STACEY VANEK SMITH, HOST:
Hello, and welcome to PLANET MONEY. I'm Stacey Vanek Smith.
ROBERT SMITH, HOST:
And I'm Robert Smith. In our last episode, PLANET MONEY got into the oil business. I highly recommend that you go back and listen to that. Stacey and I traveled to an oil well in the middle of a Kansas cow pasture to make a deal.
(SOUNDBITE OF ARCHIVED BROADCAST)
SMITH: Let's do the handshake. All right.
JASON BRUNS: All right, deal.
VANEK SMITH: Do we officially own the oil now?
BRUNS: You officially own the oil now - a hundred barrels of the oil.
VANEK SMITH: That is Jason Bruns. He's the guy who sold us our crude oil.
SMITH: We paid him $40 dollars a barrel, and we had to haggle over that price, too.
VANEK SMITH: Yes.
SMITH: And it was hard to tell whether we got a good deal or not because the price, these days, for oil is all over the place. What happened this week with the price?
BRUNS: We lost $6 or $7 in the last 10 days anyway.
SMITH: Six or $7 a barrel?
BRUNS: Yeah, a barrel - is gone. And what changed? I didn't produce any more oil (laughter). I don't think Chesapeake, Exxon Mobil - I don't think they hit no big gushers that made millions of barrels. It's just the - the market is very volatile.
VANEK SMITH: Volatility has always been kind of baked into the oil business. Jason grew up in an oil family. And he says, one year, they would barely have enough to eat, and the next year, they'd have all of these new four-wheelers and be living in a house with a lake in the backyard. And all of this hinged on one thing - the price of oil.
SMITH: Where do you picture that price coming from? Who do you picture setting that price?
BRUNS: Well, I didn't really ever think about that. I just figured it's - you know, there's a lot of trading. There's a lot of news. Wall Street - that's what it is.
SMITH: And what do you - how do you picture Wall Street?
BRUNS: I picture Wall Street as people that trade, and they never see all. They don't - they don't - they don't see all. They buy a million barrels, and they never see it. They - it's just all on paper. It's a - it's a - that's what I see.
SMITH: What are they wearing?
BRUNS: A suit with no tie.
VANEK SMITH: No tie.
BRUNS: Yeah, they just - to be more comfortable, so they can run around and look at screens. I don't know.
SMITH: But you know what, Stacey? We don't have to imagine this because as we have been here in Kansas with Jason, buying oil for $40 a barrel, our colleagues David Kestenbaum and Jacob Goldstein - they are back in New York. And they have been looking into where that number - $40 a barrel - comes from.
VANEK SMITH: Yes. That price we pay for our oil and the price we all pay when we fill up our gas tanks - they took a look at who sets that price. It's coming up after the break.
(SOUNDBITE OF MUSIC)
DAVID KESTENBAUM, BYLINE: Jacob, I've been thinking. Oil is really unlike anything else in the world. For one thing, when you buy it the way we buy it, like, in the form of gas at the gas station, the price is not on some tiny little sticker, like when you're going to the supermarket. The price for gas at the station is, like, huge letters feet-high. And it's not something simple, like $2 a gallon. It is $2.37 and, like, six-tenths of a penny. It is priced down to the fraction of a cent. And then, overnight, somebody gets up on a long ladder. I mean, that's how it's - I've never seen it.
JACOB GOLDSTEIN, BYLINE: I think it's a pole, like a big pole with a giant suction cup.
KESTENBAUM: Anyway, the next day, it's, like, a new number. It's changed.
GOLDSTEIN: It changes every day. And so there is this question. You know, that number you see in giant numbers - where does it come from? Seems simple, but we asked economists. The answer - no, it is not simple.
KESTENBAUM: So let's start here. When you see on the business news that the price of oil went up or went down, and they want to find out why, they often grab somebody from one of the trading floors. You know, the scene. It's guys - mostly guys - who spend their days shouting, buying and selling stuff, often wearing very loud jackets. Here's a clip from CNBC.
(SOUNDBITE OF CNBC NEWS SHOW)
UNIDENTIFIED MAN #1: Your glasses match your tie. I mean...
UNIDENTIFIED MAN #1: You're starting to look like Elton John or something here.
KESTENBAUM: We like the look of that guy. His name is Scott Shellady. He was wearing gold glasses. Jason, if you're out there listening to us in the fields of Kansas - he was wearing a tie. It was gold, also, to match his glasses. And he was wearing a cow print jacket - like, big black and white spots. We decided - let's talk to that guy.
