Posted on 04/27/2012 4:55:28 AM PDT by SeekAndFind
Lately, speculators have come under attack by Barack Obama. The president blames them for raising prices on oil and gasoline, and he has proposed new restrictions on oil traders. But this is a wrong turn on the road to a healthy economy.
Back in 1958, onion farmers were concerned that speculators were taking advantage of them. They were especially concerned about the extreme volatility of onion prices, which could often double in a short period of time and then drop to a level below the cost of production. Farmers aimed their ire at the Chicago Mercantile Exchange, the principal futures market for commodities. They thought if futures trading in onions was banned then speculators would not create so much price volatility and farmers would benefit. At the behest of Congressman Gerald Ford (R-Mich.), Congress banned futures trading in onions—the only commodity for which trading is prohibited by law.
Four years after the ban, Stanford agricultural economist Roger Gray examined the impact on onion prices. He found that, contrary to the farmers’ expectations, onion price volatility had actually increased. Gray compared onion price volatility into four periods: 1922-41, a period in which there was no futures trading; 1942-49, when futures trading was only developing; 1949-58, an era when futures trading was robust; and 1958-62 when futures trading was banned.
GRAY'S ANALYSIS Gray’s analysis showed conclusively that onion price volatility was far greater during the period when futures trading was undeveloped or nonexistent than during the period when it was robust. This is exactly the result predicted by economic theory. As Gray put it, “An organized futures market widens the opportunity to buy a commodity during the harvest surplus and sell it for later delivery, hence the diminution of in seasonal price range was to be expected on a priori grounds.”
This stands to reason. Speculators make their money by anticipating price changes. If they anticipate future shortages, they will buy now and bid up prices. If they anticipate a future surplus, they will sell now and put downward pressure on prices. Thus the whole purpose of commodity speculation is to moderate volatility—raising prices when they would otherwise be lower and reducing them when they would naturally be higher.
As the famous economist Milton Friedman once explained, the only way speculators could possibly increase commodity price volatility is if they are systematically wrong—buying high and selling low, which is the opposite of how they try to behave and make a profit. If they were wrong too often they would lose money and go out of business.
Said Friedman, “Speculation is stabilizing rather than the reverse…. People who argue that speculation is generally destabilizing seldom realize that this is largely equivalent to saying that speculators lose money.”
HEDGING PRICES It’s also worth remembering that those who produce commodities have a legitimate interest in wanting to hedge their prices. They may want to lock in a sale well before harvest so that they are guaranteed a profit. For hedging to work, however, there have to be speculators on the other side of the trade who are willing to buy without knowing for sure what the price will be when the commodities are available for delivery. In some cases, the speculator is also hedging; a manufacturer may wish to lock in the price of a key commodity used in production so that he can estimate his future costs with precision.
Another benefit of futures markets is guiding production. If a farmer wants to know whether to plant one crop or another, he can look to futures markets to see which offers the greater profit. He can even sell his output before it is planted and thus know with certainty whether he will have a profit or loss. Thus futures markets help moderate price volatility by telling producers to bring more or less of a given commodity to market.
high gas prices regulating oil speculationRose Garden event We can't afford a situation where speculators artificially manipulate markets by buying up oil, creating the perception of a shortage, and driving prices higher -- only to flip the oil for a quick profit. We can’t afford a situation where some speculators can reap millions, while millions of American families get the short end of the stick. That’s not the way the market should work. And for anyone who thinks this cannot happen, just think back to how Enron traders manipulated the price of electricity to reap huge profits at everybody else’s expense.
While it is certainly true that at any given moment in time speculators may cause market prices to vary from fundamental values—on either the high side or low side—it is hard to see how they could do so for any extended period without controlling supply. That is, they would have to physically hold commodity stocks off the market to raise the price above fundamentals for any length of time or bring additional stocks to market to hold it down. There is no evidence that speculators do so or even have the capacity for doing so.
BASIC SUPPLY AND DEMAND Many studies by reputable academics have looked at whether speculators are responsible for volatility in commodities markets and found that this is not the case; price swings have overwhelmingly been driven by economic fundamentals. That is, changes in supply and demand. (See, for example, the January paper by University of Muenster economists Martin Bohl and Patrick Stephan; and a just published paper by Oxford economists Bassam Fattough and Levan Mahadeva and University of Michigan economist Lutz Kilian.)
Nevertheless, there is likely to be continuing pressure to restrict or even ban futures trading. This would be a terrible mistake, as the lesson of the onion market proves. Proof can be found in a recent study by University of Michigan economist Mark Perry, who compared the price volatility of onions to crude oil. Although we think of oil as being especially volatile, the fact that it is widely traded on futures markets actually makes its price swings quite modest compared to the price for onions, for which futures trading is still banned.
It’s human nature to look for easy fixes to complex problems. Banning or restricting energy speculation, however, is a terrible idea that will likely make the problem worse.
obama knows that. obama knows what he is doing. The fools that worship and blindly follow him may not know, or care, but obama knows full well what he is doing. He also knows what he has planned for the fools that blindly worship him, follow him, and do his bidding.
Am I the only one that is getting plain fed up with our side accepting the premises of the left and arguing based on those premises?
