Is Excessive Speculation in Oil and Commodities Markets Actually Occurring?

Almost exactly a year ago, I testified before the House Ag Committee and wrote an op-ed for the WSJ on the effect–or lack thereof–of speculation on oil prices. The issue was high on the political agenda at the time, as oil prices hit $147/bbl, and gas prices were above $4/gal. The collapse in prices during the financial crisis put the issue on the backburner, but it is back with a vengeance. To loud Congressional hosannahs, the CFTC has announced its intent to impose a far reaching regime of position limits on energy and other commodities “in finite supply“–pray tell, what traded commodities are in infinite supply?

So, I guess I have to roll that rock up the hill, yet again. (I have posts on the subject of “excess speculation” and position limits from 2006, 2007, 2008, and 2009.)

At the risk of becoming even more of a repetitive bore than usual, I’ll restate my objections to these policy initiatives, and the policy initiatives themselves. Before doing so, it is worthwhile to define “excessive speculation,” something those that hurl around the phrase with abandon almost never do. I define “excessive” speculation as that which drives prices away from the competitive price consistent with available information. That is, excessive speculation distorts prices. Now, my objections:

• The mechanism by which speculators allegedly distort prices is almost never specified, and when it is, it makes no sense. Advocates of the “excessive speculation” hypothesis routinely say that speculators inject artificial demand into the market. Given that most speculators almost never actually take delivery, and thus offset their positions as they become prompt, they are not influencing either supply or demand for the physical commodity. This is a point that has been recognized since at least 1902 in a report authored by the US Industrial Commission, which included several Congressmen and Senators. Which I guess goes to show that Congressional IQ exhibits an inverse Flynn Effect.
• This is especially the case for commodity index traders, who almost all trade cash settled instruments, and hence can in no way influence supply or demand.
• That is, none of the boatloads of money allegedly flowing into commodity funds actually goes into, you know, actual commodities. Some of the money in commodity-linked investments is purely notional (e.g., in commodity swaps, or index swaps). Some goes into T-bills (in the form of margin, or in fully collateralized commodity trades).
• The evidence of a distorting speculative effect is laughable. Distortions in prices should lead to distortions in quantities, e.g., in commodity stocks. No reliable evidence of such an effect exists. Indeed, I have looked at one commodity–copper–in close detail as part of a chapter of my upcoming book on commodity price modeling. People were screaming about a speculative bubble in copper last year at the same time as the (louder) screams about a speculative bubble in oil. But copper stocks (and the stocks of other industrial metals) were drawn down sharply at the same time prices were spiking: this is exactly what one would expect to observe with a positive demand shock. Indeed, I am working on calibrating a rational expectations theory of storage model to copper data, and this model can explain the twists and turns of prices and stocks during the extreme events of the last several years. That is, speculative irrationality is not required to explain the movements in copper prices AND inventories over the 1997-2009 period. (I’ll post more on this when I finish a couple more parts of the analysis next week, hopefully.)
• Some of the “evidence,” logically ungrounded as it is, doesn’t even support the assertion of a speculative effect. For instance, a common piece of “evidence” is that prices rose right along with measures of long speculative interest in the oil markets. (This was a Michael Masters favorite). Set aside the correlation-causation post hoc/propter hoc problems, and the potential for spurious regression problems whenever one examines the relation between two highly autocorrelated series. Just look at the graph in this WSJ story:

Sure, prices and long non-commercial positions were both trending up in 2005-2008 (not that that means a damn thing). But look at what happens in late-08 and early-09. Prices and long spec positions are mirror images: prices were plunging when long interest was rising, and then, just as long spec interest peaked and began to fall, prices ceased their fall and moved strongly upwards. How can you possibly explain this if the market dances to the speculators’ tune? The speculative Pied Piper story says that these measures should move up and down together, not in opposite directions. Now, this Masters style analysis is B.S., but those who used it to rationalize their assertions of a speculative effect are hoist on their own petard: they vouched for the validity of non-commercial long open interest as a measure of the “excess” demand for oil caused by speculation, but the most recent experience is decidedly inconsistent with that story. Not that that they have even paused for thought, but continue to flog the same story.

• Not to mention that numerous analyses, relying primarily on Granger causality, have failed to find any reliable connection between changes in speculative positions and price changes. Or the analysis (by the CFTC!) showing that commercial traders tend to be market leaders and speculators are followers.

The calls for government regulation have gone international, and gone beyond calls for mere position limits. Gordon Brown and Nicholas Sarkozy penned a WSJ editorial advocating widespread governmental “supervision” (Euphemism alert!) of the energy markets (including cooperation with OPEC):

For two years the price of oil has been dangerously volatile, seemingly defying the accepted rules of economics. First it rose by more than $80 a barrel, then fell rapidly by more than $100 before doubling to its current level of around $70. In that time, however, there has been no serious interruption of supply.

The oil market is complex, but such erratic price movement is cause for alarm. The surge in prices last year gravely damaged the global economy and contributed to the downturn. The risk now is that a new period of instability could undermine confidence just as we are pushing for recovery.

Where does one even begin the ridicule (beyond noting the point that whenever French and British politicians agree, it must be a really bad idea)? Regarding volatility. Uhm, the past two years have been among the most volatile in the memory of most living people–you have to go back to the 1930s to find anything remotely similar.

In 2007-FH2008, Chinese (and Asian growth generally) greatly spurred demand for commodities. Note that in addition to commodity prices, shipping charter prices skyrocketed, even though the price of something perishable like transportation on a ship can hardly be distorted by speculative buying, because it has to be consumed and hence is impossible to hoard. That was followed by a financial collapse and economic recession of severities unseen since aforementioned 1930s. Look at every measure of uncertainty, notably such things as the VIX volatility index. These things have been at dizzying heights since last August (and had begun their rise even earlier, in 2007). What would be weird is if oil prices (and commodity prices generally) HADN’T been volatile during this period.

Regarding “serious interruption of supply.” Uhm, Gordo, Nicky–there’s this concept called “demand.” Believe it or not, it’s one of the “accepted rules of economics.” Don’t take my word for it. It’s in all the textbooks. Price evolution in the recent period is clearly demand driven, not supply driven. Prices spiked when demand spiked. Prices plummeted when demand cratered.

And there have been supply shocks. Nigeria is an ongoing source of supply shocks, and during the price spike last summer losses of sweet Nigerian crudes in the face of very high demand for distillates (driven in part by European regulations regarding clean diesel) led to big spreads between benchmark sweet crudes like WTI and Brent and sourer crudes. What’s more, OPEC output cuts (especially by Saudi Arabia) played a key role in the firming of prices following the price collapse in October-January.

I should also note that recent research by Lutz Kilian (nicely summarized in his JEL piece) shows that movements in oil prices hew more closely to movements in proxies for demand than measures of supply. James Hamilton disputes Kilian’s contention that supply shocks are unimportant, but Kilian does demonstrate that demand is clearly an important price driver. (I also have some reservations about some of Kilian’s analysis, most importantly his conclusion that changes in demand for precautionary inventories is also an important driver of prices. I don’t disagree with the logic, having written several posts and an academic paper–which will also be another chapter in the book–showing rigorously how that can work in practice. My problem is that Kilian does not measure factors that could affect precautionary inventories directly, but instead attributes oil price movements not explained by supply or demand measures to an “oil market specific” factor which he asserts is related to the precautionary inventory effect. I am currently working on developing some more direct measures that would influence precautionary inventory holdings. I have a good handle on measuring demand side risks that could influence such holdings, but measuring supply side risks is far more difficult.)

In recent months, the oil market and world equity markets have exhibited unprecedented positive correlation (something I called attention to in October-November). Oil and equities swooned together; they rallied together during March-June; and have been selling off together in the last couple of weeks. This reflects the dominant role of demand in commodity prices at present. Both equities and commodities are responding to rapidly evolving views in a highly uncertain situation about the likelihood and strength of economic recovery. They are also responding to government policies, notably aggressive quantitative easing strategies that raise the specter of inflation.

Now, you could argue that this is speculative. And indeed it is. Both equity market and commodity market participants are speculating on the future course of the world economy. But is it destablizing speculation?

What’s more, to the extent that energy prices (and commodity prices) are reflecting information/perceptions/sentiment about the future course of economic recovery, and are reflecting the same information/perceptions/sentiment as equity markets and bond markets, why would anyone think that position limits on commodity derivatives would break this linkage? Once embedded in equity prices, information/perceptions/sentiment about future economic growth become public information that will be embedded in prices even if speculators are forced to trade less.

The arguments against position limits as a policy are well known. Speculators absorb risk from hedgers, and supply liquidity. They therefore impair ability of the markets to serve their essential risk shifting function. They therefore increase the costs of managing risk, and impose harm on hedgers.

This makes a mockery of the distinction that politicians and regulators draw between the “good hedgers” with price exposures inherent in their businesses that need to be managed, and “bad speculators” who have no underlying exposure to manage, but are taking on risk like gamblers in a casino. But there is a symbiotic relationship between hedging and speculation. To whom do hedgers transfer the risk if not to speculators? And if there are no speculators, how is it possible to hedge risks? After all, hedging doesn’t make risk magically disappear, it just transfers it to somebody willing to hold it–a speculator. Thus, politicians and regulators who invariably say that they just want to protect “legitimate” commercial participants from the predations of evil speculators are more full of it than usual.

That said, there is an apparent puzzle: many of the most ardent critics of speculation are physical market participants. But it’s not necessarily a puzzle, for the same reason that nobody should be amazed that Wal-Mart (WMT) supports Obama’s health care plan: many firms benefit from regulations that make markets less efficient.

In the commodities case, here are a couple of examples.

It is well known that some commercial market participants are informed traders who make money on the basis of their information. Cargill, for instance, has an extensive information network that allows it to trade profitably. (I sat at the trading desk of Continental Grain some years back, and observed that the traders had access to information around the world about weather conditions and grain flows due to their physical presence in numerous markets. This gave them an information edge.) Such firms don’t hedge mechanically. They trade futures and other derivatives strategically to optimize a risk-return trade-off. Their information advantage allows them to time the placement and unwinding of their hedges so as to make money.

