We are a commune of inquiring, skeptical, politically centrist, capitalist, anglophile, traditionalist New England Yankee humans, humanoids, and animals with many interests beyond and above politics. Each of us has had a high-school education (or GED), but all had ADD so didn't pay attention very well, especially the dogs. Each one of us does "try my best to be just like I am," and none of us enjoys working for others, including for Maggie, from whom we receive neither a nickel nor a dime. Freedom from nags, cranks, government, do-gooders, control-freaks and idiots is all that we ask for.
Our Recent Essays Behind the Front Page
Monday, April 25. 2011
Arthur Brooks at WaPo: The O is wrong about taxing the rich:
Well, luck, motivation, and personality traits are involved too. However, luck favors the prepared mind, and "Showing up is 70% of success." Most heirs, like most lottery winners, blow their good fortunes on instant gratification. Furthermore, many people do not pursue wealth and "getting ahead" as a life goal anyway. It's just one of many possible choices of life goals, although the Marxists and Materialists might see it otherwise. Choosing life goals is a very big deal, differentiates the adults from the kids, and, for most, is probably best done in a partnership. "Chacun a son gout" - which does not mean each selects his own path to gout.
The Politics of Envy
Envy is one of those devilishly enjoyable deadly sins
Another Passover Massacre
Syria: Who is the opposition?
How to Advance Communism in the Classroom
Sheesh. We are paying them for this? They should do this on their own time, on their own nickel. Not on mine.
Reich: Let everybody join Medicare
Great idea, Robert. But my Doc doesn't do Medicare. He wants to get paid for his time and interest in my well-being, and he should be. I pay him, with my own money. I thank him, too, and also send him a holiday basket of goodies for his family.
It's not mainly about oil prices. It's about hedging the dollar with commodities, it seems to me. Global investors must hedge their risks somehow, and China wants to dump dollars. Gold, silver, oil - anything real instead of paper money.
Related, at PJ, A Field Guide to Scandinavian Literary Birdbrains:
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The evil oil speculators
Talk about clueless - its pretty apparent he doesn't have a editor never mind a clue about how commodities futures work.
Yes, supply and demand is A factor, but not the only one. The current rise in per barrel oil is due entirely to speculation - or futures betting if you will. Based on current supply and demand figures, the true price per barrel (ppb) is around $75/80. As the Saudi's said, the crude market is actually over supplied.
So why the rise in ppb pricing? Simple. Oil (and other consumable materials) have become an asset class. There isn't a lot of money to be made in the volatility of the stock markets where there is an actual tangible asset so the money moves over to commodities like oil and gold. As that market heats up, prices go up and it becomes a "hot" way to make money - period. Has nothing to do with supply and demand.
Secondarily, the weakness of the dollar due to Bernacke's unwillingness (or inability which I suspect is more the case) to defend the dollar by raising interest rates is also a cause of rising commodity and gas prices. Commodities are commonly denominated in dollars and the dynamic is weak dollar, higher pricing. Toss that into the pot with speculation and the results are obvious.
Third - a complete and total lack of understanding the pure threat of doing our own drilling for our own oil and using our own resources to produce energy from coal to whatever. It used to be that our "reserves" were thought to be something like 2% of world reserves. Turns out that isn't true - it is more likely that its closer to 50% if you include shale oil, deep water oil, natural gas and coal.
Lastly, this is exactly what the lefties in President Obama's administration (and that include the President) want - energy prices so high that we have to use less. The President even outlined this policy back when he was campaigning. He drove it intentionally by over reacting to the Deepwater Horizon fire and creating a moratorium on exploration or drilling. It is no accident that there is some correlation between the moratorium and higher prices.
Tom - I have a question for you. How can you PROVE what the "real price of oil" should be? Is there a rule or a guide?
No, there isn't. There is only the market.
