The High Cost of Gambling on Oil

RichieC

Interesting opinion piece here from the New York times. Thought I'd throw it out there see how people feel. If speculation, as this article say is adding 40% to the price of a barrel of oil, would it be in the interest of everyone to out right ban it?

The Price of oil has huge effects on economies, from the price of freight which adds cost to literally everything to the price of petrol in your car.

Today, speculators dominate the trading of oil futures. According to Congressional testimony by the commodities specialist Michael W. Masters in 2009, the oil futures markets routinely trade more than one billion barrels of oil per day. Given that the entire world produces only around 85 million actual “wet” barrels a day, this means that more than 90 percent of trading involves speculators’ exchanging “paper” barrels with one another.

Eliminating pure speculation on oil futures is a question of fairness. The choice is between a world of hedge-fund traders who make enormous amounts of money at the expense of people who need to drive their cars and heat their homes, and a world where the fundamentals of life — food, housing, health care, education and energy — remain affordable for all.

http://www.nytimes.com/2012/04/11/opinion/ban-pure-speculators-of-oil-futures.html?_r=2&hp

Fr Tod Umptious

Back in mid 2008 when oil was also going up in price there was a piece on the radio about how the oil market was basically a bubble, with most of the oil bought for speculation rather than to burn.

In Oct that year petrol was approx 115c a litre, by Christmas it was below 90c, due to the world crash that happened in between.

Permabear

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seamus

Permabear wrote: »

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To be fair though, that's money that's allegedly going somewhere. Speculation (on oil or currencies or whatever) is ticket-touting on a larger scale. It's hoarding in-demand items in the knowledge that you will be able to sell them on for a higher price later on, which in itself has the effect of artificially inflating the price.

The issue being that almost universally it's a form of pyramid with speculators at the top draining cash from the public into their private pockets, and the actual consumers of the product at the bottom losing their asses because they have no choice but to buy, or they've been convinced that small-time speculation will make them rich. This is the same of all speculation bubbles, be it oil, gold, property or currency.

But then this is a major underpinner of most of our economies - selling stuff to other people for the price they'll pay, not the price that's necessarily fair. And it's not always as clear-cut as speculation - some companies will deliberately stunt production of their popular products in order to drive up demand further and justify a higher price.

Banning speculation would effectively be a declaration that someone shouldn't be allowed to buy something unless they plan on using it. Which is actually quite socialist. Most people agree that ticket touting is wrong and would happily call for it to be illegal. But would they say the same about oil speculation if they knew the effect it could have on the way the world markets work?

RichieC

Permabear wrote: »

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Oh that sounds reasonable. Scrap the tax that provides services to the majority in favour of the few who make obscene amounts of wealth gambling on oil. And sure that money trickles down as we all know.

joseph brand

Permabear wrote: »

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Oh the horror! Have any of them been arrested? Bloody do-gooders, probably saving lives in cold weather.

Permabear

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RichieC

I suppose it would be crude (heh) of me to point out the Mr Officer works for a trading firm and has his own agenda.

Suryavarman

To quote from the article:

Many economists contend that speculation on oil futures is a good thing, because it increases liquidity and better distributes risk, allowing refiners, producers, wholesalers and consumers (like airlines) to “hedge” their positions more efficiently, protecting themselves against unseen future shifts in the price of oil.

While Mr. Kennedy would like us to believe that the rise in oil prices is all down to evil speculators, it isn't. What he fails to mention is western governments blockading Iranian oil exports. Then there is still the chance of a war between Iran and America which will cause oil prices to skyrocket in the future. When this happens speculators will start selling oil back into the market causing the price of oil to fall. Maybe it would be more apt for people to argue for less warmongering instead of less speculation.

RichieC

Well, If it's all the same I will argue for both.

Scofflaw

RichieC wrote: »

I suppose it would be crude (heh) of me to point out the Mr Officer works for a trading firm and has his own agenda.

And, in turn, the article contains a number of rhetorical devices usually seen when weak arguments are being sent out to bat for special interests:

Most disturbing, the U.S. government cannot possibly regulate the global market. Oil is an international commodity, traded by Americans and non-Americans alike on exchanges both in the U.S. and overseas. The U.S. should not outsource markets by placing a divide between America and the rest of the world. Do regulators hoping to ease oil prices really want the dollar price of oil determined in Dubai, the backyard playground of the largest oil exporter? With the proposed regulation, foreign oil suppliers will have a greater futures-market share. The oil market will become more susceptible to manipulation by these suppliers.

Do you want to let it fall into the hands of....foreigners!? Wait, why don't the foreigners already do this?

Another common misconception is that speculators only buy and hold assets. More accurately, speculators try to benefit from fluctuations in prices. In other words, speculators cannot profit from sustained high prices, only from changing prices. So, yes, the recent volatility in the oil market can certainly be attributed to speculation, but speculation cannot support an extended price rally.

We're completely innocent - we don't benefit from high prices at all. Seriously, we hate them more than you. Just look at these halos!

Major players like banks, on the other hand, are more than just pure speculators, having the resources to drive prices up.

Banks, though...well, everyone knows they're evil, right?