Competition from informed speculators tends to erode the competitive/information advantage that informed commercial firms have. Hamstringing such competition could provide a greater benefit to such firms than would result from the loss of liquidity from speculators.

As another example, a reduction in market liquidity resulting from speculative position limits almost certainly has disparate impacts on commercial firms. Some firms, due to capital structure, operational leverage, real options, or other reasons, get more benefit out of hedging than other firms in the same industry. A regulation that reduces market liquidity raises everybody’s costs, but the first type of firm’s costs go up more than the second type of firm’s. Thus, the second type of firm may actually support regulations that make hedging costlier or less effective because it raises their rival's costs more than its own costs go up.

So, the support of some commercial firms for restrictions on speculation is not necessarily a puzzle. In my view, it more likely reflects an opportunistic use of the regulatory process to distort competition in a way that profits some firms. This is a ubiquitous phenomenon, observed in many industries and many regulations: why should derivatives trading be any different?

Well, that’s all I have to say for now, though I doubt this will be last word on the subject, hardy perennial that it is. Like Sisyphus, I am resigned to the unending task of rolling the rock of enlightened reason up the slope of benighted ignorance, only to see it slip back down again.

Comments

[Keltorttruth:]

Excellent article. It should be required reading for the sheeple in D.C. I would be interested in reading your thoughts on cap and trade. I think it is an impending disaster that will plunge us squarely back into the throws of the recession.

Jul 09 03:44 PM

[Makey:]

Bravo. Well done.

Jul 09 04:26 PM

[Vuke:]

According to today's Financial Times the G8 leaders agreed $70 to $80 was a fair price for a barrel of oil.
www.ft.com/cms/s/0/9f8.../

At today's $60.40 there's not much evidence of excessive speculation.

Jul 09 04:30 PM

[Tom Armistead:]

"Given that most speculators almost never actually take delivery, and thus offset their positions as they become prompt, they are not influencing either supply or demand for the physical commodity."

So, the speculative activity is totally divorced from contact with reality, and has no effect on supply and demand. So why not take it to Vegas and see if commodity markets become rational?

Jul 09 05:24 PM

[Craig Pirrong:]

Thanks, PMK--I taught the first course on carbon trading in the country, and am currently writing a piece on the regulation of carbon derivatives.

Re c&t overall, yes . . . impending train wreck. For many reasons. I will hopefully write on some of the issues soon. The details of offsets in particular will be nightmarish. This could make the CA electricity market experience look like a cakewalk.

Thanks again.


On Jul 09 03:44 PM Keltorttruth wrote:

> Excellent article. It should be required reading for the sheeple
> in D.C. I would be interested in reading your thoughts on cap and
> trade. I think it is an impending disaster that will plunge us squarely
> back into the throws of the recession.

Jul 09 05:24 PM

[tobi:]

The problem is that the market seems to cheer higher commodity prices and sinks on lower prices although they are parasitic to an overall economy for any country other than heavily resource dependent countries. But why do you call the government unefficient haha ? A few words and proposals and the price of oil goes down, that is a great effect for a bit of verbal sabre-rattling. Commodity prices rising too fast ahead of a real recovery have a great danger of killing it.

Jul 09 05:31 PM

[nobby73:]

Excellent piece. They pretend they can't see that it's not about oil, but the uncertainty around fiat currencies especially the greenback.

My suspicion is this goes beyond oil and gas. I think they will move on to other markets in an effort to keep a control on things as the dollar crisis starts to pick up speed....

Jul 09 05:44 PM

[SteveK:]

This article is unadulterated bs. There should be a rule that whoever buys,sells, owns oil futures MUST register themselves and be in a position to put-up full monetary value oil trades and be able to take 100% delivery of oil futures they trade! And I don't mean taking delivery via a third-party! We need to stop enabling speculator gamblers from throwing hordes of money into oil futures, manipulating prices via artificial demand/supply machinations, and then rolling-over, closing-out, or selling their positions to eliminate taking delivery.

These speculators are nothing more than gamblers ... their activities have no legitimate bearing on any facet of global demand or supply for oil ... and they do nothing but distort prices in the oil marketplace. The government should regulate oil traders and eliminate blatant speculative activities!

Jul 09 06:08 PM

[paulvard:]

Speculators should just take their money somewhere and gamble among themselves rather than using oil as an excuse to speculate. The amount of oil they are speculating does not even exist. Other than people or companies that hedges because they actually uses oil these speculators should bring their money in Las Vegas rather than distort oil prices so socially detrimental. Other than brokerages and speculators these game has no societal benefit.

Jul 09 08:35 PM

[G. L. Turner:]

I watched this guy's fancy-worded testimony last year and re-read it. I gaged then and I AM GAGGIN' tonight. It sounds fancy, but it is just his way of walking you around the truth by having you get lost in the weeds of scientific jargon...most of which don't truly relate to WHAT DID Happen.

Wake Up! THIS PROF works at the UNIVERSITY of HOUSTON...GET THAT? The U of H. You know, a school bought and paid for by -

Guess Who? The American Consumer - NO,

The US BIG 3 OIL COMPANIES - a seriously heavy BUSH/Republican Group. ...YES!!!

Pirrong appeared to be nothing more than an OIL Backed Republican SHILL at that hearing. He refused to be candid with reality! Now, he is at it again. He most probably recieved a call suggesting that this article appear at this time.

Last year, Gov. Sachs, JPM and MS ran the futures disaster. Oil Execs testified that OIL should be $65 - that was all they needed...(That was March- May, by June they had 'discovered that maybe $90 was a good numer, thought they were surprised at it and the $125 to $145 that they were witnessing.)

However, this spring, the Big 3 got their 'in-house' Oil/RBOB trading desks to get in on the casino with GS and kin. Why do you think the relationship of RBOB to OIL Price moved up to 30 to 35 cpg from previous years? They needed MORE PROFITS - nothing else was happening...Oil sort of followed GASOLINE this spring.

Interesting that this 'Prof" shows up when the real energy traders, who once again have come to their senses and have look real s/d facts in the face over the last 4 EIA Weds, and 3 weeks, have decided to drop RBOB 42 cpg in short order.

GS, who was telling us oil would be $85 by year end 3 weeks ago, saw the real traders - who are tired of these Greed Meisters disrupting the 'real trade' of the hedgers, who need these markets to work properly - stepped up and have decided now to take the prices down to reality. Many are now calling for REGS, POS Limits and more transparency.

Wonder if GS bailed earlier a week or two ago, when it realized that people were not buying their bs this time around? Coincidental to the EIA data and the turnaround in the eco/recovery stats in the last 60 days, Matt Taibbi's article (stuff we said last year) appears two weeks ago and finally, the some of the other non-believing, but hurtin' faithful, start to see just what the hell has been going on.

And so now, well, oops - the slippery slope of a bursting bubble once again appears in late JUNE/EarlyJuly 2009, just like last year...

So, to the wordy Mr Pirrong I say: "you tried to dazzle us with your high falutten, scientific bs last year, and here you are trying to do it again...Go, trot yourself back into your OIL IVORY TOWER Office over there at OIL U, replete with select WS supporters and Republican PARTY OILMEN, and tell whoever told you to try and pull this on us again - "THAT WE AIN"T BUYING IT THIS YEAR"!

Hey, didn't we just witness another 'financial spec' run this spring, just like last year...only a much smaller, but equally painful result...??

Real SUPPLY and DEMAND never suugested that OIL should be above $60 this spring, and, as I told the WH in March - $1.50 RBOB for 2009 was all that was justified...!!

GT

Jul 09 10:14 PM

[G. L. Turner:]

OH, another mouthpiece ofr the OIL?GS group was Phil Verleger, a longtime "OIL ANALYST". He said all last year that $147 OIL was pure S/D...he had said we'd see $125 at some point after 2010...

I challenged him, he insulted me and Mike Masters too, who he shiiled some crazy contra-leter for old Pete Domenci, one of OIL and GS' best buds...and Dan Yergin, another expert, who would not answer my e-mails last Septemeber, when I challenged him about his teatimony that it was all pure S/D, as we watched the $147 melt to $100 and lower...

They were part of the Bush/Cheney/Paulson/GS team designed to keep Congress from getting position limits in place, a move that 'would shut down the party'....

And, here we are again!

Just the facts, jack!!

Jul 09 10:21 PM

[Steve32:]

This whole topic is actually far more simple than much of what is written here.
Imagine you have ten people who show up at the futures markets to purcase next months oil contact. 2 people represent, for example, airlines who intend to use the oil next month, and the other 8 are there buying the contract for speculation, perhaps for the oil ETFs that they manage. Of course the price of that contract will be higher than it would if those 8 ETF guys weren't there influencing demand for that contract at that particular instant. Therefore the price of oil for everyone goes up. However, that only speaks to what happens at one particular point in time. Fast forward 3 weeks and those ETF guys have to start looking to sell that contract and roll it out to the next month, or they have to take delivery of the oil, which they cant do. This eases the pressure on the contract that is about to expire, and starts raising the price of the next month's contract. The upward movement relies on more and more speculative dollars showing up each month after another. However, once cashflows into the ETFs reverse, the effect is just as violent to the downside. In the end the AVERAGE price in the long run may not be affected, but the volatility is mind boggling.

The creation of these ETFs (IMHO) has allowed your everyday John Q investor, who would have never traded futures contracts, to log into their online trading account in their PJs and start buying commodity ETFs. In an instant millions of investors representing billions of dollars had access to markets they never played in before. Every one was chasing oil so the price just skyrocketed. But once that fad was over it turned on a dime. Once the shock of the introduction of commodity ETFs wears off I bet we see volatility decrease. Realative equilibrium will return, as with any market.

