My friend Rob Fraim on Speculators:
You know, we don’t mind it when speculators drive up the price of our stock portfolios. And we didn’t complain when speculators made our house values rise.
However, now that (arguably) speculators are said to be driving up the price of oil, we hear the outcries of outrage and the call for more regulation on energy trading. “Speculator” becomes a bad word all of a sudden and said speculators are evil and must be stopped. So many are saying at least.
But let’s take a deep breath. What has always happened after speculative forces have driven the price of stocks too high? Eventually they corrected to reasonable levels (and beyond.) And what about the recent speculation-driven housing boom? It busted.
If a price movement is purely driven by speculators, at some point the market will do what the market does and the aberrant price will normalize. If on the other hand the reasons for the movement of a market are fundamentally rather than speculatively based, then all of the grumbling and grousing about speculators is shown to be irrelevant.
If skyrocketing oil is the fault of speculators time will work it out, and some of the speculators will be burned. The risk we run is that in pointing fingers at market participants and blaming them for energy prices, we end up having our attention diverted from the fundamental issues that need to be addressed – energy exploration, governmental policy, energy conservation, improving energy efficiency and most importantly the need to develop energy technology and alternative energy sources to ultimately make oil a much less critical commodity.
Good stuff — thanks, Rob!
Ditto
jimmy Carter wanted this energy policy 30 years ago.
I keep hearing all this talk about the housing boom gone bust but I’m not seeing it where I live. Sure prices have dropped maybe 10-20%, especially in the condo and low end markets but relative to where they were 10 years ago, it’s nothing.
ex. a tract house sold for $250k ten years ago, last year at the peak they were going for $850k. Now they’re around $650-700k. Still almost a triple in 10 years? Heck, even if they drop another 20%, it still would have been a great buy.
It seems the complaints come right after the peak and by those who sought to profit from the rise continuing. Most likely, prices will remain flat for the next 5 years before increasing…at least if history repeats itself.
My point is that comparing housing prices to last year’s prices is a self-fulfilling (ugly) prophecy. Compare current prices over the long term and it looks much different.
“What has always happened after speculative forces have driven the price of stocks too high? Eventually they corrected to reasonable levels (and beyond.) And what about the recent speculation-driven housing boom? It busted.”
Wow. Does that ever gloss over a lot. Housing prices are still correcting and the balance sheets of the financials are a level 5 biohazard. The economy has yet to get dumped on it’s head but oil is trying it’s hardest. After that all we need are the Mongol hords to take to the streets and Rob’s piece might look very egg-headish; like one of those who surface every now and then to say the New Deal prolonged the Great Depression when what they gloss over was the lost trust.
Marc, it took about 4 years to increase astronomically, it’ll take a couple of years at least to hit bottom (which, you are correct, MAY not be bottom compared to 1990). That MIGHT be reasonable, but that depends on how hard the owners are hit.
One of the few bright spots this country still has is its graduate schools. We have been devoting far too much brainpower to the financial sector. IF we get off our complacent asses and actually try to solve some of the problems (agricultural production, climate, energy supplies) we may, oddly enough, find ourselves again as a manufacturer to the world. BUT we’ve got to start now. With shipping costs being what they are, there is no reason not to believe that we may begin producing our own goods again. Detroit may get (an absolutely unearned) second chance.
Marc, it took about 4 years to increase astronomically, it’ll take a couple of years at least to hit bottom (which, you are correct, MAY not be bottom compared to 1990). That MIGHT be reasonable, but that depends on how hard the owners are hit.
One of the few bright spots this country still has is its graduate schools. We have been devoting far too much brainpower to the financial sector. IF we get off our complacent asses and actually try to solve some of the problems (agricultural production, climate, energy supplies) we may, oddly enough, find ourselves again as a manufacturer to the world. BUT we’ve got to start now. With shipping costs being what they are, there is no reason not to believe that we may begin producing our own goods again. Detroit may get (an absolutely unearned) second chance.
Hey no problem as long as you eat shit when you make a bad play. that’s not happening in housing now is it? The game is rigged, privatize the profits and make the little guy (taxpayer) eat your losses. Sorry, but that never works out. Now we have a hedge in oil to cover poor equities and failing banks putting evan more stress on this huse of cards. Don’t mis the forest despte the trees. I would imagine using taxpayer dollars. This is far from over and we will be amazed down the road how we thought this was just going to be a bump in the road.
oil prices will fall after surge. Governments should find ways to stop this speculative activity.
Slightly off topic, but I could not resist.
