2008 Oil Bubble
George C. Parker repeatedly sold the Brooklyn Bridge to willing buyers. The only caveat? It wasn’t his. Neither did he own the Metropolitan Museum of Art, the original Madison Square Garden, nor the Statue of Liberty, but that didn’t stop him from duping a string of gullible targets before his final arrest and conviction in 1928. Carl Sifakis, an authority on turn-of-the-century con men, once described the recipients thusly: “Several times, Parker’s victims had to be rousted from the bridge by police when they tried to erect toll barriers.”
It appears little has changed since the days of Parker and his slickster kin.
‘Speculator’ is a fancy term for traders who make money from the rapid purchase and sale of stocks, bonds, futures, or option contracts, capitalizing on the subsequent volatility. In order to achieve this, traders will engage in a process known as “churning” – the act of purchasing a security/contract and immediately offering it at a higher price. The thinking goes: Frequent churning, coupled with enough capital, results in the ability to move markets.
The oil bubble was formed by, among other things, the presence of hedge funds in the futures market. Demand grew disproportionately to the speed in which supplies could be proffered; yet orders kept coming in, sending oil prices through the roof.
Unfortunately, bubbles eventually pop. The failing health of the US economy has prompted corporate investors to head for the door all at once. Once prices decline due to the sudden availability of the once overvalued commodity, those left behind are stuck holding the bag – the hapless victims of speculators.
While Congress introduced an anti-speculation bill in early-2008 to curb excessive futures trading, the White House threatened to veto it if it is passed this year. According to Forbes, supporters want to “ensure futures prices are based on market fundamentals” to “avoid the turmoil of the stock market,” but sceptics say it will not have an impact on oil prices. A spokesperson for the Futures Industry Association said that implementing restrictions on free-market philosophy would have a severe effect on oil prices in the long-run, forcing markets to trade in more unregulated countries overseas.
Furthermore, attempting to keep an eye on an industry that sees $5 trillion exchange hands every day would require significant resources. The White House also added that doing so would force the Commodity Futures Trading Commission (CFTC) to take on too many responsibilities, which would “divert it from its core mission of promoting fair and efficient markets.” (Which begs the question: What exactly was it doing before?)
Savvy investors know to stay clear of the bubble euphoria. However, if you ever find yourself buying a stock that’s going to the moon and beyond, come see me: I have a bridge to sell you.
