Stop The Scapegoating Of Oil Speculators And Give Them Good Reason To Go Short

IBD Editorials ^ | July 8, 2008 | Walter E. Williams

[Rammer]

Thank you - well said.

The potential of oil shale from the American West is exciting. The only hurdles should be the technology and the economics, which can certainly be overcome.

It’s outrageous that our own Congress represents and additional hurdle. It seems they really do want us to suffer.

[curiosity]

During this nine month period neither the increase in supply nor decrease in demand nor the decrease of the dollar value justify what so ever an oil barrel at $ 140 dollar which is over 85% increase.

And you know this how?

[curiosity]

Just because oil prices have gone up more than you think they should have doesn't mean the increase is unjustified.

The markets possess a lot more information than you about supply and demand conditions. I tend to trust markets more than the opinion of any single analyst.

Please bring me any free market data such as supply and demand and decrease in the dollar or any other factor that justify this incredible increase.

Here's your data: there is no excess supply. Inventories are lower than usual. If prices were above fundamental value, then someone would be having to take supply off the market, i.e. hoarding oil. That's just not happening.

The market is clearing. Supply is equal to demand. How can you possibly say a price that clears the market is unjustified?

[Niteflyr]

Supply has not been inadequate to meet demand, rurgan. In the world today, where is there a genuine shortage of supply?

There IS no shortage....and those of you who think there is are one of those Eskimos one can sell ice to....quite believing all the rhetoric and do some research from reliable sources...

[rurgan]

Demand has been HIGHER than supply for several years as those accurate graphs SHOW.

The market can correct itself over a few months .So you arguing that 9 months shows speculative manipulation is ridiculous in my opinion. Those 9 months could just be a peak ,in the usual ups and downs in the market .You have to look at long tern trends. The price of oil goes up and it goes down for a few months, or for even a few years. Yes those are market corrections not “wild speculations”. But over the long term the market produces the CORRECT price after the peaks and valleys are smoothed out and the market corrects itself , a correction upward, a correction downward and so on all based ultimately on the law of supply and Demand , the most basic law of supply and demand. The graph you have to look at is that of the oil price when the peaks and valleys are mathematically smoothed , the long term average price not the price spike of a few months to condemn the speculators

People will not pay the price of oil if it is overvalued for a long time. People will walk , ride bikes, take buses, move closer to work, motor bikes, not take vacations etc. As long as there is demand at that high price then the price is the correct price in the market and there has been no manipulation (over the long term ).

And the long term trend is for prices of oil to RISE. If you look at the price of oil in 1998 you will see it was below $20 per barrel . Over the next 10 years oil has gone up and then down but the long term smoothed out graph shows a long term rise in prices from below $20 to $130 today.

Why do you, Pelosi , Democrats and the rest of the Freepers blaming the speculators , why don't you praise the speculators when the price goes down? It went down in 1998 to below $20 per barrel. Explain that. Can you explain that? To me you all are just anti-capitalist neo- Marxists because you don't trust the free market but do trust those evil liberal/Marxist villains in government , the unelected bureaucrats and politicians to actually run the free market better than local individuals with localized knowledge.

Everyone and all you Marxists, including you 3 Marxists jveritas;dirtboy;HamiltonJay, should read Hayek to see why government can NEVER run a market:

Hayek smartest man ever shows why government can never work and socialism can never work. You think Einstien was smarter? Einstien was a socialist and didn't believe in Quantum theory.

Economist F.A. Hayek, most famous for his book "The Road to Serfdom," developed a theory typically called the "knowledge problem." Essentially, Hayek argued that no one individual, or even group of well-informed individuals, could ever have enough knowledge to plan a market.

Hayek said that knowledge was localized, meaning every individual has the best knowledge about their specific place, condition, needs and resources, but no one had enough knowledge about anyone else’s to make decisions for them. Hayek’s free-market ideas were seen as sound reasons why government cannot, and should not, attempt to control economies"

If everyone Read the works of Hayek, Ayn Rand and Milton Friedman then we wouldn't have any major problems in America. Oh that's right most government educated idiots can't read. These people, Rand, Hayek, Friedmen, are geniuses who show why socialism , government planning doesn't work and why capitalism does and why capitalism = freedom and why capitalism is what created our technology and civilization. And they show why government ownership and government planning = dictatorship and economic collapse and all kinds of problems.

Ann Coulter said that what made her become a conservative was reading Milton Friedman's book Free to Choose

[Niteflyr]

Demand has been HIGHER than supply for several years as those accurate graphs SHOW.

You work for big oil eh??...a speculator?.....I've got data that says your statement is wrong...quote: "A comparison of supply and demand showed that, most recently, supply has been exceeding demand by more than a half million barrels per day. Meanwhile, the price continues to increase."

go here> http://www.physorg.com/news134646313.html

[curiosity]

You keep putting up that red herring. My point is, market price manipulation thru speculation is quite possible, whether through illegal or currently-legal means.

Yes, but market manipulation is very difficult in a market as large as oil, and manipulation seldom has an effect on prices that lasts longer than a couple days. The price changes due to manipulation of the natural gas markets you mentioned earlier didn't last longer than a few hours.

What evidence have you that someone is manipulating the crude market? The mere fact that pension funds are investing in oil futures doesn't mean they are manipulating the market.

However, as long as the greater fool theory is in play, and more money pours into commodities, the price will continue to rise even if the supply/demand aspects remain fairly stationary.

Here's the problem with your scenario. The new money is going into futures, not the physical commodity. In order to drive up spot prices of the physical commodity above the level dicated by supply and demand, someone has to be taking physical crude supply off the market. But that's not happening. There is no buildup in crude inventories.