GOLDSTEIN: In order to buy just our little hundred barrels of oil, we had to spend months - truly, months - talking to lawyers. We racked up thousands of dollars in legal fees. There were faxes and phone calls and contracts, and we had to register with the state of Kansas. All that just to buy a hundred barrels. There was a much easier way we could have done it. We could have just called Scott.
KESTENBAUM: So if I want to buy oil, you can do it for me?
SCOTT SHELLADY: Yeah. Hold on one second. Hold on. Hey, Jumbo. July Dees ...
GOLDSTEIN: Scott works at the Chicago Mercantile Exchange with a bunch of other brokers and traders, apparently including at least one guy named Jumbo. And all day long, people call up Scott and say, I want to buy this or sell that - you know, treasury bonds or wheat or oil.
KESTENBAUM: Can I buy, like, one barrel?
SHELLADY: No. You have to buy a contract.
KESTENBAUM: What's a minimum? What's a minimum? How many barrels?
SHELLADY: Let's see. It's a lot. So hold on. I'll get the contracts quick for you right now. One contract is a thousand barrels.
KESTENBAUM: Could I do 10,000?
SHELLADY: Yeah. That'd be 10 contracts.
KESTENBAUM: Can I do a million?
SHELLADY: That would take a while.
KESTENBAUM: A million barrels is a lot of oil, but there is a huge amount of oil bought and sold every day. Every day, the world uses something like 90 million barrels of oil - every day.
GOLDSTEIN: And here's one reason why it's hard to figure out what's driving the price we just paid for our oil. Scott's clients - they aren't even buying oil for today. They're buying and selling promises to deliver oil next month or next year or even eight years from now. They're trading oil futures.
KESTENBAUM: It's pretty easy to do. Oil futures used to be traded, you know, like, in a trading pit where people were yelling at each other and holding up pieces of paper. It doesn't happen like that anymore. It is all over the computer. Though Scott says if it's a big order, he might call around to other brokers just to get the lay of the land.
If you call someone on the phone, what do you say? Like, what's the language of it? There must be jargon.
SHELLADY: Yeah. I call another broker up, and I said, look, June crude - I'm looking to buy a bag. I'm 47-90 bid. What's your offer?
KESTENBAUM: What does that mean? June crude - I'm looking to buy a bag. I'm 47-90 bid. What is your offer?
GOLDSTEIN: OK. OK. So the first two words - June crude.
KESTENBAUM: That I get.
GOLDSTEIN: Yeah, it means I'm looking to lock in a contract to buy crude oil in June.
KESTENBAUM: But then he says I'm looking to buy a bag.
GOLDSTEIN: Yeah. OK. So here - OK. He's told us a bag is a thousand.
GOLDSTEIN: Right - why? So for the most ridiculous reason - like, so ridiculous I couldn't have made it up. OK. Here's why, he says. Start with a thousand. A slang word for a thousand is a grand. Simple enough. What rhymes with grand? Sand. And what does sand come in? A bag.
KESTENBAUM: So I'm looking to buy a bag means I'm looking to buy a thousand contracts for oil.
GOLDSTEIN: Yes. And it's sort of awful (laughter). It is so ridiculous.
KESTENBAUM: This is Cockney - this is Cockney rhyming slang, right?
GOLDSTEIN: Yeah. And, like, the point of this kind of rhyming slang - this Cockney rhyming slang comes from England. The point of it, I think, is to be obscure and ridiculous. Scott used to work in London, which he says is, like, the capital of this ridiculous slang, and he clearly loves it.
SHELLADY: A Valerie means one 'cause there used to be a singer - Valerie Singleton, you know. That's one.
SHELLADY: There used to be a racecar driver. Unfortunately, he died. His name was Ayrton Senna. But he would be ten because tenner rhymes with Senner (ph). So they have them all the way up, you know. For some reason, a monkey is 500, and I do - I do not know why.
KESTENBAUM: How much oil did we buy? Did we buy like some small part of a monkey.
GOLDSTEIN: A tenth of a Valerie, maybe. A...
KESTENBAUM: Not much.
GOLDSTEIN: I know. I can't even - I can't even do it in monkeys.
KESTENBAUM: So there is this massive universe of people all over the world buying and selling monkeys worth of oil. And you know what? Most of them have no interest in actually owning oil. Jason Bruns, the guy who sold us actual oil in Kansas - he was right. Most these people are never going to see or touch the oil.
GOLDSTEIN: Yeah, they're speculators. They're basically just placing bets on which way the price of oil is going to go. They bet right, they make money. They bet wrong, they lose. And according to the federal government, speculators actually make up more of the oil futures market than people who are really in the oil business.
KESTENBAUM: Would any of those oil speculators talk to us?