—
Quotable
“So long as the dollar weakness does not create inflation, which is a major concern around the globe for everyone who watches the exchange rate, then I think it’s a market phenomenon, which aside from those who travel the world, has no real fundamental economic consequences.”
Alan Greenspan, November 18, 2007
—
That is an UNBELIEVEABLY irrational statement to have come from an Ex-Fed Chairman. God help us. Well, I guess that makes us all World Travelers now, huh?
Source: PrudentBear.com
Have enjoyed your posts for over a year. Thanks for the good work. Below is a CSpan link with testomony before a Senate Committee by, among others, George Soros and Michael Greenberger, former CFTC Director. Its a long one, but a real eye opener. Start 20 minutes in for Soros and Greenberger testomony.
http://www.c-spanarchives.org/library/index.php?main_page=product_video_info&products_id=205797-1&showVid=true
It’s amazing (but sadly predictable) that so many would rush to judgement, vilifying traders and speculators, while at the same time, having little or no idea how the market actually works.
For that reason, Rob’s comments are a sorely needed reminder that speculators are not to blame for rising (or, falling) prices.
In actual practice, speculators help provide market liquidity and engage in price discovery by anticipating future supply and demand conditions and betting accordingly. In other words, they are making some judgement about the future and putting risk capital behind their opinions.
I forget where I originally heard this, but someone once summed up the issue like this:
“If an evil group of speculators were to blame for the rise in price of [object “X”], then an equally beneficial group of speculators were responsible for its subsequent decline.”
The problem with the argument stated is that a lot of innocent people get hurt by the results of the speculation. For example, even those, like myself, who haven’t taken out a mortgage in 25 years cannot sell our houses in order to relocate. This in a market that has not been part of the boom, but because no one can get a mortgage these days. We’ll get over it, but many people don’t have spare resources.
Similarly, many people who work in transportation are loosing their jobs and consequently houses, etc. because of the price of oil.
And, as we have seen, many of the worst offenders have the political clout to get bailed out when the market should crush them.
This is all very reassuring for all of us living on more than $2 / day.
But oil is different than pets.com shares and McMansions in Orange County. When speculators drive up oil prices like they have, people die.
I’m not sure that this means there is anything we can do about it, or that we should if there was, but it _does mean_ that we can’t take a nice luxurious 10,000 foot view of how this “recent unpleasantness” will all work out for all us rich white people.
The speculators per se are not the main driver of high oil prices but they are aggravating a bad situation and should be barred from the oil and gas markets. The argument that they provide liquidity is just complete crap. The Exxons, Conocos, and Valeros of the world don’t need their stinking money.
There are too many people who don’t gallivant around in Porsches or Ferraris who are going to be faced with a decision to heat or eat this coming winter. It has been bad enough for them the last two.
skeptical “When speculators drive up oil prices like they have, people die.”
What exactly is killing them?
Just how many are being killed, and how would that compare, for example, to the ~43,000 people killed in American traffic accidents annually with “cheap” oil?
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To Hell With OPEC!
Of course demand has caused the price of oil to rise. The problem though is: What would the normal price of oil be? Look at Thursday and Friday. Demand didn’t cause oil to go up by $10/barrel in one day. Or $15/barrel in two days. As others have said, sharp increases in the price of oil can lead to bad things for the economy.
What I find amazing (and perhaps unforeseen) is that it looks like speculation in oil may be actively encouraging the producers to cut back on the supply. The sad fact is that there is tons of strain in getting out as much oil as they currently do, and a lot of the strategy was to build up a large amount of investments before the oil infrastructure fell apart completely. Now that they can earn enough to make those investments without much effort, they may be encouraged to cut back and let it ride.
Does anyone know of any research that has been down about how speculators can actually affect the supply/demand curve so that it becomes reality?
Speculators typically only drive futures prices.
Physical oil can be driven up through hoarding, but speculators don’t like getting their hands dirty.
Tom F. – Canadians seem to be able to both heat and eat even though prices tend to be higher. It’s pretty cold there too. Likewise the Brits, Europeans, etc.
High oil prices hit everybody sooner or later… I didn’t see that happening with real estate prices. If Joe Blow decided to take out a loan on an overpriced house, that’s one thing. But if Joe Blow is forced to quit his job because he can’t afford to travel to work after the increased cost of food, heating, and gas is taken into account, well, isn’t that different?
Thus the howls of outrage.
…If the profits are going to discovery and exploitation of new resources, then maybe we’ll get lucky and the supply crunch won’t be catastrophically disruptive.
For now, though, it hurts like hell.
