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Speculators / Rising prices

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UptonStellington
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The scapegoat du jour of the whole situation with rising oil and commodity prices in general, at least amongst the people I speak with, seems to be speculators. It's always, "those damn speculators are responsible for this mess we're in."

Is there any merit to this claim? As far as I can see, it seems as though the speculators certainly fuel the fire. Then again, would that fire exist in the first place to the degree that it does if it weren't for significant amounts of government interventionist policy?

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"Speculators", the ones who make money consistently, are usually selling their holdings off in these situations. By the time everyone becomes interested in a new instrument (in this case oil, but gold has been too recently) they (the average joe) are the ones holding the bag, not "speculators". These "bubbles"(I don't mean to imply that a long-term collapse of oil is imminent, but at least in the short-term it appears so) are characterized by rampant recent acceleration in the price after many months or years of gains, combined with media hype - especially the word "crisis" or predictions(e,g, oil to rise to 2016).

I'm not too familiar with the structural economic policies and their effect on oil, but obviously there is an effect, and it is serious. It is not possible for anyone (no matter how fat a speculator) to move a market by himself(so-called "manipulation") or in co-operation with other really fat speculators in the long-term. Anyone who has ever tried has gone bankrupt.

Edited by yoni
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"Speculators", the ones who make money consistently, are usually selling their holdings off in these situations. By the time everyone becomes interested in a new instrument (in this case oil, but gold has been too recently) they (the average joe) are the ones holding the bag, not "speculators". These "bubbles"(I don't mean to imply that a long-term collapse of oil is imminent, but at least in the short-term it appears so) are characterized by rampant recent acceleration in the price after many months or years of gains, combined with media hype - especially the word "crisis" or predictions(e,g, oil to rise to 2016).

I'm not too familiar with the structural economic policies and their effect on oil, but obviously there is an effect, and it is serious. It is not possible for anyone (no matter how fat a speculator) to move a market by himself(so-called "manipulation") or in co-operation with other really fat speculators in the long-term. Anyone who has ever tried has gone bankrupt.

It is an interesting question. I can see no real-world reason why the price of oil has gone up THIS high. Demand (in the US) has actually gone down some as people try to use less.

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First, who says we're in a "mess"? So prices are up. Prices should be as high as the market will bear, suppliers should be maximizing their profits, and some consumers (namely, the insufficiently productive among us) should be unable to afford it; so if prices go up, hooray. There is no "fire".

Second, so-called "speculators" are just traders, perfoming a service by managing scarcity through predictions about future supply and demand; they either turn a profit or lose their shirts based on their performance. Such predictions will always be made by someone in the trading chain.

Now of course, government makes everything worse by banning supplies and taxing consumers, but that's not the problem raised here. While irrational speculation is certainly possible, the market will correct that problem as it always does when left alone. As it stands, the oil not burned today at today's prices will be available tomorrow at tomorrow's prices. Markets work. Three cheers for the traders who make them work.

Edited by Seeker
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First, who says we're in a "mess"?

I would say so, in the sense that our supply of oil -- and the hopes of increasing production to pump up that supply -- has been hindered by enviros. It's a mess in the sense that we are going to experience far higher prices for oil for a far longer time than we would if things were just laissé faire.

So are speculators NOT responsible for driving prices up at all?

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So are speculators NOT responsible for driving prices up at all?

I didn't say that. Indeed, to the extent that enviros are constraining future supply, not only are speculators driving up the price, but they ought to be driving up the price. Just how else will future constraints in supply, in the context of rising global demand, be managed if so-called "speculators" didn't drive up the price? The problem is in not placing the proximate responsibility where it belongs with the emphasis on "speculators". I'm all for blaming the enviros for making things worse, but then let's pin the blame where it belongs, not on free market participants who are merely acting in their own rational self-interest.

Edited by Seeker
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While government intervention does have an effect on the price of oil (restricting companies from drilling offshore, etc.), I think the primary reason for the high price of oil is due to the industrialization (and thus rising demand of oil) of countries like Brazil, India and China. Environmentalists like to attribute the rise in price to speculators and transportation (making statements like "We're driving our big ass SUVs" and such) but I think it's more properly attributed to manufacturing and industrial processes, especially with the growth of these countries.

