Economics the 60 Minutes Way

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60 Minutes just ran a comically slanted story on the rise in oil prices. I know that the price of oil is now down by $100 a barrel over the past few months, but that doesn’t seem to matter when you’re in the alarmism business.The 60 Minutes story is wretched, incoherent and it engages in the worst form of scapegoating. It’s hard to believe that this made it to air.
According to 60 Minutes, the surge in oil prices was due to…(wait for it)…deregulation! Yes, it seems that “hedge funds” (cue Darth Vader’s theme) and “speculators” were buying oil in order to make money. If you just toss around these scare words long enough, people will think it makes sense. Somehow this was all due to deregulation. Of course, oil is traded all over the world, but logic doesn’t play a major role in this story.
First, Steve Kroft first talked with Dan Gilligan, the president of the Petroleum Marketers Association. Gilligan admitted that the members of his trade group, the people who pay his salary, are the ones responsible and he wouldn’t hear of anyone trying to shift the blame.
Kidding!

“Approximately 60 to 70 percent of the oil contracts in the futures markets are now held by speculative entities. Not by companies that need oil, not by the airlines, not by the oil companies. But by investors that are looking to make money from their speculative positions,” Gilligan explained.
Gilligan said these investors don’t actually take delivery of the oil. “All they do is buy the paper, and hope that they can sell it for more than they paid for it. Before they have to take delivery.”
“They’re trying to make money on the market for oil?” Kroft asked.
“Absolutely,” Gilligan replied. “On the volatility that exists in the market. They make it going up and down.”

Egad, speculators trying to make money! Next we’ll hear that other people buy things and “sell it for more than they paid for it.” Of course, if you do the opposite for long enough, like GM, you may get a bailout, so maybe “profiting” isn’t a great plan. Next we’ll hear that there are oil ETFs so anyone can buy it, not just scary hedge funds.

Asked who was buying this “paper oil,” Masters told Kroft, “The California pension fund. Harvard Endowment. Lots of large institutional investors. And, by the way, other investors, hedge funds, Wall Street trading desks were following right behind them, putting money – sovereign wealth funds were putting money in the futures markets as well. So you had all these investors putting money in the futures markets. And that was driving the price up.”

So the scandal is that the rise in oil was benefiting schools and retirees. Got it.
Look, speculators don’t make an asset go up all buy itself. For any buyer, there also must be a seller. The people who bought oil were taking on the risk, and that later hurt them.

If anyone had any doubts, they were dispelled a few days after that hearing when the price of oil jumped $25 in a single day. That day was Sept. 22.
Michael Greenberger, a former director of trading for the U.S. Commodity Futures Trading Commission, the federal agency that oversees oil futures, says there were no supply disruptions that could have justified such a big increase.
“Did China and India suddenly have gigantic needs for new oil products in a single day? No. Everybody agrees supply-demand could not drive the price up $25, which was a record increase in the price of oil. The price of oil went from somewhere in the 60s to $147 in less than a year. And we were being told, on that run-up, ‘It’s supply-demand, supply-demand, supply-demand,'” Greenberger said.

The complaint is that oil went from $60 to $147 in less than a year. But now, it’s lower than where it started. Steve doesn’t bother to mention that fact which seems pretty important to me. Hey, let’s talk with a wiped out speculator. And that $25 one-day jump came AFTER oil hit its peak. So supply and demand did work after all. What failed was the ability of Mr. Greenberger or anyone else in the government to see it coming. Seems like a good argument against regulation.

“From quarter four of ’07 until the second quarter of ’08 the EIA, the Energy Information Administration, said that supply went up, worldwide supply went up. And worldwide demand went down. So you have supply going up and demand going down, which generally means the price is going down,” Masters told Kroft.
“And this was the period of the spike,” Kroft noted.
“This was the period of the spike,” Masters agreed. “So you had the largest price increase in history during a time when actual demand was going down and actual supply was going up during the same period. However, the only thing that makes sense that lifted the price was investor demand.”

So Steve, a reasonable question would be: “Did you short oil?” Or, did you ever wonder why demand was falling? The answer is simple: Higher prices were impacting demand. The system was working.

