Robert J. Samuelson has a column at the Washington Post laying out the argument that politicians (including John McCain and Barack Obama) blaming speculators for rising prices “either don’t understand what’s happening or don’t want to acknowledge their own complicity.” He argues that a “better explanation is basic supply and demand,” particularly increased demand from China and India, noting that prices are rising for commodities like iron that are not traded on futures markets. (Samuelson might also have noted the declining dollar as a factor, though a column cannot be encyclopedic.)
Yesterday’s Post ran a related column by Sebastian Mallaby, who notes not only the disastrous attempts of Washington to control prices in the 1970s, but also that speculators as a group have not added to their positions much since last August.
This is not to say that speculators have played no role in price increases at the margin. Then again, as Samuelson notes, so has government:
Government subsidies for corn-based ethanol have increased food prices by diverting more grain into biofuels. A third of this year’s U.S. corn crop could go to ethanol. Restrictions on oil drilling in the United States have limited global production and put upward pressure on prices. If politicians wish to point fingers of blame, they should start with themselves.
That seems unlikely, but it does seem likely that Congress will not launch any sort of big campaign against speculators beyong the rhetorical. Why? Because Dick Morris may not know jack about economics, but knows who the speculators are:
The new players were institutional investors like corporate and government pension funds, sovereign wealth funds, university endowments and other investors, guided by brokerage firms like Morgan Stanley and Goldman Sachs.
In other words, to the extent that speculators heve benefitted from the run-up in prices, they tend to be people tied to private and public sector unions, academia, and Wall Street. That is a portrait that could be titled “people Congress does not cross.”
So, what will it be? Will it be corn futures or oil futures that Aging Maverick will betray? Will he kiss a caribou goodbye and propose ANWR drilling? Which can be built more quickly: supertankers to ship crude to India for refining, or domestic refineries? Will Obama really go for the gold and throw greenies under the bus (move over, Gramma!)? Can both of these gomers reject pseudoscientific global climate alarmism and ensure Americans a prosperous way of life?
“In other words, to the extent that speculators heve benefitted from the run-up in prices, they tend to be people tied to private and public sector unions, academia, and Wall Street.”
So the Democrats “Energy Policy” now makes sense. Follow the money.
TheGeezer,
My guess — no more than that — is that McCain backs drilling everywhere but ANWR. Because of the Mavericky cred.
Which plays better with his primary constituency, the press?
If you could pay the $100 Sam’s Oil Club fee and pay $1.50/gallon for life, would these Obama morons (though I suspect all the $100 Obama donors are really Soros’s bundling) would these theoretical idiots who have invested over $100 each on Obama being elected and mailing them money every week jump in?
If not, let them pay $5/gal.
and for the record, I’m willing to invest another $19.99 on Hooked on Phonics
You mean public employees and their advocates don’t invest in just their not-enough-yield muni, state, and T bonds?
I guess it’s one more entry for JG’s Postmodern Newspeak Thesaurus:
When my guy buys in for me it’s sound investing.
When the other guy buys it’s speculating.
Similarly, no one heard peep from Enron stakeholders when it was selling for $95 bucks a share; and the biggest shareholder of that epitome of the stereotype of the military industrial complex that is The Evil Carlyle Group isn’t George Soros, David Rubinstein, Frank Carlucci, Madeleine Albright, William Perry, Colin Powell, or even James Baker, but the California Public Employees Retirement System.
Which was conveniently omitted from that George W Bush Resume chain email that made the Dem Und rounds a couple years ago.
“(Samuelson might also have noted the declining dollar as a factor, though a column cannot be encyclopedic.)”
Nor any mention of teh unmentionables: the Iranian response to the Israeli intervention that will more than quadruple current prices/bbl. At least quadruple. Within the next year, probably.
There’s no way to get our own ANWR ‘reserves’ on line in time for that. Or build the needed refineries, or even the ‘nearly-newly approved’ offshore drilling sites. And local nuclear power to feed the grid? A bit late for that. Thanks, hippies.
Got mule and plow?
“And local nuclear power to feed the grid? A bit late for that. Thanks, hippies”
Quit complaining and put on your O! hairshirt.