The same banks that we bailed out are major players in the energy markets: Citigroup, through its Phibro commodities-trading subsidiary, and Goldman Sachs, through its energy-trading desk. Banks are most likely playing a key role in the current run by putting the bailout money to good use: to continue the bid for oil. Again, just a fraction of the bailout is enough to corner the market and rig the price of crude — not that any of these players would dare do so.

Why mention it, then? Perhaps because we can, that way, drag in Goldman Sachs, and the bailout money...

While speculators affect the market in both directions, commercial participants tend to put upward pressure on prices. If airlines fully hedged themselves in the futures market, the price of oil would jump enormously. The futures market cannot support hedging for energy, let alone for other things; for example, investors might buy oil to hedge against losses in other investments, like stocks. With speculators out of the market, an airline's hedge would have an even bigger impact, further raising the global price for oil.

So the airlines don't fully hedge themselves in the current unrestricted market...so why would they start doing so if speculation in oil futures were restricted?

What if we took out all the traders who had nothing to do with the oil market? That would leave oil suppliers and oil hedgers: those trying to sell oil and those trying to buy oil, respectively. Suppliers benefit from higher prices and so would not be willing to sell. Hedgers, afraid of soaring prices, would buy oil futures, driving the price to unheard-of levels. Worse still, we would have to worry about the oil suppliers themselves getting in on the futures-price action. They can afford to take on huge risks in the oil-futures market because they make such large profits by comparison.

So, were it not for speculative traders in the market, suppliers would drive prices to infinity, supported by hedge funds?

It's amazing anyone ever sells anything, isn't it? I mean, the people who supply light bulbs could just, you know, refuse to sell light bulbs, because they "benefit from higher prices and so would not be willing to sell". And then, you know, hedge funds would get in on that action, and soon you'd have light bulbs that cost more than gold.

Damn! Total breakdown of capitalism ahoy!

deeply amused,
Scofflaw

Channel Zero

If memory serves me correctly, Mr Chuck Stone posted a very interesting short vid on this subject not so long ago. It seems the Oilmen are pissed with the Speculators.

http://therealnews.com/t2/index.php?option=com_content&task=view&id=31&Itemid=74&jumival=8153

RichieC

It just struck me that, on the whole, it would be happy days for the speculators if the Iranians blocked the Straights..

Permabear

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Scofflaw

Permabear wrote: »

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Um, if you find that pig attractive, then the lipstick is clearly doing its job, but it's still a pig wearing lipstick. The logical flaws in the arguments being made are as I pointed out, and those are exactly the kind of weak "arguments" trotted out in defence of the otherwise indefensible.

I'll just point out that I do understand the role of market speculation in potentially smoothing out supply shocks, so I don't really have an "angle" here. I just found the article in question extremely flimsy. The Economist article you cite is somewhat better.

cordially,
Scofflaw

RichieC

Another article with a hidden author from the ideologically biased economist. Of course the economist will say don't blame the speculators, the magazine is written by them.

The Observer wrote that "its writers rarely see a political or economic problem that cannot be solved by the trusted three-card trick of privatisation, deregulation and liberalisation."

Scofflaw

It's also interesting to, er, speculate on why the airlines felt/feel so strongly about oil speculation:

AN OPEN LETTER TO ALL AIRLINE CUSTOMERS
From 12 Airline CEOs.

Our country is facing a possible sharp economic downturn because of skyrocketing oil and fuel prices, but by pulling together, we can all do something to help now.

For airlines, ultra-expensive fuel means thousands of lost jobs and severe reductions in air service to both large and small communities. To the broader economy, oil prices mean slower activity and widespread economic pain. This pain can be alleviated, and that is why we are taking the extraordinary step of writing this joint letter to our customers.

Since high oil prices are partly a response to normal market forces, the nation needs to focus on increased energy supplies and conservation. However, there is another side to this story because normal market forces are being dangerously amplified by poorly regulated market speculation.

Twenty years ago, 21 percent of oil contracts were purchased by speculators who trade oil on paper with no intention of ever taking delivery. Today, oil speculators purchase 66 percent of all oil futures contracts, and that reflects just the transactions that are known. Speculators buy up large amounts of oil and then sell it to each other again and again. A barrel of oil may trade 20-plus times before it is delivered and used; the price goes up with each trade and consumers pick up the final tab. Some market experts estimate that current prices reflect as much as $30 to $60 per barrel in unnecessary speculative costs.

Over seventy years ago, Congress established regulations to control excessive, largely unchecked market speculation and manipulation. However, over the past two decades, these regulatory limits have been weakened or removed. We believe that restoring and enforcing these limits, along with several other modest measures, will provide more disclosure, transparency and sound market oversight. Together, these reforms will help cool the over-heated oil market and permit the economy to prosper.

The nation needs to pull together to reform the oil markets and solve this growing problem. We need your help. Get more information and contact Congress by visiting www.StopOilSpeculationNow.com.

...various airline company heads...

Now it's been explained - by The Economist and by people working in the financial industry - that what the oil speculators do is positively beneficial for the airlines, yet the airlines don't like them? So puzzling!

amused,
Scofflaw

Permabear

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RichieC

Right, so we're both coming at this from an ideological angle, are there any sources back mine or your argument from anyone with no horse in the race?

