I agree.
.
.
.
Posted on 04/27/2012 4:55:28 AM PDT by SeekAndFind
Lately, speculators have come under attack by Barack Obama. The president blames them for raising prices on oil and gasoline, and he has proposed new restrictions on oil traders. But this is a wrong turn on the road to a healthy economy.
Back in 1958, onion farmers were concerned that speculators were taking advantage of them. They were especially concerned about the extreme volatility of onion prices, which could often double in a short period of time and then drop to a level below the cost of production. Farmers aimed their ire at the Chicago Mercantile Exchange, the principal futures market for commodities. They thought if futures trading in onions was banned then speculators would not create so much price volatility and farmers would benefit. At the behest of Congressman Gerald Ford (R-Mich.), Congress banned futures trading in onions—the only commodity for which trading is prohibited by law.
Four years after the ban, Stanford agricultural economist Roger Gray examined the impact on onion prices. He found that, contrary to the farmers’ expectations, onion price volatility had actually increased. Gray compared onion price volatility into four periods: 1922-41, a period in which there was no futures trading; 1942-49, when futures trading was only developing; 1949-58, an era when futures trading was robust; and 1958-62 when futures trading was banned.
GRAY'S ANALYSIS Gray’s analysis showed conclusively that onion price volatility was far greater during the period when futures trading was undeveloped or nonexistent than during the period when it was robust. This is exactly the result predicted by economic theory. As Gray put it, “An organized futures market widens the opportunity to buy a commodity during the harvest surplus and sell it for later delivery, hence the diminution of in seasonal price range was to be expected on a priori grounds.”
This stands to reason. Speculators make their money by anticipating price changes. If they anticipate future shortages, they will buy now and bid up prices. If they anticipate a future surplus, they will sell now and put downward pressure on prices. Thus the whole purpose of commodity speculation is to moderate volatility—raising prices when they would otherwise be lower and reducing them when they would naturally be higher.
As the famous economist Milton Friedman once explained, the only way speculators could possibly increase commodity price volatility is if they are systematically wrong—buying high and selling low, which is the opposite of how they try to behave and make a profit. If they were wrong too often they would lose money and go out of business.
Said Friedman, “Speculation is stabilizing rather than the reverse…. People who argue that speculation is generally destabilizing seldom realize that this is largely equivalent to saying that speculators lose money.”
HEDGING PRICES It’s also worth remembering that those who produce commodities have a legitimate interest in wanting to hedge their prices. They may want to lock in a sale well before harvest so that they are guaranteed a profit. For hedging to work, however, there have to be speculators on the other side of the trade who are willing to buy without knowing for sure what the price will be when the commodities are available for delivery. In some cases, the speculator is also hedging; a manufacturer may wish to lock in the price of a key commodity used in production so that he can estimate his future costs with precision.
Another benefit of futures markets is guiding production. If a farmer wants to know whether to plant one crop or another, he can look to futures markets to see which offers the greater profit. He can even sell his output before it is planted and thus know with certainty whether he will have a profit or loss. Thus futures markets help moderate price volatility by telling producers to bring more or less of a given commodity to market.
high gas prices regulating oil speculationRose Garden event We can't afford a situation where speculators artificially manipulate markets by buying up oil, creating the perception of a shortage, and driving prices higher -- only to flip the oil for a quick profit. We can’t afford a situation where some speculators can reap millions, while millions of American families get the short end of the stick. That’s not the way the market should work. And for anyone who thinks this cannot happen, just think back to how Enron traders manipulated the price of electricity to reap huge profits at everybody else’s expense.
While it is certainly true that at any given moment in time speculators may cause market prices to vary from fundamental values—on either the high side or low side—it is hard to see how they could do so for any extended period without controlling supply. That is, they would have to physically hold commodity stocks off the market to raise the price above fundamentals for any length of time or bring additional stocks to market to hold it down. There is no evidence that speculators do so or even have the capacity for doing so.
BASIC SUPPLY AND DEMAND Many studies by reputable academics have looked at whether speculators are responsible for volatility in commodities markets and found that this is not the case; price swings have overwhelmingly been driven by economic fundamentals. That is, changes in supply and demand. (See, for example, the January paper by University of Muenster economists Martin Bohl and Patrick Stephan; and a just published paper by Oxford economists Bassam Fattough and Levan Mahadeva and University of Michigan economist Lutz Kilian.)
Nevertheless, there is likely to be continuing pressure to restrict or even ban futures trading. This would be a terrible mistake, as the lesson of the onion market proves. Proof can be found in a recent study by University of Michigan economist Mark Perry, who compared the price volatility of onions to crude oil. Although we think of oil as being especially volatile, the fact that it is widely traded on futures markets actually makes its price swings quite modest compared to the price for onions, for which futures trading is still banned.