All of this debate boils down to who should be allowed to participate in the future market, either directly, or via indirect ways like ETFs. Does John Q Public have a right to try to hedge the cost of filling up his tank by buying an oil ETF? I like to think so.

Jul 09 11:24 PM

[Richard Graham:]

A great example of this phenomenon is GLD, one of the world's largest holders of gold. As demand for GLD shares increases, GLD has to buy more physical gold which puts upward pressure on gold's price. Oppositely, as demand for GLD shares decreases, GLD has to sell its physical gold holdings, which puts downward pressure on gold's price. This greatly exacerbates prices changes in gold.

Jul 10 12:37 AM

[William Cowie:]

Amen, brother - I could not have said it better myself. Speculators make volatility worse, all in the name of liquidity. I'm a libertarian at heart, but in this case some regulation is needed. It may not be perfect, but it's bound to be less imperfect than what we have now...


On Jul 09 06:08 PM SteveK wrote:

> This article is unadulterated bs. There should be a rule that whoever
> buys,sells, owns oil futures MUST register themselves and be in a
> position to put-up full monetary value oil trades and be able to
> take 100% delivery of oil futures they trade! And I don't mean taking
> delivery via a third-party! We need to stop enabling speculator gamblers
> from throwing hordes of money into oil futures, manipulating prices
> via artificial demand/supply machinations, and then rolling-over,
> closing-out, or selling their positions to eliminate taking delivery.
>
>
> These speculators are nothing more than gamblers ... their activities
> have no legitimate bearing on any facet of global demand or supply
> for oil ... and they do nothing but distort prices in the oil marketplace.
> The government should regulate oil traders and eliminate blatant
> speculative activities!

Jul 10 12:47 AM

[derryl:]

I also agree with Steve K. If speculation does not affect commodity prices how is it possible for speculators to make any money?

Mr. Pirrong is talking about a zero sum equation where the price does not change with or without speculators. If both producer and user agree to $60/barrel then the 'zero sum' is $60. For a speculator to make money on the trade either the producer sells to the speculator for less than $60 or the user pays the speculator more than $60.

The only way a speculator can make money is by buying from the producer at a price cheaper than the end buyer (who takes delivery) pays. If the buyer pays a higher price then speculation raises prices, which Mr. Pirrong claims is not happening.

So either speculation raises prices or it 'taxes' producers by inducing them to sell below market price--the price the end user is willing to pay. And if producers sell below market then speculation affects prices on the supply side.

So either Mr. Pirrong's argument is arithmetically impossible, or speculators make no money and are "providing liquidity" to the futures markets as a free service. Gee, I never realized Goldman Sachs and investors in commodities ETFs are such altruists.

Jul 10 01:54 AM

[JeffDB:]

Thanks for the article. It is very well done and I'm glad you took the time to post on the same topic yet again as I missed your earlier ones.

It adds some new info for me and I am especially grateful that you note the importance of the defining "excessive speculation" as I think sometimes people talk past each other because they are using different definitions.

I agree with your main premise and have been arguing that case since last year, primarily with respect to oil prices and have done here in a few posts as well.

It does seem to me, however, that one point you make:

"Given that most speculators almost never actually take delivery, and thus offset their positions as they become prompt, they are not influencing either supply or demand for the physical commodity."

is true in most instances, but may not have been true in the unusual contango situation we had this spring.

A lot of people were screaming about "the oil bubble" in 2008 when oil prices really spiked, and yet the evidence really did not support that contention. In particular demand had been exceeding supply for awhile and inventories had been drawing down even as the price spiked, violating the economic maxim you state:

"Distortions in prices should lead to distortions in quantities, e.g., in commodity stocks. No reliable evidence of such an effect exists."

Paul Krugman made pretty much the same assertion in his piece in May 2008, The Oil Nonbubble www.nytimes.com/2008/0...

But this spring was a different story with respect to the oil prices, as Mr. Krugman notes in a blog entry on July 8th, 2009:

krugman.blogs.nytimes....

"This time, however, oil inventories are bulging, with huge amounts held in offshore tankers as well as in conventional storage. So this time there’s no question: speculation has been driving prices up."

I'll recap an excerpt from this post seekingalpha.com/user/... about how one bank which had taken TARP funds was playing the arbitrage and affecting the oil supply in both the current month and in the future month when they actually sold the oil they were storing because of the contango, which was "caused" by the speculators:

Morgan Stanley Hires Supertanker to Store Oil
www.oilandgaseurasia.c...

"Morgan Stanley hired its tanker at $68,000 a day, the two brokers said. That works out at $1.02 a barrel a month, based on a 2 million-barrel cargo. Benchmark U.S. oil futures are trading at an average of $3.65 more than the previous month between February and June."

So, if I understand this correctly, it would work out something like this. They buy 2 million barrels of oil on the spot market and simultaneously(?) sell 2 million barrels on the futures market for $3.65/ barrel more than they paid. They then rent the ship for $1.02/barrel for that month (counting insurance and other expenses?) and pocket a tidy profit when the oil is delivered.

$7,300,,000 gross profit from the sale of the oil 2 ml barrels X $3.65/barrel
-$2,040,000 expenses for renting the ship for oil storage for 1 mo.
-----------------
$5,260,000 profit per month per tanker

-------------------------

That may be a relatively minor point, however. Even though I think "the speculators" did in fact affect the actual supply available to the refineries and the public for a few months or so, I don't think it meets your legitimate definition of “excessive speculation” = "that which drives prices away from the competitive price consistent with available information."

Although I think the speculators were wrong in their guesses as to where supply, demand and prices were headed, it was a fairly reasonable guess given "the available information". Our government was, after all talking about the "green shoots" of a recovery etc. and given the supply and demand imbalances prior to the recession and the supply cuts by OPEC since then, that reasonable people might come to the conclusion that prices might rise a few dollars a gallon in a couple of months or so.

In this case it probably made us consumers pay a little extra for our gas for a few months, and probably will have made the prices a little more volatile than they could have been, but that is all a function of not being perfectly accurate on the projections. Had they been accurate they may well have done us a service even if they *did* affect the available supply, shifting some of it from one month to another. It might have made prices go up then, but that could have been a good thing if it induced people buying cars to opt a little more toward the efficient vehicles end of the spectrum, or helped some producers start or continue on with projects that might otherwise have been canceled. Ditto for alternative fuels projects etc. Shifting some of the supply to a later month could also have helped even out the peaks and valleys in the pricing if it had been sold in a month when the supply was tighter.

As I say I agree with your overall premise and think you do an excellent job of presenting it. But I think a lot of people are trying to make hay of the "speculative bubble" this spring that pushed prices up a bit over and above what the current supply and demand situation would likely have been otherwise.

Jul 10 02:54 AM

[JeffDB:]

On Jul 10 01:54 AM derryl wrote:

> I also agree with Steve K. If speculation does not affect commodity
> prices how is it possible for speculators to make any money?

I can see situations where that would be the case. For instance, if an oil producer were contemplating whether or not to go forward with a project and decided that s/he could make money with it as long as oil prices were above $65/barrel in 3 years when the oil would be flowing. If he saw that the August 2012 futures were selling at $73.89/barrel he could hedge his bets by selling oil futures for the number of barrels he felt he could have ready to go by that point. If prices went down by then he'd still presumably be making a profit as he has x number of barrels sold at $73.89 regardless of the then current market price.

The "speculators"/investors would lose in that instance. If on the other hand the prices jumped to $93.12 that oil producer would "lose" on his hedging bet, but he would still be making the profit he bargained for and should have no real complaint. He wanted to hedge his bets, in effect taking out an insurance policy to protect him from the risk of price movements in the oil.

Of course the players on the other end of that futures contract might have been hedging their bets as well. Taxi companies, barge lines, air lines, contractors and theoretically even individual investors might have been trying to lock in their fuel costs for the year. If oil prices jumped, gasoline, diesel & jet fuel prices would be sure to follow. They might get hammered with higher fuel prices, but if they did their hedging correctly, they would then have profits from the futures contracts to help offset their additional expenses. If prices dropped, they would lose on the futures contracts, but that would be offset by their lower fuel expenses.

In those instances it might look like gambling, but in effect it would be the exact opposite. They would be reducing their risk. They would eliminate much of the volatility in their fuel expenses by locking them in ahead of time.

> Mr. Pirrong is talking about a zero sum equation where the price
> does not change with or without speculators. If both producer and
> user agree to $60/barrel then the 'zero sum' is $60. For a speculator
> to make money on the trade either the producer sells to the speculator
> for less than $60 or the user pays the speculator more than $60.

But you are talking about future events. Neither party knows with certainty what the future prices will be. That is where the "speculation" comes in. If both parties "hedging" there doesn't necessarily need to be a "winner" and a "loser" though that depends upon how you define those terms. But a farmer who wants to lock in his prices and not worry about whether the bottom will drop out from under wheat prices when he goes to sell may be happy to sell to a speculator many months ahead of time. Then he can buy the seed and equipment etc and make the investments he needs with one less risk to worry about. He might be quite happy with the transaction even if prices are higher than he contracted for when the time comes. He may be very anxious to do the same thing the next year. He'll gladly trade the slow steady profits for the volatile price swings he endured in prior years.

The same might be true of buyers of those futures contracts who "lose". An airline who is selling tickets months in advance might like to lock in their fuel expenses ahead of time and will gladly live with those times when spot fuel prices drop below what they paid for them on the futures market. they may "win some and lose some" but it gives them some stability and predictability in their expenses which they wouldn't have had otherwise.

> The only way a speculator can make money is by buying from the producer
> at a price cheaper than the end buyer (who takes delivery) pays.
> If the buyer pays a higher price then speculation raises prices,
> which Mr. Pirrong claims is not happening.

I don't think that's necessarily the case. The price to the eventual buyer is going to be dependent upon supply and demand at that point in time. If there are ships floating in the Gulf anxious to sell their product at the same time the speculator is trying to sell his contracts and there aren't enough buyers, the price is going to drop. If there isn't enough supply and the buyers, probably refineries are clamoring for more, the prices will rise. Whether it's the original producer or the speculator who bought it from the producer for resale shouldn't really matter to the buyer. It's still all about the supply and the demand.

