24 Aug 2008

Time Says Oil Prices Rigged

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In a piece that starts out harmlessly enough and then descends into absurdity, Time argues that oil producers themselves are probably buying futures contracts in order to fatten their earnings. You might think manipulating the world oil market would be risky and expensive, but you (apparently) would be wrong, according to these writers:

The point is, it would only take about $9 billion to control the entire long position in oil. That sounds like an enormous amount of money, but some of the major individual players in oil are bigger than the market itself: Sultan Hassanal Bolkiah Muizzaddin, of Brunei Shell Petroleum, is worth about $23 billion; Saudi Prince Alwaleed Bin Talal Alsaud is worth about $21 billion; Russian Vagit Alekperov of LUKoil is worth about $13 billion…

All an oil supplier would have to do to raise prices is buy up futures contracts.

It’s not even that risky. Either the suppliers/investors risk an insignificant fraction of their gargantuan fortune, or they entice other investors to share the risk. With virtually unlimited resources and an actual tie to the underlying commodity, oil suppliers are in a far better position to accomplish this manipulation than, say, the Hunt brothers were during their attempt to corner the silver market in the 1970s.

There are lots of holes in the overall piece, and I will dissect them in an upcoming issue of The Freeman. For now, those readers who are dying to know why speculation in the futures markets isn’t causing record oil prices, should refer to my report for IER, or the geekier discussion at EconLib.

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