Permabear

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Scofflaw

Permabear wrote: »

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Mm...I'm not sure what that would have to do with the argument, though. These are companies to whom fuel prices are of vital interest, but it seems that they don't realise the great job the speculators are doing on their behalf.

That may be because they simply have no idea at all how the world of oil works - but it seems rather more likely that they do, and the traders are, despite their protestations of innocence, actually costing them money.

After all, as you've saved me the trouble of arguing, the airlines are hardly pro-regulation on principle. Nor can I see any other reason why they would want the speculative traders regulated. Which leaves their claimed motive - that the trading costs them money - as their most probable actual motive.

cordially,
Scofflaw

timesnap

Permabear as an obviously highly educated person and Commander in chief of the Libertarians on Boards, you always have the words,but you seldom have the answers.:pac:

Every attempt by eco friendly groups to find alternative sources of energy have been obstructed by Oil companies.
Just about every patent by genius inventors that threatened the Oil industry was bought from the inventors,then put on a shelf gathering dust.

SamHarris

timesnap wrote: »

Every attempt by eco friendly groups to find alternative sources of energy have been obstructed by Oil companies.
Just about every patent by genius inventors that threatened the Oil industry was bought from the inventors,then put on a shelf gathering dust.

You do realise that oil companies are interested in making money, you agree with this, right? They get oil for the money, not for its own sake.

So if they had a magic fuel/machine that could "threaten" the oil industry, that one company would use that fuel to make massive ammounts of money for itself, not "obstruct" it to make less money from oil because it really really likes the stuff.

SamHarris

I doubt anyone is going to find too many people without at least a little personal bias on something like oil

My understanding of speculation is that its loans and investments that are not as secure as the regular ones.

If investments in oil are inherently risky, and that pushes up the price -but then those investments mean much more oil is found in the future (the "peak oil" limit has not been reached for decades because of this) - how do you stop one without the other being severly impaired?

Or is that even what speculation means?

Does speculation in oil mean something different?

Also taxing oil is not as simple as mearly getting more money for different social services - thats so naive it is laughable - it pushes the cost of services and products and new enterprise so high that it can be counter productive. It is taxed because the government knows it is always going to remain a high scource of revenue for them, no one can easily move on to something else, not because the money they make from it is directly going to build new schools ( which would then be much more expensive to build on account of the higher oil price).

When you can tax luxuries so much more efficiently, taxing neccessities to the extent that we do in Ireland with oil strikes me as counter productive, especially when it is for something as superflous as the 'green' taxation that everyone with anything approaching sense knew would have little or not lasting effect on world greenhouse gass emmissions.

SamHarris

Scofflaw wrote: »

Do you want to let it fall into the hands of....foreigners!? Wait, why don't the foreigners already do this?

I think his point was that if the US banned it, the speculation would and does merely take place elsewhere and it would merely ensure the money made did not land in the US.

A fair one in a US newspaper.

timesnap

SamHarris wrote: »

You do realise that oil companies are interested in making money, you agree with this, right? They get oil for the money, not for its own sake.
So if they had a magic fuel/machine that could "threaten" the oil industry, that one company would use that fuel to make massive ammounts of money for itself, not "obstruct" it to make less money from oil because it really really likes the stuff.

Why do you think they bought up promising patents?.
The easy money was in Oil.
When the profit available from alternative energies exceeds the profits from Oil they will unleash the eco friendly products they have already tested for sure.
Suddenly Green party candidates woldwide will find themselves flushed with money from 'mystery' doners.
Astonishingly peak Oil has already long since been reached, according to the best known scientific evidence.
It could be that same scientists have an agenda too.
All is fair in Oil and war.

Scofflaw

SamHarris wrote: »

I think his point was that if the US banned it, the speculation would and does merely take place elsewhere and it would merely ensure the money made did not land in the US.

A fair one in a US newspaper.

Except that there's nothing stopping that speculation taking place elsewhere already, just as there's nothing stopping the various other straw men he raises from happening.

So it's an argument that sounds like it means something, but doesn't...and in turn one then needs to wonder why it's in there. The rest of the arguments are kind of similar - he raises the idea that the banks could speculate with the bailout money, even though he says they don't do it. Why? He mentions Goldman Sachs...again, why?

The author is, quite frankly, just pushing emotional buttons. I'm slightly surprised he didn't add that oil speculation is as American as Mom and apple pie, and being against it is somehow unAmerican, but perhaps that was a little bit of a stretch.

Sam Harris wrote:

I doubt anyone is going to find too many people without at least a little personal bias on something like oil

My understanding of speculation is that its loans and investments that are not as secure as the regular ones.

If investments in oil are inherently risky, and that pushes up the price -but then those investments mean much more oil is found in the future (the "peak oil" limit has not been reached for decades because of this) - how do you stop one without the other being severly impaired?

Or is that even what speculation means?

Does speculation in oil mean something different?

