Commodity Trader on the Oil Market

RUSH: Here’s Bob in Chicago. Bob, welcome to the EIB Network, sir. Hello.

CALLER: Rush, good afternoon.

RUSH: Hi.

CALLER: Back on oil one more time.

RUSH: Yeah.

CALLER: Rush, the oil companies have absolutely no motivation whatsoever to drill more or produce more. The current situation is utopia for the oil companies and for the traders. The production is equaling demand, there is no shortage of fuel — and if they provide more fuel, then the balance changes, supply exceeds demand, the price goes down, and the profits go down. What in the world would any CEO of a major corporation in a commodity industry want to drive prices down and in turn drive profits down?

RUSH: Well, there is an answer to that, but your premise is correct. I want to say that. But there’s an answer to your last question. You drive prices down to sell more. I mean, you can increase profits by volume, or you can try to get profits by as high a price as you can, the biggest margin that you can. With gasoline, oil, this is something people can’t do without. It’s sort of like food. They really can’t do without it. They can reduce their use of it in certain ways. I want to go back to your original premise, because in researching all this I found a story in — I guess it was in — Business Week, and it was a year ago, March 12th, and it was about the annual ExxonMobil meeting with their shareholders, and it was a three-hour meeting, and there were some journalists in there and the CEO at the time was Rex Tillerson, and Rex Tillerson made it clear to everybody in the room that their concern is not fulfilling the needs of consumers. He’s got a business to run; you’re exactly right. He’s got a profit margin to maintain. He has got expectations. You know, just like every other company, they project what their growth rate is going to be every year, and the stock price depends on them hitting it. And the stock price —

CALLER: Exactly.

RUSH: — the shareholder value is the primary impetus of corporations, not fulfilling consumers’ needs. I mean, the two are sort of linked, but their primary fiduciary responsibility is to the shareholders.

CALLER: Not in a commodity business, Rush. Not in a commodity business. In a commodity business, it is not the same as an industrial environment —

RUSH: Well…

CALLER: — where you’re concerned about the customer.

RUSH: No, no, no. I said their shareholders, not customers. They are concerned with shareholder value. That’s to whom they have to be loyal so there are ways of doing this.

CALLER: Yeah.

RUSH: In fact, at this meeting, at this ExxonMobil meeting in March of ’07, Rex Tillerson projected zero net growth in oil production, even though new fields are scheduled to come on line, others are scheduled to go off line and run out of supply. But the journalist reporting the story said that the theory behind this is, is that if they project too much growth in one year and don’t hit it, even though they do have growth, then the stock price is going to suffer because the street analysts are going to say, ‘Uh-oh! Problem with Exxon. They didn’t meet their expectations.’

CALLER: Exactly.

RUSH: It happens with every company. And so this journalist said flags went up when he realized that what Tillerson was telling the shareholders was that they’re not in business primarily to see to it that customers can afford the product. They’re in it to make sure shareholders and investors in the company continue to get value for the investment, and that there are ways of doing this by managing the supply.

CALLER: Mmm. Exactly. And if you keep the production down, the price is going to stay up, and the earnings are going to stay up. In a recent article from Forbes about two weeks ago, Rush, there was a very interesting article talking about the fact that domestic production is down 25%, and the consumption is up by 35%.

RUSH: You’re close. The number is even more stark than that. I think since the late eighties, production is down 40% and consumption is up 30. I mean, it’s a huge, stark difference. The federal government put those numbers out. But regardless, there’s a counterbalance to this, too. Do you think when the oil execs are being grilled by the House and Senate judiciary committees and they respond, ‘Look, Senator, you can complain all you want to us, but as long as you’re going to keep 62% or 84% of this nation’s oil supply off limits to us, then you can’t blame us,’ do you think they’re being honest about it? Do you think…?

CALLER: No. No, I don’t.

RUSH: You don’t?

CALLER: No. They’re going to control the amount of fuel that is drilled in this country, and they’re gonna supplement it with import and use the domestic fuel as a balance. That’s all it’s being used for. They would keep that oil in the ground for the next hundred years. There’s no reason to pull it out. Drain the Middle East, leave domestic fuel in the ground, and control the numbers.

RUSH: I’ve heard that theory advanced, too, but you’re not saying let the Middle East run out of oil as a strategic move and a foreign policy move? You’re not equating that theory or functioning —

CALLER: Use as much of it as you possibly can and leave domestic in the ground.

RUSH: Well, okay, if you’re going to fund a project use other people’s money if you can instead of your own —

CALLER: Exactly.

RUSH: — and don’t touch your own principal. Okay.

CALLER: Yeah.

RUSH: I understand that. But there’s a counterbalance to this at some point, and that’s the market. If the price gets too high, they’re not going to be able to. The market’s not going to be able to support it. They still have to sell the refined products in order for these profits to be realized.

