Time Magazine: Are Oil Prices Rigged?

[RamboLiberal]

We've all read that speculators are driving oil prices artificially high — a claim that gets more interesting in light of oil's recent fall below $115. But maybe we're looking at it from the wrong perspective. Suppose that major suppliers in the oil industry are these manipulative speculators.

Is it possible that oil prices are rigged? You bet. Here's how:

Just how would you raise prices if you were an oil supplier? Controlling the supply — as in the 1973 OPEC embargo — has become less effective with more sources of oil worldwide. And oil suppliers clearly cannot raise prices by controlling demand in the physical oil market; ultimately, they need to sell their oil, not buy it. However, with the market inefficiencies that we expose here, oil suppliers can regain the upper hand by artificially inflating demand using a different market. To understand this mechanism, we must take a glimpse into the future — the futures market, that is.

The price of oil reported in the news is actually the price of oil in the futures market. In this market, traders do not exchange physical barrels of oil, but instead trade contracts which obligate them to exchange oil at a quoted price at a specific date in the future, usually months in advance. Such a contract allows companies to hedge positions by locking in prices early. Airlines might buy futures contracts to reduce their exposure to rising fuel prices. Conversely, oil companies might sell futures contracts to assure a profit against future price drops. It's all about reducing risk and uncertainty. But what if oil suppliers were instead buying oil futures, compounding their own risk and reaping enormous profits from the explosion in the price of physical oil?

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Ari J. Officer studies financial mathematics at Stanford University. Garrett J. Hayes studies materials science and engineering at Stanford University

http://www.time.com/time/business/article/0,8599,1834888-1,00.html

[FreakinDJ]

1. When price does not follow demand - its rigged

and that is what we have been seeing

[OwnedByFerrets]

2. Does the sun rise in the east??? DUH!!

[MarjorieG]

3. Saddam's creating instability of oil was a major reason for invading, so....

How did the war affect the oil company profits versus the rest of the costs, and to whom. The companies still got their their profits, but a lot of unintended consequences. Maybe unintended, considering profits of others.

[GoesTo11]

4. Bear meet woods

[zbdent]

5. Dear Time - the Sky is Blue ...

[Andy823]

6. I agree 100%

They know how to manipulate the price from the crude price on down to the gas pumps. I thin this is why congress hasn't done something earlier to stop speculators. Big oil has a lot of money going into the pockets of those in congress, and I bet a lot of people in congress have millions invested in oil speculation also. The people need to kick out those in congress who won't vote for tougher regulations on speculators , and the way they do business.

[libodem]

7. Who could think it isn't?

Look at how it's coming down to correlate with the elections. Of course it's rigged. They want another effing repuke in office to bounce them way back up again. In fact I wonder if tech stocks won't recover with a Dem back in the White House? I think those repukes have some sort of insider thing going with the utilities. Can we say ENRON?

[tbyg52]

8. >>Who could think it isn't?

Someone who gets all their news from the Fawning Corporate Media (FCM). So it's nice that a member of the FCM is reporting it for the sleeping.

[meow2u3]

9. Is the Pope Catholic?

Does the cat shit in the litterbox? HELLO?!!

[Chalco]

10. Is the pope Catholic? Well, duh! nt