SHELLADY: I don't think so 'cause they're hedge funds, and they're pretty secretive, so, you know, I wouldn't - probably not.
KESTENBAUM: You can understand why speculators would not want to talk to the press. The idea that people who are just betting on the price of oil are playing such a big role in the oil markets - that makes some people really angry, especially when oil is expensive.
(SOUNDBITE OF CONGRESSIONAL HEARING)
UNIDENTIFIED MAN #2: We must end the excessive speculation in the energy markets.
UNIDENTIFIED MAN #3: Ending rampant speculation in the oils future market has the capability of doing something for us.
UNIDENTIFIED MAN #4: We need to consider a full range of options to counter this rapacious speculation.
KESTENBAUM: This is a congressional hearing in 2008. The price of oil was going through the roof at the time. I was actually at this hearing. I was new to covering economics. I had just started at Planet Money. And I'll be honest. I had no idea what to make of these claims. I tried to do a story for the radio, but I just got more and more confused. I never actually filed it. As we were doing this series now on oil, I started thinking about this question again. The price we just paid for our oil - the price we all pay when we fill up our cars with gas - is that set by speculators?
GOLDSTEIN: Scott Shellady, as promised, could not find us a speculator to talk to, but many, many phone calls later...
KESTENBAUM: Just yes or no. Are you a speculator?
MARK YUSKO: Yes, we are speculators.
GOLDSTEIN: This is Mark Yusko. He's the CEO of Morgan Creek Capital Management.
KESTENBAUM: How much money do you guys have under management?
YUSKO: About three billion.
KESTENBAUM: Oh, that's a lot.
YUSKO: That's a decent number. It's small in - it's small in the world of asset management, but we're...
GOLDSTEIN: Big in the world of NPR.
GOLDSTEIN: That 3 billion includes millions of dollars in oil futures.
KESTENBAUM: What are you going to do with all that oil?
YUSKO: Well, right now, we just want to hold it 'cause we think the prices are going to slowly creep back up.
KESTENBAUM: If the price of oil goes down, he'll lose money. But if it goes up, he'll make money. Not because he owns any gas stations. He's not in the oil business. This is just a bet.
GOLDSTEIN: We played Mark that tape of the congressmen complaining about speculators - complaining essentially about Mark.
(SOUNDBITE OF CONGRESSIONAL HEARING)
UNIDENTIFIED MAN #2: We must end the excessive speculation in the energy markets.
YUSKO: Ridiculous. Ridiculous. Just the idea that excess speculation - there's no such thing, right? I don't think it exists.
KESTENBAUM: Mark says, sure, sometimes we speculators drive up the price of oil. But you know what? Sometimes we drive it down.
YUSKO: You could have people speculating that prices were going to fall and selling more.
GOLDSTEIN: Put aside for a minute the question of whether speculators are good or bad. Mark is getting at something here that I've noticed for a long time. When the price of oil goes up a lot, you hear tons of complaints about speculators. You hear from Congress. You hear all these stories in the news about, oh, speculators are driving up the price of oil. But when the price of oil falls, you never hear stories about, like, oh, speculators are driving down the price of oil. Oh, why are speculators making oil so cheap? Never.
YUSKO: Well, that doesn't make good media coverage and doesn't certainly make good politics.
KESTENBAUM: Now, of course, Mark is going to complain about how politicians view speculators. And, of course, Mark is going to say speculation is fine. He is a speculator. So we found somebody who is not a speculator to weigh in on this and who has spent a long time trying to figure out the answer to this question we've been trying to figure out. What does drive the price of oil? And should we get mad at speculators like Mark Yusko the next time the price of oil spikes?
GOLDSTEIN: His name's Dan Murphy. He's an economist at the University of Virginia, and he got interested in this question of speculators and what was setting the price of oil right around that time of that congressional hearing. At that time, the price of oil was just going bananas. It has gone from $40 a barrel to over a hundred.
KESTENBAUM: Was there a day when you were filling up your car and you looked up at the sign and thought, I'd like to understand that better?
DAN MURPHY: I was driving a scooter at the time, so it was a little bit less important to me.
KESTENBAUM: What kind of scooter?
MURPHY: It was an Aprilia Scarabeo.
KESTENBAUM: Does it look cool?
MURPHY: Not with me on it. I'm the least hip person. There's no scooter that's going to change that.
KESTENBAUM: You're driving a little scooter. You don't really care what gas costs. But as an economist, he did care. He looked at a ridiculous price spike, and he thought - what the heck is going on?
MURPHY: I did not know, to be honest. I was curious what could be causing this. Why then? Why was it going up so fast?