Stock portfolios and commodities indexes are two very different things. Equities were always meant to be paper assets. Grains, Fuels, Materials, etc + (extreme amounts of leverage) were not.
spinchange,
Please explain the conceptual difference between me owning the stock of a company that deals in commodities futures versus me dealing with commodities futures directly.
It would be nice if there were some kind of regression model which showed speculaton versus normal demand led prices. Maybe we need a new energy policy which explores alternatives. I read a statistic which said that the energy used in a nuclear reactor was approximately 30 percent. Ther rest was wasted. Focusing on recovering wasted energy would seem a worthy goal.
You have arrived Barry, now your getting yahoo board pump & dump spam (j l Mealer post)!!!
A majority of TBP readers will agree that increased future regulation of the markets is a reality born out of the events of the past year, though I am certain that a lesser amount will agree that this is the appropriate course of action. Another regulation or limitation imposed will be who is allowed to participate in commodity markets- specifically, who is allowed to particpate in petroleum futures markets. Certain commodities, think crude and the grains, are too imperative to the world dynamic to be manipulated by speculators. Thusly, time is too crucial to let the cycle of bubble expansion-bubble bursting play out. Simply put, governments will not continue to allow commodity speculation at current levels. If further regulation doesn’t happen, what’s next? Fresh water futures, pure air contracts?
NO MATTER THE PRICE OF OIL, THE PROLES HAVE TO BUY IT!
The workaday desperate run-of-the-mill citizenry has built its entire existence around the gas pump! Stupid idiots handed their happiness over to Exxon years ago! Sure, they cut out the summertime trip to Myrtle Beach when gas hits $4/gal, but what about the weekly fill-up? How else are the proles going to get to their workaday jobs and cart their good little Christian children from school to soccer practice?
This is the thought that permeates Fairfield County: Ha! We can drive up the price and the f—ers will still buy it! $8/gal and there’ll still be demand! Maybe a slight demand decrease but they’ll still sucker up and pay for the bulk of it, and they’ll even cut into absolutely *every* other expense to do so. It’s a market exploiters wet dream!
It’s a racket that’s so much better than Internet stocks or housing, even though the latter- with it’s exploitation of the “American dream” narrative- was a particularly good one while it lasted.
It’s a big market but we are Masters of the Universes! We will never die! We can take this bull by the horns… and who among the Budweiser-drinking Nascar-watching cognitively-deficient masses is not going to pay more for something that his whole existence is based on?
The good little obedient Christian proles will never know what hit ’em.
When speculators operate directly in commodities, they operate in a primary market. The purchase of primary products can be akin to hoarding goods. There is a direct impact on supply/demand and the economy at large.
In stock market speculation, the impact is on a secondary market, of which the primary market is effected indirectly (e.g. via taking a stock market profit and spending it on a car).
It is obvious to me that the current speculative impact on energy prices and some soft commodities has a far worse and direct consequence on the economy, e.g. the well being of all of us. This just does not compare to e.g. having bought tech stocks in 1999.
I agree that eventually, supply/demand will work out the situation. In the meantime, however, I strongly believe that margin requirements at regulated markets have to be adjusted upward for long positions. This always has been done in commodity markets when there was an obvious speculative bubble happening. The Hunt Brothers can tell a story about that. Whether this would be enough to stop the frenzy, I do not know as the opaque over the counter market seems large(r).
I don’t see a problem with speculators who make the right call. They just anticipate the market move and smooth it in the process, they buy when prices are too low and sell when prices are too high.
The problems are speculators who are wrong since they enhance the fluctuations both up and down.
So I’d not blame speculators, but dumb speculators as those that get sucked by the bubbles (tech, housing, oil?).
No one knows when the music will stop for the current rally in oil. Looking at the USO ETF, it looks like its current $112 level is about 40% above its 200 day moving average (exponential), which leaves it shy of the Nasdaq Composite’s March-00 Highs (5130 range) relative to its 200 day moving avg at that time (3460 range). Who’s to say this trend isn’t like a “Stretch Armstrong” toy from the 1970’s….the kids won’t stop stretching it out until they find out what it looks like when the break it.
Wow, it’s amazing how many buy — at least to some extent — the “evil speculators” theory. As others pointed out, no one was complaining as “no money down” speculators drove housing prices to the moon. Speculators only become whipping boys when prices are going against us (housing down, oil up).
On the fundamental side, I seem to recall Jimmy Carter setting a goal 30 years ago, that the U.S. should not import more than half its energy. Now it imports more like three-fourths, an obvious strategic vulnerability. What have we been doing for the past three decades? That sure wasn’t the speculators’ fault.