I would think that was obvious from the OP, and from the articles being cited. This is not about investing money in oil exploration to make money. This is about making money with money.

cordially,
Scofflaw

Scofflaw

SamHarris wrote: »

You do realise that oil companies are interested in making money, you agree with this, right? They get oil for the money, not for its own sake.

So if they had a magic fuel/machine that could "threaten" the oil industry, that one company would use that fuel to make massive ammounts of money for itself, not "obstruct" it to make less money from oil because it really really likes the stuff.

Thing about liking to make money is that it's best to make all the money you can out of what you currently do before moving on to something new. If you were in a dominant market position, had a massive amount of cash, and knew that the world changes only slowly, then what you'd do with rival technologies is buy them when they're small, and develop them once the money from your major earner ran out. That way you don't have to drop the profitable line of business you're already in, and the new-tech startups don't develop into serious rivals.

In the meantime you continue to protect your profitable line of business through well-established techniques and channels, such as political donations.

As you say, it's about making money.

cordially,
Scofflaw

SamHarris

timesnap wrote: »

Why do you think they bought up promising patents?.
The easy money was in Oil.
When the profit available from alternative energies exceeds the profits from Oil they will unleash the eco friendly products they have already tested for sure.
Suddenly Green party candidates woldwide will find themselves flushed with money from 'mystery' doners.
Astonishingly peak Oil has already long since been reached, according to the best known scientific evidence.
It could be that same scientists have an agenda too.
All is fair in Oil and war.

I dont, did I say that? I said they would use whatever method would make them money.

Who is 'they'? You are acting like they are a monolithic group. There are many governments and companies involved, each looking for advantage, if they can find it by using a "green" fuel they will.

The reason green fuel is not used as much as others is because it is more expensive for the end user, not because oil companies are stopping us using them. Its inneffincies are what leads to its high price.

No, peak oil is constantly changing as different stocks are found and technologies open more that we knew were there but that at first seemed unusable. Frackign has opened up massive reserves. See the US which may soon become an oil exporter, not because it is using less oil (though it is) but because massive reserves have become available. any graph you care to look up in google will show you this.

SamHarris

Scofflaw wrote: »

Except that there's nothing stopping that speculation taking place elsewhere already, just as there's nothing stopping the various other straw men he raises from happening.

Em... thats what I said.

Scofflaw wrote: »

So it's an argument that sounds like it means something, but doesn't...and in turn one then needs to wonder why it's in there. The rest of the arguments are kind of similar - he raises the idea that the banks could speculate with the bailout money, even though he says they don't do it. Why? He mentions Goldman Sachs...again, why?

It does if your american and the only effect of illegalising the practice would be to push the profits overseas and not effect oil price. Hence he was explianing to the audience he was most likely to have the probable impact of illegalising the practice in their state. A pretty erudite point to make, it impacts heavily on the discussion, if one were merely going to ban the practice in one country.


Not being terrified of foreigners ...

I wasnt arguing he was right, as is pretty clear from my post, I only addressed that one remark as it had no merit, indeed it didnt even make sense in relation to what was said.

Scofflaw wrote: »

I would think that was obvious from the OP, and from the articles being cited. This is not about investing money in oil exploration to make money. This is about making money with money.

cordially,
Scofflaw

Then you should check what specualtion actually is, if you believe it is so obvious. Its clear many here do not know the full meaning of the term, and believe it only deals with the trading of futures. If you want to be better understood, use the right terms.

It often does involve investment, indeed it usually does. If the person in the article is stating that it adds 40% to the value of oil, and uses that particular word then it covers stuff like risky investments - you cannot pick and choose the meaning as a single part of a broad definition and then claim your meaning is clear. Please actually know what your talking about before dismissing a question like that, its pretty clear few people here understand the term entirely, including you.

http://en.wikipedia.org/wiki/Speculation

Making money with money? Explain.

SamHarris

Scofflaw wrote: »

Thing about liking to make money is that it's best to make all the money you can out of what you currently do before moving on to something new. If you were in a dominant market position, had a massive amount of cash, and knew that the world changes only slowly, then what you'd do with rival technologies is buy them when they're small, and develop them once the money from your major earner ran out. That way you don't have to drop the profitable line of business you're already in, and the new-tech startups don't develop into serious rivals.

Its not only oil companies that can invest in energy.

No company has a dominant market share, at the moment. There are dozens of oil companies, and they are not even the biggest oil producers, states are .The companies are in it merely to make money, a new energy scource would do that, that is beyond question.

A company, any company will not pass up a patent for a new miracle energy that will replace oil over time. Can you not see how that would make whoever discovered it the wealthiest company on earth? Suddenly they would have a monopoly, at least untill the patent ran out. No one would risk "passing it up" on the assumption that all major business' (oil or not) would also do it.

Any company, or even individual with sufficient capital can invest in and market a new energy scource, particulaly if it was more efficient than oil. Are you suggesting companies are investing in reasearch, copyrighting the new fuel and then not using the fuel to make money off oil? Untill the patent runs out of course. Or that individuals are taking their newly discovered fuel to a company, only to not bother bringing it to another that does not have a vested interest in oil remaining expensive? The reason no one has is because it does not exist yet.

