didn't help the value of the dollar much, either.

So, are we better off than we were eight years ago?

Bad week...

:)

$11 /barrel? Even scarier.

Dow down 403 points today.

The boys who lost in the housing market are now recouping in the commodity markets with fee hand to fix the system. Nothing changes!

It's $4.09 at the pump nearby and will probably be $4.19 tomorrow. I was talking to my mom on the phone and she related to me how she'd been hearing predictions of $7 /gallon on TV recently.

is the excuse de jour.

Oil is high because demand exceeds supply. Every reduction in consumption we've made (which are miniscule, so far) has been consumed by Asia.

All these little events people focus on have short term effects that move prices from day to day, but the steady upward pressure is more like a law of nature.

No politician or economist is going to fix this one.

I did inhale.

have to take delivery if you don't close out the contract. The vast majority of contracts are closed out. I'm afraid I'm on the "a large amount of this is speculation" side of the equation, which is not to deny that it's being driven by fundamentals at the base.

Oil hits $139 as jobless figures stun US

· Biggest rise for 22 years in unemployment
· Shares and hopes of dodging recession tumble

* Ashley Seager
* The Guardian,
* Saturday June 7 2008

Oil prices leaped to another record high yesterday as Israel warned Iran about its nuclear sites and the dollar slumped on news of the biggest jump in US unemployment for 22 years.

Global crude ended a run of lower prices as it jumped by more than $11 a barrel to more than $139 - it has risen more than $17 in two days. The price eventually settled at $138.54. On Wednesday the price had fallen to as low as $122.

Already jittery oil markets were sent into spasm by remarks from Israel's transport minister that an attack on Iranian nuclear sites looked "unavoidable". Any attack on the country would threaten supplies from the whole region.

Prices were also boosted by a prediction from investment bank Morgan Stanley that crude may reach $150 by July 4.

Earlier in the day the dollar had fallen against the euro partly on speculation that the European Central Bank may consider raising interest rates to curb inflation. Then markets were rocked by a report showing US unemployment suffered its biggest monthly rise for 22 years.

Shares dived after the US unemployment rate unexpectedly jumped to 5.5%, intensifying fears that the world's biggest economy is sliding into recession. The Dow Jones industrial average lost nearly 400 points, more than 3%, to close at 12,209. In London, the FTSE 100 closed the week down 1.5%, or 88 points, at 5,906.

The US Labor Department said non-farm payrolls fell by 49,000 in May from the month before. That was broadly in line with expectations but the department revised its April figure to show a drop of 28,000 rather than the 20,000 estimate it made last month.

The unemployment rate jumped from 5% in April to 5.5%, the biggest rise since February 1986 and the highest rate since October 2004. As stocks tumbled, so did the dollar, which shed nearly a cent against the euro.

Bond prices moved sharply higher as expectations of any near-term increase in interest rates subsided. Gold futures jumped 2%, to $891 an ounce as investors, taking fright, sought a safe haven.

There were substantial job losses last month in construction industries, where 34,000 cuts were made, in manufacturing, where 26,000 jobs were lost, and among providers of professional services, where 39,000 jobs went.

"The overall trend is clearly weakening, with the unemployment rate having increased by a full percentage point over the past 12 months," said James Knightley, an economist at ING Financial Markets. "This will continue to depress consumer spending - the fiscal package is being fully swallowed by higher gasoline prices - and will, in our view, help to keep activity depressed for longer than financial markets are currently discounting."

Nigel Gault, chief economist at Global Insight, said: "The rise in unemployment throws some cold water on the idea that the Fed will soon raise interest rates to prop up the dollar and rein in inflation. The Fed is in a difficult spot with first-half growth not far above zero, but inflation climbing. We believe that the economy is too fragile for a rate hike before 2009."

I find it very disturbing that after suffering through seven years and five months of Bush and Bushies deriding the nuances of issues and marginalizing and excluding experts, there are people here who are now willing to do the exact same thing in their anxiousness to herald the arrival of peak oil.

As usual with most issues, the story is not that simple; the current high price of gasoline is not simply because of peak oil.