I have another question. Does speculation only work in one direction? That is, can speculators ONLY drive prices up? Because people who blame speculators forget that when prices fall, this is the result of speculation, as well. In other words, speculators can only push prices in a direction if one or both of 2 things happen:
1. they corner the market (rarely occurs, if at all any more)
2. the trends which they are speculating on are well developed and growing, rather than simply faddish and overblown (bubbles)
Today, the use of oil and its demand has more than quadrupled since 1990, as China and India have begun to grow. If you simply plot the price line based on a mere quadrupling, then the actual price is somewhere from $68 to $144, depending on which end of the range you choose to do your linear progression from. This puts your claim "in the range", but hardly making it the hard and fast price you'd like it to be.
In fact, virtually all studies of the impact of speculation have shown it to have limited or no impact in the long term direction of oil prices. In FACT, there are some claims which indicate speculation has moderated the price as firms have used options to keep their energy costs limited.
Consider this - if as a firm I place an order to purchase oil 1 year in the future at $100 a barrel, but "speculators" have driven the price to $120 - who comes out ahead?
I do! And the speculators lose. Why? Because I locked in my price at a level that is far below where it exists, and the "speculators" are the ones who have to provide for the physical delivery at a cost below their average (assuming they haven't hedge this particular position away, as they likely have).
Either way, my speculation has moderated any impact of THEIR speculation.
Let's take it a step further. I've now taken delivery of my oil, and I'm trying to decide what to do 1 year out again. I decide that the market is looking toppy, so I don't renew my option at $120 for 1 year out.
The "speculators" have driven prices beyond physical demand constraints....prices are too high. Now what?
Well, other speculators show up and take short positions. Uh Oh! Speculators are driving the price DOWN!!! Now what? Those evil speculators aren't doing what I thought they were supposed to do!!
There is always a component of speculation in markets. As oil prices rise rapidly, the tankers often physically sit out in NY harbor (I've seen them, and you know when they are fully loaded by the water line), waiting for a price which suits their owners' delivery price. On the other hand, if the market is volatile or heading down, these same owners offload as quickly as possible to keep their cash flow positions intact and their ships moving.
Either way, the ships CAN'T sit in the harbor forever hoping that speculators always do one particular thing to benefit you. They have schedules they have to meet, too.
I'm always amused by the way people accuse "speculators" of driving prices up, but never acknowledge that any price correction is also the result of speculation.
Your "lock in" is only for a set period of time - in short, the delivery date for that period and that is usually done in one month increments. You can buy options for longer contract dates like two or six months (or contract periods) - those are strictly bets and not hedges. Now, if you buy a "lock" in at $100 and the price goes to $120, then yes, you make out like a bandit - if the oil is delivered. Additionally, delivered oil is usually done on the "spot" market and not by contract trading because in contract trading you are trading a future and betting against future prices.
that's not what drives the price of oil or any other commodity. Not all contracts are for delivery - they are pure bets on the price rising and the potential profit to be made. In your scenario, the price of oil would never rise because there wouldn't be any incentive for it to rise.
Now your scenario, oddly enough, that is exactly why the price of oil stayed so stable for so long. There wasn't an incentive for traders to drive the price. It was strictly a commodity - something to be bought and used. The contract gains and losses were in the 10ths of a cent, not dollars. When that changed was when oil and copper, corn, pork bellies - whatever, became assets instead of commodities.
Want proof? The last oil bubble went from $110/bbl to $34/bbl in one week. Nothing in the supply chain changed, same amount of oil delivered, bought and sold. $76 dollars per bbl inflation because of speculation - purely speculation. Some made out like bandits, some lost their shirts - that is the nature of commodity trading. And that happened in the bubble before that and before that, etc., etc., etc.
The reason it happened is that oil briefly became viewed as an asset class - pure and simple. Something that can be held which will gain or add value.
The other issue is how margins work in purchasing contracts. Let's say you buy a contract for 100 barrels at $1,000 - ten bucks a barrel. If you are playing on margin, which traders do, you control that 100 barrels for a month for a percentage of that $1,000 - usually 5 to 6% of the contract value. So you only have to lay out $60 to control $1,000 worth of oil. And you trade on that margin if you want by swapping your contract for another betting that the contract will either go up or down. So by percentage, there is little risk in playing the market if it constantly goes up. And with players joining in the fun because there isn't any real money to be made in other markets, the market becomes either over bought (price keeps on climbing - speculation) or over sold (bubble collapses).