> So either speculation raises prices or it 'taxes' producers by inducing
> them to sell below market price--the price the end user is willing
> to pay.

I don't see how speculators can arbitrarily "raise prices" OR "tax producers". How exactly could they "induce them to sell below market price against their will? If it is an arms length transaction, not done by force, then it would seem that the producer must see them as providing some "value added service" or they wouldn't voluntarily be dealing with them in the first place.

> And if producers sell below market then speculation affects
> prices on the supply side.

But the premise is incorrect. They are not selling below market. The futures market is an open one and by definition the price point at which the buyer and seller agree to the transaction IS the market price.

> So either Mr. Pirrong's argument is arithmetically impossible, or
> speculators make no money and are "providing liquidity" to the futures
> markets as a free service.

Some speculators do make money, some lose their shirts. Those who are just hedging their bets probably come out about even in the long run and reduce their risk in the process.

> Gee, I never realized Goldman Sachs and
> investors in commodities ETFs are such altruists.

I think there could be and likely have been some abuse of trust by some investment firms or advisors. If they put investors in risky investments they didn't understand or that were not appropriate for them that is a completely different matter.

Jul 10 03:46 AM

[Hooker:]

Come on. This is all clear and unobstructed nonsense. Required reading for whom, speculators needing a confidence boost to futher induldge? Playing with specualtion is solely the domain of the few. This type of capital trading is nothing short of aiding to the demise of not only the America economy, it is as well the world economy.

Spculation does not effect supply and demand..? Perhaps demand does not follow the stock market persay' yet people hide the extra dollar when price goes up coupled with the effect of a near catastophic weak economey. Supply, of course oil producers manipulation along with speculation... Indeed supply has nothing to do with price here. Gasoline a bi-product of the refinement of crude merely is stockpiled and this in turn causes interest in futures trading for the word is "Supply" Its there but maipulated.

Vuke G-8 Does not agree that oil should be 70-80 Russia does and this comment is to impact their own position in their own contribution to the world oil market further imposing the fear factor... Low oil reserves.

Lets face it... the few gain from the worlds economic losses. There is no doubt that government intervention in speculation will happen. The economic abyss that exsists and will continue is the indicator of what a prudent government should and will do. Reaganomics is a false attempt at the freedom of the Democratic idea of making money without government over sight. Yeah so what happened, de-regulation put the the Foxes in charge of the henhouse.

Time has come children....The waves you have surfed are now hitting rocks that will break apart those boards you soared on..Run-away unobstructed gains for the few? As Spock would say... The needs of the many outweight the needs of the few.

On Jul 09 03:44 PM Keltorttruth wrote:

> Excellent article. It should be required reading for the sheeple
> in D.C. I would be interested in reading your thoughts on cap and
> trade. I think it is an impending disaster that will plunge us squarely
> back into the throws of the recession.

Jul 10 07:22 AM

[melanie wold:]

You need to look into the actual oil market a little more carefully before making blanket pronouncements about it. Price rises due to demand do not have to be about actual physical demand - not at first. The demand bubble that causes prices to rise or fall is about financial market speculation. Witness the prices rising this year when oil was overflowing storage tanks and vessels. The physical market wins eventually, but not before the speculative side has taken its profit. thewoldreport.blogspot.../

Jul 10 08:23 AM

[john s. gordon:]

speculation using 30/1 borrowed leverage was and remains excessive. distortion abounds.
end of discussion.
> jack

Jul 10 08:48 AM

[Vermonter43:]

How about federally taxing the trading gains of oil speculators (any person frim or association who cannot take delivery of ALL their contracts into their own storage facilities) at 85%, denying any deduction for trading losses, and extending the jurisdiction of the U.S. I.R.S. to any person, firm or association worldwide who has ANY commerical contact with the USA or any person, firm, or association that has contact with the USA. Make evaision of the tax on energy trading profits subject to mandatory incarceration. Perhaps these actions might cool the ardor of the speculators that Craig tells us do not exist at all. Club Gitmo is soon to be empty, and the collected speculators could vacation in style....

Jul 10 08:54 AM

[The Greates...:]

My heart is lifted, some people are beginning to see the real reasons for the rise in the price of crude, and the volatility of the energy market is caused by the speculation and not always the demand and supply of the commodity. The world is still reeling from the disastrous effects of the summer of 08 and will not be allowed to recover if things remain the same in this industry. I suggest every American call, write, email and fax your concerns to your representative ASAP, it is of national importance that this industry be reigned in before we are pushed into a depression.
It is not about supply and demand anymore, it is about control of the market that supplies the product.
Persons within the United States seeking to trade key US energy commodities – US crude oil, gasoline, and heating oil futures – are able to avoid all US market oversight or reporting requirements by routing their trades through the ICE Futures exchange in London instead of the NYMEX in New York.
For some good reading on this subject check out this site.
Global Research.
www.globalresearch.ca/...

Jul 10 08:56 AM

[The Greates...:]

A very interesting article on the Cap and Trade bill in Congress and things you should know about it.

Obama's Cap and Trade Carbon Emissions Bill

globalresearch.ca/inde...

Jul 10 09:02 AM

[lookit:]

more BS from the pro-oil lobby. in the current recession (am sure the writer would argue there IS no recession) demand is down, supply is up - but prices are going up. Why? Because SPECULATORS "think" the economy will improve and demand will go up. Didn't we learn anything from the artificial manipulation of energy by that other stellar Houston brand Enron? Trading in oil and other commodities we all need to survive should be BANNED. Period. OR trading should be taxed to the point that profits are miniscule. The industry can not and WILL not police itself.

Jul 10 09:04 AM

[Tony Daltorio:]

Your comment is pure bs. I will support your "solution" if you will support the registration of all people who speculate in Google, Apple, etc. where the speculation DWARFS the speculation that occurs in the oil markets.


On Jul 09 06:08 PM SteveK wrote:

> This article is unadulterated bs. There should be a rule that whoever
> buys,sells, owns oil futures MUST register themselves and be in a
> position to put-up full monetary value oil trades and be able to
> take 100% delivery of oil futures they trade! And I don't mean taking
> delivery via a third-party! We need to stop enabling speculator gamblers
> from throwing hordes of money into oil futures, manipulating prices
> via artificial demand/supply machinations, and then rolling-over,
> closing-out, or selling their positions to eliminate taking delivery.
>
>
> These speculators are nothing more than gamblers ... their activities
> have no legitimate bearing on any facet of global demand or supply
> for oil ... and they do nothing but distort prices in the oil marketplace.
> The government should regulate oil traders and eliminate blatant
> speculative activities!

Jul 10 09:17 AM

[The Greates...:]

Another very interesting point of view on speculation in the oil and gas market:
www.time.com/time/busi...

Jul 10 09:20 AM

[Tony Daltorio:]

Great article! Again most of the commenters are looking in the wrong place - if you are looking for "excessive speculation", you need look no further than the stock market, the "green shoots rally" and Goldman Sachs. The stock market speculation absolutely dwarfs what occurs in the commodities markets.

Jul 10 09:22 AM

[DWStein:]

I'm not quite sure what 'some regulation is needed' means, as there is already some regulation in place.

Moreover, everyong who takes part in the futures market is speculating.. yes, even actual producers and buyers. Why?

Well, they don't need to take part in the futures market. They could simply buy and sell in the spot, and or execute private contracts. The very act of 'hedging' a cash flow stream is a gamble. A buyer could lose out becuase the price drops and vice versa. It's a zero sum game; just becauase you happen to own the commodity does not mean a futures position will make you money.

By limiting the number of players in the makret you will definitley reduce liquidity, and probably increase volitility (they are typically inversly related). So a policy of 'some regulation' might actualy hurt the public in incrased cost - an economic transer to the market makers. There's no free lunch for the public either.

Lastly, to the degree there was an 'excess' of something during the run to $140's, my bet is excess liquidity. The largest market manipulation, my many orders of magnitude, is the FOMC (and other central banks of the world). I think very low us overnight rates and the PBOC dollar peg, and middle east dollar pegs (causing strong inflationary effects overseas) were the most likely culprits.


On Jul 10 12:47 AM William Cowie wrote:

> Amen, brother - I could not have said it better myself. Speculators
> make volatility worse, all in the name of liquidity. I'm a libertarian
> at heart, but in this case some regulation is needed. It may not
> be perfect, but it's bound to be less imperfect than what we have
> now...

Jul 10 09:29 AM

[Milkweed:]

With all due respect Mr. Pirrong are you on drugs? Oil hits $148 last summer six months later it's at $38 a couple of weeks ago it's over $70 now it's around $60? This is all due to end users of oil negotiating with actual suppliers of oil? Yeah right!

Jul 10 09:41 AM

[Walker88:]

Unbelieveable Article defending the price manipulation that even a 2nd grader can understand. Take ECO 101 and learn what supply and demand is all about. It is NOT about pure specualtion and gambling. When a commodity, any commodity rises drastically when its supply has never been higher and the demand is down, something is CROOKED! Your defense of these shenanigans is typical of some ivory tower hack with nothing better to do. YOU are the one full of BS!

Get a real job someplace or begin to tell the truth. By the way, did you work for Howard Hunt during the silver BS?

Jul 10 09:50 AM

[The Greates...:]

I think that some of the posters here are missing a key element to consider, say like comparing apples and bananas. Most people do not have to have a computer to drive to work, they do however have to have fuel.
And I have not read any comments about last weeks “Rogue Trader” being blamed for the spike in crude pricing, I find that interesting. Anyway you slice it, the cost of crude in 08 has had detrimental effects on the global economy, and the profit sheets speak large volumes (very large) over the last 6 years in oil and gas companies. Not wishing to step on anyone’s toes here but, “ If it walks like a duck, quacks like a duck, and looks like a duck, it probable is a duck.” Speculation is not solely limited to the oil and gas industry, like the Hunt brothers in the silver market, or the break up of the “Baby Bell” communications industry. It can not be good for 5 major companies and 13 OPEC countries to control a commodity that the whole world depends on. Check out the deregulation’s of the Phil Graham bill in 2000, enabling the Enron scandal and its lasting effects today. That bill undid what Congress had implemented after the first Great Depression. Let’s hope history does not repeat it’s self.