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While government intervention does have an effect on the price of oil (restricting companies from drilling offshore, etc.), I think the primary reason for the high price of oil is due to the industrialization (and thus rising demand of oil) of countries like Brazil, India and China. Environmentalists like to attribute the rise in price to speculators and transportation (making statements like "We're driving our big ass SUVs" and such) but I think it's more properly attributed to manufacturing and industrial processes, especially with the growth of these countries.

In places where development is sprawled over a large distance with little access to public transit, the economic blow is sure to hit the hardest. Buildings stacked on top of each other is the way to go.

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As far as I can see, it seems as though the speculators certainly fuel the fire.
"Fuel the fire" is emotive. Let's start by assuming that we're talking about those speculators who are rational. Such people speculate about the future demand and supply of oil. Then, using that, they speculate about what the price will be. Then, they buy or sell. Of course, they can turn out to be wrong, and then they will lose money. However, to the extent that they are rational, all they do is reflect the new evaluations of the market, and move the price to reflect those new evaluations.

When people complain about "speculators", they often envision some type of irrational speculator, who is buying oil without a good grasp of the fundamentals, and contrary to what the fundamentals would indicate. There are always some such people in the market, but there are also times in various markets where there is an above average number of such people. Some pretty smart traders (e.g. George Soros) think it is so in today's oil-market, other pretty smart people (e.g. Jim Rogers) think it is not so. If it is so, and if Soros is right, there is nothing to worry about over the longer term. It would imply that prices will end up coming down, the irrational will lose their money.

Almost all commentators (including Soros and Roger) agree that a large part of the price-rise is a rational reflection of two major factors:

  • fundamental new evaluations of future demand and supply
  • the falling value of the dollar

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It is an interesting question. I can see no real-world reason why the price of oil has gone up THIS high. Demand (in the US) has actually gone down some as people try to use less.

Oh there are several real-world reasons.

1. The dollar is worth a lot less internationally. So even if supply and demand were constant across the world, it is going to take more dollars to buy oil. To a large extent Americans are seeing the fact that their money is worth a lot less than it used to be.

2. Globally demand is increasing. China and India have a lot more cars on the road now than they used to have.

Americans have to get used to the fact that they aren't as rich as they thought they were, and more people want these things than just them.

Anyway, all speculators really do is take risk away from the producers and so on, and take it on themselves. The producer sells the risk by excepting a given return, and the speculator gambles that the future return will be higher.

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Dow recently announced price increases of 20% to offset the rising costs of inputs. Chief Executive Andrew Liveris, mentions that the U.S. has proven reserves to cover 15 years of total U.S. demand. Of this, only a little over 2 years worth is open to exploitation under current law.

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Okay, let's try to look at all the factors we can see in a quick, not-so-deep analysis.

First off, we will start with the obvious.

Lack of raw crude

Supply of crude is low. Not to say there isn't crude out there; there is, we just can't get to it. There are laws restricting our drilling and refining of the oil. There are also other people drilling and refining, which brings us to the next factor

Cartels, namely OPEC

OPEC controls huge amounts of oil, they have the ability to set prices and they can do this because they control and coordinate large state-owned operations. OPEC restricting output increases the costs of oil for the average consumer, who is also paying other prices...

Taxes

I think we pay about 45 cents per gallon of taxes, which could be more or less depending on where you live. Also, most oil suppliers probably fall into the 38% income tax bracket, which gets passed on to the consumer. I remember hearing the other day at the conference that some companies pay about 58-63% of there revenues to taxes. I'd have to look that up though. The point is that all those taxes get passed on to the consumer.

Increasing demand

As West pointed out above, there are a lot of other countries in the world demanding oil like we are. With restricted outputs, and high taxes, these people suffer from the same things we do, and are getting there oil from the same places. With more demand and shrinking supply we have (*gasp*) higher prices. There also is the retarded amounts of traveling consumers do as well. I blame that on a mix of irrational people and economic policies that destroy incentives too create affordable alternatives to cars.

"Alternatives" sapping up funding

One thing that might factor into this as well is the amount of funds by oil companies that are being used to find alternative enegry sources. These are big projects which require a lot of capital. Those costs get past on too us as well.

Plastics and other things

Crude oil is also refined into plastics and a wide assortment of goods, the demand for these goods are growing as well. With the above factors, this just makes both motor oil and plastics more expensive, and the number of farms switching production to Ethanol is also driving up the price of food, which comes in these plastics, which is transported by trucks and vechiles that use the oil... All of these factors should equal higher food prices, and that's exactly what we have. High costs of regulation and inspections play a key part in the entire process as well.

