Posted on 07/03/2008 7:32:43 PM PDT by USFRIENDINVICTORIA
Politicians who try to make oil cheaper by restraining speculation will just make things worse
ALTHOUGH the price of oil continues to hit new records, it has in one respect been a quiet week on the oil markets. America’s lawmakers are celebrating Independence Day by taking a few days off. That has led to a brief interruption in the torrent of proposals aimed at curbing speculation.
Ten different bills on the subject are in the works in Congress. Before the House of Representatives shut up shop, it approved one by a vote of 402-19. America’s politicians are not the only ones to have fingered speculators for the feverish rise in the price of oil and other raw materials. Italy’s finance minister believes that there is a “magnum of speculative champagne” included in the price of each barrel. Austria wants the European Union to impose a tax on speculation. Saudi Arabia and other big oil producers routinely blame the price on frothy markets, rather than idle wells.
The accusers point to the link between the volume of transactions on the futures markets and the price of oil. Since 2004 the near tripling of trading in oil on the New York Mercantile Exchange (NYMEX), the world’s biggest market for the stuff, has neatly coincided with a tripling in the price.
What is more, investing in oil has become something of a fad. Commodities traders and hedge funds with long experience have been joined by less expert sorts, including pension funds and individuals. All this, the theory runs, is contributing to a bubble in commodities. The rush of punters betting on higher prices is begetting a self-fulfilling prophecy: it is the tide of new investment, rather than inadequate supply or irrepressible demand, that is pushing the price of oil ever higher.
Follow the oil, not the futures This reasoning holds obvious appeal for those looking for a scapegoat. But there is little evidence to support it. For one thing, the surge in investment in oil futures is not that large relative to the global trade in oil. Barclays Capital, an investment bank, calculates that “index funds”, which have especially exercised the politicians because they always bet on rising prices, account for only 12% of the outstanding contracts on NYMEX and have a value equivalent to just 2% of the world’s yearly oil consumption.
More importantly, neither index funds nor other speculators ever buy any physical oil. Instead, they buy futures and options which they settle with a cash payment when they fall due. In essence, these are bets on which way the oil price will move. Since the real currency of such contracts is cash, rather than barrels of crude, there is no limit to the number of bets that can be made. And since no oil is ever held back from the market, these bets do not affect the price of oil any more than bets on a football match affect the result.
The market for nickel provides a good illustration of this. Speculative investment in the metal has been growing steadily over the past year, yet its price has fallen by half. By the same token, the prices of several commodities that are not traded on any exchanges, such as iron ore and rice, have been rising almost as fast as that of oil.
Speculators do play an important role in setting the price of oil and other raw materials. But they do so based on their expectations of future trends in supply and demand, not on whims. If they had somehow managed to push prices to unjustified heights, then demand would contract, leaving unsold pools of oil.
The futures market does sometimes signal that prices are likely to rise, which might prompt speculators to hoard oil in anticipation. But it is not signalling that at the moment, and there is no sign of hoarding. In the absence of rising stocks, it is hard to argue that the oil markets have lost their grip on reality.
Some claim that oil producers are in effect hoarding oil below the ground. But there is also little sign of that, either among companies or countries: all big exporters bar Saudi Arabia are pumping as fast as they can.
It takes two to contango Despite their dismal reputation, the oil speculators provide a vital service. They help airlines and other big oil consumers to hedge against rising prices, and so to reduce risk—a massive boon amid the economic turmoil. By the same token, they provide oil producers with more predictable future revenues, and so allow them to expand more confidently and borrow more cheaply. That, in turn, should help to lower the price of oil in the long run. Any attempt to curtail speculation, by contrast, is likely to make life harder for firms and oil more expensive.
Are you proposing that speculation be outlawed?
Arbitrage works the other way as well, buying in the cash market and selling in the futures market will drive the cash market up. Furthermore, the sellers in most cases have the choice of selling in the case or futures markets, so they are their own arbitrageurs.
And as I said, if you don't think speculators cannot drive prices, explain the real estate market.
Actually, banning speculators is not the subject of the proposed legislation that is the subject of this article. The legislation would only enforce the same position limits on index speculators as there are on any other speculators in the futures markets and would treat investment banks as speculators and not as “commercials” as they currently are.
You are repeating the talking points of the Democrats/Marxists.
Democrats being Marxists naturally blame the speculators ( the free market) and the oil companies (private companies/Capitalism) for the skyrocketing oil prices.
Speculators are not causing oil prices to rise. Neither are U.S. oil companies. OPEC has because because they have purposely held back production.
The reason oil prices are high is because supply has not kept up with demand since 2005.
Futhermore speculation is happening in many markets around the world, London, Dubai, Asia etc. So you and Democrats/Marxists are saying all these speculators in different countries with different laws are all conspiring to set the same price. That is a ridiculous assumption. This fact shows that is the price that supply and demand allow.