It’s human nature to look for easy fixes to complex problems. Banning or restricting energy speculation, however, is a terrible idea that will likely make the problem worse.
So... What happens if all of the speculators decide to move their business off shore?
Your understanding of the futures market seems very thin. Futures trades actually smooth out the irregularities that would develop in any commodity due to seasonal, political, weather, transportation anomalies etc. When you take on a futures contract you own the product. You may make a profit or you could take a big big loss depending on the fluctuations. Since most commodity contracts are held for minutes, maybe a couple of hours, they are traded actively and the prices stay in a very close range. Go spend a day at the Chicago Board of Trade or the Merc or any of the active commodities exchanges and learn how the system works. You'll be glad you did.
Former trader
Perhaps you should talk to Eric Bollings about it.
If you know more about it than he does you could get your own TV show.
I agree.
.
.
.
There is no way to compare oil to NG.
NG has sales value limited by pipelines or underground storage space, which is limited.
Oil can be transported by truck from the wellheads, to tanker ships and sold anywhere in the world.
The difference between the two equates to supply and demand. You cannot successfully speculate an increase in price if there is an abundance of supply relative to demand.
Speculation is not the source of high prices. Limited supply relative to demand is the source. Speculation is only one of the pricing steps given the supply and demand conditions.
The only lasting way to lower price is to increase supply relative to demand (or decrease demand relative to supply or both). Far more oil is traded in markets outside the US. To make the NYMEX more restrictive only pushes more traders to operate in foreign markets. To think that we will be priced separate of those is naive, especially considering that most of the crude oil we use is imported.
Also natural gas is shipped by tanker, even LNG is shipped by truck in some locations. It is only a matter of price; the transport costs are greater than compared to oil, but not prohibitive in many markets.
Control a majority of the market? Not unless they take delivery and sit on it, otherwise how would they control any of it?
Wall Street financial companies Goldman Sachs, JP Morgan, Citigroup and others all had sizable oil storage operations in 2008. They didn't even have to move the oil, they just traded futures contracts off it and let 'contango' do the rest.
How sizable?
How does ‘contango’ let them control the market?
It's been estimated that close to 10% of the available oil was being held off the market this way in 2007-2008, certainly enough to drive prices higher and ensure these players won their 'bets'.
Oil futures contracts are for future delivery. This isn’t like they are just gambling on Intrade - they are buying contracts for oil delivery. The fact that they don’t take delivery doesn’t mean they don’t control the market. As much as 80% of the contracts for future oil delivery are held by speculators. Sure, they can default and not take delivery - after all, the margin requirements are so low that they risk little by doing so. However, speculation has an enormous impact - even the CEO of Exxon has said that as much as 40% of the price of oil is due to speculation. That might be current, but if past history is any indication it can be much higher than that.
10% would be about 8 million barrels a day. Nearly 3 billion barrels a year.
Where did you find that estimate?
If you don't touch the oil, don't store the oil, don't consume the oil, how do they control anything?
As much as 80% of the contracts for future oil delivery are held by speculators.
So what?
Sure, they can default and not take delivery -
Default? What does that mean in reference to an oil futures contract?
after all, the margin requirements are so low that they risk little by doing so.
Yeah, they could lose their margin deposit. How little do you think that would be?
even the CEO of Exxon has said that as much as 40% of the price of oil is due to speculation.
And why wouldn't he say that? Anything that gets the idiots attacking Exxon to attack someone else is a good thing. It's easier than actually educating the idiots.
I'd like to see you acknowledge that before delving into the question of 'how big' a bunch of greedy whores they are.
They hold a contract for delivery. If the oil producers don’t have it reserved for them, then it isn’t a contract. This is in no way a difficult concept to understand. They purchase a contract for future delivery with the sole intent of reselling it, though several large banks HAVE taken delivery - this time with the sole intention of stockpiling it to prevent losses.
Didn’t I read that Zer0 started tapping the SOR this week or last?
We can be assured that gas prices will stay below the $4/gal. mark until after the election.
That seems to be the price that perks the naysayers.
When the market thinks something is going to increase future usage or decrease future supply, the futures market turns that into rising prices.
When the market thinks something is going to decrease future usage or increase future supply, the futures market turns that into falling prices.
And it has nothing to do with greedy whores.
Who? The nasty speculators? What about the speculators who are short a contract?
If the oil producers don’t have it reserved for them, then it isn’t a contract.
You don't think all contracts are sold by oil producers, do you?
They purchase a contract for future delivery with the sole intent of reselling it,
When they buy the contract, it makes prices rise? When they resell it, don't prices go down?
Food aid, if their lucky. US communities will cheer the arrival of UN food trucks. /sarc off
The leftist aka progressive blame high gas prices on every thing but them. No new refineries. Epa laws mandating more then 20 different blends of gas for the nation.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.