Weak dollar

As mentioned above, the Fed's policies and Congress' lack of understanding of effective economic policies are killing the dollar. Althoug the bail-outs recently have helped by fighting off massive amounts of deflation (one way to fix the problems they caused) inflation is still setting in and the dollars we use everyday are getting us less and less.

Combine all these together and it's no surprise that we are paying so much. Is there anything I missed?

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There is at least (estimation from 1980s) 25 trillion cubic feet of natural gas and 1.7 billion barrels of crude oil untapped in the Beaufort Sea and Arctic Islands (Canada's Northwest Territories ). An environmental group called World Wildlife Fund Canada is lobbying to delay the current round of leasing bids (open to oil companies). I like the Native's response: "The Inuvialuit are sick and tired of having their future economic well-being blindsided by southern-based environmental organizations that poke their self-righteous noses into someone else's backyard without either having the decency to consult with the people that live there or offer any realistic alternatives to their economic challenges."

Part of the challenge is transportation - Mackenzie Valley gas Pipeline (oil companies are hoping for a similar solution for gas) is still inching through very lengthly (it has been years in the making) regulatory process (thousands (literally) of permit applications going through various environmental reviews).

---------

American environmental groups have already succeeded in delaying Arctic offshore drilling (Chukchi Sea area in Alaska is estimated to contain 15 billion barrels), recently winning a court order that forces Royal Dutch Shell PLC to delay its drilling plan as a result of deficiencies in the environmental assessment.

Edited by ~Sophia~
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The scapegoat du jour of the whole situation with rising oil and commodity prices in general, at least amongst the people I speak with, seems to be speculators. It's always, "those damn speculators are responsible for this mess we're in."

Is there any merit to this claim? As far as I can see, it seems as though the speculators certainly fuel the fire. Then again, would that fire exist in the first place to the degree that it does if it weren't for significant amounts of government interventionist policy?

In late 1998 or early 1999, oil dipped briefly below $10 per barrel. Where were those speculators then? Interestingly, at that time the U.S. dollar had been appreciating for about 4 years. It had appreciated roughly 25% by then from its bottom in 1995. The dollar is not the only factor (other factors cited in this thread are also important), but it is a significant one that explains the oil price. A good deal of today's gain in the price of oil, denominated in dollars, reflects the depreciation of the dollar.

Speculators are agents that transmit fact-based expectations about future supply and consumption trends into present prices. As such, they facilitate economizing between present and future supply/consumption. If the expectation is that future consumption will be high and supplies will be constrained -- or that nominal demand expressed in dollars will be high due to dollar depreciation -- then speculators will bid up the price of oil today. That is happening now.

The opposite happened in the late 1990s, at least with regard to the purchasing power of the dollar. Expectations were that its purchasing power would strengthen relative to the world's currencies. Therefore speculators bid down the price of oil.

In regard to the general point of whether speculators can manipulate the market, they cannot alter the long-term or fundamental course of markets. Market prices incorporate such fundamental information. If a speculator positioned himself (incorrectly) against the long-term trend, he would be bankrupted very quickly. For example, if a speculator in 1995 incorrectly bet that oil would go up, he would have lost his shirt.

Blaming the speculators is a lot like blaming the gas gauge for showing that your tank is empty, except that the "speculator gas gauge" is even smarter. It accounts not just for the amount of gas in your tank right now, but also for the nearness of a gas station down the road. The "speculator gas gauge" will adjust to reflect the ease with which you can fill up your tank in the future, thus encouraging you to either consume more gas or less right now, depending on those facts.

The speculator's role is very valuable. If the government restricts it, it will make the markets work less efficiently. Ultimately, this will mean less oil availability because it will become more costly to finance oil production and refining. Capital will demand a higher premium to invest in that sector if financial liquidity and quality market information about future demand/supply are reduced because speculation has been diminished.

Edited by Galileo Blogs
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There have been some recent proposals (by politicians, of course) to raise margin requirements in order to choke off speculation. This would have a negative effect because speculators serve a crucial role in that they provide liquidity in the market.