Jul 10 09:54 AM

[The Greates...:]

Also, does this article suggest that oil is not a "finite resource?" as promoted by the "Peak Oil Theory" in the opening paragraph?

Jul 10 10:30 AM

[Ferdinand E...:]

In an unpublished note I look at two spikes, about l981 and l991, and the sustained oil price rise in 2008. Heavy speculation was involved in both spikes, but because most speculators are smart people, they did not attempt to turn those spikes into a sustained price rise. WHY, because they knew that the fundamentals would not allow this to happen, and so they made their money and departed... for that day or week or whatever it was.

In 2008 it was different. The key component of the fundamentals was that demand was outrunning supply, thanks to OPEC smartening up. SO, speculators (as a group) were/are dependent on fundamentals. This is why I say that fundamentals and not speculation determine the oil price. Of course if speculators were dumb - or noise traders as they are called - this logic might not hold up. Incidentally, a few noise traders do get rich.

Anyway, I won't go any deeper into this, although eventually I intend to put it into mathematical form. I also intend - in various lectures - to crush anyone who brings up the hypothesis that speculators determine the oil price, other than through fundamentals.

By the way, where did that idea about the power of speculators come from. I'm willing to admit that if you look at the increase in open interest in the oil futures market (NYMEX) in 2008 you might come to the conclusion that speculation or noise trading had a lot to do with the price rise, but the absolute key factor was what one observer called OPEC's resource nationalism: keeping their oil in the ground!

Jul 10 10:41 AM

[notsosmart:]

wow! an uneducated guy like me has been saying for years that wall st is just a ponzi/casino.now more & more las vegas is mentioned in conjunction with wall st. its all a game/gamble & unless you are on the inside your chances are poor.if you want some of the crumbs left for jerks like us just think for yourself & buy & hold good div.paying cos & join their drip plans.it worked great for me.in aworld of selfserving ceos (liars)thats a way to go.

Jul 10 10:51 AM

[Baboon:]

Excellent article. The government can't regulate who and when is eligible to buy and sell commodities ( stocks, real estate etc) and who is not. This is a free market, stupid.

Jul 10 10:58 AM

[The Greates...:]

Never before has the theory of supply and demand been proven so wrong in this one commodity product as has been shown in the 2009 rise in the price of crude oil this year. Every available storage facility is running over with supply, gas inventories are working on a three month increase in spite of all the prognosticators predicting drops in inventory. The world is simply over ran with the stuff at this point in time, and yet, the price has risen to around $71 a barrel and gas around $3 a gallon once again. Only recently has the price started to loose some steam, or maybe it was just profit taken. Whatever the reason, one must question the validity of the supply vs demand theory on this one commodity. Seriously, who tells us there is only this much oil left here or there? Where are the inventory reports generated? What entity promotes the “Peak Oil Theory”? OPEC controls around 40% of the oil market, that leaves another 60% from other producers. But then there are the 5 major oil companies who act as the middlemen, who have their finger on the pulse of the world’s economy. It is simply the control of the supply to market that generates the volatility in the commodities industry today, coupled with some inside information creating the speculation of the product. The ability of a few that affects the whole world’s economy. This is sometimes called the “Dark Energy Trading” loopholes, going back to the re-writing of the energy commodity bill by Phil Graham.(2000)

Jul 10 11:29 AM

[The Greates...:]

Another example of the effects of speculators in the crude oil commodities market was the “ Rogue Trader” who with a 16 million barrel order of crude, pushed up the price of crude oil $4 in the blink of an eye. (that’s just twice the amount of oil Saudi Arabia’s daily production) So one can keep believing in the supply and demand theory, or take off the blinders.

Jul 10 11:41 AM

[DJPLonestar:]

You have got to be kidding me that you actually believe that speculation has no impact on the futures contracts of oil. I am sickened that you advocate large banks and hedge funds driving up the future price of oil at the expense of the American public. Where was the huge spike in demand and the subsequent loss of demand when oil tripled and fell 300% in 15 months ? You are the one using smoke and mirrors with your "charts". People are beginning to see through your manipulative game and you are scared. And as far as the government not being able to regulate the futures markets as the baboon expressed, you could not be more wrong. You are stupid baboon ... they regulate it every day to try and keep people like this out. To protect people from the likes of ths guy who would artifically raise prices to line his own pockets. If thats the American way, then publically and personally go to a town where everyone lost everything and tell them that. You'll leave on a stretcher ... and I would pay good money to see that. That will be some true American justice for people like you. Losers.

Jul 10 11:43 AM

[The Greates...:]

It is not about supply and demand anymore, it is about control of the market that supplies the product.
Persons within the United States seeking to trade key US energy commodities – US crude oil, gasoline, and heating oil futures – are able to avoid all US market oversight or reporting requirements by routing their trades through the ICE Futures exchange in London instead of the NYMEX in New York.
For some good reading on this subject check out this site.
Global Research.
www.globalresearch.ca/...

Jul 10 12:03 PM

[Baboon:]

That is your wishful thinking that anyone can regulate the markets. Many countries tried it and failed and now they are returning back to the free market economy. Either you set the price of oil fixed or you let the market rule. No middle ground.


On Jul 10 11:43 AM User 444877 wrote:

> You have got to be kidding me that you actually believe that speculation
> has no impact on the futures contracts of oil. I am sickened that
> you advocate large banks and hedge funds driving up the future price
> of oil at the expense of the American public. Where was the huge
> spike in demand and the subsequent loss of demand when oil tripled
> and fell 300% in 15 months ? You are the one using smoke and mirrors
> with your "charts". People are beginning to see through your manipulative
> game and you are scared. And as far as the government not being able
> to regulate the futures markets as the baboon expressed, you could
> not be more wrong. You are stupid baboon ... they regulate it every
> day to try and keep people like this out. To protect people from
> the likes of ths guy who would artifically raise prices to line his
> own pockets. If thats the American way, then publically and personally
> go to a town where everyone lost everything and tell them that. You'll
> leave on a stretcher ... and I would pay good money to see that.
> That will be some true American justice for people like you. Losers.

Jul 10 12:21 PM

[User 385198:]

Really like this article, particularly the view of the co-existence of hedgers and speculators. We all should keep in mind that nobody can predict the future with complete certainty. Speculators absorb risks and supply liquidity, thus justify their existence and rewards. Government regulation should allow fair competition to bring down the costs to all market participants, rather than hinge on so called ‘excessive speculation’.

Jul 10 12:45 PM

[jupenya:]

Now, how do you regulate or control speculation? We, in the US, are no longer running the "World Series". So how do you reg. outside of the US markets - that would be the challenge. The Texas RRC did it for a while - then OPEC. Now let’s look at history a bit, Supply/Demand has been about even - +or-2 to 3% for the last 30 years, although it hit a high of 4% Demand over Supply in 2007 when the price avg. $75, then in 2008 it dropped to 3.1% D over S with the price hitting the $147, but finishing @ $97 avg for 2008. Now compare the year 2007 to 1999 the D over S was 4% - and the avg. price was only $23.60 adj. for inflation ( Actual 1999 $17.97 ). To add the US side for the same period 99/2008, please note that our consumption has been flat at about 19.5 million bpd, while production has fallen from 7.7 to 6.7 bpd. While world production has gone from 72 m bpd to 82 mbpd - and demand fr. 75 to 84.4 mbpd - same world demand supply. The point here is that these last few years ('03 to now) have become very speculative while S/D relationship have no changed much - China & India hoopla BS included - production has been keeping up with demand. The data provided here is easily obtainable.

Jul 10 12:54 PM

[DJPLonestar:]

Again ... the free market only works if it is not abused. You are promoting the abuse of the free market at the expense of the consumer. There was a time when the biggest holders of oil futures contracts were not oil companies, but hedge funds that never even took delivery. If I buy 60% of the contracts and there are cotracts for oil that exceed the actual supply of oil by 30%, the market price of the contracts goes up. That is not true demand, that is market manipulation that makes EVERYTHING cost more. How can you even justify your argument when oil was in a huge surplus 2 months ago and the price went up 20% ? You are clinging to a weak argument at best buddy. Not a chance that anyone will believe your idea anymore, and yet, you are still trying to defend your position. Watch what will happen here ... they will pass regulation and then the traders will move to the up and coming Dubai exchange that is outside all regulation ... why is that ? If it is done fairly now, why would it move there ? Because you are either fooled by articles and comments like these, or you are a greedy individual trying to make money off everyone else. It really is that simple ... yo just try to confuse people with "charts" and statistics and you should be ashamed of yourself. And BTW, your insecurity shows by you giving me a -1 because I disagreed with you sir ... LOL.


On Jul 10 12:21 PM Baboon wrote:

> That is your wishful thinking that anyone can regulate the markets.
> Many countries tried it and failed and now they are returning back
> to the free market economy. Either you set the price of oil fixed
> or you let the market rule. No middle ground.

Jul 10 01:06 PM

[The Greates...:]

Just a little FYI:
The last 20 years have been characterized by rising U.S. oil consumption, but now the U.S. Energy Information Agency. incorporating the most-recent changes in U.S. consumer behavior, says there will be no appreciable growth in U.S. oil consumption between now and 2030, with biofuels accounting for all of the growth in liquid fuels. So, if you’re the average American family, working two jobs and commuting 30 miles both ways, the cost of a gallon of gas is very important to them. If this trend continues, there will be just two class of Americans, the have’s and the have nots. People with out working income become desperate, they lose their hope and their dreams. Not to mention the rising cost in utilities, food, or basically every single thing made, shipped, barter, sold or bought in America cost more when fuel goes up.
So, what benefits the whole world if oil costs go through the roof? It has already cause the current economic down turn, which will never turn around if the energy market continues to operate the way they have been allow to do. At some point there will be a depression of huge impacts that the world may never recover from.