CALLER: And at that point you cut back on the import and you use domestic.

RUSH: What difference is it going to make? No, because they don’t…

CALLER: The advantage is the oil commodities.

RUSH: Yeah, but they don’t determine the world price strictly vis-a-vis their production.

CALLER: Oooooh.

RUSH: Is a drop of Saudi oil more expensive than — just in raw terms, forget import and export, you know, is a drop of Saudi sweet crude — any more expensive than ours?

CALLER: Rush, I can’t say. I don’t know. I’m not an expert in the oil business, but I’ve been involved in commodity for a long, long time; and this is not unlike any other commodity.

RUSH: Okay then.

CALLER: Take the corn industry, the farmers with corn.

RUSH: Right. Understand. But then I must ask this question. Given what you have said here, are you suggesting that American big oil companies have engineered this massive price rise of oil?

CALLER: Rush, I hesitate to say that, but you can draw your own conclusions.

RUSH: Well, if they’re doing that — and I frankly don’t think they can because I don’t think they control enough of the world’s oil.

CALLER: They don’t have to control the world oil. All they have to do is control our oil.

RUSH: No, but it’s… Look, we’re not bringing enough out of our ground to have an effect on it. This is the point. ExxonMobil is our largest American corporation. ExxonMobil reported the largest profits recently of any American corporation, and it represents two to three percent of the world’s oil. Common sense tells me that Rex Tillerson and his boys in there could not be affecting the world oil price with that little control over the massive supply of oil that is in the globe. I think the market’s too big and too complex to be managed and controlled by any single entity, and I don’t think a cabal could get together and do it, either. OPEC does not control all the supply, either. And they are in the competitor business, and if OPEC raises their price too high and somebody thinks they can sell more of it with a lower price they’re going to do it; and there’s a market out there for buying it as cheap as they can get it. So I don’t know how you would control this. But, look, it’s an interesting theory, and it is interesting to understand that ExxonMobil (I’m sure this is true of most of them) their fiduciary responsibility is to their shareholders, and they have to manage their growth every year so that they show growth; so they don’t have an off year because then the stock price plummets and the CEO gets in trouble. That’s when the board gets unhappy. Anyway, I have something else on this that I’m going to dig up here that I’ve buried somewhere in the Stack and I’m going to read it, ’cause it’s about commodities (well, and one other thing), their lifespan and how they all had a bubble, and then what happens to them at the end of their big run. And you’ll find it fascinating.

BREAK TRANSCRIPT

RUSH: All right, now as to our last caller who was a commodity trader, commodity traders are commodity traders. I don’t think many of them understand liberalism. I really don’t think that there is a strategic policy in place to let the rest of the world use up all of its oil while we save ours so that we are the only ones that have any left. That’s not what the libs are doing here. The libs are trying to harm the United States of America. They’re trying to cut us down to size. They don’t have any intention of letting us tap domestic fields. There’s no smart plan out there. It’s easy to contrive of a circumstance where you might think so, but, of course, oil isn’t like any other commodity. Look at corn. Government subsidizes agriculture. It does so in several ways, including now through ethanol. They would never subsidize oil! Can you imagine the government subsidizing oil? It’s just the exact opposite. There’s another thing, too. When you talk about prices getting as high as they are now, the theory is that US oil companies could get domestic oil much cheaper than having to buy oil at the market price from somebody else.

Now, this, of course, depends on the expense involved in bringing up domestic oil, but it’s a very complicated thing. To think that there’s a massive plan out there is just (sigh). One could not be managed. But I found a chart here. Casey Research chief economist Bud Conrad — and he had no intention of showing what I have observed on occasion; his point here is to show if you had made ‘just four trades over the last four decades — into exactly the right sector at the beginning of a strong new trend — you could have turned $35 into $150,000. Or $350 into $1,500,000 … or $3,500 into $15 million,’ and he tracks four things. The ten-year price increase in gold; the ten-year raising price increase to the Nikkei stock market in Japan, that index; the ten-year dot-com NASDAQ bubble; and now oil. So in the past four decades of bubbles, there have been these four: gold; the Japanese Nikkei; the NASDAQ, which led to the dot-com bubble; and now oil.

What happened after gold in the seventies? Gold in the seventies dropped from $850 to $250, after its big run-up. The Nikkei dropped from 40,000 to the 10,000 area. The dot-com bust, NASDAQ went from 5,000 to about 1500. Oil hasn’t yet topped. But when it does, the others that I’m talking about here dropped at least or 75%. You might even want to throw the housing bubble in here if you want. Look at how dramatically housing prices are falling. We’ve got this pattern. The reason I’m bringing this up is, is because common sense tells me that the market’s not going to be able to support this 135, 150, certainly not $200-a-barrel oil. Something is going to happen; it’s going to have to burst — and when it does it’s going to burst big like all these others have. That’s why I feel confident about this.