The myth that the Republicans, and the Drill-heads keep screaming about; is a domestic oil supply.
There is no such thing, and there can never be one.
All our domestically produced oil is sold on the open market. Period

Greetings ladies and gentlemen to the latest episode of Manufacturing Monday. Couple of interesting things to discus today, and some interesting numbers to watch this week.  First we have what appears to be a new take on price fixing by manufacturers.  Next we explore the recent collapse in the price of grains. Our last piece is a story from the Financial Times where companies and groups are hiring the very element that help drive up their costs, speculators, to well...sorta fight speculators.  Kinda reminds me of those old westerns where they hire a gunfighter to take on the baddie.  Finally, as mentioned, there are numbers we're watching, the Producer Price Index being released tomorrow, Jobless claims and the Philadelphia Fed Survey on Thursday.

weren't so wrong.

It seems the CFTC (Commodity Futures Trade Commission) has been poking around the edges after everyone has been poking sticks at them:

The Commodity Futures Trading Commission has changed the reporting classification of one massive participant in the market for NYMEX crude oil futures from "commercial" to "non-commercial" after reviewing its trading activity and concluding that "commercial hedging or risk management activities did not constitute a significant part of the overall trading activity."

This single institution had huge long-short spread positions amounting to
around 327 million bbl of crude oil, and amounted to around 20% of the
entire futures and options positions previously attributed to producer and
consumer "hedgers".

There are not many institutions in the world capable of running positions on this scale.  The spread risk is enormous.

Phil Gramm recently said, "We have become a nation of whiners." And that this is a "mental" recession. You also have Rush Limbaugh spouting off that 5% of the U.S. carries the other 95%. The Republican party is out-of-touch. The amazing thing, about these statements, is that the GOP is finally being honest about who they are and who they represent. They don’t support the average person. Their base is, as George W. Bush said, "the haves and the have mores."

For a truly breathtaking (and accurate) view of the news headlines, I like to go over to Life After The Oil Crash dot com and get a bracing, non-candy-coated view of where our economy, and civilization, are headed.

You'll be shocked at the headlines, all of which are from major economic sources like the Wall Street Journal, the Economist, Forbes, etc., showing the truly epic scope of the current economic nightmare.  

One article that struck me especially hard lately was the one which this diary will be about.

It basically says this:  At some point, the price of oil will consume 100% of the world's income.   This articule postulates that $300 a barrel for oil is the point at which so much of the world's income will be spent merely buying oil that the entire economy will come to a screeching halt.  And we'll be looking over the "smoldering ruins of the world's economy."

There was a good bit of debate on Capitol Hill last week on what to do to reign in oil speculation.  According to testimony given by Michael Masters before the Senate Committee on Homeland Security and Governmental Affairs, institutional investors are significantly driving up the price of commodities traded on futures markets.

More after the jump:

There has been a lot of speculation in the media (and from oil producers) about whether speculation in the market is in large part (or in any part) responsible for the recent run up in oil prices. If this is in fact a large contributing factor, who is benefiting financially?

You just knew this was going to happen eventually.  The skyrocketing price of petroleum soon reaching the $200 level as our astute Jerome a Paris noted, has not only caused pain at the pump.  It has also started to hit the foundations of the whole way manufacturing done.  The whole mad free trade system is starting to buckle.

Some big happenings today, my fellow Kossacks!

While most of our country, rightly so, is focused on the ever increasing cost of gasoline, and its effect on our economy, this will be one of those diaries that reminds you that a much more valuable resource (now commodity?) is endangered.  This resource is something we need for life, and it is simply water.

We are running out of freshwater

In the first seven years of the new millennium, more studies, reports, and books on the global water crisis have been published than in all of the preceding century. Almost every country has undertaken research to ascertain its water wealth and the threats to its aquatic systems. Universities around the world are setting up departments or cross-departmental disciplines to study the effects of water shortages. The Worldwatch Institute has declared: "Water scarcity may be the most underappreciated global environmental challenge of our time."