Jul 10 01:13 PM

[DJPLonestar:]

And now I see that most people here also see what is going on ... nice people, NICE !!! Down with the greed ! Capitalism is not about greed, it is about working and earning your own way to success and sometimes riches. It is about your freedom to live the lif you want to. Somewhere along the way, some people figured out a way to swindle money from you and me. Now they cal it the free market. Just because you can, does not mean it is right to do so. Anyone that supports this article is just plain driven by greed and soes not care about their "neighbor". Those are the people we do not need in this country any more.

Jul 10 01:13 PM

[DJPLonestar:]

And now I see that most people here also see what is going on ... nice people, NICE !!! Down with the greed ! Capitalism is not about greed, it is about working and earning your own way to success and sometimes riches. It is about your freedom to live the lif you want to. Somewhere along the way, some people figured out a way to swindle money from you and me. Now they cal it the free market. Just because you can, does not mean it is right to do so. Anyone that supports this article is just plain driven by greed and soes not care about their "neighbor". Those are the people we do not need in this country any more.

Jul 10 01:13 PM

[DJPLonestar:]

Absolute rubbish here. If you need oil because you are an oil company, and I - a hedge fund hold 60% of the contracts, what choice do you have other than to buy them from me at an increased price ? People are not "stupid" anymore.


On Jul 10 10:41 AM Ferdinand E. Banks wrote:

> In an unpublished note I look at two spikes, about l981 and l991,
> and the sustained oil price rise in 2008. Heavy speculation was involved
> in both spikes, but because most speculators are smart people, they
> did not attempt to turn those spikes into a sustained price rise.
> WHY, because they knew that the fundamentals would not allow this
> to happen, and so they made their money and departed... for that
> day or week or whatever it was.
>
> In 2008 it was different. The key component of the fundamentals was
> that demand was outrunning supply, thanks to OPEC smartening up.
> SO, speculators (as a group) were/are dependent on fundamentals.
> This is why I say that fundamentals and not speculation determine
> the oil price. Of course if speculators were dumb - or noise traders
> as they are called - this logic might not hold up. Incidentally,
> a few noise traders do get rich.
>
> Anyway, I won't go any deeper into this, although eventually I intend
> to put it into mathematical form. I also intend - in various lectures
> - to crush anyone who brings up the hypothesis that speculators determine
> the oil price, other than through fundamentals.
>
> By the way, where did that idea about the power of speculators come
> from. I'm willing to admit that if you look at the increase in open
> interest in the oil futures market (seekingalpha.com/symbo...)
> in 2008 you might come to the conclusion that speculation or noise
> trading had a lot to do with the price rise, but the absolute key
> factor was what one observer called OPEC's resource nationalism:
> keeping their oil in the ground!

Jul 10 01:17 PM

[The Greates...:]

Oh, and Peak Oil is still just a theory, remember the power of propaganda.
Further, the only reason the oil industry is paying tankers for storage is because they have their hands on the valves. It is a mathematical equation as to how long the current surplus will last. Also, they did not see the bottom falling out in Aug 08, and it did take them by surprise. They already had the oil out of the ground when the market went south. I am sure they will continue to cut back production until demand is artificially running ahead of the current supply.

Jul 10 02:40 PM

[Fred Linn:]

Speculation, buy low-sell high, produces nothing in the way of goods or services. It is parasitism. It siphons wealth from those who actual produce goods or services and funnels it to those who produce no goods or services. Ticks on the camels back.

Investing means using capital resources to create something that makes the production of a product possible. Speculation is not investing. Buying corn and storing it in hopes that the price will go up is speculation. Buying corn and storing it to plant next year's crop is investing.

The parasites have taken over the US economy. They are calling it investing, but it is really speculation. Consumers are the camel of the economy---and speculators want consumers to spend more and more and more. Consumers are already being sucked bloodless by the parasites looking for short term profits, and ignoring long term needs. The camel is getting very anemic.

Importing 70% of our energy is bleeding the camel. Exporting jobs to take advantage of low wages and social conditions overseas is bleeding the camel. Increasing taxes and decreasing services such as infrastructure is bleeding the camel. Unrestricted exploitation of environmental resources is bleeding the camel. Know the old saying, "There's still lots of fish in the sea."----well, the fish are fast disappearing from the sea. Over 1/2 of the oceans most productive fish habitats are under restricted usage or closed due to overfishing. Catches in the remaining fishing grounds is down.

We need to put the camel in intensive care. Anemic camels can't carry loads. When anemia gets bad enough, the camel dies.

www.storyofstuff.com/

Jul 10 02:43 PM

[Fred Linn:]

--------"Oh, and Peak Oil is still just a theory, remember the power of propaganda."----------...

It is? Then why are tar sands in Canada being exploited to produce oil that just 15 years ago was considered too expensive and environmentally damaging to produce? Because we have past Peak Oil, that is why.

In the 150 years of "producing" oil, not one single drop of oil has been produced. We are consuming oil at a phenomenal rate, but we have never produced a single drop.

Jul 10 02:49 PM

[Baboon:]

Your forgot to mention that capitalism is also about marketing and selling the products and services to the end customers. With many buyers and sellers in between a manufacturer and consumers.


On Jul 10 01:13 PM DJPLonestar wrote:

> Capitalism is not about
> greed, it is about working and earning your own way to success and
> sometimes riches.

Jul 10 03:16 PM

[Baboon:]

Futures contracts aren't real oil.


On Jul 10 01:17 PM DJPLonestar wrote:

> Absolute rubbish here. If you need oil because you are an oil company,
> and I - a hedge fund hold 60% of the contracts, what choice do you
> have other than to buy them from me at an increased price ? People
> are not "stupid" anymore.

Jul 10 03:20 PM

[sunnsea:]

Speculators rule and write articles or have shills do it like this because it's so easy. Want to move the price up a couple of dollars a barrel? Just shout "Nigerian pipeline explosion" in the room full of Wall St. wussies with CNBC in earshot. Who's to know if there really is a pipeline explosion or not? Been to Nigeria lately? Maybe there was and maybe there wasn't. And of course if Nigeria doesn't work that morning, there's that old reliable "China demand." or Inda demand. There was the Olympics last year so I guess there was a bit more "China demand" than usual but China is also investing heavily in transportation alternatives and batteries for the next generation of cars so even this claim is suspect.
On the other hand, if the unemployment rate continues to climb, I'lll see you at $20 to 25 a barrel by the end of the year whether you or the G8 think $70 a barrel is a "fair" price.

Jul 10 04:20 PM

[David White:]

steve32: your explanation is overly simplistic and faulty. Basic economics says that the supply and demand curve dictates the price. The speculators will be in their positions for most of the month (each month). Therefore they have increased demand for roughly 29/30ths of the time. Assuming (for the sake of this example) no change in supply, their actions have resulted in a big raise in the price for most if not all of the month that they are invested in a futures contract (or their ETF is).

According to you, because they sell before the contract comes due, there is no net effect, especially since the people who really want the oil know they are going to sell. This is simply not true. The people who really need the oil cannot always afford to wait until someone else sells. They have to ensure their supply. They have to buy a good portion of their supply during the time the speculators' positions have added to the price (through demand). Plus because the speculators are rolling their contracts (i.e. showing high demand in the months ahead), the prices of the near term contracts do not go down as much as they would normally. This results in a higher overall price for oil. This is why the bottom can fall out so rapidly.

Jul 10 04:26 PM

[The Greates...:]

The cost of crude oil accounts for about 60-65% of the price of U.S. gasoline. For every $1 that oil rises, the price of U.S. regular unleaded rises about 2.4 cents a gallon.

Oil has fallen about $13 in roughly a month, from $73 to about $60 per barrel Thursday. That means the price of U.S. regular unleaded gasoline, which hit a high of $2.67 a month ago, should drop about 31 cents, give or take a few cents for regional variation.
One of the reasons oil has started bottom back out is the same reason gas fuels are coming down, you can not keep a artificially manufactured price sustained for a long period of time. Eventually, you have to either drink it, or sell at a more reasonable price. Americans are just not buying into the recovery that the speculators keep rattling on and on about. Hint there are more apartments for rent in the US today then in the last decade. Where did this exodus go? They went when the jobs went, 450,000 a month to the tune of over 10,000,000 since last year and still counting. We will most likely see a 12% unemployment number before the end of 2009. If all the stimulus funding is going into big business, then we are back to Reaganomics and the trickle down effect. Which, BTW, started the de-regulation of corporate American thus allowing American jobs to be shipped out of the country for labor cost at pennies on the dollar. Great for the corporate bottom line, not so great for America as a whole.

Jul 10 04:33 PM

[The Greates...:]

And if they (oil industry) did develope the ability to make oil, do you think they would tell anyone?

Jul 10 04:43 PM

[The Greates...:]

Bigger-than-expected increase in US gasoline reserves.
The Department of Energy reported Wednesday that gasoline in storage grew by another 1.9 million barrels last week, the fifth straight week that stocks have grown. This was the July 4 week-in, most Americans drove to the back yard, the kiddy pool and barbecued.

Jul 10 05:13 PM

[Baboon:]

Merchants are not for producing anything, they are for buying and selling.


On Jul 10 02:43 PM Fred Linn wrote:

> Speculation, buy low-sell high, produces nothing in the way of goods
> or services.
> www.storyofstuff.com/

Jul 10 06:43 PM

[ChrisJCook:]

Nate Hagen's post re CFTC and futures position limits at the Oil Drum was good....

www.theoildrum.com/nod...

I made a long comment, from the perspective of someone who used to regulate energy markets for a living (I used to be Director of Compliance & Market Supervision at the IPE...now ICE Europe), and the CFTC part follows...


"....Secondly, I believe that the CFTC are barking up the wrong tree.