GOLDSTEIN: That - it seems funny to me. Like, price of oil - you think, like - done. Like, we did that, like, a hundred years ago. I don't know. Whatever. It's like any other market. Whatever.
KESTENBAUM: This was a real question. Like, what is actually driving the price of oil? Why is it so hard to tell?
MURPHY: Because there's a lot of moving parts in the economy. There are a bunch of different things that can all change the price of oil. And trying to isolate these changes at any given point is tough.
KESTENBAUM: Dan didn't know whether speculators were behind the run up in price, but he wanted to find out. To understand how he went about trying to figure this out, you have to understand the mechanism by which speculators might be affecting the price of oil.
GOLDSTEIN: He walked me through this when I first talked to him, and it's actually really interesting. Like we said, speculators are mostly buying oil futures. These are contracts that lock in a price for a certain amount of oil at some point in the future - six months from now or a year from now or whatever.
KESTENBAUM: And when I was first thinking about this, I was like, how can that even affect the price we pay at the gas station today? 'Cause you can think of those futures contracts as just bets between people about what the price of oil will be in the future. And if that's right, why does it matter? You know, one side wins. The other side loses. How does it affect the price?
GOLDSTEIN: It's like the speculators are just, like, betting on the Super Bowl. You know, lots of people bet on the Super Bowl. Some people bet on one team. Some people bet on the other. It doesn't matter. It has no effect on who wins the Super Bowl.
KESTENBAUM: It's not supposed to (laughter).
GOLDSTEIN: At least, we hope it doesn't. Right.
KESTENBAUM: So Murphy says in this case, it's like the gamblers can affect the outcome of the game. Here's how. Suppose a bunch of speculators bid up the price of oil for, say, six months from now. Well, then somebody who has oil now might look at that and say, hey, smart people think oil is going to be more expensive in the future. You know what I'm going to do? I'm just going to take my oil here, and I'm going to stick it in this tank, or I'm going to leave it in the ground. I'm going to not sell it today.
GOLDSTEIN: And if enough people do that, then that means there is less oil being sold today, right? Supply goes down. That does drive up the price of oil today. That does drive up the price everybody has to pay when they fill up their cars with gas.
KESTENBAUM: So to see if this was actually going on, Dan looked at that insane price spike that the members of Congress were complaining about. He looked at oil production. He looked at prices. He looked at inventories, trying to figure out - did speculators cause the price spike?
MURPHY: They played a negligible role.
MURPHY: Well, we see some evidence that there might have been speculation in the form of oil producers keeping oil on the ground, but it's very small. So, yeah, I would say it's pretty much negligible.
GOLDSTEIN: Murphy didn't just look at this one moment. He looked at oil prices over several decades, and he found that speculators did affect the price once in a while. But for the most part, he told us, he found the speculators did not have much effect on the price. A typical - you know, typical oil price is not really affected much by speculators. They were, in fact, more like those people betting on the Super Bowl - off to the side.
KESTENBAUM: So if it is not speculators, what is driving the price of oil?
MURPHY: Our basic finding is that there's global demand that was driving the real price of oil.
GOLDSTEIN: Demand. And also important - supply?
KESTENBAUM: Correct. But if that is the case - right? - why does the price move around so much? I mean, like the price of TVs...
GOLDSTEIN: The price of everything.
KESTENBAUM: ...Is a function of supply and demand, and the price of televisions doesn't double in six months. They don't change the price tag every night.
GOLDSTEIN: Yeah, oil is different than TVs. It's different than almost everything we buy because if the world wants more, say, TVs, some new factory will start making more TVs. The price won't go crazy. You know, it costs roughly the same for one more factory to start making TVs.
KESTENBAUM: But when the world wants more oil, the oil has to come from somewhere. And the first barrels that come out of the ground - they are cheap. But the additional barrels - they have to come from different places where it is more expensive to get the oil out of the ground. That is why the price can move so dramatically.
GOLDSTEIN: So if you're somebody who speculates on the price of oil - if you're, say, Mark Yusko - you can close your eyes and see, like, this map of the whole world. And there are these little price tags scattered all around showing how much it costs to get oil out of the ground in different places.
YUSKO: You start with the cheap stuff in the Middle East that costs, you know, eight or $10 to get out of the ground. And then you've got the stuff in the Permian Basin which costs 15 or $20. That's in Texas. And then you go to shallow water offshore in the Gulf of Mexico. Then you go to deep water offshore off the coast of Brazil, and now you're up to 40 or $50. Then you go to the oil sands up in Canada. Now you're more like 70, 75. Then you go to really super deep water. Drilling will cost you 80, 85. Then above that, you know, you've got stuff that you can't get for a hundred or $120.