People would be on much firmer ground with a CT in this regard if they said that the countries that nearly entirelly on oil were seeking to cover up this new scource, maybe its not the usual bad guys for CTers, but it actually at least makes sense on the face of it.

Scofflaw wrote: »

In the meantime you continue to protect your profitable line of business through well-established techniques and channels, such as political donations.

As you say, it's about making money.

cordially,
Scofflaw

Yes, and I dont think you realise how much companies would make from a new scource.

Scofflaw

SamHarris wrote: »

Its not only oil companies that can invest in energy.

No company has a dominant market share, at the moment. There are dozens of oil companies, and they are not even the biggest oil producers, states are .The companies are in it merely to make money, a new energy scource would do that, that is beyond question.

A company, any company will not pass up a patent for a new miracle energy that will replace oil over time. Can you not see how that would make whoever discovered it the wealthiest company on earth? Suddenly they would have a monopoly, at least untill the patent ran out. No one would risk "passing it up" on the assumption that all major business' (oil or not) would also do it.

Any company, or even individual with sufficient capital can invest in and market a new energy scource, particulaly if it was more efficient than oil. Are you suggesting companies are investing in reasearch, copyrighting the new fuel and then not using the fuel to make money off oil? Untill the patent runs out of course. Or that individuals are taking their newly discovered fuel to a company, only to not bother bringing it to another that does not have a vested interest in oil remaining expensive? The reason no one has is because it does not exist yet.

People would be on much firmer ground with a CT in this regard if they said that the countries that nearly entirelly on oil were seeking to cover up this new scource, maybe its not the usual bad guys for CTers, but it actually at least makes sense on the face of it.



Yes, and I dont think you realise how much companies would make from a new scource.

I think I do, in fact. The difference between what you're saying and what I'm saying is this "miracle source". There isn't any such thing - at least not that we know of - there are just more or less profitable ways of making energy, and none of the known alternatives are anywhere near as profitable as oil. The cost of extracting a barrel of oil from Saudi reserves, for example, is about a dollar - there is no other source of energy that comes close to competing with that.

So the smart thing for the oil companies is to continue extracting oil, and running oil distribution and supply networks, until the profit from oil declines to the point where it's roughly the same as the profit from alternative sources.

In the interim, though, it's still a good idea to buy up any promising alternative energy idea and store it for that day, because it will be more expensive to do it later.

So, yes, the oil companies have a vested interest in protecting their current business model, because the alternative is not a "miracle energy source", but a variety of less profitable energy sources.

cordially,
Scofflaw

Permabear

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benway

Permabear wrote: »

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I'm not sure that the "illegitimacy" of pure speculation should be so easily dismissed - the tale of the dog in a manger springs to mind, and the words of Frank Sobotka.

Further, I think it should be clear to most that the "financialization" of Western economies has had undesirable consequences - wouldn't the money that's tied up in oil speculation perhaps be more productively spent in activities that create true value in the "real" economy? Interesting piece by Joe Stiglitz here, pointing to massive structural weaknesses in the underlying economy as a reason, additional to regulatory and monetary issues, for the crash, and highlighting the need for massive investment so as to consummate the transition from an industrial to a service-based economy.

But where will the money come from? Banning counterproductive, in the literal sense, speculation and incentivising investment in the "real" economy might be one way to approach it.

I think that volatility in the market is only part of the problem here.

Scofflaw

Permabear wrote: »

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OK - now that makes sense as an airline motive. In other words, get the other speculators out of the market so there's nobody to bet against us and we can hedge without being wrong-footed.

Permabear wrote: »

The core problems underpinning oil speculation are (a) government warmongering, which creates a legitimate fear of supply shocks, and (b) the extremely low interest rates mandated by the Federal Reserve, which incentivize speculation in riskier asset classes such as oil.

If governments genuinely wanted to do something about speculation, they could address the underlying issues driving volatility in the market (namely, their own inept foreign policy and monetary policy) rather than trying to redirect public anger at the traders.

Also good points. Perhaps you should have written the article defending the speculators rather than Mr Officer, because those points are very much more cogent than the ones he trotted out.

cordially,
Scofflaw

Permabear

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Scofflaw

Permabear wrote: »

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I think there's a general point there, although I don't know whether it quite boils down to "the government...pumping economies full of cheap credit", although in a regulatory sense it does. There has been a massive expansion of speculative capital in the last two decades, and it's not just down to government policy - some of it is probably down to improvements in IT that have allowed a far more detailed and rapid movement and tracking of capital, as well as automation of dealing, which has also helped release and direct capital on a vaster scale than ever before. I would even go so far as to say that the fundamentals of capitalism have shifted, in quantity if not quality.

And that shift has given us a very high-pressure capital environment, where even a small opportunity results in capital piling in in such quantities, and - importantly - at such speed, as to create an opportunity in itself almost every time. Speculative bubbles of all sizes are now an ongoing feature of the landscape - it's probably time to start thinking about what that means, and whether it requires regulation.

cordially,
Scofflaw

Dannyboy83

Scofflaw wrote: »

So the smart thing for the oil companies is to continue extracting oil, and running oil distribution and supply networks, until the profit from oil declines to the point where it's roughly the same as the profit from alternative sources.

