Posted on 03/13/2012 3:16:55 PM PDT by tobyhill
How does 6% compare to margins on other commodities?
Don’t oil ‘speculators’ have to close out their positions like other commodity ‘speculators’?
Commodity ‘speculators’ lose plenty often.
Are you saying the commodity trading rules are different for oil, and if so how?
The oil speculation market is about nothing of the sort. It’s about profit. I have no problem with that. I have a problem with the fact that their “paper oil” is confused with real oil. Oil demand, for example, is about as inelastic as any commodity. Saying that speculators are betting on large changes in demand is pure folly. Now, you might argue that they are betting on changes in supply. Well, check here:
http://www.indexmundi.com/energy.aspx?product=oil&graph=production
Dating back to 1981, the biggest drop in year to year oil production was 5.92% (from 1980 to 1981) while the biggest jump was 4.88% (from 2003 to 2004). In other words, BOTH SUPPLY AND DEMAND ARE INELASTIC. No sane person can look at the actual numbers and find that the massive swings in prices are justified.
Are you honestly making the claim that speculation prevents airlines from hoarding oil? Speculation doesn’t prevent anyone from hoarding real oil nor does it in any way prevent shortages. It is simply a manipulation of the actual demand. Also, the entire elimination of speculation (which is not what I am arguing) would cause the price of oil to stabilize around what the market will bear. The producers are limited as to what they can charge by what the actual demand is (not artificial demand).
This is really not a hard concept.
6% was an example. The actual margin amounts are given in total dollars. It’s essentially a security deposit. The percentage varies based on the value of the contract and depends on the price of oil. In a basic sense, as the price of oil increases, the actual risk involved in speculation decreases.
The oil commodity trading rules are different in the sense that the margin requirements are different. This does not mean that oil is essentially a different commodity because it isn’t. Stocks, for example, require a 50% deposit. Stocks are not considered a commodity. The range is usually between 2% and 15% depending on the current contract value. Oil is not necessarily any different from hogs, corn, wheat, or any other instrument where people don’t actually want the product. Other commodities are subject to the same fluctuations (you may have noticed food prices increasing).
The problem with speculation - especially when speculation constitutes a majority of the demand - is that it becomes market manipulation rather than speculation.
Markets shouldn’t be that hard a concept for you either. Even Newt mentioned something like a 10% change in supply in natural gas cratered the price by over 50%. Small differences in supply can make a big difference in price in any direction. And, yes, they are watching the market to anticipate changes in supply (Middle East turmoil, accidents, government exploration) or demand (economic booms or busts). It’s not just airlines, you could have governments like China or India hoarding oil as well. The speculators keep the oil priced too high for hoarders to grab it, making sure the world will have the available supply it needs even when demand is high, thanks to them keeping the price at a reasonable market level. Because it’s better to fill your tank at a high price than not be able to fill it at all.
This is an economy. If a commodity gets scarce, we need to know about it as early as possible, or anticipate it so we can plan accordingly. It’s working well, as we already have our politicians pushing to drill for more oil in anticipation of likely shortages, which might give enough lead time to stave off a real crisis. And if you don’t think potential nuclear war in the Middle East is a crisis that will impact oil supply, you’re being irrational. The markets are working. The markets are telling us we’d be better off economically producing more oil domestically, and they’re right.
Middle East turmoil, accidents, government exploration...yes, that’s a marked departure from the reality of the history of the entire world. Wait, no it isn’t. It’s always been that way. Why are you acting like all of a sudden now the oil-producing countries are destabilized? They have always been that way and probably always will be. Unless you are going to argue with the facts that supply and demand are inelastic, I have no idea what the hell you’re talking about. If oil supplies have been consistent for 30 years despite all of the events that have occurred, I have no reason to suspect (nor should anybody else) that the future will be different.
I’m sorry if I don’t see the speculators as some sort of guardian angel making sure we all have oil, even at ridiculously inflated prices. I’m sure that’s exactly what they intend to do. We should thank them. Hell, we should go back and praise everybody who cratered Enron. After all, they were probably doing the same thing.
If a commodity gets scarce...yes, if a commodity gets scarce, it would be good to know about such an event. Of course, AS YOU CAN PLAINLY SEE, THE COMMODITY IS NOT SCARCE. The speculators have been wetting their pants with wild swings in expected supply and demand yet NONE OF IT HAS EVER MATERIALIZED.
It isn’t the markets, by the way, that tell us we should be producing more oil domestically. It’s common sense and it’s been telling us that for probably 50 years.
C’mon, now, you don’t remember the the oil embargo and gas lines of the 1970s?
It’s not about speculators intending to do anything. It’s about capitalism which allows people to act in their own self-interest for the benefit of everyone.
You’re referencing the present again when I’ve been emphasizing that the usefulness of these trading markets is to anticipate the future. The speculators think oil is going to even higher, so they buy it up. They’re doing that by analyzing the lay of the land and if they’re willing to put their own money on the line to back up their prediction, then we ought to take it seriously that a shortage in supply is likely to occur.
Without someone working to anticipate a shortage, it would happen suddenly, we wouldn’t be prepared for it, and we wouldn’t have nearly enough oil to live on. It would be truly scarce and far higher-priced than it is now in the futures market.
No question that this market can be wrong and it can develop into a bubble. But this type of market is the best we’ve got, far better than government central planners.
Then it’s very hard to believe the commodity trading rules are a major cause of ‘unfair pricing’.
Like with minerals it is the actions of the producers, which can’t be affected by trading rules, that determine the oil price. In the past the europeans, and then the US until Carter, dealt with avaricious oil and mineral producers effectively.
And now we’re an ‘avaricious oil and mineral producer’ ourselves. Sitting on our stocks despite the cost to our industry until the nether land freezes over.
No, I can’t see changes in the commodity trading rules doing much good. Too many ‘sovereign’ actors involved.
I don’t remember that because I wasn’t born. I can read, though. It has almost no bearing on the speculation issue, however.
Speculators do not act in their own self-interest for the benefit of everyone. They act in their own self-interest for the benefit of themselves. Also, I hate to break this to you, but YOU pay for it. When you spend $70 to fill your gas tank, perhaps you’re fine with $40 or so of that going to line the pockets of self-serving bankers. I am not, because they are not providing me with any sort of service. Some people, no doubt, receive some marginal benefit from that in the form of increased returns on stocks and mutual funds. This is hardly a consolation, though. It is a direct transfer of wealth.
Also, for the last time, a shortage in supply is not likely to occur. If you aren’t going to look at the stability of the world’s oil supply over the last 30 years, then I’m going to stop bringing it up because you won’t listen to reason. The massive fluctuations in the price of oil have no correlation to either oil supply or oil demand. Those are the true indicators of a market.
I have to admit I have never heard your argument - that speculators are benevolent and powerful factors that act to “anticipate shortages” and somehow prepare us and/or shield us from the effects of such a shortage. It’s wildly illogical and based on no real-world examples so I can’t really comment either way, but my gut tells me that it’s an incredibly bizarre position.
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