There’s no way to get our own ANWR ‘reserves’ on line in time for that. Or build the needed refineries, or even the ‘nearly-newly approved’ offshore drilling sites. And local nuclear power to feed the grid? A bit late for that. Thanks, hippies.
I hear ya dude. But I’d like to turn to Hollywood and remind you of a little Oscar-winning film called Places in the Heart starring Sally Boniva Field, Danny Fidel’s Big Buck Glover, and Ed What am I doing in the movie with these two whackos Harris.
Sally wanted to get the first load of cotton to market and Danny and Friends helped her pick all night AND THEY DID IT!!
C’mon guys, if Hollywood can do it, Big Oil sure as hell can.
Fixed that for you.
Quit complaining and put on your O! hairshirt.
Do you think the static electricity from the hairshirt could power my house?
“You mean public employees and their advocates don’t invest in just their not-enough-yield muni, state, and T bonds?”
You’re over your head here, son. “State” bonds are “muni” bonds which are tax-exempt and tax-exempt pension funds don’t buy them, dickweed. As to the rest of your blather, Enron may have been a criminal enterprise, but anybody with a scintilla of understanding as to what they were doing can only marvel at the foreshadowing they provided to what a cap and trade market would be.
“Do you think the static electricity from the hairshirt could power my house?”
– Probably not, but as tempers continue to ruse, and the dirty little secret that we have met the investment bad guys and they are us, begins to filter out into the general electorate, the heat that will engulf Washington’s Capital hill fossils will undoubtedly generate enough gaseous emissions to power the entire country for the next decade.
– So the evil speculators turn out to be none other than our own blue ribbon fund managers. Tsk tsk, imagine that. So the real reason no one on wall street wants to talk about opening the Rockies is why screw up a good thing. Fuck the taxpayer.
– As long as the SEC/Gov. insists on treating oil like pork belly futures this will never change.
Also, for those who are interested, there has been some talk in the financial press the last few days regarding the possible implementation of the seldom used “uptick rule” by the Commodities Futures Trading Commission (CFTC) on oil futures contracts. It has only been employed a handful of times in the past to curb excess speculation in commodities, most notably in silver when the Hunt Bros. attempted to corner the market in the early ’80s.
The implementation of the rule would mean that traders could only close long positions (sell)on upticks in the price of the contract and could not initiate new long positions; they would have to wait for a downtick.
Watch for oil futures to drop $20-30 quickly if/when they do this.
“Watch for oil futures to drop $20-30 quickly if/when they do this.”
– Not so sure it will work in this case if they try that kelly. Remember, in the Hunt brothers Silver market case, the sources were primarily domestic or privately held mines the Hunts had heavy investments in. In the case of Oil, its much more world price levels driven, and the sneaky investments are found to be offshore these days, and therefore not under the purview of CFTC.
– The only way possible to effect world oil price trends is to flood the market with the threat of large new resources. You only have to open it up to potential and you will see just that potential of supply side increase on a huge scale, the Colorado oil shale is estimated to be 800 billion barrels of recoverable sweet crude – four times the entire oil reserve of the big three ME producers, depress the oil futures market. Remember, speculation is all about “perceptions”, which makes the Democraps feel right at home with it.
One other thing: the general direction in prices of commodities (trend) interests speculators only to the extent to how they place their trades, or “The Trend is my Friend.” What this means is if the trend reverses, the specs will be scrambling to get on that side.
The trend, to put it mildly, on oil has been up for almost a year. Thus the speculation has been on the long (buy) side. If the trend starts down, they will get on the short (sell) side ASAP. Add to this fact that contracts have daily limits to the amount of price swings (up and down), and you have the ingredients of a rout in oil futures over a period of just a few weeks. All it takes is a catalyst. A tipping point if you will.
Except that commetators like Ed Wallace have actually added up teh supply and demand figures and found that Supply is UP and demand is DOWN, which in classic markets would push the prices down.
Here. Here. Here.
That’s not what’s happening. If Samuleson or anyone else can show Wallace’s figures to be off, I’d take a second look, but when I add it up, I get the same sums.