Makes sense, altho doesn't it ignore market share - i.e 'is it better to have 90% of my money or 1% of Bill Gates?'

KyussBishop

It's tricky to read up on this problem, but it seems that what amounts of accounting trickery (involving prepay contracts) by some investment firms and oil producers (previously Goldman Sachs and BP between 2005-2008; speculated to be JP Morgan now), has created an enormous invisible market for oil, and that this lack of transparency has made the real value of oil uncertain, leading to increased market volatility.

Combined with media and investment-firm hype about the future value of oil (due to overstated risks of war and false claims about future increase in demand), this seems to be pushing the prices up enormously.

There's a two-tier market effectively; those with inside knowledge about the 'invisible' market (typically producers), have much better data than those in the public markets, and so when it comes time for this price bubble to collapse, it's the people with inside-knowledge of the invisible market who will sweep up the profits (which actually is often at the speculators expense).

It's complicated, but it looks like the legality of this 'invisible market' might be in question in some places.

Some interesting (but complicated) articles on it here:
http://www.nakedcapitalism.com/2012/03/chris-cook-spikes-and-speculation-in-the-oil-market-%E2%80%93-flash-crash-part-deux.html

May want to read these two first:
http://www.nakedcapitalism.com/2012/01/chris-cook-naked-oil.html
http://www.nakedcapitalism.com/2012/03/chris-cook-the-ghost-of-enron-past-explains-oil-market-manipulation.html

benway

Permabear wrote:

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That is a very narrow view of the dynamics of boom-bust, which is routinely peddled as a self-evident truth. Willfully, or otherwise, it excludes the consideration of the myriad of other pertinent factors - political, social, historical, regulatory. To me, it's wholly deficient.

Scofflaw wrote:

Speculative bubbles of all sizes are now an ongoing feature of the landscape - it's probably time to start thinking about what that means, and whether it requires regulation.

Very much so. I agree wholeheartedly with this analysis of the recent financial crisis:

The financialization of the real economy not only implies that Wall Street is governing more and more economic sectors, it also implies that money is increasingly being invested in finance itself and not in the real economy. This form of capital switching to the quaternary circuit [financial markets] is being used as a way to resolve a crisis in the primary circuit [the "real" economy]; but, according to Harvey, capital switching can only delay a crisis, not withhold it. Moreover, capital switching has a tendency to enlarge a crisis, both in size and in geographical scope....

...Crises have often been blamed on a lack of openness and transparency. Yet, the current crisis originates in a market made open, liquid and transparent, located in a country that prides itself on its free, open markets. In addition, an analysis of financial crisis since 1945 demonstrates that financial liberalization, whether de jure or de facto, precedes the majority of crises (Kaminsky & Reinhart 1999) – the current crisis is no exception (cf. Dymski 1999; Gotham 2006). Apparently, liberalization-enabled securitization and financialization, by embracing risk rather than avoiding it, act against the interests of long-term investments (cf. Minns 2001: 108).

The latter point, especially, is important for present purposes.

Even the IMF have belatedly begun to admit, through clenched teeth, that open capital markets have limited value in nurturing development, if any, and that these moves, in fact, tend to cause volatility in the domestic market, rather than growth.

The role of technology is interesting, I'm forever posting links to Adam Curtis' stuff, but I find that he gets it pretty much right, for me, most of the time - the first part of All Watched Over by Machines of Loving Grace hits this particular nail squarely on the head, summarised here. It's particularly noteworthy that even Alan Greenspan himself grasped the fundamental weakness of the "financialized" approach, and briefly sounded a note of caution, before being forced to backtrack owing to political pressure, eventually choosing to simply throw up his hands and say, "the New Economy moves in mysterious ways."

Honestly, I would've thought that the need for a massive reconfiguring of the financial system, by way of regulation, would have been uncontroversial at this point, I find it worrying that there are still plenty of people out there who want to cure the global economy's acute snake-oil poisoning with another generous dose of snake-oil.

RichieC

The worst thing about these traders is how collectively they can basically hold entire governments hostage to their demands. If we fail the investors sure they'll all do a runner with their money and leave us all in a pit of destruction.

Ireland forced to cut public services that are vital while putting ourselves into a generation of debt to cover their gambling losses because the fear of private investor back lash if we let them down. It's a disgrace.

The Public good is not served by these people, they appear to me as money hungry robots sitting behind a computer screen trading pieces of paper and making themselves kings.

Essentially the freedom Pb et all long for they already have, our governments are subservient to their will, governments elected by a majority. They simply long for even more power over the common folk.

Permabear

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RichieC

Permabear wrote: »

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You simply counter my rhetoric with your own and demand it is taken as the gospel.

I wouldnt vote Sin Fein in a million years.

Permabear

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carveone

I feel that this is a drive-by posting - the thread has got a bit technical for me. But...

Permabear wrote: »

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That's the thing though - the Fed has kept savings rates so low and bond returns so low while inflation is so high (my opinion; the fed's is that everything is just fine as long as we ignore minor things like energy and food) that investors have no choice but to put their money into the markets.

