Don't Blame the Oil 'Speculators'

Fortune Magazine/money.cnn.com ^ | June 27, 2008 | Jon Birger

[kellynla]

NEW YORK (Fortune) -- "Make no mistake about it," U.S. Rep. Bart Stupak, D-Mich., said Monday while chairing a meeting of the House Energy and Commerce subcommittee on Oversight and Investigations. "Excessive speculation in commodity markets is having a devastating effect at the gas pump that is rippling through our entire economy."

Here's a suggestion: The next time a Congressional committee wants to hold a hearing on how "speculators" are driving up oil prices, each committee member should first be required to demonstrate - preferably in their opening remarks - a basic understanding of the mechanics of futures trading.

Even better, they should be required to explain in detail how it is that investors who never take delivery of a single barrel of crude - and thus never remove a drop of oil from the open market - are causing record high oil prices.

If there were such a requirement, I guarantee we'd never again see a circus like the one Stupak presided over Monday.

"Do I think [Washington politicans] understand the role of futures markets - how they facilitate price discovery and the transference of risk?" asks former U.S. Commodities Futures Trade Commission chief economist Gerald Gay. "No, they're clueless - at least most of them."

[wendy1946]

Here's something on FR which struck me as a more intelligent discussion of the subject.

[IronJack]

Isn’t it interesting how nobody is to blame for high gas prices but gas prices continue to climb out of sight? Maybe all that money consumers are paying is just an illusion, and we’ll wake up soon and find out that we each have several thousand dollars we thought was gone.

[11th Commandment]

Index Speculators are a cause of higher oil prices because they are unique in that they have taken possession of the commodity and held it, something never done before by the traditional pit traders! What the amount is, is anyone guess. I know during the fall 2006 non-hurricance oil speculation bust gas dropped 75 cents to $1.00 per gallon.

However, you are still right!!!! the underlying problem is that congress has de-commoditized oil by making it scarce. If Clinton had signed ANWAR and the US was 2 years into the continental shelf, do you think any speculator that was not clinically insane would take possession of oil in the hopes of dumping it later for a profit? HELL NO!

If you want to put the index speculators out of business, make oil a commodity AGAIN!!!!! In a way these guys have actually helped US.... Instead of gas creeping to $4.00 a gallon as the liberals wanted, it accelerated to $4.00. Hopefully this will wake up the American people to understand that drilling has to be a part of any energy plan.

[kellynla]

[JamesP81]

If you want to put the index speculators out of business, make oil a commodity AGAIN!!!!!

Hate to burst your bubble. If you drastically increase supply, you only put half the speculators out of business. In commodities trading, if someone buys an oil contract, someone else had to sell it. Now, if the market goes up, the buyer makes money and the seller loses money (margin calls have to be coughed up by the loser, not to mention the asset has lost value as well). If the market goes down, the seller makes money and buyer loses money on margin calls and loss of asset value.

IOW, if you dump a bunch of oil on the market, the speculators that are long will get smoked, to the benefit of the speculators that were short.

[curiosity]

Index Speculators are a cause of higher oil prices because they are unique in that they have taken possession of the commodity and held it,

Really? Where are they holding it?

[SoldierDad]

Does anyone else find it interesting that, with the exception of areas affected by Hurricane damage, no fueling stations in the U.S. has suffered from a lack of fuel and had to close their doors, despite all the claims that demand cannot keep pace with supply?

[SoldierDad]

Strike that, reverse it. Supply cannot keep pace with demand.

[econjack]

Bashing futures traders may well be good politics, but it's stupid public policy.

Congress has no idea how futures (or any other) markets work. They trot out the oil execs and badger them, hoping the blame will stick. The talk about windfall profits taxes so all the stupid people in the world will say: "Yeah, that'll fix 'em!" Idiots!

When that didn't work, they trot out speculators and badger them, talking about nine bills to regulate those markets. This is even more stupid because there's nothing to prevent oil speculators from operating in markets where the US gov't has no say whatsoever.

The fact is, Congress and its No Drill policy is where the blame belongs, but as long as Congress has someone or something to drag out and distract all the stupid people, they will continue to do so.

Congress wants to do nothing that will lower fuel prices until after the election. Never mind that two years ago Pelosi promised to lower fuel prices, which were $2.50/gallon then. Congress will not open ANWR, the OCS, or federal lands because they know that just announcing that drilling would be permitted would send the pump price falling and that might just be a good thing for consumers. And whats good for consumers--at least in Democrat eyes--is not good for the Democrat party.

Congress can ease the pressure on oil price tomorrow by simply opening up ANWR, the OCS, and federal lands, but they won't. They put themselves before everyone and everything else, especially those who they are supposed to serve. If I didn't need the oil so badly, I'd tar and feather the lot tomorrow!

[11th Commandment]

I don't disagree with you textbook definition of future traders; however, if I am holding oil (not contracts) and it drops (like in the fall of 2006, but permanently this time) I will sell sell sell my holdings (not contracts). If I have a brain and now know oil is freely flowing as it should, I am out of the buy and hold business.

[11th Commandment]

I don't disagree with you textbook definition of future traders; however, if I am holding oil (not contracts) and it drops (like in the fall of 2006, but permanently this time) I will sell sell sell my holdings (not contracts). If I have a brain and now know oil is freely flowing as it should, I am out of the buy and hold business.

[Parley Baer]

It’s world wide demand.

[kellynla]

You must the last person on FR who hasn't realized that the major reason prices of oil have risen is simply a factor of supply & demand.
It's Friday and I have neither the time or the inclination to give you a more complete explanation but if you go to the Dept. of Energy's website http://www.eia.doe.gov and check out the demand versus the supply data for crude oil over the last five years you will discover that as demand increased over the past three years, supply was relatively flat and did not noticeably increase until this year. Have a good weekend. I 'm outa here!

[11th Commandment]

I think IronJack was being sarcastic... ?

[SoldierDad]

Of which supply seems to have no problem in meeting.

[durasell]

We must find someone to blame immediately! Assigning blame should be a top priority!

[nitzy]

Has the world wide demand doubled in the past 3 years? What an amazing boom!

The oil companies know the true value of a barrel of oil. Whenever a new oil field is discovered or new innovations in drilling are perfected, the oil companies do a cost/benefit analysis to determine where and how to drill. If it will be profiable they drill. If not they don't. They are currently basing their R&D and exploration decisions on $50 per barrel oil. They know that $140 oil could go away with the stroke of a pen.

[VaRepublican]

That pie chart is nice and its really sweet.Who controls and runs the ira’S, The pension funds, the mutual funds and individual investors are directed by whom. That article was so confusing that its no wonder that the replies to this post will call me an idiot. I'm sorry did I imply that wall street is part of the problem? Good lord your all right I'm an idiot and I just don't get it. Speculators ROCK.

[Paul Ross]

What the jerks fail to recognize is the global market and the foreign players are having a vastly bigger impact on prices than are U.S. investors. The foreign players making the most impact are Russia, Iran, Venezuela and China.

Communists.

Still doing their best to sabotage free economies.