KESTENBAUM: Here is what sets the price of oil. Take all the oil people are buying today. Start at that end of the spectrum where oil is cheapest to produce and work your way up until you've satisfied all that demand. The more demand there is, the further up the price spectrum you're going to go. And finally, you get to that last barrel you need - the most expensive one someone is willing to buy. That barrel is the one that is setting the global price for oil.
GOLDSTEIN: So we're looking for someone for whom it just barely makes economic sense to turn their well on.
GOLDSTEIN: That's the person who's basically setting the price of oil.
YUSKO: Correct. Today, it's probably the drillers in the United States.
KESTENBAUM: Jacob, do you know a driller in the United States who is thinking about maybe turning on a well?
GOLDSTEIN: I'm glad you asked, David. Jason Bruns, the man who sold us oil - he has this other well. He is trying to decide right now whether to turn it on. He's trying to decide - does it make economic sense to turn this well on?
KESTENBAUM: Yeah, so he was wondering who sets the price of oil. In some ways, he's setting the price of oil. He took Robert and Stacey out to visit that well, and they're going to take the show from here.
BRUNS: We're looking for a little road.
SMITH: After we bought our oil, Jason drove us out to see - what's the well called?
VANEK SMITH: Oh, Ansel well number 3.
SMITH: Ansel Well Number 3. And it sort of embarrasses him because normally a well is run by a pump jack. It's going up and down. This particularly well - it's right next to Interstate 35, and it is completely stopped. So hundreds of thousands of people drive by and see that this well is producing no oil. It is a literal hole in the ground.
(SOUNDBITE OF DOOR CLOSING)
VANEK SMITH: So it's not - it's - nothing's happening.
BRUNS: No, we shut it down a few months ago with the low oil price and are - we're waiting on the price to go up.
VANEK SMITH: Actually the price did go up a few weeks ago, and Jason thought this is it. I'm going to turn my well back on. But then the price of oil went right back down again.
BRUNS: I'm kind of in limbo. Do we plug it? Do we get rid of it? Do we start it back up?
SMITH: Day by day, you go back and forth?
BRUNS: Oh, yeah, my emotions go back and forth day by day. Yeah, I absolutely do.
VANEK SMITH: There are people like Jason all over the country. And they're watching the price of oil, and they are doing the same calculation.
SMITH: Do you ever think that you're kind of affecting the price of oil in some small part when you and thousands of guys like you turn off your wells?
SMITH: The supply goes down.
BRUNS: Yeah, yeah.
SMITH: And if you all turn them back on at $45 a barrel, then maybe you keep the prices low.
BRUNS: Yeah. I thought that way before. And then I began to think, well, but what can a little guy like me do? But I guess if you - I've thought - you know, if we all do the same thing - yeah.
SMITH: And what's amazing when you talk to Jason is he's not collaborating with anyone. He's not making these decisions with thousands of other people. He's making his decision. Yet, if you take his decision and you add it together with thousands of other decisions just like it, that's where the price of oil comes from.
VANEK SMITH: So when you see the price of gasoline at the station in those huge letters down to the tenth of a penny, you can think of that price as like the world's shortest and most cryptic newspaper. The whole world is in there. There are wars in there - sanctions.
SMITH: There are people buying their first cars in China. There are princes in Saudi Arabia doing what princes do.
VANEK SMITH: And then there is Jason Bruns, standing next to Interstate 35 in Kansas, trying to decide whether to flip the switch and turn on one more well.
(SOUNDBITE OF MUSIC)
VANEK SMITH: There are a lot of people at NPR who we would like to thank so much for helping us buy oil. Neal Carruth, Christopher Turpin, Edith Chapin, Ariel Zambelich and the visuals team and our editor Bryant Urstadt.
SMITH: As we're our journey with the PLANET MONEY oil, we'd love to hear from you. Why don't you write us? You can email us - email@example.com - or find us on Facebook or Twitter. We are @PlanetMoney.
VANEK SMITH: Today's show was produced by Sally Helm with help from Elizabeth Kulas. Thanks, guys.
SMITH: And, of course, David Kestenbaum and Jacob Goldstein.
VANEK SMITH: And if you're looking for another podcast to listen to, check out Code Switch. Code Switch looks at how race and identity intersect with everything in our lives. Check it out at the NPR One app or at npr.org/podcasts.
SMITH: Stay tuned. Next episode, the journey of the PLANET MONEY oil continues because we got to sell this thing. We've got to get it to a pipeline. We've got to get it to a refinery. The PLANET MONEY oil is on the move - next episode. I'm Robert Smith.
VANEK SMITH: And I'm Stacey Vanek-Smith. Thanks for listening.
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