It's worse though. I listened astounded the last time Bernanke went on about Quantitive Easing. It couldn't have been more clear what he was saying:

...If you hire too many workers or give the workers you currently have pay raises – I shall not only stop giving you free money but I shall also raise the interest rates on the money you borrow....

In other words, no QE3 if you hire American workers. Er... OK.

I'm also really interested in the long term effect of this much money sloshing around an economy. I'm not an economist person but I do remember an equation describing velocity of money in terms of supply and output. It seemed to indicate that once the money velocity starts to increase, 1970s style hyperinflation is on the cards. I'm thinking that the Fed is largely telling porkies about the rate of inflation now.
I'm no expert but I think long term investors should probably have a think on that one!

KyussBishop wrote:

It's tricky to read up on this problem, but it seems that what amounts of accounting trickery (involving prepay contracts) by some investment firms and oil producers (previously Goldman Sachs and BP between 2005-2008; speculated to be JP Morgan now), has created an enormous invisible market for oil, and that this lack of transparency has made the real value of oil uncertain, leading to increased market volatility.

Sometimes I think I understand what's going on, and then my brain explodes.

First thing I will say about oil prices is that even the base price is very much higher than it was 10 years ago. By base I mean what people (whoever they are - in this case I'm using the CEO of Exxon) consider to be the fair value of oil. Which is around $70. This means that you seem to get two sides where one side is arguing that oil prices are due to peak oil/disasters/war/etc and the other is arguing it's speculation - when both are right to various degrees.

Second, there is considerable messing going on in the nymex by the big players. You can see them at it, pretending that there's demand for 300 million barrels of oil for May delivery and then cancelling them all and rolling the contracts over. Easy enough given the margin - I could use $6k to control 1000 barrels of oil ($102,000 worth). And then CNBC get in on it and start yapping about $300 oil, trying to push the price up. The big guys even have offshore tankers to hold oil to give the illusion of demand. Alledgedly

But hey, if the Fed insists on giving trillions of dollars in free money to banks, what do you think is going to happen! Course, Obama could use the 3/4 billion barrels of oil in the Strategic Petroleum Reserve and smoke these guys. Is that what happened in October 2011 when oil hammered down to the $70s in about a week? Can't remember but I do remember Obama threatening to do exactly this...

Lastly, there is no way, no matter what the "experts" say, that oil would go to 140, 150, 160...200. Largely for the same reason that other products can't - noone can buy them at that price. At least currently. The first world wants oil at less than $120/bbl. Above that our economies become smoking holes in the ground.

richiec wrote:

The Public good is not served by these people, they appear to me as money hungry robots sitting behind a computer screen trading pieces of paper and making themselves kings.

That's not the half of it. Most of the time they are actual robots. The algorithmic programs pilfer your money as soon as you do anything... Bloody computers...

benway

Permabear wrote: »

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I strongly object to these "mob mentality" type slurs. There are cogent reasons, based on principle as well as experience, as to why de-"financialization" by way of regulation is one on the most pressing policy imperatives of our time. Trite as it is to point out the definition of insanity, same methods, different results, etc.

If you don't want to engage with the substantive argument, for whatever reason, that's your choice. But immediately dismissing those who disagree with you as lacking the faculty for "critical thought" just drags down the thread.

Permabear wrote: »

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And why did the banking sector implode? Deregulation and light touch played a massive role here, especially in terms of the "financialization" of the mortgage industry.

Further, have you really given serious thought to the real practical implications of letting the banks fail? I don't think it would have been pretty.

None of this should be taken as absolving Fianna Fáil or underplaying government's role, but it's undeniable that there are serious issues around the disjuncture between the financial services sector and the "real" economy that need addressing, and I don't think that we can rely on "market forces" to achieve this, not with the current emphasis on short-term capital flows. The fundamentals of the economy can't be allowed to atrophy, lying in a poor second to speculation.

carveone

My last posting is a bit messy but the point was that high prices aren't simply "speculators" or simply "global factors" or "democratic uprisings" or whatever is current. It's more complex than that. What I do feel it comes down to is decades of brain dead government policy.

When you take 1/3 of US crop production out of food and put it into fuel tanks, and pretend this is a Good Thing, what do people think will happen to commodity prices? Or to the 100 million plus people who were on the edge of starvation before the West started this crap. I guess the public think
all the trouble in Libya, Syria, Egypt, etc is just coincidence and nothing to do with the West.... Wheat prices have just exploded since 2006...

When failing mortgage-backed securities force investment managers to look for other places to invest in a climate of risk reduction, where do people think they will flee to? Commodities. Oil Futures. Gold. Wheat. Copper.

When you reduce interest rates to zero, and pour trillions of dollars of money into banks like GS, MS, DB, KB etc, at the same time as ignoring needed regulation and underfunding regulatory authority what happens? Party time!

Sure the NYMEX is super - traders don’t have to take delivery on their contracts, they can simply pay to roll them over to the next settlement price, even if no one is actually buying the barrels. Personally I thought that contracts outnumbering actual delivery is a sure sign of market manipulation but whatever...

