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A rough estimate of the Cost of Excessive speculation in the oil commodities market.

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How much has excessive speculation cost the people of the world, the United States?


While this would seem like an impossible question to answer with any certainty, it isn’t that hard to get a fairly accurate approximation from the historical records. Simply look to the records for periods when speculation was not a factor to establish an upper limit price to use as the base figure for oil price without speculation, and repeat the process for periods when speculation was evident. The data used here is based on the WTI contract  for the past 30 years oil (1982 – present)



While speculation has always been a part of the commodities markets, it has historically been kept at approximately 30% – 35% of the market volume. In recent years it has been reported that it now represents 70% to 80% of the market. To establish a demarcation to use in this exercise I looked at the data of the CFTC and the non-commercial NET OPEN POSITIONS. The fall of 2003 was the last time that this net position was short the market, in other words speculators have held a persistent long position since the end of 2003 and the volume of non-commercial contracts have sky rocked since the then. Therefore I decided to use the end of 2003 as the demarcation point between the periods; before this date, speculation while present it wasn’t a primary driver of price, after this date it was the primary driver of price given the fact that the volume contracts held by the non-commercial participants had become much larger than the commercial participants and it has been a persistent long position, unlike past periods in which usually an even mixture of both long and short positions.


            When examining the data it is evident that the price of oil for the period from 3/82 through 12/03 never exceeded $36.13 and the average over that period was $22.67 bbl. Implicit in the selling price of a commodity is the fact that the production cost must be even less otherwise the producers would stop producing the commodity. To be able to state that the price of oil during the speculation period was indeed caused by speculation it must be confirmed that the underlying cost of production has not materially changed as compared to the prior period and that market conditions have not changed appreciably. From the United States Senate Committee on Finance hearings on May 12 2011, Senator Baucus stated that the major oil producers average cost of production was approximately $11 bbl in 2010 as evidenced by the oil companies’ 10K reports filed with the SEC. At this level I think that we can say that the current high prices for oil are not caused by overly high cost of production. Given the fact that oil consumption has fallen in the US and even in China in the past year, the rise in the price of oil cannot be blamed on an increase in demand. Given that the increase in production of oil in the past year would negate any argument that there is an insufficient quantity of oil for the market. The fact that the normal market forces should be pushing down the price of oil the only conclusion that can be drawn is that speculators are indeed pushing up prices. Back to establishing a base price, it could be argued that the average price ($22.67) from ’82 to ’04 should be used and this argument would have merit. The high price ($36.13) for the period before speculation corralled the market could also be used. For this exercise I chose $40.00 to be very, very conservative. So what follows is a spreadsheet  that uses $40.00 as the base price to figure the cost of speculation in the WTI contract since January 1, 2004.


martin horzempa



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