Guess What Can Impact Oil Prices Right Now ...


I know that our politicians have become enamored with the notion that expanding offshore oil drilling will cause gas prices to drop -- even President Obama buys into the nonsense -- despite the plethora of evidence to the contrary. It will, for the record, be years and years and years before any sort of impact from expanded drilling will be felt. But there are other factors, besides supply and demand, that an have a more immediate impact on the price of oil -- among them, speculation. Take, for instance, this recent case, where a couple obscure stock traders managed to corner the entire oil market with the mobilization of relatively few resources ...The New York Times reports (via Kevin Drum):

In a matter of a few weeks in January 2008, the defendants built up large positions in the oil futures market on exchanges in New York and London, according to the suit ... At the same time, they bought millions of barrels of physical crude oil at Cushing, Okla., one of the main delivery sites for West Texas Intermediate, the benchmark for American oil, the suit says. They bought the oil even though they had no commercial need for it, giving the market the impression of a shortage, the complaint says.

At one point they had such a dominant position that they owned about 4.6 million barrels of crude oil, estimating that this represented two-thirds of the seven million barrels of excess oil then available at Cushing, according to lawsuits

Drum responds: "So all you have to do to corner the market is use a bunch of subsidiaries to buy up about 5 million barrels of crude? That's nothing. It's $500 million or so. There must be thousands of hedge funds, investment banks, PE funds, or private investors who could pull off something like that."

Indeed. This is further reminder that oil prices are the result of a complex network of factors, and that the US government agreeing to expand domestic supply years down the line will have little immediate impact in the market. Hijinks like this are liable to move the needle on oil prices more than such a prospect of increased drilling -- though the number one determinant remains supply and demand. And, of course, supply has peaked, and demand is burgeoning.

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