Here’s a thought: the truly destructive speculators were the ones who created unregulated OTC derivatives such as CDOs and CDSs, pocketed the profits and bonuses, and left the mounting bill to the taxpayers. And their enablers were the regulators — headed by Alan Greenspan, who proclaimed a bright New Age of derivatives which spread risk to the far corners of the globe — who let them do it.
You’ve got to distinguish the capos of racketeering from the foot soldiers. Get a grip, folks.
Estragon:
“The World Bank defines extreme poverty as living on less than US$ (PPP) 1 per day, and moderate poverty as less than $2 a day, estimating that “in 2001, 1.1 billion people had consumption levels below $1 a day and 2.7 billion lived on less than $2 a day.””
Currently there are _hundreds of millions_ of people right on the bubble of moderate ($2) vs. extreme ($1). As you push grain prices higher due to higher fuel and transportation costs[1] you either put more people into extreme poverty in real dollar terms, or even in some cases, in nominal terms.
So since 2.7 _billion_ people are @ $2, and are being pushed by high fuel costs to $1 (real or nominal) I would answer your question:
“Just how many are being killed, and how would that compare, for example, to the ~43,000 people killed in American traffic accidents annually with “cheap” oil?”
with:
Not worth comparing at any time for any reason.
A rounding error on the number of people starving to death at less than $1/day is _several_ orders of magnitude higher than your stat.
Oops, I just compared it …
your game sucks.
I’d say the real speculators are all the bozo’s who bought a Suburban thinking oil would stay cheap.
skeptical,
Wouldn’t people living on $1/day have a pretty minimal crude oil footprint?
Speculators driving up stock prices didn’t cause millions of people around the world to go with out the basic necessities of life. Or cause millions of children to go to bed hungry. The reality is that unregulated capital will likely cause a vast majority of the people espousing it to ultimately lose their jobs as well. Then we’ll see how trite the response is to “get over it because it’ll fix itself”.
Only in oil speculation do you have the ability to bring the globe to a screeching halt.
There is no oil crisis so severe that it can not be made more painful by government actions to solve the oil crisis. Exhibit 1 – the corn ethanol fiasco.
My fear is that over the coming weeks the President and Congress in a mad rush to solve the oil crisis will outdo each other to take actions that will backfire. You think the speculators are putting you in pain. Wait til the President and Congress show you what real pain is.
If the oil price is a bubble, the speculators leave when the bubble bursts. But the laws (like the corn ethanol fiasco) enacted by the President and Congress remain and inflict pain on consumers, taxpayers, and the economy long after the bubble bursts.
The oil producing/exporting countries are getting insanely wealthy without having to do anything (other than hire foreign workers to pump their oil for them). Why can’t the food producing/exporting countries, such as the US, start demanding higher prices for food. Food is more essential than oil.
Barry,
while your friends opinion has some merit, speculation is one of the primary causes, promoted by the CFTC with low margin limits, the lack of regulation of ICE, and index speculators.
It would be one thing to make the argument were everyone on the same playing field, they are not and have never been. The markets are regulated, but certain segments are not, this needs to be changed. Hedge funds provide no disclosure, are now allowed within our pension funds due to the ability of “some” to sell this as a non-correlated asset class, index speculators have announced massive allocations to the space because they were also sold a “non-correlated” asset class.
The most laughable thing about this whole mess is that this is the most levered space in the markets today!!!! Deleveraging results in one thing…..CORRELATION and the bullshit that these institutions sold will unravel.
I want to see the investigation into the institutions that front-ran this allocation into the supposed non-correlated, massively over-levered asset class.
geeze guys, am I missing something here ??
speculators = bad people that want to make
money by buying things that go up like oil
by this thesis, warren buffet is a speculator, why doesn’t anyone call him evil ??
so what are the other million + people doing in the stock market buying shares in companies ??
to take a loss ??
You non-oil-speculating “investors” are hypocrites. But, I issue you this challenge: drive less and then you’ll drive my energy positions into losses.
Think you can do it? Frankly, I HOPE you do. Until then, stop your complaining. You’re embarrassing.
This price rise will hopefully spur Americans to use energy more responsibly AND to innovate (e.g., build electric cars).
Do any of you “investors” remember “innovation”?
By the way, the atmosphere can’t take the CO2 from all the fossil fuel not yet consumed.
INNOVATE.
What happened to common sense? Really, I am serious. I have got to believe that most of you posting here are very educated and for the most part, insulated from the reality of 9/10s of the planet.
Can you not see what is happening and has been happening? You are being eliminated. Your demands, your hope of that utopia with cradle to grave priveledges, is gone.
You keep thinking, not ME. And that is what your problem really is. You have read alot of history and you keep thinking not ME and not NOW. Wake up, its you and its NOW.