So yes - despite the protests of the masses, speculators have a huge impact on the oil market in times when other asset trading cannot produce acceptable profits.
Actually, that drop wasn't all "pure" speculation. It was market driven because supplies were over fulfilled and demand dropped off dramatically in the aftermath of the stock market and housing market meltdowns.
What you're describing is that sometimes speculation has a magnifying effect on asset pricing - something very different than claiming that speculation is driving prices. It's also clear, as you point out, that the speculators can move in either direction.
So it's hardly speculation that's a problem, it's the supply and demand curve, which is currently under stress and allowing speculators to play the game a bit more effectively than normal. This is a short term (length of time being indiscriminate at this point) problem, until the stresses in the economy are eliminated.
I've actually traded in commodities, on margin, and I'm aware of the "game". I'm also aware that while speculation can magnify price movements in either direction, over the long haul they are a moderating effect on pricing.
It's very likely that any upward pressure speculators are able to apply, right now, above and beyond that which the market will bear WILL eventually cause the pricing to fall back down to a level which is below "real" - until it then rises again (as we saw 3 years ago)
By the way, the case you've made can be applied across any "good". Commodities, stocks, options, housing, etc.
Last year I locked in my home heating oil for $2.90 for the season. By the end of the season it was at $3.50. I received 3 shipments, all under the market rate. Was I a speculator? Yes. Did I "win"? Yes. 3 years ago I didn't lock in my rate. The price fell all season. Was I speculating? Yes. Did I "win"? Yes.
I wonder if Obama will investigate me.
Speculation is, by and large, a good thing. If you see a hurricane coming up the coast, and you go out and buy electric generators to sell in the aftermath - are you speculating? Yup. Did you provide a much needed service by selling them to people who needed them? Yes.
Can't buy into the "speculation is all bad" arrangement. Too pat, too easy, not really very precise for real application. Eliminating speculation will create just as many market anomalies or shortages as speculation is blamed for. The only thing you'd avoid are the magnification effects of pricing as it swings from bubble to bust.
The rich did their fair share when they got rich. You can't get rich without supplying something that others value at more than they had to pay.
The economy runs on disagreement. No voluntary trade occurs unless each side makes a profit, and that's only possible when each side values the items traded differently.
So you want as many voluntary trades as possible. Add up the amount of the difference in valuation across each trade, and the standard of living of the nation rises by that amount.
The rich supply something that others value much higher than the rich person supplying it does. That's how they got rich. By producing something valuable.
"Great idea, Robert. But my Doc doesn't do Medicare. He wants to get paid for his time and interest in my well-being, and he should be. I pay him.'
Dunno why, but that comment made me think of my paternal grandfather. He was a pharmacist and ran his own small town drug store (very similar to the one in 'It's a Wonderful Life").
Anyway, after he died we were in his store. I pulled a drawer open and it was full of busted wrist watches. I asked what they were doing there, and Dad told me that during the 30s people had traded them for their prescriptions.
I will leave it to the reader to decide if that constituted 'payment" for hi services or if it was the right thing to do.
He decided to forgo his own payment in circumstances that struck him as right. No one else decided for him. That's how charity works, and it's completely different from wealth redistribution by fiat.
How do you imagine he might have responded to a customer who simply demanded to be supplied for free, because healthcare is a human right?
It's worth noting that when class warriors mention that 1% of the population has 40% of the wealth, and that the % of wealth has grown over the last 10/20/30 years, they are also NOT asking the question regarding WHO the 1% is. Because it is NOT the same people. There is a proportion who have not changed, but there is also a proportion who have managed to pull themselves into that position. 30 years ago, Bill Gates was not in that 1%. Today he is. Larry Ellison was not. Michael Dell was not. And so on.
So these arguments which pit the 1% against the 99% are fallacious from the start. They forget that the 1% is fluid, changing and open to opportunity.