Peak oil is the underlying, long-term trend. But there is lots of evidence that
speculation now accounts for up to one half of the price of oil. Earlier this week, the Senate Commerce Committee held Full Committee hearings on Energy Market Manipulation and Federal Enforcement Regimes. George Soros's testimony is short and to the point:

According to my theory, every bubble has two components: a trend based on reality and a misconception or misinterpretation of that trend.

SNIP

We are currently experiencing the bursting of a housing bubble and, at the same time, a rise in oil and other commodities which has some of the earmarks of a bubble. I believe the two phenomena are connected in what I call a super-bubble that has evolved over the last quarter of a century. The misconception in that super-bubble is that markets tend toward equilibrium and deviations are random.

So much for bubbles in general. With respect to the oil market in particular, I believe there are four major factors at play which mutually reinforce each other.

First, the increasing cost of discovering and developing new reserves and the accelerating depletion of existing oil fields as they age. This goes under the rather misleading name of “peak oil”.

Second, there is what may be described as a backward-sloping supply curve. As the price of oil rises, oil-producing countries have less incentive to convert their oil reserves underground, which are expected to appreciate in value, into dollar reserves above ground, which are losing their value. In addition, the high price of oil has allowed political regimes, which are inefficient and hostile to the West, to maintain themselves in power, notably Iran, Venezuela and Russia. Oil production in these countries is declining.

Third, the countries with the fastest growing demand, notably the major oil producers, and China and other Asian exporters, keep domestic energy prices artificially low by providing subsidies. Therefore rising prices do not reduce demand as they would under normal conditions.

Fourth, both trend-following speculation and institutional commodity index buying reinforce the upward pressure on prices. Commodities have become an asset class for institutional investors and they are increasing allocations to that asset class by following an index buying strategy. Recently, spot prices have risen far above the marginal cost of production and far-out, forward contracts have risen much faster than spot prices. Price charts have taken on a parabolic shape which is characteristic of bubbles in the making.

So, is this a bubble? The answer is that the bubble is super-imposed on an upward trend in oil prices that has a strong foundation in reality. The first three factors I mentioned are real and would persist even if speculation and commodity index buying were eliminated. In discussing the bubble element I shall focus on institutional buying of commodity indexes as an asset class because it fits so perfectly my theory about bubbles.

Soros' fourth point is where you must distinguish between traders and speculators. The arrival of indexed institutional investors "investing" in commodities as assets is a relatively new development that has occurred since a number of esoteric financial derivatives markets began collapsing last August.

Soros points out that "Commodity indexes are not a productive use of capital." Investment in commodity futures provides useful, non-speculative capital ONLY when producers are selling their future products now in order to finance production.

For those who want even more meat with their nuance, take the time to read the testimony of Michael Greenberger, Professor at the University of Maryland School of Law. Greenberger was director of enforcement of the Commodities Futures Trading Commission in the late 1990s. Greenberger argues forcefully that there are plenty of indications that there is a speculative frenzy, but it is now impossible to get the evidence because Goldman Sachs and Morgan Stanley have finagled an market for oil futures trading outside the regulatory view of the CFTC:

The former International Petroleum Exchange (―IPE), a British exchange then trading foreign delivered petroleum contracts with trading matching done in London, received a CFTC staff FBOT no action letter permitting the presence of U.S. IPE terminals to trade foreign contracts.23 In 2001(?), IPE was bought by the Intercontinental Exchange an Atlanta-based, U.S. owned exchange whose prominent founders were, inter alia, Goldman Sachs, Morgan Stanley and British Petroleum.

Sometime after 2001, it is my understanding that the trade matching computerized systems for all ICE trades were brought to the United States. ICE has a U.K. subsidiary, ICE Futures Europe, but that that subsidiary is does not ultimately control the trading on ICE; nor, as I understand it, are the ICE trade matching engines within the U.K.25 In January, 2006, ICE announced that it would trade West Texas Intermediate (―WTI) crude oil contracts, a contract which had theretofore been traded exclusively on the New York Mercantile Exchange (―NYMEX), an exchange fully regulated by the CFTC.26 It is my understanding that this was the first time that a ―foreign exchange operating under an FBOT traded on its U.S. terminals a U.S. delivered futures contract. Despite the fact that ICE is now a U.S. owned exchange with U.S. trading engines trading U.S. delivered crude oil contracts, the CFTC continues to treat that exchange as a U.K. entity for purposes of its energy contracts to be directly regulated exclusively by the Financial Services Authority (―FSA) of the United Kingdom.

