« previous | TPM CAFÉ READER POSTS HOME | next »
Speculators ate my Buick
Many, many government officials and media pundits have blamed "speculators" for rising commodity prices, but as Huffington Post reports:
(Energy Secretary) Bodman disputed that assertion Saturday, saying oil production has not kept pace with growing demand, especially from developing countries like China and India.
"Market fundamentals show us that production has not kept pace with growing demand for oil, resulting in increasing prices and increasingly volatile prices," Bodman told reporters. "There is no evidence that we can find that speculators are driving futures prices" for oil.
He said commodities markets have experienced a huge influx of money from financial investors in recent years, but they have been following the market upward rather than driving the increase in the price of oil.
They make handy bogeymen, but these speculators are essentially traders in a free market. They bet on prices going higher, on prices going lower and a bewildering array of other variables as well. And they lose money when they bet wrong. To argue against speculation is to argue that we should move away from free market pricing and towards subsidized pricing, like China and India, or even towards a planned economy, like the failed Soviet Union.
Advertisement
Comments (3)
I posted the below yesterday. It address, among other things, your naive idea of a "free market" operating in oils futures.
Generally, I have no gripe with speculation-driven markets, particularly when the market deals with non-essential items like stock prices.
But when one of the necessities of life, like oil or corn or rice, becomes the target of the manipulators, it becomes a social issue requiring federal and perhaps international government intervention through regulation.
How do you think entities like the SEC came into being? How do you think Anti Trust Law evolved?
See if reading my long post below is worth your time, please.
FB
Obama Strikes Back at the Oil Speculators, While McCain/Bush Sleep
By Fredrick Bernanke - June 22, 2008, 7:27PM
Today Barack Obama became the first national figure to enunciate a plan to deal with the speculation-driven increase in the price of oil.
Dribs and drabs of concern have come from the Administration, usually via the SecTreas, but Obama today leaps beyond anything yet proposed and gives some coherence to a multifaceted plan of action to address another new and unique issue.
Oil price rises have the same effect as tax increases, and are brutally regressive to boot. Money is extorted from individuals pockets; but instead of flowing INTO the USG, it flow OUTWARD into the pockets of such wonderful organizations as the House of Saud, the Iranian Gov't, Putin, Inc., Chavez' Venezuela.
It is the greatest transfer of wealth in world history. And the wealth is being transferred from the Western & Eastern (Japan) Democracies to the boys listed above. [Granted, some of this wealth returns in the form of investments made in the US by various foreign entities.]
It also means, obviously, that oil consumers have less in their pockets to pay for other goods and services, thereby slowing the economy.
The oil market, until very recently, was composed primarily of those players who actually were in the oil business. They made their buy/sell decisions based on fundamental supply/demand equations.
Recently, the same guys who brought us the Tech Bubble in US stocks in the late 1990's realized that the actual supply/demand equations need not be the primary factor in moving oil prices. Rather, the mere purchase of oil futures contracts in great volume was enough to drive the price of oil up. These speculators have/had no intention of actually taking delivery of an oil tanker full of crude: they only want their pieces of paper, the contracts, to go up in value.
They also noticed that these futures markets were subject to limited regulation and disclosure requirements. Yum Yum.
Just as in the Tech Bubble when company share prices rose to the moon, irrespective of the actual economic worth of the company itself, so now we see the value of oil contracts going to the moon, irrespective of the actual "value" of a barrel of oil.
Obama proposes closing the "Enron Loophole" which permits domestic companies from escaping regulation on their oil futures trading activities; it calls for a draconian increase in international regulation of futures trading; and it calls for the opening of investigations by the DoJ and another regulatory authority currently charged with monitoring futures trading.
The importance of this proposal, and the fact that the man who is likely to be the next Prez, has shown he takes the issue seriously and is not merely saying we should bike to work, cannot be overestimated.
It's Bold. It's Brave. And it shows Barack's got some good economic advisers on his team.
June 23, 2008 8:50 PM | Reply | Permalink
I read it yesterday. I think such tinkering will cause more problems than it will solve. In today's WSJ, we read that, "leaders of the the world's two leading oil exchanges ... argued against increasing the amount of capital investors would have to put down to buy futures contracts, saying such restrictions would drive commerce offshore." And that in a nutshell is what will happen if we restrict oil trading in the US - it won't end - it will move offshore.
The WSJ also noted that lawmakers have asked the Commodity Futures Trading Commission to reclassify swaps dealers as speculators, even though they act directly for commercial hedgers like United Airlines. That reclassification inflates the percentage of speculators from under 40% to 70%, which makes the bogeyman of speculation appear ever more threatening.
June 24, 2008 7:58 AM | Reply | Permalink
Donal,
That re-classification is very interesting and very telling.
I, too, generally shy away from government intervention; but the stuff (oil, corn, rice, etc.) that these boys are screwing with now is too important to the people of the world to allow rampant, "free market" forces the wreak their havoc in the name of profit. It's just too dangerous.
FB
June 24, 2008 9:24 PM | Reply | Permalink
Post a Comment