World Business

In reply to BusinessWeek Economics Editor Peter Coy, Ed Wallace clarifies why the oil futures market is not working properly

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by Ed Wallace

"When money has nowhere to proceed, it is parked in wares, as this is one of the few investment instruments that actually rises the more money you pour into it." —Oliver Jakob, an algebraist at Petromatrix in Switzerland.

"Oil Near $143 on View Dollar Will Keep Falling," —John Wilen, Associated Press, June 27, 2008

Dear Peter,

First of all, I would like to thank you for your response (BusinessWeek.com, 7/8/08) to my recent column (BusinessWeek.com, 6/27/08) on the oil futures markets. I would besides, humbly, allied to thank you for pointing lacking that I’ve become something of a hero to the middle class in America for my columns on energy. Obviously, I didn’t set out with that particular goal in mind. Nor do I have a problem with futures markets in general; they are responsible for injecting badly needed liquidness into commodities for our future use. From what you have written, I can perceive numerous areas where we agree completely.

But I don’t be persuaded that either united of us has helped our readers grasp any rigid reality: By 2015 the world will be faced with a legitimate and serious oil supply-and-demand problem. Many oil insiders be under the necessity told me that it will be some enduring energy crisis that has the potential to fundamentally reorganize our economic society.

While the International Energy Agency is not usually my especially liked source of information, I put great credence in Charley Maxwell of Weeden & Co.; Maxwell was quoted on Energytechstocks.com in February for the reason that predicting oil supplies would straiten starting in 2010. He said that peak production would come a scarcely any years later and that oil might exist priced at $180 a barrel by 2015; and he added that it will make prisoner of "$12 to $15 a gallon [for gas] to get Americans to let go of their precious freedom of mobility." Scary stuff—and hitherto, looking at the charts for increased oil production in the futurity against growing worldwide consumption, I tend to believe Charley’s prognostication. As I told a group of students at Texas A&M earlier this year at the annual Student Conference in continuance National Affairs, "We are leaving you a far worse world than our parents left us."

On the other hand, in a BusinessWeek.com column (BusinessWeek.com, 8/15/07) I wrote last year, I suggested that, to alleviate our current and future energy problems, Americans should meliorate our energy efficiency—and was roundly blasted by readers. I wasn’t their man of superhuman achievements that day.

We besides are in agreement considered in the state of to the profitability of refining diesel. You are exactly equitable in stating that we are not able to refine enough lower-sulfur diesel. That Middle East refiners find it greater degree profitable to sell their sulfur-laden fuels to Asia, while Europe’s product constraints make it incapable of exporting a great quantity diesel to the U.S., is besides true.

Still, we have a scarcely any items on which we disagree.

First, you mentioned that I be seized of put much of the reproach on speculators and manipulators for today’s current oil prices, adding something to the effect that I should not put abundant faith in any statement of fact by a member of Congress. Let me clarify: It wasn’t politicians but expert witnesses and their testimony in fit with a front of Congress that formed the basis of my articles.

Next, I’m sure you didn’t mean to suggest that speculation and manipulation are the one and the other acceptable behaviors in fast article of merchandise markets. As we both apprehend, there are three classes of traders in the futures market:

1. Traders—population who are bidding with the intent of actually taking delivery of the goods on the contract’s due date;

2. Speculators—those who are merely there for the profits to be made by flipping paper; and

3. Manipulators.

To the best of my knowledge, manipulation of the market is still unlicensed. In fact, principally have forgotten that BP (BP) was caught manipulating the propane mart in the winter of 2004 and fined $373 the multitude.