Let's put it another when: when the price of oil is above the level dictated by supply and demand, there has to be excess supply of readily usable oil. Where is it? Inventories are lower than usual right now. No one is hoarding oil. There is no excess supply. That means supply=demand, which means the market is clearing.

The price that clears the market is by definition the price determined by supply and demand.

[dirtboy]

So you arguing that 9 months shows speculative manipulation is ridiculous in my opinion.

You ignore the third leg of the stool - the tremendous amounts of investment money flowing into commodities futures markets. Supply and demand can remain fairly static, but if money flows in, you get a bubble. It happened with tulips, tech stocks and housing. And IMO it is partially behind the recent signficant price run-up.

[dirtboy]

The price changes due to manipulation of the natural gas markets you mentioned earlier didn't last longer than a few hours.

Wrong. Amaranth drove the price of gas up for several months.

[rurgan]

I don't work for big oil and I am not a speculator. I work in the Education private industry. I'm just a lower middle-class average Joe.

The following graphs of world oil supply and demand clearly show that world oil supply has not met world oil demand for several years. Demand has been greater than supply.This , the most basic law of economics, the law of supply and demand should put an end to all this scapegoating of the speculators (the free market), hopefully.

Proof that demand has not met supply for several years

Furthermore the long term trend , the graph for the last 10 years of the price of oil, after peaks and valleys have been mathematically smoothed out shows a long term increase in the price of oil from below $20 in 1998 to $130 in 2008.

[curiosity]

Wrong. Amaranth drove the price of gas up for several months.

Bull. You are talking out of your rear.

Amaranth was charged with was manipulating closing prices on three seperate days. The effects didn't last longer than a few minutes after the next day's opening.

http://www.knowledgeproblem.com/archives/002147.html

And BTW, they were driving prices down, not up (so as to realize profits on their short positions). Do your research before bloviating like that.

[curiosity]

Greater Fool - as long as the money six weeks later is at 110 percent, and so forth and so forth, the price will keep going up.

That's only true of the futures price, not the spot price. The net amount of money going into the spot market isn't changing. How is it, then, that the specs are driving up the spot market?

[jveritas]

I guess we cannot convince each others. I show you arithmetic and numbers and you showed me a lot of talk. This current oil speculations is the opposite to our free market capitalist economy basic and fundamentals.

You can have the last word in this debate.

[curiosity]

The only "arithmatic" you showed was a large increase in the price.

Sorry, but a large price increase does not necessarily mean there is a bubble.

And FYI, I did refer to some hard numbers: oil inventories, which are actually lower than usual. If there were a futures-speculation-driven bubble, they'd be higher.

Here are some more numbers for you to look at: futures prices vs. spot prices. Here's a hint: futures prices are actually lower relative to spot prices (once you adjust for the time value of money). If speculation in the futures markets is driving up spot prices, you'd see the opposite: futures prices much higher than spot prices.

So much for your bubble theory.

[Toddsterpatriot]

You keep missing the point.

No I don't.

This is not the function of a single actor but a herd.

I showed you how a single trader buying and then selling futures has no permanent impact on price. A herd that has no impact is more of the same.

Investment banks such as GS and MS have goals to massively increase their commodities investment business.

Great, they want to increase trading volume, so what?

There is a lot more money chasing the same amount of commodities.

Don't confuse the underlying commodity with the future on the commodity.

I think if three steps are taken - eliminate long funds, eliminate position limit exemptions for investment banks, and get pension funds out of commodities - and you will see a drop in price.

At best, a small, temporary drop.

[Niteflyr]

the law of supply and demand should put an end to all this scapegoating of the speculators (the free market), hopefully.

You state you are an average joe...and 12 CEO's of major airlines today in an open letter to Congress called for them to curb excessive speculation that is driving up oil prices...let me ask you this... since you seem to know more than these CEO's do....why aren't you more successful?

[Niteflyr]

link to above reference here

[Toddsterpatriot]

12 CEO's of major airlines today in an open letter to Congress called for them to curb excessive speculation that is driving up oil prices...

If 12 CEO's of major airlines today in an open letter to Congress called for them to raise your taxes to subsidize the airlines, would you agree?

[HamiltonJay]

BS, demand is not HIGHER THAN SUPPLY.

Not sure what cooked books your refering to, but when you pull up to your local gas station and can’t get gas, or when you see plants closing because they can’t get the raw materials they need derived from oil then you can play that consumption demand has outstripped supply.

I dare you, dare you right now, get to your local grocery store, and walk the isles. You tell me where you see oil production not keeping up with consumption. Believe me when OIL production cannot keep up with production you won’t be able to go into a store and buy a case of bottled water or soda packaged in PLASTIC bottles made from OIL derivatives for 13-20 cents a bottle in bulk. You see gas stations with NO GAS.. You’ll see factories halting or slowing production because they can’t get the raw materials they need.

The only crap going on right now is complete speculative greed, we are not running out of oil, we are not at peak oil.. we are nowhere near some oil crisis. We are just seeing another fiscal bubble driven by greed. Want to see it end? Simple, require 50-75% margins on futures trades, and require that the terminal where trades are placed be regulated by the laws of the country they reside in, you’ll see this thing pop overnight.

Go pick up a bottle of motor oil, and check the price, its risen over the last 5 years, but it hasn’t tripled, same with asphault, same with plastics. All you have going on here is a greed tax being levied by hedge funds and others who have created this bubble, pure and simple. You can bring as much supply as you want online and it won’t change this because its not a function of supply and demand, its a function of greed and fear.

[jveritas]

Excellent post.

I said it many times before. The current trend of oil speculations is exactly the opposite to all the fundamentals and basics of our free market capitalist economy. Neither the law of supply and demand nor the lower value of the dollar nor any other factor and nor all factors combined will ever justify this high price of oil. The numbers and the facts do not justify it, period.