Is Oil Artificially Priced in the "Free" Market?

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David Callaway draws a timely comparison between Wall Street’s springtime predictions of $200 crude oil and key policy makers’ autumn predictions of a pending global economic meltdown. He points out that oil’s failure to reach $200 a barrel — it is now sitting in the low 70s after collapsing from $145 — is suggestive that the current economic gloom will not reach apocalyptic proportions. There is a good probability that Callaway is right — in the short term.

Powerful individuals at Goldman Sachs played a central role in the run up of oil prices. Using Goldman’s reputation as one of the world’s premiere investment banking houses — although Goldman has operated recently like a brass knuckled hedge fund — these people used institutional prestige to create a self-fulfilling prophecy. By predicting a specific price level for oil they were able to congeal a global speculative coalition operating with some type of tacit agreement not to take profits until oil approached the target of $150. Thus boosted, once oil climbed above $100 a barrel, the cabal used price momentum to predict an even higher price — $200 a barrel — thus providing incentive for the late acting public to scurry in above $120 a barrel and get fleeced as early entrants unloaded positions and went short for the ensuing price fall.

While analysts often use “target prices” to organize efforts to drive share prices higher (usually on behalf of vested interests), this technique is more difficult with commodities, since elevated prices cut consumptive demand. In stocks, elevated prices may increase demand when trend momentum is read by technical traders as more persuasive than fundamental pricing benchmarks. Stock pricing, by nature, is fluid due to the subjectivity of valuing paper assets owned for trading gains. Commodities on the other hand are owned for commercial sale. Therefore, it is highly disconcerting that Goldman players could orchestrate a buying psychology in commodities sufficient to influence global hedge funds to partially corner “paper oil,” or at least manage the trading dynamic in the market float. This disruption of market efficiency illustrates the need for robust rules to govern the world’s financial markets. It may say something as well about the erosion of basic justice in the world.

Most Americans will pay high heating bills this winter because utilities felt the need to begin making advance oil and natural gas purchases during the summer while prices were very high. Economies around the world were pushed over the edge by the bleed-over of high energy prices into many cost structures. In low wage countries tens of millions of people have struggled to feed their families as food commodity prices soared under the influence of elevated oil prices. Did the people at Goldman Sachs or the big hedge funds lose any sleep over this? Hardly? The miseries of the masses mean little to people whose self-worth is measured by plunder.

While an apocalyptic experience may not be the next page in the world’s history, influential predictions can move leveraged markets where paper assets are priced in terms of trader confidence. Short sellers stand to make out like bandits if the gloom continues. An entire universe of short equivalent vehicles, like reverse ETFs, were created over the last ten years. Now, there is an increased incentive for various elites to predict gloom and doom. The scare tactics not only extend the size of short side gains but allow the next long side speculative cycle to be dramatically more enriching to those in the know. Unfortunately, speculators stand to profit as good people with the right motives point out the market errors that need to be remedied. The unintended consequence of financial reform movements is the extension of capital gains opportunities for the most advantaged members of society. Thus, it is especially important in down cycles to enhance regulations to prevent the gaming of misfortune.

Unparalleled amounts of socialized capital are being thrown at banking and liquidity problems. While national governments are becoming increasingly burdened with private debts, checks on consumer price inflation resulting from productivity gains and business efficiencies give government officials some cover in using monetary inflation as a tool to manage debt. This is another great injustice against the people, and a strong argument against lowering capital gains rates for speculative investments. In sum, America is unlikely to see a financial apocalypse just around the corner. But when it does come (after financial games to prop up economies are no longer sustainable), a lot of just desserts will be met. Sadly, a great many innocent people will suffer as well. That’s the real price of God-forbidden “free markets” — the laissez faire philosophy of letting powerful players make their own rules for trampling those unable to adequately defend their reasonable interests.