SNIP

The Senate Permanent Investigating Subcommittee has now issued two reports, one in June 200632 and one in June 200733, that make a very strong (if not irrefutable case) that trading on ICE has been used to manipulate or excessively speculate in U.S. delivered crude oil and natural gas contracts.34 The June 2006 report cited economists who then concluded that when a barrel of crude was @ $77 in June 2006, $20 to $30 dollars of that cost was due to excessive speculation and/or manipulation on unregulated exchanges.35 If that assessment is correct one quarter of the price of crude oil, and crude oil, derivatives, such as gasoline and heating oil, are the direct result of market malpractices by traders. Of course, we also know through U.S. enforcement actions and criminal prosecutions that Enron, using the Enron Loophole, for its Enron Online (an exchange that was deregulated in the way ICE is deregulated today), drove the price of electricity up almost 300% a year for California consumers in the 2000-2001 era.36

SNIP

My own view is that there can be no ―final commitment by FSA and ICE on these ―near term commitment points, because the United Kingdom‘s FSA is going to have to reconfigure (or more likely reinvent) the collection of its own data in order to be able to satisfy the CFTC‘s investigative needs in this regard. These ―near term failures in data collection only serve to highlight the total laxity of the FSA regulatory process as it applies to these markets; the extent to which CFTC analysis has been and will be uninformed ; and the absurdity of the CFTC‘s continuous charade that a U.S. owned exchange (ICE) located in Atlanta and trading critically important U.S. delivered energy products (WTI) should be regulated by the United Kingdom, whose regulation of these markets is self evidently lacking by the latter‘s need to mask its inadequacies through ―near term commitments.

I do not mean to be skeptical of peak oil, it is a fact, and it needs to be dealt with. But there is no reason to give Wall Street and the hedge funds a "free pass" by asserting the only causal factor is peak oil, and anything else is "denial." Why let Wall Street and the hedge funds walk off with the hundreds of billions of dollars in speculative "profits" they are making from riding the peak oil trend? Wouldn't that money be better used to create the alternatives to a fossil fuel economy?

Greenberger notes that a few years ago, the Congress gave the FERC authority to invade the CFTC’s turf and investigate price manipulation in the natural gas markets. It would be interesting to look at how prices in the natural gas market are behaving compared to the oil market. Congress has now given similar authority to investigate the oil market to the FTC – which interestingly was immediately followed by the CFTC singing a new tune on the state of that particular market. Greenberger’s testimony is an excellent example of an expert guiding us through all the nuances and details of an issue. Anyone who does not bother to read it really has little idea of what’s really going on. If anything, the current run-up in oil and gas prices is a case study of how deregulation has hobbled the government’s ability to not just protect the common welfare, but also monitor developments that impact the common welfare.

Bush and the Bushies ridiculed experts and nuance, and they have brought the world two wars without end and the worst financial and economic collapse since the first Great Depression. Let's not repeat the mistakes of ideological arrogance they made.

If you don't have a job from a high energy cost induced recession, then except for the occasional trip to the grocery store...you don't need a lot of gasoline. Certainly no trips to the mall or to the Olive Garden on Friday night. So there may be a lot of gasoline available in the short term.
And on a different but converging track, the high rolling planetary oligarchs, derivative and sovereign wealth funds may just be looking for a place to store value and carry it forward to the future. The US$ is obviously not the way to do that now, and so commodities, mostly oil, seem to be filling the gap.
The irony is that the absolute deregulation that the free marketeers wanted may create the chaos that will destroy them.
Nate Hagen's article on Soros, Reflexivity and Peak Oil over at The Oil Drum gets into this and the comments section is excellent.

in 2 or 3 days. Crazy.