Blaming speculators assumes that Obama & his ilk care about high energy prices. False premise.
Good article. Thank you.
Exactly. Obama is engaging in classic Marxism. In a free market economy, we call these people “investors”. They build businesses. They build industries. They hire people. Well, Obama hates “investors”. He uses the Marxist term of “speculators” instead. He wants them stopped. He wants to hurt the economy. High energy prices are central to his overall plan. The guy is doing as much damage to personal and economic freedom as he can.
Why is it that we have to participate in the “global market” at all, if we have sufficient potential to provide our own energy with our own domestic market prices?
The Victor Davis Hanson article today was good.
Obama sees capitalism as “neo-colonialism”, exploiting, all over again, his “daddy who abandoned him”.
What were the 'economic fundamentals' that led to the spike in oil prices in 2008?
That drives up prices on the futures, which are then sold at inflated prices.
That is what is happening today. Even Eric Bollings, who worked in that business, said that.
Require real assets to cover the trades and that problem instantly goes away.
The millions of dollars of contributions from Oil Interests to the DNC and The Messiah’s Re-Election coffers are used to keep additional oil off the market (Keystone, Offshore Drilling, ANWAR, etc.). Follow the money, as always.
But regular unleaded is down about 13 cents in this area since he did it.
Victory lap commencing in 3......2.......1.......
>>In a free market economy, we call these people “investors”
If it was their own money, BUT...
http://www.zerohedge.com/news/guest-post-hard-evidence-bailed-out-banks-take-more-risk
...it’s not.
“Gee, Moses has been up on that hill an awful long time, He and his God must be dead; so hey, screw them and their moral “Law” we’ll just throw everybody’s gold into the fire and worship what comes out, again.”
It’s a Ba’al out, get it? {badumpump}
Apply your logic to the Natural Gas Futures traded on the same rules.
Not to mention far more oil is traded in markets outside the US than on the NYMEX.
There is a 17 year cycle in oil that has repeated itself many times [1974, 1991, 2008]. Every 17 years we see a spike in oil followed by a rejection of the high by 50-75%. I have traded oil and I will tell you that I was looking for a high in oil prices in 2008. And it was the day that Goldman Sachs came out and said [with prices at $140] that oil was going to $200.00. I knew that was the key statement to the high in price [never go with what Goldman says]. That week [July 7, 2008] we put in a doji on the weekly oil chart [sell signal] and oil fell to $39 by year-end. Nobody blamed me for causing prices to drop $100.00
Now here is the real culprit .. State Gasoline taxes. The average profit for Exxon on a gallon of gasoline is about $0.02, and the average state tax on gasoline is $0.48. The scariest thing is that the average American is too stupid to realize the media and administration has this all wrong ... even O'Reilly has drunk the Kool-Aide.
http://thespeechatimeforchoosing.wordpress.com/2011/04/29/the-truth-gasoline-taxes-vs-evil-exxons-profits-plus-why-oil-prices-are-so-high/
I would guess they were the same “economic fundamentals” that caused the price of gasoline to plummet from over $4.00 a gallon to about $1.50 basically overnight.
I always suspected speculation was a major factor in oil pricing, but after Bush signed the executive order to expand offshore drilling and the price collapsed so quickly - with zero change in the actual supply OR demand for oil - I no longer have any doubts.
As another has said, Eric Bolling, a former “oil man” and solid conservative, will tell you that speculation has a huge effect on the market and people who do not actually consume the oil control a majority of the market. I’m not sure why this is considered “investing” by some because it isn’t. Imagine what the prices of food, clothing, and housing, etc., would be if 75% of the perceived demand for those items came from people who didn’t actually use them.
Nope. And I believe I know why the Establishment Republican Party sabatoged and eliminated our [Conservative[s] candidate[s] early on, thus enabling , barring a miracle or accident, obama to be re-elected.
I’m glad you mentioned natural gas. If we are to run around blaming speculators for the high price of oil, we have to blame them for the record low price of natural gas.
The way that government interferes is by raising margin requirements. This is what they did last year with Silver futures and it collapsed the price.
If commodity trading is used by someone to moderate their exposure to volatility, then it is not speculation. If someone is using it to try and make money it is speculation. But you need both to keep the market going.
If a farmer and an onion buyer are standing by the road negotiating a price for the farmer's onions and two guys are standing on the other side of the road betting on the outcome of the negotiation, how does their betting influence the negotiation on the other side of the road? I think it does not.
1) Japan is having to use oil for much of its electrical generation to make up for the shutdown of its nukes, therefore offsetting the large drop in gasoline consumption in the US as of late,
2) The Obama Administration's actions have helped increase the tightness of supply by cutting back on American exploration and development, and
3) In market conditions where supply and demand are tightly aligned as we see now, the high leverage for speculators allows them to drive up prices well beyond what we have seen in the past for such conditions - namely in 2007-2008 and 2011-2012 - the bubble is generally short-lived but very profitable for those who can also short it on the way down, and it is painful for the consumers having to pay the higher prices at the pump.
There is no one factor causing these price spikes, several factors have to be in alignment. Unfortanately, too many involved want to point at other culprits and not realize the culpability across the board nowadays.
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