For a deliverable contract, the futures market converges on the spot market, and not vice versa, and while position limits are useful coming in to the spot month, they are not really necessary even there because any clearing member who goes in to a delivery month without ensuring that either he, or his clients, are in a position to make or take delivery in accordance with exchange rules is in deep shit.

In my view, and this was the tenor of my evidence to the UK Parliament Treasury Select Committee last year, the big problem lies in the (rightly named) Brent complex ("Brent" is of course now BFOE - Brent, Forties, Oseberg, Ekofisk).

The hugely traded ICE BFOE contract is of course cash settled and therefore can have no direct influence on the physical or "spot" market price any more than a bet between me and Nate.

It is settled against a price calculated against trading in respect of the BFOE 600,000 barrel forward contract, but even this price is not that against which most of the global oil price is calculated. It is the Platts assessment of "dated" BFOE contracts to which we must look for that, and the relationship between the ICE futures price, the forward price, and the dated price is what makes the Brent complex...well, complex. It is also a licence to print money for intermediaries at the expense of end user producers and sellers.

Moreover, although it may not be easy for US politicians to accept, WTI is, through the existence of massive arbitrage trading between BFOE and WTI, almost entirely irrelevant as a pricing benchmark other than in the US. The ICE BFOE tail wags the NYMEX WTI dog, and a great part of NYMEX trading continues to be locals feasting on order flow.

I have long believed that a good starting point - and indeed the basis of a new global energy architecture is a global trade repository.

www.theherald.co.uk/bu...

Such a registry, through an exclusive user group ("International Energy Trade Association"), gives both a mechanism for transparency, and also a tool for enforcing and maintaining agreed market standards - ie suspension or termination of membership of the user group, and hence of the right to register transactions.

I digress.

For as long as we have a financial system dominated by intermediaries intent on maximising profits - and moreover a system in which these profits are accounted not in Units of value but in Units consisting of claims over value asserted "ex nihilo" by credit institutions - then we are stuck on the current treadmill.

I believe that the key is to create a partnership-based framework within which end users transact directly, and where intermediaries transition to service providers. In fact we are already seeing this trend writ large in the way that producer NOCs are taking back ownership on reserves from NICs, and re-engaging with them as service providers.

As I outlined here, my proposal is essentially for the creation of simple but radical new asset classes, which are to all intents and purposes new currencies. In particular, these would be units redeemable in gas, electricity, and other carbon-based fuels but priced against a Unit of Measure or "Value Standard" consisting of a fixed amount of energy.

It is only by bringing to bear a full global market price of energy to bear on those nations profligate in its use that we will see a serious reduction, and through monetisation, we may compensate the citizens of these nations with Units redeemable in energy which have a global value in exchange.

Within a partnership framework it will be possible to address resource use, apply a carbon levy, and much else on the basis of sharing gain and pain.

My take on what has been going on these last 15 years in the oil market is that we have seen three periods:

Firstly, from the mid 90's to maybe 2002/3 we saw the dominance of investment banks and oil trading intermediaries who routinely and systemically created artificial levels of price volatility. They profited from this, and from information asymmetry at the expense of end user producers and consumers who were using the market for its intended primary purpose - ie hedging.

Secondly, from 2002/3 to last year was the era of the hedge funds, who began to lead market volatility, but the investment banks morphed seamlessly into making money from prime brokerage, and privileged knowledge of order flow and positions.

Finally, and more recently, we have seen the flow of money into "safer" ETFs and the likes of the GCSI.

Pillaging these big fund positions has been going on for years. I blew the whistle on it 9 years ago and lost everything I had - livelihood, home, family - as a result, but it has long since been accepted that such conduct is a fact of market life.

The FT's John Dizard wrote tellingly about "Goldman's magic commodity box" here...

www.gata.org/node/4787

Hell, if you make the rules, you can't break them can you?

Finally, and apologies for such a long post, I think that what is happening in the market is that funds such as GCSI are essentially being used to prop up the market price through long term manipulation of the BFOE complex.

I am reminded of the way in which the International Tin Council kept the tin price artificially high for years - until production ramped up, they ran out of money, and the price collapsed overnight in 1985 in the "Tin Crisis".

I am also reminded - and this is probably a closer analogy to current shenanigans - of Hamanaka's long term manipulation of the copper market which went on for 10 years, and for five years was undetected.

Of course, the producers who are coining in hundreds of billions aren't going to complain about a few billion to middlemen, and the consumers don't know that they are losing.

This brilliant article by Mike Riess is a must read in the context of

www.materialsmanagemen...

What is needed IMHO is a new global energy settlement at a Bretton Woods II where a new architecture, pricing mechanism, reserve currency denominated in energy and investment distribution allocation is made in respect of energy. "

Jul 10 06:58 PM

[JJDD:]

The author of this piece is very misinformed on the relationship between futures and oil prices. In the oil market, most oil is sold through long-term contracts and the prices in those contracts are determined by adding a differential to the futures price (WTI, Brent, BWAVE etc.) Futures aren't a paper bet on the direction of prices determined by some independent process. Futures themselves *determine* the price of most physical oil traded today. For more details see:
www.nakedcapitalism.co...

Jul 10 07:28 PM

[JJDD:]

Craig,
You are spreading some serious misinformation in this post. Please do yourself a favor and carefully investigate how oil prices are actually determined in practice. In the oil market, most oil is sold through long-term contracts and the prices in those contracts are determined by adding a differential to the futures price (WTI, Brent, BWAVE etc.) Futures aren't a paper bet on the direction of prices determined by some independent process. Futures themselves *determine* the price of most physical oil traded today. For more details see:
www.nakedcapitalism.co...

On Jul 09 05:24 PM Craig Pirrong wrote:

> Thanks, PMK--I taught the first course on carbon trading in the country,
> and am currently writing a piece on the regulation of carbon derivatives.
>
>
> Re c&t overall, yes . . . impending train wreck. For many reasons.
> I will hopefully write on some of the issues soon. The details of
> offsets in particular will be nightmarish. This could make the CA
> electricity market experience look like a cakewalk.
>
> Thanks again.

Jul 10 07:34 PM

[Steve32:]

Mr White: I am honored that you took the time to respond to my post. Some thoughts: Please keep in mind that when most people here talk about commodity prices they are referring to the price of the futures contracts, not a spot price. I was speaking in terms of supply and demand for the futures contracts. My contention is that the more buyers competing for the contract today, the higher the price. A speculators bid for the contract is no different than an end users bid. I think my basic economics are spot on.

Secondly, I did not state there was no net effect. I stated the net effect was more volatilty in the short run.

Lastly, i beleive you are mistaken about the effects of rolling the contracts. In part you are actually supporting my argument: the following months indeed start to show a higher price for oil. However your are incorrect about the effect on the expiring month contract. The price goes down more than it normally would, not less as you stated. This is due to all of the spculators dumping the contract. Additionally since the market knows the speculators have to roll out to the next month, vs take delivery, there is a premium for that contract. So the speculators get pinched on both ends. This is the so called Contango effect.

So I think we are somewhat saying much the same thing. During a run up prices may go higher, and during a sell off much lower than would happen with fewer speculators

By the way to SteveK, please remember that there are speculators who do indeed loose $$, and a ton of it for that matter. Research a guy by the name of Brian Hunter some time.

Despite the initial shock that these ETFs created I have to beleive that in the long run the more people participating in a market the better and more true the price discovery is.

On Jul 10 04:26 PM David White wrote:

> steve32: your explanation is overly simplistic and faulty. Basic
> economics says that the supply and demand curve dictates the price.
> The speculators will be in their positions for most of the month
> (each month). Therefore they have increased demand for roughly 29/30ths
> of the time. Assuming (for the sake of this example) no change in
> supply, their actions have resulted in a big raise in the price for
> most if not all of the month that they are invested in a futures
> contract (or their ETF is).
>
> According to you, because they sell before the contract comes due,
> there is no net effect, especially since the people who really want
> the oil know they are going to sell. This is simply not true. The
> people who really need the oil cannot always afford to wait until
> someone else sells. They have to ensure their supply. They have to
> buy a good portion of their supply during the time the speculators'
> positions have added to the price (through demand). Plus because
> the speculators are rolling their contracts (i.e. showing high demand
> in the months ahead), the prices of the near term contracts do not
> go down as much as they would normally. This results in a higher
> overall price for oil. This is why the bottom can fall out so rapidly.

Jul 10 08:15 PM

[notsosmart:]

& the games go on.

Jul 10 08:57 PM

[Fred Linn:]

from sunnsea---------"And of course if Nigeria doesn't work that morning, there's that old reliable "China demand." or Inda demand. There was the Olympics last year so I guess there was a bit more "China demand" than usual but China is also investing heavily in transportation alternatives and batteries for the next generation of cars so even this claim is suspect."----------

China is investing heavily in alternatives. Abengoa is building plants to make ethanol from bamboo---six of the largest in the world. China is now building ethanol only cars---capable of running on hydrous ethanol, straight from the still, no blending. Their schedule was for 1.8 million last year, and 2.6 million this year. That is 4.4 million cars that run on ethanol only, in two years----supply must be plentiful. In addition, China is exporting ethanol now.
www.mobilemag.com/2006.../

The real news is Europe however. Netherlands, up 63% from 2007 to 2008. France up 47% same period. Spain up 190%.
Sweden up 211%. Brazil up 45%. El Salvador up 33%.

From some articles that I have seen under automotive news---I also think the Chinese are working on an inexpensive diesel/electric hybrid. Diesel engines are already high compression engines that can be double the thermal efficiency of gasoline powered engines. Diesel engines get around 30% better mileage than gas engines----and they need no modification to run on biofuels. They can be made to run on ethanol with a simple change in air/fuel mix and addition of hotter glow plugs. Railroad locomotives are one of the most efficient means of transport we have, and we've been running diesel/elecric hybrid locomotives with plain old lead/acid batteries for over 70 years with great success. If you can run a 6,000 to 8,000 bhp locomotive with a diesel engine and lead/acid batteries---we should be able to do the same with cars and trucks with little problem, what can be scaled up, can also be scaled down in size.

