Posted on 07/28/2008 4:43:23 AM PDT by Delacon
Calling President Bush's proposal to lift the 18-year moratorium on new offshore oil drilling "a political gimmick" that he will not allow to come to the floor, Senate Majority Leader Harry Reid is instead pushing his own proposal, a bill requiring the Commodity Futures Trading Commission to curb excessive speculation in energy markets.
The bill, which stalled Friday when Sen. Reid was unable to find 60 votes to overcome GOP demands for numerous amendments including one to allow more offshore drilling, would require traders to provide more information about over-the-counter transactions, and also adds restrictions to U.S.-based traders buying and selling on foreign exchanges.
(Rep. John Larson, D-Conn., would go much further, prohibiting anyone without the ability to actually accept delivery of crude oil from buying a futures contract on an over-the-counter derivatives market. "That could effectively eliminate speculative trading," CNN reports.)
The Democratic strategy responds to fierce public pressure for the Congress to "do something" about soaring oil and gasoline prices. It presumes oil industry claims that prices are rising because of "supply and demand" considerations are bunk -- that the real problem lies with "speculators" bidding up the price of oil in the futures markets.
Also on Tuesday, a federal task force led by the Commodities Futures Trading Commission and including staffers from the Departments of Energy and Agriculture, the Treasury, the Federal Reserve, the Federal Trade Commission and the Securities and Exchange Commission released an interim report on their investigation into the rising fuel prices, The New York Times reports.
Their conclusion?
The task force says its research "does not support the hypothesis that the activity of these groups (the futures traders) is driving prices higher."
Instead, the task force found the rise in oil prices over the past five years is primarily due to -- guess what? -- "rapidly rising consumption and sluggish growth in energy supplies worldwide."
Price hikes, of course, are a major way a properly functioning market notifies suppliers that it may now be worth their while to go explore for new sources, or to begin producing a commodity -- oil, in this case -- from sources previously judged uneconomical.
Thus, despite the popular wailing, Economics 101 teaches us that rising fuel prices are not a problem, but rather a necessary step toward solving the real looming problem that we might not have seen coming but for the research of the futures traders -- oil supplies not rising quickly enough to meet near-future demand.
"The report's key finding was that speculative investors more often changed their positions after prices moved, not before," The Times reported Wednesday.
That suggests that these traders "are responding to new information -- just as one would expect in an efficiently operating market," the government task force reported. (The group's complete report is due in September.)
"In identifying the drivers of energy prices," according to the Times, "the report noted that oil consumption grew 3.9 percent between 2004 and 2007. At the same time, oil supplies lagged that demand, with production growth from nations outside the Organization of Petroleum Exporting Countries slowing to levels well below historic averages."
But if the markets are working properly -- simply serving as alarm bells to notify us of the real problems, which lie in the area of supply and demand -- what earthly good will it do to impose more restrictions on the free and proper operation of the futures markets?
In fact, couldn't that do some harm -- kind of like silencing an obnoxious smoke alarm so it can't wake us up the next time?
Given that reducing energy consumption would be a good way to cripple the U.S. economy, wouldn't it make more sense to -- just thinking off the top of our heads here -- build more refineries, and open likely new oil fields to drilling?
Good heavens. If that's true, could that mean George Bush and the "evil oil men" are the ones who've been telling the truth, while it's Harry Reid and the Democrats who are "lying to the American people"?
ping
Let me suggest they look in the mirror, then.
“energy markets and speculators; congress looks for a bogeyman.”
congress has no further to look than the mirror.
Professional land speculator Harry Reid KNOWS speculation, so I would trust his judgment when it comes to accusing speculators. Odd that he hasn’t called himself on it, though... ;-)
> Energy markets and speculators Congress looks for a bogeyman
Get a mirror.
Could this mean that the MSM is FINALLY going to report the TRUTH for once?
We live in strange times, indeed....but I'm not holding my breath about the MSM....
Oil futures markets are not dissimilar to bookmaking.
You have some bets on one team, and some bets on the other team. The bookmaker’s job is to try to even out the betting between the two, so he doesn’t lose money no matter the outcome, and then he makes his money on the vig, the vigorish, which is the percentage he charges all bettors to handle their bets.
He attracts bettors to bet on one team or the other by changing the point spread as needed. If he has too many bets in one direction, he changes the point spread to attract bettors to bet the other way, which tends to even out the betting.
Now, I recognize the comparison breaks down because the bookmaker is essentially betting against all bettors, and the market isn’t, but the point is that the bets are supposed to be even between both sides of the bet.
In the futures market, that means that there can be just as much money earned by investors (bettors) when the commodity is going down as when it’s going up. Couple that with the concept that investors only need good reasons (good in their minds) to bet that the commodity is going down in value, and it’s easy to see that they don’t care which direction the valuation is going, as long as they’re betting the right way.
That’s why the oil futures market can be turned around on convincing news, or convincing rumors, that the U. S. is serious about increasing oil exploration and production. That would get investors betting the other way, that the value of oil would go to go down, rather than up.
The corollary to this is that there are two ways a group of people could control the oil futures market:
1) Control enough capital investment in oil futures to influence enough investors to move the market in their direction (extremely difficult, and some would say impossible)
2) Control the convincing rumors or convincing news that oil at a future time will have a significantly higher (or lower) value (not nearly as difficult)
Pray for W and Our Troops
Somebody posted a sheet on dem vs pubby voting records on energy over the last 30 years or so; that combined with this should be in every mailbox or under every door in America.
Could you find that sheet and post it? If its in html and you don’t know how to post in html, could you post a link? A poster on another thread said historicly the republicans in congress are almost as culpable as dems on hindering oil exploration and I would like to get some definitive info.
I’ll try to find it. Anybody claiming equal culpability for the parties is way off base, there’s been a tiny bit of crossover but the big problem has always been the dems.
My frendzsh, we need vigorish trading!
Congress looks for a bogeyman
Democrats are trying to confuse the voters by finger pointing and blaming everyone but themselves. The stupidest idea is the proposal by the Democrats to not allow anyone anyone who can’t take physical delivery to not be allowed to participate in energy futures markets. This would have the effect of greatly reducing the liquidity of the futures markets. There are also futures markets in agricultural products. Why don’t the Democrats make speeches attacking futures trading agricultural products?
“Oil futures markets are not dissimilar to bookmaking.”
The main difference is that most investments in energy have long lead times between the initial investment and the revenue stream that it produces. To have a liquid market where both producers and consumers of energy can have both price discovery and the ability to lock in a future price provides an enormous economic benefit to everyone. Traders and speculators keep the market liquid so that when a producer or consumer of energy wants to lock in a future price someone is there to take the other side of his contract. The energy futures markets are a huge benefit to the economy and the Democrats have decided to try to destroy them for political gain.
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