Posted on 07/26/2008 5:28:44 AM PDT by decimon
CHAMPAIGN, Ill. — Proposals to reign in wallet-draining gasoline prices by curbing speculation in oil markets would likely increase costs at the pump instead of trimming them, a University of Illinois economist says.
Scott Irwin argues congressional efforts to curb trading by speculators is a “misguided witch hunt” that ignores the root of America’s energy problem – a finite global oil supply that has been stretched thin by surging demand in China, India and other developing countries.
“We need to have a real national debate about issues related to both the demand side and the supply side of our energy use. That’s what we need to be focusing on, not speculators,” said Irwin, an agricultural and consumer economics professor who testified this month before a House committee considering limits on speculation in futures markets.
The Senate voted unanimously this week to move ahead on legislation to curtail speculation in oil futures markets, which Irwin contends would be a step backward in the battle against $4-a-gallon gasoline prices.
“If the markets become overregulated, they become less efficient mechanisms for transferring risk from parties who don’t want to bear it to those that do, creating added costs that ultimately get passed back to consumers,” Irwin said.
Dozens of proposals have surfaced to scale back speculation that has exploded in oil markets over the last few years. Billions of dollars have been pumped into oil futures and related over-the-counter derivative contracts, which supporters of trading limits contend has artificially inflated oil prices by 20 to 50 percent.
Irwin maintains that speculation accounts, at most, for a small part of the recent spike in oil prices, based on a recent study of commodity futures markets he conducted with Southern Illinois University agribusiness economist Dwight Sanders.
The study shows that a surge in trading by commodity firms has offset the dramatic rise in speculation, maintaining a market balance of buyers and sellers.
“The bottom line is that the balance between hedgers and speculators in our commodity markets today is very much within historical norms for these markets going back to the 1940s,” he said. “We argue that when there’s a buyer and a seller, the market will balance itself.”
Another key, Irwin says, is that investments by speculators largely amount to “side bets” on the price of oil and other commodities. “They rarely buy and hold physical tanks of crude oil. That’s where the price is set,” he said.
He says history is dotted with misguided attacks on speculators, including a 50-year-old ban on onion futures trading that producers are seeking to repeal even as limits are being mulled for oil markets.
“We have been here before and we have made now well-documented mistakes in trying to over-regulate markets, so let’s not make the same mistake again,” said Irwin, who has studied the impact on speculation on commodity futures for nearly 25 years.
Ironically, Irwin says his earlier research dealt with cases where speculators were blamed for driving down farm commodity prices.
“That says something all by itself,” he said. “In all big market cycles, when prices are very low, the natural sellers such as farmers will start screaming that speculators are the problem. And when prices are really high, the natural buyers in the market – consumers and processors – are the ones screaming.”
“There’s a tendency to look for a scapegoat, and speculators are the convenient scapegoat,” he said. “But, really, it’s a supply and demand issue.”
Editor’s note: To reach Scott Irwin, call 217-333-6087; e-mail sirwin@illinois.edu.
All that’s needed is to investigate all the t-Bone Pickens, George Sor*sses, and Warren Buffet-lines, and upon conviction bury them where nobody will ever discover them.
The key word here is “futures”. If China and India’s need for oil continues to grow and there is still only a set supply then of course the price will rise. It is rising on the FUTURE needs. If we lifted the bans on drilling here the price would drop significantly because there would be an influx of oil from another source in the future. It is SUPPLY AND DEMAND, plain and simple.
"Raising taxes must always raise revenues!", etc.
“a finite global oil supply that is controlled by a cartel, which acts like a monopoly. The difference being that instead of setting the price outright, the cartel sets the price by limiting the supply brought to the market.”
There, fixed his statement. I can’t believe the people who are allowed to be “professors”. The only thing these economists profess is that capitalism is bad all the while ignoring the control that despots have over the oil market. Let’s see what the price of oil would be in a true free market where supply and demand truly are free to act.
