article sheds no light when citing a non-existent Goldman Sachs figure and anonymous “experts”. My question of why European oil is more costly flies in the face of a massive US ‘speculation premium’.
Tomorrow: we explore TP’s companion ‘report’ that specifically fingers Koch Industries as the builders of an empire of oil speculation. You may have never heard of Koch Industries before, but I promise you will know more after reading my next post.