Posted on 03/05/2012 6:41:53 PM PST by U-238
The next time you drive to the gas station, only to find prices are still sky high compared to just a few years ago, take notice of the rows of foreclosed houses you'll pass along the way. They may seem like two parts of a spell of economic bad luck, but high gas prices and home foreclosures are actually very much interrelated. Before most people were even aware there was an economic crisis, investment managers abandoned failing mortgage-backed securities and looked for other lucrative investments. What they settled on was oil futures.
An oil future is simply a contract between a buyer and seller, where the buyer agrees to purchase a certain amount of a commodity -- in this case oil -- at a fixed price [source: CFTC]. Futures offer a way for a purchaser to bet on whether a commodity will increase in price down the road. Once locked into a contract, a futures buyer would receive a barrel of oil for the price dictated in the future contract, even if the market price was higher when the barrel was actually delivered.
As in all cases, Wall Street heard the word "bet" and flocked to futures, taking the market to strange new places on the fringe of legality. In the 19th and early 20th centuries it bet on grain. In the 21st century it was oil. Despite U.S. petroleum reserves being at an eight-year high, the price of oil rose dramatically beginning in 2006. While demand rose, supply kept pace. Yet, prices still skyrocketed. This means that the laws of supply and demand no longer applied in the oil markets. Instead, an artificial market developed
(Excerpt) Read more at money.howstuffworks.com ...
This is not IMO a totally accurate article. The notion that a futures market is an artificial market is not correct. It does not track pure supply and demand at the end use, but it is based on pure supply and demand of the futures contract.
If not, then just buy oil futures and retire, cuz they never go down, right? Wrong.
I will say that futures market does mean that extremes can be exaggerated, but this works both ways. We’ve seen oil at 147 and at 32 in the last 36 months. The 32 was as unrealistically low as the 147 was high. The average of those two is about what it should be actually.
The point is, the futures market drove it down to 32. No one was bitchin about the “artificial” futures market then, were they?
One word. Stability. Flood the market with oil from a stable country, and the speculators will get out of that market and prices will crash.
You are correct. A+++
This is like blaming thermometers for the weather.
It is ludicrous.
Futures tend to follow real oil prices—not the other way around—something for fund managers to bet their clients’ money on. Other oil investors invest in each of many individual companies. Oil buyers are the drivers of oil prices, and enormous amounts of cash are required to take delivery.
Oil’s going up, because some of our trading partners are manufacturing many useful things and need more of it every year for their production and customers (hundreds of millions of new drivers over the next few years). Global interests (global corporate sponsors) pay for propaganda such as that posted above in order to keep the heat off of themselves.
Read “The Marching Morons,” by Cyril Kornbluth. Have fun. Enjoy the slide.
Good points
Gee, I wonder where we could find one of those.......hmmm........
The only type of speculation that drives up oil prices at all is the one about whether Zero was born in the US.
The problem is, and always has been, OPEC.
OPEC also bankrolls all the anti-American radical and liberal orgs in the US.
OPEC also bankrolls worldwide jihad.
OPEC also paid for Zero’s college years and who knows what else. He’s clearly never held a job, nor had to.
Thanks U-238.
Great analysis, but have you ever tried explaining that to a lib? Zzzzzz.......
You are welcome, SunkenCiv.OPEC is a big obstacle.
:)
Yes—kind of a long short story. But it’s funny to read and a little enlightening, even to this day, IMO.
I remember reading that.
Thanks for linking that.
:)
“The problem is, and always has been, OPEC.”
A viable plan to get us off ME oil and tap the vast pool of hydrocarbons here at home was put forward by longtime oil man T. Boone Pickens during the last election.
McCain wouldn’t touch it. Hannity wouldn’t entertain such ‘nonsense’ and the plan never saw the light of day on his show, to all of our detriment.
Maybe some of the current candidates will adopt it (I know Newt has some plan but I’m not familiar with it. I may also be a realistic plan as well).
Now, suppose you have April futures trading at 100, May futures trading at 110, and June trading at 120. This provides an incentive for somebody who holds physical oil to hold onto it and sell a May or June futures contract. Oil then gets held onto in storage in anticipation of higher future prices. Eventually, though, the holders of physical oil run out of storage and need to actually deliver.
Yes, the article has a very flawed premise. The vast majority of the oil market is based in real supply and demand. Speculation operates at the margin and most of the time it acts to depress price volatility, not make it worse. Speculation can temporarily distort price discovery, but the door closes fast and speculator’s monetary fingers get smashed if they don’t get out of the way when they are on the wrong side of the trade.
The writer asked a question, but failed to answer it, and oversimplified his attempt.
The writer also seems unduly taken with govt regulation as the way to keep the market real as oppposed to artificial. He’s got that not just wrong, but backwards.
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