Hay lets all buy items from China and India just think of ALL the money we will save,and they still do.
I disagree.
In the first place, Irwin sounds like a capitalist arguing against socialistic controls.
Secondly, that the rest of the world is less capitalistic than we, or wholly command and control, is nothing new. That has been true from the beginning of the Republic. Just another reality that we, as capitalist-realists, contend with.
This has been 30 yrs in the making. WE HAVE TO DRILL HERE AND NOW!!! That is the only option.
Duh, hasn’t anyone noticed the government is taking over our banks with our money.
The government has no right to limit free market financial transactions. The fact that it already does is no justification.
Government is always working to end the free market economy, and to acquire all control over all financial transactions.
Not entirley. Demand has been falling for 13 straight weeks. Bloomberg had the story on their energy prices page for about a grand total of four hours this past Tuesday or Wednesday. And they got rid of THAT in a big hurry.
But the price has been rising for those very same 13 weeks up until about a week ago. That is not supply and demand, that is speculation. The President talked about and then lifted the Executive order on offshore drilling. In those two weeks prices crude dropped $24-$25 a barrel. Seventeen percent! That is not supply and demand.
Some will say (Bloomberg) that it is because the Saudis increased production. Nope. They did that weeks before the President talked about and then lifted the Executive order on offshore drilling. Prices never flinched, they just kept right on climbing.
In other words, as soon as there was just a HINT, just a whispered rumor, that the United States might actual tell the likes of the communists (referred to in pee-cee circles as “democrats”) to pizz off, we are going to actually (gasp) drill for crude oil, the price of crude dropped like a rock.
Now is when we need to beat the drum in front of Nutjob Nancy's tent and make everybody look at her when she proclaims "I have no plans to do so," referring to scheduling a vote to lift an offshore drilling ban.
We need people to KNOW that the economic health and national security of the United States is going into the toilet because of one sociopathic nutcase. Nutjob Nancy.
We need to take up a collection and have a straightjacket with her name embroidered across the back delivered to her on the floor of the Senate.
Just imagine what would happen to the price of crude if we,… hang on…, actually did something, like explore and drill offshore on the continental shelf ? Would prices drop when the crude finaly hit the market in two or three years?
Or would the price drop when the drilling platforms are towed into place?
No conspiracy here. That demand has dropped, in the developed countries, has been widely reported. If that has translated to a worldwide reduction in demand then that, from all indications, is a temporary phenomenon and the markets look to the future. It's still about supply/demand.
This guy missed the whole point. The entire argument is long side only index speculators whose total holdings are a large fraction of the entire market. Every other class of speculator has position limits, but not these guys because of the Goldman Sachs “loophole.”
As usual, Congress is “solving” the wrong problem in ways which will only make things worse.
The drop would be immediate. The last thing any of these oil producing countries want is for the USA to become independent.
We are going to crash and burn if something is not done NOW. When it is all said and done, we will see our ecomony sink. Our economy is based on the buying of goods and services, if we are putting all our cash into our gas tanks with nothing left over we will see massive unemployment. Small businesses will take the hit the hardest.
Did he?
"The study shows that a surge in trading by commodity firms has offset the dramatic rise in speculation, maintaining a market balance of buyers and sellers.
“The bottom line is that the balance between hedgers and speculators in our commodity markets today is very much within historical norms for these markets going back to the 1940s,” he said. “We argue that when there’s a buyer and a seller, the market will balance itself.” "
Doesn’t matter if it was not in this country or some other. The price of crude is global. Since the futures market can be viewed as part of the pricing mechanism I suppose one could argue that "everything" is supply and demand. But that is a bit of a stretch as one would be dismissing speculation entirely. And since no other factors changed on the scale of the change in the price during those two weeks (17%), the only factor left that did change that much is the speculative market. It was not a corresponding change in the actual inventory.
What do you want done? What government controls are you calling for? If you are not calling for government controls then what are you doing?
Congress is, and has been the problem.
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