Masters believes the investor demand for commodities, and oil futures in particular, was created on Wall Street by hedge funds and the big Wall Street investment banks like Morgan Stanley, Goldman Sachs, Barclays, and J.P. Morgan, who made billions investing hundreds of billions of dollars of their clients’ money.
“The investment banks facilitated it,” Masters said. “You know, they found folks to write papers espousing the benefits of investing in commodities. And then they promoted commodities as a, quote/unquote, ‘asset class.’ Like, you could invest in commodities just like you could in stocks or bonds or anything else, like they were suitable for long-term investment.”

There’s no need to use the phrase “quote/unquote.” Commodities are indeed an asset class. This is fear-mongering masquerading as “quote/unquote” journalism.
As far as suitable long-term investments go, gold has been holding its own against stocks for a couple years now. And what’s worse, I bet a lot of gold investors never take delivery either.

“Are you saying that companies like Goldman Sachs and Morgan Stanley and Barclays have as much to do with the price of oil going up as Exxon? Or…Shell?” Kroft asked.
“Yes,” Gilligan said. “I tease people sometimes that, you know, people say, ‘Well, who’s the largest oil company in America?’ And they’ll always say, ‘Well, Exxon Mobil or Chevron, or BP.’ But I’ll say, ‘No. Morgan Stanley.'”
Morgan Stanley isn’t an oil company in the traditional sense of the word – it doesn’t own or control oil wells or refineries, or gas stations. But according to documents filed with the Securities and Exchange Commission, Morgan Stanley is a significant player in the wholesale market through various entities controlled by the corporation.

Anyone see Morgan’s stock lately? I have. I own it.

The Wall Street bank Goldman Sachs also has huge stakes in companies that own a refinery in Coffeyville, Kan., and control 43,000 miles of pipeline and more than 150 storage terminals.
And analysts at both investment banks contributed to the oil frenzy that drove prices to record highs: Goldman’s top oil analyst predicted last March that the price of a barrel was going to $200; Morgan Stanley predicted $150 a barrel.

So Goldman drove up an asset that it owned. Do we know if the bank got clobbered once oil plunged?

Asked if there is price manipulation going on, Dan Gilligan told Kroft, “I can’t say. And the reason I can’t say it, is because nobody knows. Our federal regulators don’t have access to the data. They don’t know who holds what positions.”
“Why don’t they know?” Kroft asked.
“Because federal law doesn’t give them the jurisdiction to find out,” Gilligan said.

So now we have our scoop. Price manipulation might be going on, but we have zero evidence of it. But now we’re going to hear that dark forces are at work.

And in 2000, Congress effectively deregulated the futures market, granting exemptions for complicated derivative investments called oil swaps, as well as electronic trading on private exchanges.
“Who was responsible for deregulating the oil future market?” Kroft asked Michael Greenberger.
“You’d have to say Enron,” he replied. “This was something they desperately wanted, and they got.”

Just mention Enron and suddenly you have a story. Let’s ignore the fact that nearly every commodity was soaring.

“When Enron failed, we learned that Enron, and its conspirators who used their trading engine, were able to drive the price of electricity up, some say, by as much as 300 percent on the West Coast,” he added.
“Is the same thing going on right now in the oil business?” Kroft asked.
“Every Enron trader, who knew how to do these manipulations, became the most valuable employee on Wall Street,” Greenberger said.

Again, we have zero proof of anything. Just some people made money and some people lost money. Now Kroft has to update the story to account for the gigantic decline in oil, so we now do a quick about-face.

But some of them may now be looking for work. The oil bubble began to deflate early last fall when Congress threatened new regulations and federal agencies announced they were beginning major investigations. It finally popped with the bankruptcy of Lehman Brothers and the near collapse of AIG, who were both heavily invested in the oil markets. With hedge funds and investment houses facing margin calls, the speculators headed for the exits.
“From July 15th until the end of November, roughly $70 billion came out of commodities futures from these index funds,” Masters explained. “In fact, gasoline demand went down by roughly five percent over that same period of time. Yet the price of crude oil dropped more than $100 a barrel. It dropped 75 percent.”
Asked how he explains that, Masters said, “By looking at investors, that’s the only way you can explain it.”

Yes, it’s the only way. Just as it is all the time.
The last sentence is the worst. I can’t believe a professional journalist said these words:

The regulatory lapses in the commodities market that many believe fomented the rampant speculation in oil have still not been addressed, although the incoming Obama administration has promised to do so.

Posted by Eddy Elfenbein on January 11th, 2009 at 8:33 pm

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