Why are speculators allowed to speculate on essential products.

Outkast_IRE

For example oil . The AA in a recent article blamed speculators for the recent rise in the price of oil. Leading them to conclude the supply and demand matters less now than ever, they are saying speculators are responsible.

Would it be possible to avoid specualtors alltogether and go directly to an oil producing nation and offer them a set amount per barrell etc.

The same goes for something like wheat etc.

andrew

Outkast_IRE wrote: »

For example oil . The AA in a recent article blamed speculators for the recent rise in the price of oil. Leading them to conclude the supply and demand matters less now than ever, they are saying speculators are responsible.

Would it be possible to avoid specualtors alltogether and go directly to an oil producing nation and offer them a set amount per barrell etc.

The same goes for something like wheat etc.

Essential recourse, like any other kind of resource, need to be allocated efficiently, and in accordance with the extent to which they're supplied and demanded. When a harvest is bad, the market for wheat pushes the price of wheat up, in recognition of the fact that if there's going to be less wheat to go around next year, then it's best to have the price of the wheat go up today. It's best to have the price go up today than next year, because the increase in price today reduces consumption today, meaning there's more wheat to go around next year. If the price didn't go up today and went up next year, then there'd be over consumption up until next year's harvest, at which point there'd be an even greater shortage of wheat and an even greater price increase.

So having a market for these commodities makes sense, because it's in general a good way to allocate them. Of course, markets aren't always used when things are very scarce (like during WWII) but in general markets allocate wheat and other commodities well.

Speculation, then, is a tricky thing to get a handle on, because it occurs for different reasons. From the above example, you could say that speculators are pushing the price up; but in that case it's a good thing (good speculation), because they're pushing up the price in response to real supply constraints, and really all they're doing is acting as a part of the market mechanism, enabling wheat to find it's proper world price. On the other hand, it's possible that speculation occurs in the absence of supply constraints, which is what the AA are getting at; this is a bad thing (bad speculation). But the thing is, how do you tell the difference between good and bad speculation? How do you know why someone is bidding up the price of a commodity, perhaps they have information about supply that others don't, which completely justifies their speculation. Or maybe they just think that others think the price will go up, and it becomes a self fulfilling prophecy. It's impossible to tell.

So speculation isn't banned, because 'good' speculation has a valid function, and it's pretty much impossible to tell the difference between 'good' and 'bad' speculation.


Also, regarding your last bit about avoiding speculators; if a speculator is willing to buy a barrel for more than you're willing to buy a barrel, the country selling the oil has no incentive to sell to you.

cookie1977

Good answer!

andrew

Here's a relevant link, regarding the price of oil at the moment: European governments ramp up emergency oil stocks

Stabshauptmann

Outkast_IRE wrote: »

FWhy are speculators allowed to speculate on essential products.

I dont see why it would make a difference if the product was essential or not.
Either its fair to speculate, or its not.

andrew wrote: »

Speculation, then, is a tricky thing to get a handle on, because it occurs for different reasons. From the above example, you could say that speculators are pushing the price up; but in that case it's a good thing (good speculation), because they're pushing up the price in response to real supply constraints, and really all they're doing is acting as a part of the market mechanism, enabling wheat to find it's proper world price.

Thats when they are actually buying and selling though.
I think there is a lesser arguement for trades that affect share price by a person who does not have a stake in the underlying.

I'm referring to naked short selling.
I can flood the market with "sales" and this oversupply / market psychology pushes the price down, but I dont actually own the shares Im selling.

Same with futures. The price of a security may be affected by the futures market (in theory its the other way, but not everything is logical), but I have no intention of pysically settling my position. I dont want the oil, I have no use for, I just want to bet on the price.

In naked short selling, and futures I might have good information, but does that make it good speculation?

about avoiding speculators; if a speculator is willing to buy a barrel for more than you're willing to buy a barrel, the country selling the oil has no incentive to sell to you.

Then we should, perhaps, only allow trades based on physical settlement?
Forwards yay, futures nay?
Selling your shares good, naked short selling bad?

Just trying to help the OP. I think shorting, in particular naked shorting, is very dangerous, but futures to be an invaluable tool.

Outkast_IRE

Some great answers thanks for that.

Voltex

A futures trader who bets on buying an resource now with the view to it being more valuable in the future is called a speculator....yet an equities trader who buys an asset now and sells it at a profit in the future is called smart!!

bnt

It still requires two parties to make a deal. A farmer sells his* future crops at a given price in the spring, rather than wait for the summer to see what the market will bear then. That's all it takes to create a commodities future contract - which the buyer can then sell on at a profit, and which is the basis of the speculation.

In other words, that commodity future contract represents a transfer of risk; from the farmer (who might get less, but gets it up front) to the trader, who accepts the risk that the value of that commodity could decrease. To kill that market, you'd basically have to stop farmers selling futures contracts at all, leaving them holding all the risk. Without those contracts existing in the first place, there'd be nothing to commoditize, create derivatives of, or speculate on.

* yes, I know there are woman farmers out there.

Jan Hus

In a free market governments are not allowed to stop them