Democrats think further government regulation of the free market will improve things. I have seen hundreds of examples where government regulation and interference has made things much worse (oil drilling, health care,Colleges, public schools, USSR, Eastern Europe etc.)
If you are right and this is speculative bubble then prices will fall like they did in the housing sector. But you are wrong. I’ll see you here in 3 months when the “bubble” will not pop but oil prices will be $200 and then next year when they’ll be higher than that.
Hayek shows just one reason why government planning can never work: http://www.mackinac.org/article.aspx?ID=9529
http://www.takimag.com/site/article/the_diversity_recession_or_how_affirmative_action_helped_cause_the_housing/
“Uncovering the roots of the disastrous home mortgage bubble that popped last year will keep economic historians busy for decades. Yet, one factor has so far been largely overlooked: the bipartisan social engineering crusade to drive up the rate of homeownership by handing out more mortgages to minorities.
More than a negligible amount of the blame for the mortgage meltdown can be traced back to multiculturalism: government-mandated affirmative-action lending, demographic change, illegal immigration, and the mind-numbing effects of political correctness.”
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However the market corrected itself in spite of all these laws and regulations and now we have lower home prices but of course the liberal media makes it worse than it was and now home prices being low is bad. But the liberal media is lying again hiding the true cause which I just posted above and instead blaming free market capitalism. I heard home sales are rising again so the market is working despite all the government interference. The liberal media exxagerated the problem otherwise home sales would not be rising. actually the job losses and coming recession are caused by skyrocketing oil and gasoline prices not any housing bubble.
Ding ding ding rignt out of the box.
Well, you are a clueless twit, ignorantly spewing Goldman Sachs propaganda. Futures markets have always had position limits for speculators, and for good and valid reasons. The particular legislation under consideration would only classify investment banks as speculators rather than as commercial participants in the market(producers or consumers of the physical commodity). Why do you object to this? Either you are on GS payroll or are you really that clueless. Or maybe you still think that after all that has happened in the last 6 months that what is good for GS is good for America.
You can educate yourself about the specific problems in this market by reading Testimony of Michael W. Masters Managing Member / Portfolio Manager Masters Capital Management, LLC before the Committee on Homeland Security and Governmental Affairs United States Senate May 20,2008
As to your ignorance of economics, I don't know how to cure that. You are probably going to lecture me about "free markets" and all that stuff that you are actually also totally clueless about. The classic economics theorem on free markets is the so-called "welfare" theorem (which has nothing to do with THAT kind of welfare). It states that in order to get the benefits that you expect from a free market, three conditions must hold: 1.) no monopolistic (or ogopolistic power). 2.) No information asymmetries and 3.) no externalities.
Not only do not all of these apply to the current oil futures market with a large fraction of total positions held by long side only speculators, but in fact, none of them apply.
Come back and we can argue further when you have a clue what you are talking about.]
But if your only response to this is to call people Marxists then I am going to continue to call you an ignorant and foolish tool of the investment banks.
Speculators.
Are the ones, who are going to plummet the price of oil, when the time comes.
Emphasis is on TOO. You needed to spend more time studying how real estate brokers, developers, speculators, mortgage brokers and mortgage banks worked synergistically to run this speculative bubble in which everyone who wanted to own a house was forced to participate willy-nilly.
It was a bubble even before Greenspan's 1.75% negative amortization liar loans.
Furthermore, you are putting words in my mouth without understanding what I said, because you don't understand now speculators make money in markets where there are inelastic supply and demand curves, probably because you don't understand the classical theory of economic rents (see Ricardo).
The question on the table is what to do if anything about long side only index speculators who have none of the position limits that apply to other speculators in futures markets. That is the subject of the current legislation. As far as anyone has argued, this particular class of speculators serves no useful purpose.
Since the do not buy and sell, but merely buy and hold positions of ever increasing size, they do accumulate commodities in fact. Oil producers, instead of producing and selling on the spot market, can sell on the futures market to customers who never want to take delivery. So they leave the oil in the ground.
And when supply is relatively inelastic, it is price that sets consumption. This is the classic theory of rents (read Ricardo on the subject). But when demand is also inelastic and there are externalities (i.e. you will stop eating out in order to pay for gas to get to work), then the price above the marginal cost of production is arbitrary, and speculators can, by taking a small quantity off the market, drive prices up for everyone. Long side only speculators, in effect, by accumulating ever larger futures positions are paying producers to keep their oil in the ground.
See Master's paper, linked at post #26. Then read fso301's post at #18. Then you will begin to understand a lot more about what is going on. If you want the graduate level course read Soros's books on his "reflexivity" principle. Then read some economic history of bubbles and crashes, and then you will understand how we hoodwinked ourselves into an ungodly economic mess all worshiping at the altar of what we thought was a free market but turned out not to be.