It seems to me that the day is coming when oil is not the only game in town.

Jul 11 02:41 AM

[Hooker:]

I will comment on this one..
"Blanket Pronouncements" Well this is exactly what I said..ie:..Price increase.
U.S Gasoline consumption is at a 20 year low, really heading close to 25 but I will remain "Conservative" Lets not even talk about Oil.. Granted oil 'Crude' Yes....... this element follows world demand. But Gas? Again....If oil companies are stockpiling gas.. Again. a bi-product once discarded, then how it is not speculation that causes the direct increase in price. Please, the issue here is not what the real truth is.... it is how wall street, ...analysts that are vested to big oil,.... The big 3 ....yes Ford GM & Chrysler that infuse billions in oil futures to name a few.....

COME ON, magical word play. Attorneys do it all the time. For example... ........"If china sees an increase in demand this will effect the monatary fund in europe. This shall cause a collapse in the general fund that issues stock to needy people. After entiltlement the fed will have to engage this by lowering the fed thus opening more money to the market...mothers of 2.3 children will then apply to the give mom a break fund which will increase positive growth in the rental sector.......... End of a BS example... Ok, None of that makes sense and why... Cause it is the langauage of the game. 99% of all people havent a clue about the jibber jabber. And all this amounts to Speculators trying to manipulate what they want to sell at higher price...... I know I was very elementry. But hey, those of you that push the issue are the ones that dont want it to end.

Now let me say this... if nothing else. If a buyer is not able to take delivery then it should not be allowed. Period. This amounts to little less then extorting money from the world economy. But we call it speculation. Why is crude oil allowed to be "Paid off" to sit at sea waiting for the money speculated to move into the price range they bet on. Yeah thats right, large brokerages paying 68K a day to have a tanker sit at sea idle so supply is "Supposedly" low.

Bantoring on... see this is all to make a point and to have the masses say...... "Yeah Why is that" How does oil go up in price merely cause there is some government unrest in a spec of land in africa? Why? Because it is an excuse to bolster position to place fear.....Fear is a great seller. It Causes demand..No one has ever heard of that spit of dirt but now its news, so how does it effect the world price of oil.....

Now on the other hand......Have a hurricane threatene the eastern lower U.S. And what happens?? Prices go up. On everything. Then the government steps in and says... "No no... You cannot Price Gouge. Supply is plentyfull, it is unlawful to gain from those in peril." Oh My...!! Wasnt I just talking about false speculative positioning???

Yeah, the analysts and the speculators...They play with Monopoly money then somehow they reach in your pocket, grap a fistfull of cash and with it... a get out of jail card.

On Jul 10 08:23 AM melanie wold wrote:

> You need to look into the actual oil market a little more carefully
> before making blanket pronouncements about it. Price rises due to
> demand do not have to be about actual physical demand - not at first.
> The demand bubble that causes prices to rise or fall is about financial
> market speculation. Witness the prices rising this year when oil
> was overflowing storage tanks and vessels. The physical market wins
> eventually, but not before the speculative side has taken its profit.
> thewoldreport.blogspot.../

Jul 11 08:29 AM

[The Greates...:]

It is not about supply and demand anymore, it is about control of the market that supplies the product.

Jul 11 10:17 AM

[Baboon:]

Apparently the relationship between futures and spot oil is not that obvious as it's still a subject of academic dispute. Whether futures determine spot or not is not important. The point is that this is a free market and anyone has the right to participate.


On Jul 10 07:34 PM JJDD wrote:

> Craig,
> You are spreading some serious misinformation in this post. Please
> do yourself a favor and carefully investigate how oil prices are
> actually determined in practice. In the oil market, most oil is sold
> through long-term contracts and the prices in those contracts are
> determined by adding a differential to the futures price (WTI, Brent,
> BWAVE etc.) Futures aren't a paper bet on the direction of prices
> determined by some independent process. Futures themselves *determine*
> the price of most physical oil traded today. For more details see:
>
> www.nakedcapitalism.co...
>
>
> On Jul 09 05:24 PM Craig Pirrong wrote:

Jul 11 11:24 AM

[Fred Linn:]

from the Greates......--------"And if they (oil industry) did develope the ability to make oil, do you think they would tell anyone? "------

Biofuels can be made from any type of plant material at all, including cellulose----and we have been able to do it for over 80 years with Fischer-Tropsch process. Biofuels produce almost no pollution when used(and a used now to reduce pollution)----are renewable, sustainable, and are better fuels than petroleum. And if we have ethanol widely available, we can double the thermal efficiency of our current gasoline engines with all off the shelf technology that requires no changes in manufacturing or engineering. That means a 200% to 400% increase in efficiency over the best hybrids, and no extra cost. And biofuels are compatibable with our current infrastructure because they are liquid fuels. Diesel engines can use biofuels in any proportion with petroleum with no modification at all, even 100%, no petroleum, with no loss and sometimes gains in performance and durability. Flex Fuel vehicles cost no more to manufacture than gas only, and can use up to E85(85% ethanol) in any combination with gasoline, just fill up with whatever is available.

That is what the petroleum companies do not want you to know----we have them now, and we've had them for years.

Biofuels can do anything that petroleum can do, and they can do it better. We can even make plastics and all sorts of other products from biosources. In WW2, the US built a large plant in Wisconsin, that made ethanol out of wood----which was used to make butadiene, artificial rubber, to make tires for the war effort.

The Greates.........______... is not about supply and demand anymore, it is about control of the market that supplies the product."------------

ABSOLUTELY RIGHT!!!!

The petroleum industry tries to spread false information about biofuels any way they can. They like having a monopoly over the rest of us and want to maintain that monopoly at any price---so that they can continue to keep prices up. By the very nature of the widespread availability of sources and many and varied means of production, biofuels are antimonopolistic.

Jul 12 01:34 PM

[Fred Linn:]

nobby73---------"My suspicion is this goes beyond oil and gas. I think they will move on to other markets in an effort to keep a control on things as the dollar crisis starts to pick up speed.... "---------

Drugs. Why do you think we have been fighting a "War On Drugs" every since Nixon, over 30 years----and today there are more drugs than ever out there. It isn't a "War On Drugs" it is a "War For Drugs"--------the war is for control of the flow of drugs, to not stop the flow of drugs.

Don't believe it? Why do you think we have the US Army in Afghanistan? It's a turf war---using the US military. The Big Money gang vs the Taliban gang. The US has been in Afghanistan for over 7 years. Afghanistan is the source of about 90% of the world's illegal opiates. Opiates are cheaper and more readily available now than they were 7 years ago. The entire US military could not wipe out a bunch of poppy fields in a third world country in 7 years of occupation? Yeah, we don't have the firepower. We'd better order a few hundred billion dollars worth of new equipment.

Drugs are the commodity backing the currency of the very rich and politically well connected. Oil is too---not the oil that is out of the ground----the faucets on the well pumps. If you think you are playing in a free market, you are making sucker bets.

Jul 13 10:55 PM

[Keltorttruth:]

Why? If I am an airline company looking to hedge against high oil prices, why do you think I shouldn't be able to do so? Alternatively, if I believe in peak oil and think the prices will sky rocket but don't have the time or ability to accurately discern between the public E&P companies and want to eliminate any company specific risk and tie my returns directly to the commodity, why shouldn't I be able to do so? How is buying and selling a commodity any different than buying and selling a public equity or bond (or, rather, why should it be any different); isn't all investing speculating? If you buy art or real estate or baseball cards or gold, aren't you hoping the value goes up so that you can sell it in the future at a profit? As long as there is no blatant attempt to corner the market, why should commodities be any different?


On Jul 09 06:08 PM SteveK wrote:

> This article is unadulterated bs. There should be a rule that whoever
> buys,sells, owns oil futures MUST register themselves and be in a
> position to put-up full monetary value oil trades and be able to
> take 100% delivery of oil futures they trade! And I don't mean taking
> delivery via a third-party! We need to stop enabling speculator gamblers
> from throwing hordes of money into oil futures, manipulating prices
> via artificial demand/supply machinations, and then rolling-over,
> closing-out, or selling their positions to eliminate taking delivery.
>
>
> These speculators are nothing more than gamblers ... their activities
> have no legitimate bearing on any facet of global demand or supply
> for oil ... and they do nothing but distort prices in the oil marketplace.
> The government should regulate oil traders and eliminate blatant
> speculative activities!

Jul 14 02:24 PM

[Keltorttruth:]

I was going to get really upset, but then I read your name and it explains an aweful lot. Although Vermont appears to be fully socialist, many of the rest of us believe that risk should be rewarded when it pays off and punished (by the associated losses) when it fails. What about biotech or technology firms? If they put a bunch of risk capital at work and it pays off, should they have to pay 85% taxes? Should they not be able to deduct their speculative R&D losses? What about you? What do you do for a living? I am going to guess you organize political rallies. If you buy a bunch of red bandanas and T-shirts expecting all of us to join you neo-commie party and we don't and you fail miserably, should you be able to deduct your losses? Can you explain to me the difference?

Also, I am pretty sure that you will already go to jail for tax evasion in this country, ask Wesley Snipes.


On Jul 10 08:54 AM Vermonter43 wrote:

> How about federally taxing the trading gains of oil speculators (any
> person frim or association who cannot take delivery of ALL their
> contracts into their own storage facilities) at 85%, denying any
> deduction for trading losses, and extending the jurisdiction of the
> U.S. I.R.S. to any person, firm or association worldwide who has
> ANY commerical contact with the USA or any person, firm, or association
> that has contact with the USA. Make evaision of the tax on energy
> trading profits subject to mandatory incarceration. Perhaps these
> actions might cool the ardor of the speculators that Craig tells
> us do not exist at all. Club Gitmo is soon to be empty, and the collected
> speculators could vacation in style....

Jul 14 02:51 PM