For this diary, I will be offering quotes out of a new article on "The American Prospect"...follow me below

I'm not sure if anyone noticed this yesterday, what with all the political news and now today with the story from Guantanamo.  But the price of Corn broke a new high.

Many people wonder: why has oil gone up 800%+ since 2003?  That's a mightly high inflation rate.  Are China and India soaking up the stuff?  Is OPEC stingy?

My theory is that speculators, just as they did when housing became an investment instead of a dwelling, are driving the price up through the roof.  I don't pretend to be alone in this theory.  Soros pointed out the blowup of asset valuation in the Financial Times on Monday.  But as The Wall Street Journal points out, investors are taking advantage of the delay in credible information on the effects of skyrocketing oil prices on demand.  The most recent report from the International Energy Agency (IEA) on Tuesday only reflects data on global supply and demand ending April 2008.  There's generally a 2-month lag on information, and as Lawrence Eagles, the IEA's head of market analysis, said:

For a market to operate efficiently you need perfect data, and the data we have is far from perfect.

I trade commodities - just finished up a one year engagement helping a firm trade their international feedstock and offtake contract in biodiesel. I was a guest speaker at a major natural gas industry function in 2005 - the title of my talk "Is Volatility Really Due to Hedge Funds" (the answer was yes).

So, when I hear people saying that hedge funds are the cause of energy prices going up in "the face of the supply/demand balance", I gnash my teeth. Why? Because hedge funds define the supply/demand balance.

Ok, you say: "But I see the oil storage numbers going up, I see demand dropping - that means there is more supply than demand." The answer is you are correct but only in part.

I used to trade but I also originated for the firm - that means I went out and sold structured transactions to other companies. The discussion I had with them has relevance to this discussion.

More below:

(Editor's Note: I see the the CRB chart I posted is huge and has overlapped an ad or two.  My apologies on this, I'm not sure how to shrink it without losing the data.  Once again, sorry for the overlap.)

Folks, in the Age of Bush, these ISM numbers are considered "growth."

For many this will be a controversial position so I only ask that you hear me out before ....you know...

We all remember the Enron speculation induced power crisis from a few years back. We are now seeing an oil price spike and some here are tempted to place the blame again on speculators.

Yes, speculators have a role in the oil price spike but there are reasons that they have been able to play the market, and ways that we can "beat" them.

Bonddad recently wrote about a Bloomberg article on rising beef prices.  My quibble isn't with his technical analysis, but with one of his comments. He thought that demand was increasing for beef because...

...as the world's standard of loving [sic] increases (think India and China making more and more money) people will want better things like steak.

A columnist for the automotive section of our local paper has covered some very important ground in the past few weeks, writing the kind of column that will never appear in the news section or on the editorial page where it belongs.  In his two columns written over the course of the past two Sunday papers, he has explored the real reason for the high price of gas, linking it to many other scandals (like the subprime mess), all originating with one crappy piece of monstrous legislation.  I'll quote a few paragraphs, but this one is worth reading in its entirety:

Does it surprise you to discover that the US Senate investigated the rigging of the oil market by speculators in the summer of 2006 – and concluded that there was no supply and demand problem with oil? Did you know that their conclusion was that speculators were responsible for a 70 percent overcharge in the price of oil in the months leading up to the summer of 2006?

Follow me below the break for more...

When agricultural subsidies were institutionalized during the New Deal era they kept the country fed and farmers solvent in the face of overlapping economic and environmental disasters. Subsidies were first offered in exchange for not growing major commodities after a decade of oversupply and declining crop values. The policy allowed production to be reduced while the farmer’s income remained constant. A three-part system of subsidies was introduced in the 1934 farm bill with the intent of regulating supply and stabilizing income for farmers regardless of market conditions (Agricultural Adjustment Act of 1933). While the details and names of the programs have changed over time, the overall policy of subsidizing commodity production to guarantee an ample supply of food has not (USDA, a).