The High Cost of Gambling on Oil

RichieC · 12-04-2012 02:19PM #1

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

12-04-2012 02:31PM

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 · 12-04-2012 02:51PM

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seamus · 12-04-2012 03:08PM

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 · 12-04-2012 03:10PM

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 · 12-04-2012 03:20PM

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 · 12-04-2012 03:22PM

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RichieC · 12-04-2012 03:27PM

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 · 12-04-2012 03:33PM

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 · 12-04-2012 03:38PM

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

Scofflaw · 12-04-2012 03:44PM

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 · 12-04-2012 03:48PM

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 · 12-04-2012 03:55PM

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

Permabear · 12-04-2012 05:31PM

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Scofflaw · 12-04-2012 05:45PM

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 · 12-04-2012 05:49PM

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 · 12-04-2012 06:01PM

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 · 12-04-2012 06:21PM

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RichieC · 12-04-2012 06:33PM

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 · 12-04-2012 06:35PM

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Scofflaw · 12-04-2012 10:55PM

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 · 12-04-2012 11:09PM

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 · 13-04-2012 12:04AM

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 · 13-04-2012 12:23AM

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 · 13-04-2012 12:39AM

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 · 13-04-2012 12:53AM

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 · 13-04-2012 01:29AM

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 · 13-04-2012 01:43AM

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 · 13-04-2012 02:06AM

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 · 13-04-2012 02:09AM

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 · 13-04-2012 02:29AM

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.

The High Cost of Gambling on Oil

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