More on Gas

http://hotair.com/archives/2011/04/21/drudge-headline-6-gas-by-summer-a-fresh-look-at-the-culprits-driving-fuel-prices/


from which I found:


http://www.dailyfinance.com/2011/03/28/the-real-reason-gas-prices-are-soaring/


The Real Reason Gas Prices Are SoaringBy Charles Wallace Posted 7:00AM 03/28/11 
Energy, Economy, Goldman Sachs , Morgan Stanley  

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Have you ever wondered why when you go to the gas station to fill up the  family 
car, the price of gas at the pump has just jumped 25 cents a  gallon over the 
past three days? Perhaps you thought the oil companies  were just being greedy. 
Or you believed the nightly news pundit who said  that gas prices went up 
because the crisis in Libya was affecting  supplies of oil. One professional oil 
trader says that you'd be wrong on  both counts.

Dan Dicker, who has spent nearly three decades in the oil market, has a  
profoundly disturbing explanation of why the price of oil, and the  gasoline 
that comes from the crude product, has risen so dramatically in  recent months. 
It turns out, Dicker says, that the price has nothing to  do with supply and 
demand for oil. It's the financial market for oil,  filled with both 
professional speculators and amateur investors betting  on poorly understood oil 
exchange-traded funds, who have ratcheted up  the price of gas to such sky high 
levels.

"There is no supply issue going on here - what you have is the  perception of 
the possibility of a supply issue," Dicker says. "A whole  bunch of people are 
pouring money into an oil market trying to take  advantage of what they perceive 
to be a real risk in supply. It's a  marketplace that I argue should not be 
allowed to be wagered on like a  stock or bond."

Dicker notes that Libya produces only 1.3 million barrels of oil a day,  just a 
tiny fraction of the world oil market. Even if Libyan crude were  lost to the 
world market in the current turmoil, and there is no sign  that it is, Saudi 
Arabia has 5 million barrels a day to use in case of  an emergency. 


Dicker, who has just published a book called Oil's Endless Bid: Taming The Price 
of Oil To Secure Our Economy,  makes a strong case that if the government 
stepped in and regulated oil  trading so that only investors with a genuine 
interest in the physical  product, such as airlines and heating oil companies, 
could buy and sell  oil futures, then the price of oil would fall by 50% 
overnight and our  economy would be much better off.

Why Greater Regulation Is Needed

"You have to make it so the original intent of commodity markets, to be  used 
almost exclusively as hedging tools, is returned," he says.

Though Dicker acknowledges that is not likely to happen, he points out  that 
when the 2008 economic crisis froze all financial markets and  investors 
stampeded to the sidelines, the true price of a barrel of  crude oil became 
known: $32. It's now hovering at around $110 thanks  entirely to investor 
demand, he says.

One of the reasons Dicker is calling for greater regulation of the oil  market 
is that no one really knows how large it is or what is going on  it on a 
day-to-day basis. In fact, it reminds Dicker of the market for  credit default 
swaps, which brought down the insurance giant AIG and  forced the government 
into a $180 billion bailout.

The market for oil traded financial instruments has been estimated at  between 
$8 trillion and $30 trillion, but there are no concrete numbers  because traders 
don't have to tell anyone how much they are betting  either for or against the 
oil price. Dicker says if the government  minimally required oil trading to be 
conducted in a transparent manner  on exchanges instead of the current 
over-the-counter system, a large  number of speculators would leave the market 
and the price of would fall  sharply.

He also notes that the major shift in oil trading has been relatively  recent. 
First, financial firms such as asset managers and pension funds  realized they 
needed to diversify their holdings of stocks and bonds,  which had performed 
badly over the previous few years.

The move was made easier by the arrival in 2006 of electronic trading of  oil 
futures. The formerly cumbersome process of trading oil with a  floor trader at 
the New York Mercantile Exchange was suddenly replaced  by a streamlined process 
requiring only a few keystrokes on Chicago  Mercantile Exchange's Globex 
computer platform.

From a few thousand trades an hour at the old NYMEX, traders now process  
millions of trades an hour by computer. Dicker estimates the financial  market 
for oil is 15 times greater than the amount of actual oil being  traded, with 75 
types of futures being sold on exchanges. That doesn't  even include all the 
private, over the counter transactions that take  place.

"The amount of money pouring into hard assets, particularly oil, is  outsized 
because it's new and fresh, so you get these outsized moves  from $68 a barrel 
in the summer of 2010 to $100 now," Dicker says.

 
Why does all this trading drive up the price, when buyers and sellers  should 
theoretically cancel each other out? Dicker says that is  primarily because 
almost all oil investments being sold by the big  investment banks are long 
trades - bets that the price will go up. While  it's also possible to short oil 
ETFs, no one does. So that's heads ever  skyward.

"There is no shorting of the market and the commodity market is not like  a 
stock market," he says. "It is not designed to have only one half of a  trade. 
It is designed to inspire both halves, that's how you arrive at a  correct 
price." Dicker gives the following example: Let's say you live  in a 
neighborhood where all the homes are priced at $200,000. Suddenly  an army of 
buyers arrives who want desperately to move into the  neighborhood. You were not 
really interested in selling before, but now a  buyer offers you $400,000 for 
your $200,000 house. What are you going  to say?

"That's what's going on in oil," Dicker says. "You have this army of  people who 
have been flooding into a brand new neighborhood and they've  had to inspire 
somebody to sell and the only way you can do that is pay  an outrageous price 
for it."

The Biggest Winners

Among the biggest winners of the new oil markets are investment banks like 
Goldman Sachs (GS) and Morgan Stanley (MS),  which create new products for 
clients and then use that information to  trade on the products. In 2004 and 
2005, Goldman Sachs made $1.5 billion  a year trading oil, Dicker says. In the 
first half of 2009 alone, the  firm made $3.4 billion oil trading profits. Firms 
like Goldman are not  taking bets that oil will move lower or higher. Trading 
simply means  naming a spread of buy and sell prices from which they can eke out 
tiny  but regular profits, a business without risk. 


Dicker is particularly contemptuous of oil ETFs of the kind that many  small 
investors have used as vehicles to diversify their holdings. "In  these markets, 
they way they are set up, with all the edges with  investment banks, the regular 
investor is just fodder," Dicker says.  "The ETFs are the world's worst 
investment. They've only lasted this  long because oil prices continue to 
rally."

So if gas prices would come down sharply with minimal regulation, why  doesn't 
the government step in and impose limitations as it has done  recently for other 
derivatives, forcing most firms to conduct their  trading on exchanges? Dicker 
believes it is largely because large  financial firms with a direct interest in 
oil trading have made so much  money with oil that they can afford to lobby 
Congress to block any  significant reforms.

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