While you have beat your breast about taxes and regulation, you have helped destroy yourself. You are just a pawn of the pig men and you did not get yours FIRST.
So goodby to all that. You can embrace the SPECULTORS THAT MAKE MARKETS SO GREAT but I think you will be wondering, as you sink below the waves and you realise that you can not breathe that YOU HAVE BEEN HAD. And you will not be lining up to special order your Lambergini, but hoping to get a Swinn. What is a Swinn, a bicycle, which right now about 90% of the world’s population would give anything to have, and it does not take one ounce of oil.
‘Commodity speculator’ and equity market ‘speculator’ may not be identies. What is his purpose in conflating the two:
A Justification for further financialization?
There is no such thing as a bad bubble? (Even though the commodity price bubble has direct impact on the real economy constituted by billions of real people whereas equity bubbles can only be said to have indirect consequences?)
Bubbles end? (From a global perspective, what negative consequences flow from the death of commodity bubbles?)
An argument against re-regulation? (No matter that dereg has not proven to be such an unmitigated plus as its promoters love to argue?)
Anyway, to consider the oil price run to be based in fundamentals is, imo, equivalent to arguing financial markets efficiently capture present and high probability future realities rather than being open to self-fullfilling socio-psychological fantasies for which justifying stories can always be found.
Whether real or financial or their combination, the market is not always right.
Estragon,
If the folks at the Oxford Institute for Energy Studies know what they are talking about, and I suspect they do, the modern oil price regime is one of formula pricing in which prices for the many grades of crude oils are (depending on grade) set +/- in reference to a small number of benchmark crude oils, with the prices for these latter being “market related” (i.e. determined within what are financial markets and related to the real through information flows).
While I’m not sure about the degree of interconnectedness with futures’ prices, there are also assessments from such companies as Platts or Argus.
My point though is merely that prices are not so immediately determined by physical supply/demand as theory may wish.
Not sure whether this is needed/overkill or in response to real or imagined arguments (directed at me or not). But, in case “real”, I’ll continue my defense of energy speculators/investors (e.g., myself):
As with stocks, we know the market isn’t always right. We know physical supply/demand don’t completely dictate prices. Same with anything.
Oil might plummet this week. I don’t know. But, I do know everyone has the power to make a difference by not wasting energy and by voting for politicians who present better solutions.
By the way, I started “investing responsibly” only in the past few years and don’t have much play with. So, despite mild returns the past 5 years, I expect to be pedaling a bicycle like Mary (er, is that you, Madame Defarge?) described and not driving a luxury car. (I chose the wrong industry some years ago. Switching cost me. And I expect to switch again because outsourcing keeps following me like the Reaper follows a quadruple bypass patient.)
A price rise now is the best way to spur people to innovate. The sooner, the better.
Take my money, please.
Leaving the house in the morning is speculating.
Any voluntary action having a potential positive or negative outcome based on variable(s) beyond the control of the actor is, by nature, speculative.
The price of oil is what the market says it is – no more, no less. Currently, the market says that a barrel of oil is worth around $137. Think the price will rise? Get in. Think it’ll go down? Get out. Buy, sell, or sit on the sidelines according to your “understanding” of market dynamics, but also understand this immutable fact: You are gambling.
I currently am willing to gamble that day will follow night. The future price of pork bellies? Not so sure.
I have an idea on how to stop the speculators. Congress could pass a resolution condemning any attack on Iran. That would include the threat to cut off aid to any country that tried to do so. Calming security jitters in the Middle East, and sending the price of a barrel of oil plummeting.
How about it? A peace dividend that works!
What is hilarious is how many people think commodities speculators are like stock speculators. Anyone who has traded/speculated in commodities fundamentally understands the actual price level and the direction up/down of the commodity means squat. A commodities speculator cares about only one thing . . . making money by being on the winning side of a trade. You can make just as much money on the downside as the upside in commodities.
Anyone who complains about people starving due to commodities prices doesn’t understand squat about commodities or markets. If corn skyrockets, there are plenty of farmers who plant MORE corn, thus causing a eventual equilibrium in the market.
The futures market was developed to help SMOOTH out price spikes due to weather/environmental factors, and it does a pretty good job.
To those who complain about real increases in food prices . . . deal with it . . . that’s called life, unpredictability, weather, etc. and why its a good idea to have food storage and 6 months of living expenses. Especially considering that in the US we spend so little % of our incomes on food it is insane.
Then people say we are driving up prices for 3rd world countries. How many that say that have been to a 3rd world country? They have ridiculously cheap food . . . it’s not the price of the food that’s the problem for them it’s their own countries economies and their own ability to find a job. Lack of education and (generally) and a socialized (i.e. lack of free market) country.