Here's an interesting article, for those who are interested: http://www.safehaven.com/article-10347.htm

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Apparently George Soros thinks there is an oil bubble:

Billionaire investor George Soros is to tell US lawmakers on Tuesday that “a bubble in the making” is under way in oil and other commodities and that commodity indices are not a legitimate asset class for institutional investors.

He is expected to tell a congressional committee that rising oil prices are the result of a number of fundamental changes and factors in the market, but that the relatively recent ability of investment institutions to invest in the futures market through index funds is exaggerating price rises and creating an oil market bubble.

Surprisingly, Soros doesn't want more regulation of commodity markets:

Mr Soros will say a crash in the oil market “is not imminent”. But he says it is desirable to discourage commodity index investing – or the “elephant in the room” in the futures market – though not with more regulation.

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Apparently George Soros thinks there is an oil bubble:

Billionaire investor George Soros is to tell US lawmakers on Tuesday that “a bubble in the making” is under way in oil and other commodities and that commodity indices are not a legitimate asset class for institutional investors.

He is expected to tell a congressional committee that rising oil prices are the result of a number of fundamental changes and factors in the market, but that the relatively recent ability of investment institutions to invest in the futures market through index funds is exaggerating price rises and creating an oil market bubble.

Surprisingly, Soros doesn't want more regulation of commodity markets:

Mr Soros will say a crash in the oil market “is not imminent”. But he says it is desirable to discourage commodity index investing – or the “elephant in the room” in the futures market – though not with more regulation.

From the parts of his testimony I read, he builds up a "good" case for regulation, but then he says he doesn't want regulation. If he didn't want regulation, he would not have testified in front of Congress, which is the only body in the country that has the power to regulate the commodities markets. Certainly he would not have laid out his arguments to that body that irrational speculation by institutional investors is fueling the rise in the price of oil. I don't know what his real motive was in testifying, but it sure as hell wasn't to prevent regulation.

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I was a little surprised to read the last part of the article where it is claimed that he doesn't want regulation. I didn't read his actual testimony. In any event, Soros is a snake so I doubt his motivation was to promote Capitalism.

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You know, I was talking with my friend and he made an interesting point: When we see prices for something like oil go up, as has happened before, people start freaking out. With a rise in oil prices, some people conclude that we are running out of resources, earth and environmentalist movements gain steam, speculators are blamed. But usually, it's a result of some government policy -- injecting too much money into the economy, for example.

I thought that was interesting, and all you have to do is flip on CNBC to see most of the people saying this is an issue of supply and demand, not stemming from speculators.

Can somebody explain, then, how an absolute genius, Jeff Sachs (just wikipedia the guy -- he became a full professor at the age of 29), is basically reading out of the environmentalist handbook, saying things that I learned in an introductory economics class (with a heavy Keynesian slant, even) not to be true? http://www.economist.com/ scroll down and watch the video called "state of the planet 2008" ....

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Can somebody explain, then, how an absolute genius, ..., is basically reading out of the environmentalist handbook, saying things that I learned in an introductory economics class (with a heavy Keynesian slant, even) not to be true?
Keynes was supposed to be very bright too; and Kant predicted the existence of Uranus before it was acually discovered. Basically, heavy brain power can still lead to the wrong conclusions. It happens with stunning frequency in all sorts of disciplines. My favorite example is Buffet vs. the Nobel prize winners who ran Long-Term Capital. While Buffett is probably very intelligent, the Nobel Prize guys can probably beat his pants off when it comes to advanced Math. Yet, his reality-focus makes him a billionaire while they end up bankrupt. Then, to change the example a bit, consider Buffett's incorrect view on ethics. Edited by softwareNerd
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Keynes was supposed to be very bright too; and Kant predicted the existence of Uranus before it was acually discovered. Basically, heavy brain power can still lead to the wrong conclusions. It happens with stunning frequency in all sorts of disciplines. My favorite example is Buffet vs. the Nobel prize winners who ran Long-Term Capital. While Buffett is probably very intelligent, the Nobel Prize guys can probably beat his pants off when it comes to advanced Math. Yet, his reality-focus makes him a billionaire while they end up bankrupt. Then, to change the example a bit, consider Buffett's incorrect view on ethics.

Exactly. Look at Soros too. A brilliant investor who made a billion dollars selling the british pound short, yet believes the government needs to "correct for the excesses of self-interest." I would be very surprised if Soros wasn't purposely implying support of commodities regulation during his testimony to congress.

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