You, AndyJackson are repeating the Democrats/Marxists’ talking points, blaming the speculators etc. Your post sure sounds like Democrat talking points to me.
The fact is that speculators and oil companies are not manipulating oil prices. Oil prices are rising because supply has not kept up with demand since 2005. That’s simple economics. World Oil production has barely risen since 2005 while world oil demand has skyrocketed during that time.
http://en.wikipedia.org/wiki/Peak_oil#Production
“World oil production growth trends were flat from 2005 to 2008. According to a January 2007 International Energy Agency report, global supply (which includes biofuels, non-crude sources of petroleum, and use of strategic oil reserves, in addition to crude production) averaged 85.24 million barrels per day (13.552×106 m3/d) in 2006, up 0.76 million barrels per day (121×103 m3/d) (0.9%), from 2005”
Economic shortage is a term describing a disparity between the amount demanded for a product or service and the amount supplied in a market. Specifically, a shortage occurs when there is excess demand; therefore, it is the opposite of a surplus.”
http://en.wikipedia.org/wiki/Economic_shortage
So there is a shortage because supply has not kept up with demand. You should learn about definitions and economics and stop believing the Democrats/Marxists and the liberal/Marxist mainstream media.
I believe in free market capitalism .What do you believe in an economy regulated by government idiots or in full Marxism/socialism? It seems like you are a Marxist to me since you believe government can better run the economy than free market speculators. I believe in no regulation by government. Read Hayek, Friedman's Free to choose and Ayn, Rand to see that free markets works but socialism/government planning doesn't : Genius Hayek destroys Socialism/government planning
I'll meet you here next year to see that the price of oil will be at least $200 per barrel . If this rise in oil prices were a speculative bubble or driven by speculation then it will surely pop soon. But it won't because the price is being set by the law of supply and Demand not speculation.
Your name calling says more about you than me and name calling from anonymous posters on the Internet doesn't bother me. I picture you in a rabid rage, calling me names. It is just amusing to me that words on a screen can get others angry.
The legislation to reclassify investment banks as speculators rather than as "commercial operators" would seem at worst harmless, so why does the proposal to do so get your dander up so much that you call those who propose it, or those who think it a good idea, Marxists?
From your vehemence it sounds like you are one of the pigs with his snout in the trough.
And by the way you ignorant lout, had you read what I wrote, I had already attributed the problem to inelastic supply and demand curves, which is why keeping speculation under wraps actually matters in the first place.
I believe in a lot less regulation. But I think laws against fraud, murder, theft, rape, driving down a public street at 200 MPH are in our best interest.
And BTW the reason we have a lot of economic regulation is because it turns out the having the world run by unregulated monopolies is worse than government regulated monopolies. Perhaps you would like a return to the unregulated days of the Trusts before that great socialist reformer, our first Marxist president, Teddy Roosevelt. Me, I think he moved in a necessary direction.
I believe in free market capitalism with no government regulation. However of course I believe in some laws that protect individual rights, life, property, contracts, from other individuals and from government.
How can you say you are not a Marxist if you agree that the Marxist/"progressive" Roosevelt moved in the right direction. Yes I believe that the U.S. should return to the limited government of the 1800's.
Monopolies are created by government.
"The alleged purpose of the Antitrust laws was to protect competition; that purpose was based on the socialistic fallacy that a free, unregulated market will inevitably lead to the establishment of coercive monopolies. But, in fact, no coercive monopoly has ever been or ever can be established by means of free trade on a free market. Every coercive monopoly was created by government intervention into the economy: by special privileges, such as franchises or subsidies, which closed the entry of competitors into a given field, by legislative action. (For a full demonstration of this fact, I refer you to the works of the best economists.)"
"The necessary precondition of a coercive monopoly is closed entry—the barring of all competing producers from a given field. This can be accomplished only by an act of government intervention, in the form of special regulations, subsidies, or franchises. Without government assistance, it is impossible for a would-be monopolist to set and maintain his prices and production policies independent of the rest of the economy. For if he attempted to set his prices and production at a level that would yield profits to new entrants significantly above those available in other fields, competitors would be sure to invade his industry."
Ah. Until you told me that I am arguing with a Randian, I didn't quite realize the depths of idiocy of my interlocutor, but this little quote says it all.
Go play with your mommy.B-bye.
bump for later
The price of oil is likely to plummet — just as it has before — when the fundamentals of supply and demand shift.
Speculators, by providing liquidity to the market, will help the futures market discover the new price of oil futures much quicker than it would otherwise.
The Democrats are betting that the shift in market fundamentals will coincide with their regulations on speculation — so that they can take all the credit for cheaper oil. If the GOP lets this happen, it deserves the consequences at the polls.
One of the differences between the housing market and the oil futures market is that when a speculator buys a house, it is no longer available for other buyers. Either he lives in it or he puts it up for rent.
When a speculator buys an oil contract, he hasn't reduced the oil available for end users.
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