To those who say housing price increases don’t hurt anyone, tell that to the generation of 25-35 year-olds, new families, etc. starting out who can’t even afford a starter home b/c they are now 500k+.
It’s really amazing for a financial econ. blog how many people here show a true lack of understanding about the free market, and economics in general. Read Man, Economy State. by Murray Rothbard . . .shoot just read the 1st 5 chapters.
Maybe people would prefer:
– price controls on “X”
– to wait in lines for “X” and then
– to run out out of “X”.
The challenge with oil and commodities trading is that the dislocation caused by asset bubbles is so severe that waiting for markets to correct causes too much hardship. It is hard to tell some one who is going hungry because of food prices to wait for a correction.
John McCain is going to solve all your economic problems!
Soon in your favorite movie theater!
Comments are so random. But I felt compelled to leave a not for Barry. I appreciate your wisdom. I’m a young investor trying to make sense of the market and your writing help me greatly.
Estragon:
They aren’t buying oil. They’re buying _food_.
The rise in oil has increased the price of their food, by a significant amount.
Now they buy less food. Many starve. To death.
I think that volatility in the price of oil creates a substantial cost to the economy. How can capital be correctly allocated if the price of a factor as crucial as energy has a large random component?
If we had a core portion of the economy where things were more stable and predictable – including the basic components of most people’s lives, things would run better.
I will admit that any solution to this would itself have a cost and that it may even be that there is no solution that would not be worse than the problem.
Nonetheless, it is worth noting the price we pay. These large fluctuations make long-term projects unplannable. An incentive structure has also been put into place that makes various forms of gambling rational and hard work foolish. That can not possibly be good for us.
Commodity markets were designed for hedging and speculation (the buying or selling of said commodity to profit from price movement.) The problem is these markets were not designed for one-way investment which is what we are seeing from the long-only index funds. This new group of investors have come into these markets in an attempt to obtain the return they cannot get because the Fed has twice driven rates below the levels that pensions, endowments, insurance companies, etc. require to maintain their balance sheets. It is not some hedge fund manager or CTA who is causing the problem,they trade both sides of the market; it is CalPERS or grandma’s annuity that is the villain now.
Meh, you all can defend speculators all you want. Out here in the real world, the price of oil is everything.
People made decisions on where to live and what kind of car to buy years ago when the price of gasoline was much lower. They can’t react quickly.
Estragon, u really need to learn a lot about futures, and how commodity markets work.
The system work this way – it is the futures prices now, which set the spot prices, not visa versa. Most of the contracts in the spot market are just linked by certain formulas to futures prices. Only small portion of spot trades “independently”.
The link between futures and free spot capacity would be carry or reverse carry arbitrage.
The problem is this kind of arbitrage is costly and requires considerable capital investment. It is not like selling buying index futures and basket of snp500 stocks.
U have to have storage for physical commodity and pay expenses for transportation. U may also face significant margin calls if the commodity price is one way train as it is now. u also can not buy say brent to deliver for wti in cushing – the markets are independent.
So if there are a lot of speculators, their positions are not different from any real physical demand. It’s just hoarding, only the hoarding is done by coms, who sell them the futures and put physical commodity in storage.
And if price goes up a lot many people around the world are indeed starving.
Further the more, futures do not reflect any physical consumption balance at all. For this to be the case, there have to be say a unified market for “oil” in the world, there all major producers and consumers (the best case is ALL) are hedging. That would be an “equlibrium” price.
Thus in real world there is no such thing as a price for commodity which reflects supply/demand. Just no such thing at all, due to they market work and limit to arbitrage, etc.
So speculators can and do affect prices big time, for a while.
continued – And by doing so, they may affect capital investment decition for a long time. Think of the costs to build storages, etc. The perfect example is this extra capital costs in broadband building during Nsadaq boom, or an overhang of housing in America now.
So this is a complex problem but the solution is not easy or staightforward.
Shane; How many that say that have been to a 3rd world country? They have ridiculously cheap food…
Huh, this person has, and not on a vacation. So soon as food production ceases to be for direct use by the producer and community but for the market, ‘cheap’ becomes relative not to personel income in some other part of the world but to the income of the majority in the local market.
‘Ridiculously cheap’ can become progressively less affordable when conditions of surplus labor, employer pressures, changes in land tenure, interact to help hold wages at or below subsistance levels. Speculative price surges, higher inflation and lower real wages further exacerbate as does the rise of input prices on the production side.
