Tuesday, May 24, 2011

Oil: The Mess Goldman Sachs Made

The price of oil is rising again. Gas costs at the pump almost $4 a gallon. There is no fundamental reason for that. The world economy is cooling at the moment, as many indicators show. Less economic growth means a diminished demand for energy, which should lower the price of oil. And there is plenty of oil on the market as the weekly inventory numbers show. Added to that, members of OPEC, the cartel of the leading oil producers, are stressing, that they see no need for augmenting oil production, because there is not enough demand for it. The world has plenty of oil, they claim.

But the oil price is climbing anyway. The reason is that many funds, especially hedge funds, buy oil. They invest in energy because the price is rising and they bet that the rally continues. This is a typical herding behavior which leads to a snowball effect. Rising oil prices are generating further price rises. This dangerous behavior is fueled by some banks which pour gasoline on the fire (pun intended). They predict higher oil prices and induce therefore more oil buying which drives the prices upwardy.

Today Goldman Sachs and other banks increased their oil price forecasts. Goldman Sachs predicts now an oil price of $130 a barrel (recently $107). Morgan Stanley also raised their oil price forecast. The managers of many funds react like Pavlov´s dog, buying more oil on cue, just because the banks recommend it. The banks are heating the oil price rally because they earn billions with the trade of oil (via futures and other derivatives) and selling funds which invest in oil.

This is reminiscent of the year 2008. Then the oil price climbed to $146, even though the recession had already started then. The oil buyers ignored the weak economy, because Goldman Sachs and other banks fiercely recommended buying oil. Goldman Sachs was then the major oil price booster, because the bank set a target of $200 for the near future.

The reaction was that the rising oil price pumped billions of dollar out of the western economies and caused the recession to sharpen. Companies & consumers had to cut their budgets because of the rising expenses for oil & gas. Many commuters didn´t have the money to pay the high gas prices or their mortgages. Therefore they skipped payments to the banks, which caused the bust of many financial institutions and worsened the financal crises. The mess Goldman Sachs made led to a severe world worldwide recession.

This is also a failure for the official regulators of the financial markets. The bureaucrats are clueless and do nothing against the rising oil prices and the gossip mongering of Godman Sachs & Co, which makes billions by producing an oil crises and an economic disaster.

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