I think speculators are causing problems with oil prices, despite Rush Limbaugh’s determined defense of the guys. I think he’s missing a point: some aren’t driven merely by monetary causes, some may be driven by an ideological desire to damage the US economy, along with the OPEC nations. Certainly the idiot Democrat congress isn’t helping matters, nor did the idiot Republican congress before them. But you can’t pretend speculators aren’t causing damage with their ever driving lust for more money from oil at any cost even to themselves. This is one of those areas where they aren’t making as much money as they think: the cost of oil drives all prices up.
“The only way possible to effect world oil price trends is to flood the market with the threat of large new resources.”
Just the perception of an increase of supply will have some effect, BBH. That’s why they’re called “futures.” ;) The fact that oil futures prices haven’t rolled over is probably because none of the big buyers believes we’re serious about extracting our own oil…yet. And with the possiblity of a D in the WH with a D majority in Congress, it’s probably safe to stay long for a while.
Mallaby’s article is focused completely on price controls–something that is not needed (nor, as he rightly points out, desireable). All that is need is what has worked in the past–higher margin rates on futures trading. Simply require investors to have a higher proportion of the money to cover the contracts they are making on hand.
This also serves to protect the speculator as well, when the market goes in to contango, as it will from time to time, or rather, should do if it were operating properly.
“…guided by brokerage firms like Morgan Stanley and Goldman Sachs.”
The same people who put out the big scare forecasts evey month or so abotu $200/bbl oil.
Which motivates people to trade in the futures market to cash in on the big paydays being forecast. Which pushes the prices up.
It’s advertising masquerading as journalism and it’s manipulating the markets.
– RTO, I think what were seeing is the difference between “now” and “future”, and future is what speculation is all about. Even a supply side surplus looks puny when you look at all the world projections of “usage” what with China and India coming into the equation in a big way.
– On the other side of the coin what have our law makers been doing consistently for the last 15 years. The message, loud and clear, we’re not going to touch our reserves, nor expand our refineries or alternate sources, including a de facto moratorium on nuclear, so invest freely guys, oils only going to get more scarce as time goes on.
– Since America’s “potential” represents a significant bellweather in trends, we’re stoking the fires of speculation, and minimizing the effects of supply and demand, mainly the Democrats, but the Reps hands are not clean on this either.
True, BBH, and I’m all for the Drill Here, Drill Now. Just the news that we’ve acutally started could shrink prices out of proportion, if, that is the marketeers don’t drown that out with Iran War Scare or Hurricane damage reports, which push it up all out of proportion and which they are actively trying to accomplish.
As for Now vs. Future, yeah, I get it, but that is what Wallace is writing about. Loaded oil tankers parked off shore and not moving–it’s a symptom of the market–the people who have the oil create a mini-supply shortage by holding their inventories rather than selling it because next month it’s going to be worth more.
ExxonMobil recetly rejected a contract on the grounds the price was too high. Sounds like that would help the price go down, but it’s spun as deeping a (non-existant) shortage and so the price goes up.
Heh. Not only do gubmint workers mostly vote Democrat, but few citizens realize how well their masters are faring economically:
State and local government workers are enjoying major gains in compensation, pushing the value of their average wages and benefits far ahead of private workers, a USA TODAY analysis of federal data shows.
Full story.
RTO,
Thanks for the links to Ed Wallace. If you like actual information, rather than Peaker Pap, Rigzone and Tankerworld provide quite a bit of free material. The Tupi field has generated an astounding level of investment by Petrobras. Brazil is going to “drill their way out” to fourth place in total reserves fairly quickly.
– Just one or two years ago who would have thought that black gold would become the lynch pin in the whole global WOT and the worlds economy to such an extent, and there doesn’t seem to be any easy answers. Lets say tomorrow that we oipen all our reserves for exploration. Some of the immediate to medium range results might be:
– World wide oil prices are pushed back fown into the reasonable zone at 20 – 30 dollars a bl.
– America almost instantaneously achieves a conservative 100 years of total independence on critical energy reliance.
– America becomes a net exporter of oil.
– But.
– What happens in the ME if their main source of money suddenly drys up.
– What happens to the world economy if America recaptures the lions share of Export/Import trade balance again.
– What happens to Isreal if the economies of the ME across the board are depressed.
– What about the potential of an Iranian Mullacracy feeling desperate to act as it sees its influence slipping even faster.