Speculation is fine. Volitility is the problem because of the destabilizing nature it has on long term capital (scary, scary)… With energy, because its such a heavily subsidized and manipulated market, its, in the end an opaque market – which makes for more volatililty, more speculation… rinse repeat.
Good Stuff? Yeah, if cold, inhumane, dogmatic idealism is your bag…
Read Michael Master’s testimony before the U.S. Senate Committee on Homeland Security and Governmental Affairs given on May 20, 2008.
It is clear, cogent, factual and, most importantly, SOCIALLY SENSITIVE.
First, the comparison between equities speculation and commodities speculation is apples and oranges. Capital made available in equities markets can be put to productive use for the benefit of all. Contrarily, capital thrown at commodities solely for the sake of benefiting from upward price pressure is nothing more than a pump and dump scheme whose perpetuation needs but a greater fool. What good does this do?
But more importantly, though, the impact of commodities speculation — particularly that which is being influenced by Index Funds — is insensitive to the reality being negatively imposed upon an entire society for the benefit of a few.
Indeed, as far as I am concerned firms like GS and MS who are largely promoting Index Funds are acting contrary to the interests of the People of the nation in which these firms operate. By facilitating such speculation, these firms not only demonstrate themselves utterly incapable of self-regulation, but show themselves subversive to the cause laid out in the Preamble of the United States Constitution.
Blatant speculation in items necessary for our modern society’s fruitful functioning are WRONGLY compared to speculation in equities. There is just no comparison.
When Rob Fraim writes “The solution is not blaming speculators for the long-term failures of economic planning and policy,” he is 100 percent wrong. The long-term failures of economic planning and policy have occurred precisely because a financial caste (which I believe can be traced back to the House of Morgan and the creation of the trusts in the later 1800s) has arisen which has made sure that economic planning and policy favors the casino economy at the expense of anything else. In his testimony on June 3 before the Senate Commerce Committee on “Energy Market Manipulation and Federal Enforcement Regimes” George Soros said something very, very interesting, which has not received, imho, the attention it deserves:
I think when historians a half century or so from now look back, they will write that Merton, Scholes and Black may have been one of the biggest disasters to befall national economies in the modern age. Their theory of rational pricing based on stochastic models has been the foundation of one financial disaster after another, from portfolio insurance and the 1987 crash, to collateralized mortgage obligations and the crash of 2007. But the key to understanding why rational pricing models led to crashes is to recognize that the idea of rational pricing allowed the financial system to decouple itself from the real economy: the financial system no longer concerned itself with providing the credit and finance for the creation of future productive capacity, but increasingly concerned itself with finding ways to manipulate and arbitrage differences in the values between existing productive capacity and increasingly derivative financial paper.
Which is why I assert with such certainty that all those things which we MUST do – energy exploration, governmental policy, energy conservation, improving energy efficiency and most importantly the need to develop energy technology and alternative energy sources – are unlikely to be successful until the financial system is reformed to reassume its proper role of support to achieving these goals. To go back to the Soros testimony, we can pop all the small bubbles we want, but until we pop the super-bubble, we really are hobbled in whatever we attempt.
I really need to unload on the person that posted the remark above, “What exactly is killing them?”
You stupid, ignorant, arrogant bastard. I just got back from visiting some poor relatives in the south, and I can tell you, they are at the point that they are having to decide between buying gasoline for their cars or buying food to put on the table. But chowderheads like you don’t sense any of that. And when you feel the tip at your belly, it’ll be too late. Go crawl back under a rock you useless piece of rat dung.
Oil is a limited resource, limited in two ways, there is only so much of it to freely pump out and there is a limit to how much can be pumped out per day. We as a society have tapped out the easy stuff and engineers have designed the best ways to make what seemed hard – easier. So now we are actually getting to the limit of how much oil we can get out of the ground per day. This limit is called peak oil production and it is a real thing. Just look back at what happened in the US when peak oil production was reached and we had to start buying it from elsewhere. (read The Oil Factor by Leeb)
So now that we are at or near this peak production we are thinking about what the hell are we going to do to reduce prices. You aren’t. Why in the hell would any company pull oil out of the ground and sell it for the $75 a barrel you think is fair versus the $130 it will be able to get next week. It is absurd to think that we can drop the price to “where they should be” and not have things messed up. Maybe congress should subsidize it for the poor. That always works well when congress acts to affect markets.