Oops, went and got preachy

KyussBishop

benway wrote: »

I strongly object to these "mob mentality" type slurs. There are cogent reasons, based on principle as well as experience, as to why de-"financialization" by way of regulation is one on the most pressing policy imperatives of our time. Trite as it is to point out the definition of insanity, same methods, different results, etc.

If you don't want to engage with the substantive argument, for whatever reason, that's your choice. But immediately dismissing those who disagree with you as lacking the faculty for "critical thought" just drags down the thread.

Agreed; I'm interested in and happy to have discussions with Libertarian supporters on various topics, but when discussions start getting 'dirty' like that it just gets frustrating, personal and circular.

Substantive arguments get ignored for whatever reason, and any opportunity to actually learn from the discussion or reform viewpoints disappears, because people dig their feet in.

carveone wrote:

Sometimes I think I understand what's going on, and then my brain explodes.

First thing I will say about oil prices is that even the base price is very much higher than it was 10 years ago. By base I mean what people (whoever they are - in this case I'm using the CEO of Exxon) consider to be the fair value of oil. Which is around $70. This means that you seem to get two sides where one side is arguing that oil prices are due to peak oil/disasters/war/etc and the other is arguing it's speculation - when both are right to various degrees.

Second, there is considerable messing going on in the nymex by the big players. You can see them at it, pretending that there's demand for 300 million barrels of oil for May delivery and then cancelling them all and rolling the contracts over. Easy enough given the margin - I could use $6k to control 1000 barrels of oil ($102,000 worth). And then CNBC get in on it and start yapping about $300 oil, trying to push the price up. The big guys even have offshore tankers to hold oil to give the illusion of demand. Alledgedly

But hey, if the Fed insists on giving trillions of dollars in free money to banks, what do you think is going to happen! Course, Obama could use the 3/4 billion barrels of oil in the Strategic Petroleum Reserve and smoke these guys. Is that what happened in October 2011 when oil hammered down to the $70s in about a week? Can't remember but I do remember Obama threatening to do exactly this...

Lastly, there is no way, no matter what the "experts" say, that oil would go to 140, 150, 160...200. Largely for the same reason that other products can't - noone can buy them at that price. At least currently. The first world wants oil at less than $120/bbl. Above that our economies become smoking holes in the ground.

Heh, yes it is painful trying to fully understand how the market manipulation works on a technical level (especially as I am learning economics as I go).

Speculators, while they are key to it, don't seem to be the root cause of it all anyway (and last time around many got shafted); as you say, more complicated than that, and the 'invisible market' looks like poor enforcement of regulation.

I think (judging by the articles I posted earlier) that the September-October thing was investors switching from oil futures to US treasury bills; no idea why there was that change though

Ya it seems pretty clear that consumption of oil is going to keep on going down for the foreseeable future, so current prices won't hold; I think this current bubble is due to pop now at any time, so may see a normalization of prices soon (before it presumably starts all over again).

carveone

benway wrote:

The worst thing about these traders is how collectively they can basically hold entire governments hostage to their demands.

If I was to examine the US, I'd say the government is hardly hostage. The Senate is just an extension of Goldman Sachs after all. You can't hold yourself hostage.

benway wrote:

They simply long for even more power over the common folk

I don't think that's true. The 99% don't have any money left. Now they (the 0.01%) long for the .99% as well. I wonder how long it will take them to realise that...

Ok, I'm being a bit flippant for Soc/Politics perhaps.

benway wrote: »

as to why de-"financialization" by way of regulation is one on the most pressing policy imperatives of our time.

We are so screwed it isn't even funny. Over the last 50 years the West has moved to decouple the jet engine of capitalism from the socialist cart to the destruction of both. In the 1960s engineers, programmers, pilots, doctors were held in great regard. That's shifted to the suit brigade and financial services. We've gone from balanced budgets to pretending that rich = assets (instead of equity - ie: what do the liabilities matter?) From manufacturing to services, from production to consumption etc etc etc. Just started reading a book called "How the West Was Lost" by Dambisa Moyo. Just in case I was feeling optimistic

Trite as it is to point out the definition of insanity, same methods, different results, etc.

And it's getting faster. The distance between boom and crash seems to be getting closer together. 1974, 1987, 1994, 2001, 2008.... 201_?

And why did the banking sector implode?

Because the government let them pay one credit card off with another. That always ends badly - the US went wump and wouldn't give them (or anyone else) any more credit advances. Apparantly this is somehow Germany's fault eh Scofflaw

carveone

KyussBishop wrote: »

I think (judging by the articles I posted earlier) that the September-October thing was investors switching from oil futures to US treasury bills; no idea why there was that change though

I'm sure the EU debt crisis played no small part. I knew the EFSF was going to be announced (it wasn't news - it was announced for weeks) and had made market investments. I got absolutely smoked when Greece did its thing three days later. And then 2012 starts with pretending absolutely nothing is wrong. I'm going to go lie in a corner with a bag on my head and wait until it's all over.

I think this current bubble is due to pop now at any time, so may see a normalization of prices soon (before it presumably starts all over again).

I think so too. I've been thinking so since February We'll have a nice big correction. Bernake will bring in QE3 and then everything will be fixed. What could possibly go wrong!