– The rise of the global economy has made everything more complicated.
Housing market sucks. Financial instruments market sucks. Equities market currently in the tank. Commodities going up, people making money. H-m-m-mm. Meanwhile future supply from places like Nigeria, Iran, Iraq, Russia, Burma, Libya, the United States and others is imperiled? And you are telling me people with a fiduciary duty to achieve relative gains for their clients actually want to get in that asset class and that price is going up with more ‘buy’ bidders for relatively fewer goods/sellers? Shocking, I tells ya, shocking.
Oh and BBH, don’t you also believe the rise of the global economy has made everything better as well as more complicated?
– “Potentially” better in many respects Sdferr. Just to cite one of a long laundry list, every uptick in world quality of living is a downtick in available Jihadist recruitments.
– As in all things, whether its a net plus depends on how we and the rest of the major players handle it.
BBH:
You can say that again. Wasn’t the Aging Maverick the single vote the Republicans needed to terminate the Democrat filibuster on legislation (that had already passed the Republican-controlled House) ending the ban on drilling in ANWR?
Oh, that’s right – it’s McCain…he’s not really Republican.
Well, protectionism looms in the background, I guess. Or should we call it untoward groupism, yeah my tribe(!) and screw all those others sort of thinking that endangers the whole? Or were you thinking of some other danger altogether?
In a sense though, after one gets past the difficulty of recognition of the win-win nature of trade due to comparative advantage, then so long as more trade happens, more wealth happens, which in turn means things get better on the whole. People still die of course but their grandchildren live better, no? Surely it is not ‘only’ better when per J. Sachs and others wealth is re-distributed toward achieving an imagined equality and hence in their terms, improvement?
Sdferr, sounds good until the bubble bursts. Then what?
The answer: Everthing will suck and for quite some time afterward.
Margins that are less than 1% of the cost of the goods being contracted represent a 98%+ bubble on every single one.
I don’t know RTO. Maybe all that capital you propose to encumber in a larger Surety Bond can be better put to other, more productive uses, no? Maybe not, but some showing should be made before leaping off that particular cliff, I think.
Bubbles generate and decay with some frequency. They are not in themselves something I get worked up about beyond trying to stay out of them myself.
Personally, I think that if I must assign a reason why things will suck, it is far more likely to be caused by the undue influence of politicians interfering with the efficient production of goods and services, ‘markets’, in other words, than not. Things like, you know, Harry Reid saying that oil and coal makes us sick, we should do something about it!, and the follow on legislation etc. We the citizens of the United States have stood by for many years now and let our energy supplies, the very basis of any productive economy whatsoever, deteriorate to the point that as many have noted above, it may be years (1? 2? 3?) until the balance in supply and demand at the margin will be restored. So much the worse for us.
We forget the link of freedom and wealth creation at our peril.
RTO. I think you’re right.
it’s a symptom of the market–the people who have the oil create a mini-supply shortage by holding their inventories rather than selling it because next month it’s going to be worth more.
It isn’t the speculators that are driving the market, it’s the producers. The speculators are riding the market.
If the margin was $2/barrel at $20 cost per barrel (and it was), that was a 10% up front requirement. Why shouldn’t the proportion remain fairly constant? The price has ballooned but the margin has remaind static. It seems reasonable that inorder to make a futures contract, that they ought to have to show that they have at least $14/bbl when the cost is $140/bbl.
Rusty, I think we’ve got a chicken/egg thing going on. Are the producers responding to the market, or driving it?
Um, I may be remembering wrong, but wasn’t one of the things that got blamed a lot for the 1929 stock market crash (and yes, I realize stocks and futures aren’t the same — bear with me), that many investors were buying stock on margin — putting down only 10%? And when the margin calls came many of these margin-buyers couldn’t cover, and that had a ripple effect throughout the market, evaporating a lot of wealth held even by people who’d never used margins in the first place?
And didn’t Wall Street change the rule to increase the margin so this wouldn’t happen again?
Is the difference between stocks and futures really relevant enough to this instance, to keep this margin business from doing something similar here?
I guess that should read:
“And didn’t Wall Street change the rule to increase how much you had to pay to play margins so this wouldn’t happen again?”