World demand for oil is rising and every day it is harder to pump out as much oil as we would like. This equation is not debateable. Sure there are days where things go right and it is easier. A new field comes online, but at the same time oil fields are drying up and shutting down. The net result over time is that it is harder to get as much oil as we want. This means demand is rising while supply is falling. Period. There is no way around it. You can argue it is going to take much longer versus shorter to reach the real peak, but to argue against the point is futile. Maybe you think the peak production wont be reached until 2020. So, ok all the speculators that thought it will happen now will be right in 12 years. Then what will you do. Just face the fact, oil is free energy and there is only so much of it.
Free how can that be? Well how many man hours of labor do you think are in a gallon of oil? If you dont know I guarantee you will guess low if you are being honest with what you believe. Would you pay $1 for 100 people to come over and work on your yard for 6 hours? It would look nice. That’s worht $1 right? Now if things got terrible and you had to pay $5 for those same 100 people would you gripe and moan about it? No, you would pay up for that free energy. Would you pay $17 dollars for the yard crew? How about $350? At some point you are going to say, “you know what, the free energy was nice when it was around, but I really dont need each blade of grass cut by hand, I can just buy a mower and cut it myself instead of spending $1400 a month. It was fine when I paid $4 a month but now that it is $1400 I think I will just save the money.”
Think about it for a second what would happen if your car vanished or there was no gas for it. You would have the inconvinience of ugh a carpool with your spouse or even, omg, taking the mass transit.
Is there a point in the gas prices that would cause you to do things differently? For me I could care less if gas was $12 a gallon in the short term. I spend about 1/50th of my monthly income on gas because I make plenty and only have to drive about 1000 miles a month. Not everyone has it so easy. You will need to figure out what lengths you will go to to make your world a better place. Just pick a number where you cant take it anymore and plan ahead. If gas reaches $x per gallon I will have to do something. For me this number is probably something like $6. I will buy a fuel efficient car so I dont waste my money. There are people that $3 was too much and have to do something. The problem is the time lag in fixing your situation. It is hard to move or get a close job at a moments notice. But over time people will fix what is wrong or suffer. It will start by missing the movie on the weekend or the drive to grandmas house is now a monthly thing. The food goes from canned soup to mac and cheese and from specialty bread to cheap bread to flour and yeast.
Think about what you will need to do when it gets to a certain price and then plan ahead. I am looking for the efficient car now and if it gets much worse I will buy two desktop computers one for work and one for home instead of carting my laptop around, same price anyway, so I can ride a bike to work. I will also work 4 days a week for longer shifts and even work a day at home. I got a flexible job indeed. What will you do?
Whatever your breaking point is, unless you made the forbes 500 list, we will hit your uncle point sometime in the next couple of decades. You better plan ahead instead of getting a stoopid idea like making congress investigate and fix all the gouging and speculation that made your life tough.
At some point we, as a society, have to quit using resources faster than they can be replenished. We will not be able to develop new technologies until the prices are properly aligned to do so. Look at Germany and solar power as an example. You can’t go anywhere without seeing solar panels there. Why? Because they made it worth $1 every 2 kilowatt-hours if you produce solar power. The invested in the future. They paid 10 times a smuch to get the ball rolling over time. They will not have to endure the spike in oil we will before we get are act together. Its a fraction of that to burn coal or oil here in the US. So we could care less and burn the coal or oil never looking at the reality that world demand for this stuff is going to make the prices unbearable at some point. If you think $4 gas is bad wait until we hit $400 a barrel oil in a year or two and have to pay more than $10 a gallon. I will wager that you will be crying to your senator to do something when you should be doing something now.
Get out there and support nuke plants for cheap electricity, support reserach into fusion plants, solar, wind, batteries, bioenergy and what the heck toss in some wave energy for good measure. We need electric cars, a lot more batteries, and mass production of these items to have bearable prices. The key is not to wait but to be proactive in the solution.
Hey Folks,
I apologize for the dump post as esteban called it about McCain’s Economic plan, but I felt it extremely important to what this blog is all about. I know you must agree!
We need to find another source of fuel tax revenue prior to getting rid of fossil fuels and the best way is to involve the speculators in putting their money into USA businesses.
That would be best for the USA…
Agreed?
I am a businessman and a CEO for Mealer Companies, a “green” (hate that term) engineering company.
Friends, and I say this with sincerity (maybe it’s an Arizona thing), we need to make this work and we need a plan that worls, otherwise we will never get out of the starting gate and once our vehicles are on the market in two years, the gov’t will have a new tax base and Americans will have great new jobs.. and we can sell some non-fossil fuel cars and motorcycles and other products we have.
This should be a very good next several years with McCain in office… Otherwise, anyone wanting to or actually earning over 150k to 200k per year will face daunting taxes from the socialist side of politics.
Yes, with your own USA mfg business that’s easy pickings.. We can do it people.