The Oil Bubble

Did anybody see 60 Minutes last night? I don’t often get to watch it, but it came on right after that amazingly hard-hitting football game between the Baltimore Ravens and Tennessee Titans.I have to say, the Pittsburgh Steelers are probably the only team in the NFL that doesn’t mind playing the Ravens right now. Some of the hits in yesterday’s game were painful to watch. If Ray Lewis ever hit me like that guy he blew up on the sideline (helmet flew off), there’d be a new editor for Daily Profit.

Anyway, 60 Minutes ran an excellent piece on the run in oil prices from 2005 – 2008. And guess what? It was all Enron’s fault! 

Apparently, in 2000, old Kenny boy successfully lobbied to have certain regulations of futures trading on private electronic exchanges removed. Enron, as we know, was big into energy trading, and they apparently had a means of working prices higher. But they needed secrecy to do it.  

The test case for Enron was the summer of 200X, when electricity prices in California shot though the roof and Pacific Gas & Electric (PGE) was forced into bankruptcy. When Enron got its come-uppance, the Enron traders who knew how to orchestrate these massive price increases went to work – you guessed it – at Goldman Sachs, Morgan Stanley, JP Morgan and other investment banks. Oil prices started running shortly after that… 

*****Now, I have no problem with speculating on prices. It is every investor’s right to put their money at risk based on what they believe. But the type of speculation that 60 Minutes report alleges is completely different. 
We’re talking about massive institutionalized price manipulation. Remember when Goldman Sachs (NYSE:GS) was making its “super spike” forecasts? First, oil was going to $100. Then it was $130. Goldman finally went as high as $200 a barrel. Morgan Stanley only got as high as $150. (Apparently, they weren’t as greedy as Goldman.) 
These forecasts were all based on rising demand from China and India. Even though for the entirety of 2008, when oil prices went absolutely bonkers, the EIA was reporting that supply was rising and demand was falling. I vividly remember OPEC’s repeated assertions that the oil markets were well-supplied. 
*****It’s pretty easy to imagine how Wall Street’s investment banks were able to pull off this massive fraud. They put out research calling for higher prices, put their money to work, and then hit the phones, encouraging every investor they can to get long oil. 
It’s remarkably similar to how these same investment banks parlayed ridiculously bullish research on Internet companies to land multi-million dollar investment banking deals. The research departments were separated from investment banking. But that didn’t stop the research divisions from supporting the big banks trading activities. 
*****Now we’re getting to an issue that’s come up in Daily Profit in the past – free markets. I will argue until my dying day that a truly free market is every bit as idealist a dream as Lenin’s communism, Jefferson’s democracy or Adam Smith’s capitalism. There’s a little thing called human nature that will always, absolutely, get in the way of an ideal anything. Aristotle knew it. And yet we continue to struggle with the idea. 
Regulated capitalism is the only way to go. The human of emotions of greed and the desire for power will trump any moral system, every time. Were it not for regulations and prohibitions against monopolies, we’d have an emperor Vanderbilt, Rockefeller, or Carnegie right now. 
*****The one thing that 60 Minutes glossed over in its report was Goldman Sachs. During oil’s run, Goldman built the world’s largest energy trading department. It also made the most outrageous forecasts for oil prices. And who was CEO at the time? Why, it was Treasury Secretary Henry Paulson. 
*****So now we have to wonder what the future holds for oil prices. As you know, I’ve been lukewarm on the sector for the near future. The massive wealth destruction that’s occurred at hedge funds and other institutional investors, combined with demand destruction, should keep a lid on the speculation that helped drive oil prices higher for some time. 
But as with any lie, there’s always a kernel of truth. And in this case, demand from China, India and other emerging economies will return. In the meantime, let’s go ahead and take our profits from Graham Corp (AMEX:GHM). As always, I’d love to hear how you did with this stock. 
*****Are you getting bad advice from your financial planner? Does he or she not know where to turn for profitable investments? Then join me, Ian Wyatt, as I put up $100,000 of my own money to show individual investors how to grow their wealth. We’re kicking off Ian Wyatt’s $100,000 Recovery Portfolio with a special Video Event on January 22, 2009 at 6 pm ET. It’s completely free and the pre-registration period has begun. If you’d like to attend, here’s the LINK 
*****Well, I did it again. Every time I think I’m going to get to your emails, some other pressing topic seems to come up. I greatly appreciate Daily Profit readers taking the time to write.  


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