Commodities: Oil prices fall on speculation; not supply and demand

[YumYum]

It is argued that essential commodities, such as oil and food, should not be speculated. It was speculation that drove oil to almost $150 a barrel. In these troubled times supply and demand should be the driving force behind the price of essential commodities; not speculation.

Oil falls below $82 as traders eye US jobs report

Oil falls below $82 in Europe ahead of key US July employment report

Pablo Gorondi, Associated Press Writer, On Friday August 6, 2010, 7:32 am EDT

Oil prices fell below $82 a barrel Friday ahead of a key employment report that will help investors gauge the strength of the U.S. economy.

By early afternoon in Europe, benchmark crude for September delivery was down 20 cents to $81.81 a barrel in electronic trading on the New York Mercantile Exchange. The contract fell 46 cents to settle at $82.01 on Thursday.

Analysts expect the Labor Department to say private employers hired 90,000 workers in July, a slight increase from the 83,000 hired in June. But the unemployment rate will likely rise to 9.6 percent from 9.5 percent because of government layoffs tied to cutting temporary census jobs.

"Oil prices may be subject to push-pull in investment sentiment -- support from some as a hedge against inflation and pressure from remaining concerns over the prospects of slow economic growth," said an energy report from Sucden Financial in London.

Traders will be closely watching how stock and currency markets react to the jobs data as signs of overall investor sentiment. Most European stock markets were higher Friday and the euro was down slightly at $1.3163 from $1.3179 late Thursday in New York.

full article....
http://finance.yahoo.com/news/Oil-falls-below-82-as-traders-apf-4056920812.html?x=0

 

[brandon]

So should we outlaw the futures market?

 

[brandon]

"Speculation" is a critical, integral part of any free market. And as any free market, the individuals who participate in it benefit not only themselves, but society as a whole.

Speculators add liquidity to markets. They lower the spread. They find companies or commodities that are listed at inaccurate prices and drive the prices closer to their true value. Speculators bear risks that others don't want to. If a bread maker wants to lock in the price of wheat at it's current value for purchase in 1 year, the speculator will allow him to do that; transferring risk from the bread maker to the speculator ensuring society gets bread regardless of what happens in the wheat market.


This "blame the speculators" nonsense is juvenile and ridiculous.

 

[YumYum]

"Speculation" is a critical, integral part of any free market. And as any free market, the individuals who participate in it benefit not only themselves, but society as a whole.

Speculators add liquidity to markets. They lower the spread. They find companies or commodities that are listed at inaccurate prices and drive the prices closer to their true value. Speculators bear risks that others don't want to. If a bread maker wants to lock in the price of wheat at it's current value for purchase in 1 year, the speculator will allow him to do that; transferring risk from the bread maker to the speculator ensuring society gets bread regardless of what happens in the wheat market.


This "blame the speculators" nonsense is juvenile and ridiculous.

That is not necessarily true. The bankers taking bailout money to speculate on oil and drive the price to $150 a barrel is not juvenile; it's evil.

http://www.huffingtonpost.com/raymond-j-learsy/your-tarp-money-being-use_b_160249.html

 

[Seraphim]

That is not necessarily true. The bankers taking bailout money to speculate on oil and drive the price to $150 a barrel is not juvenile; it's evil.

http://www.huffingtonpost.com/raymond-j-learsy/your-tarp-money-being-use_b_160249.html

If some speculators do evil, are all speculators evil? Should we outlaw speculatory investing to drive the evil away, while also driving away the honest investors who make up most of the market? Or should we pay attention and catch the evil and prosecute the evil as necessary?

 

[YumYum]

If some speculators do evil, are are speculators evil? Should we outlaw speculatory investing to drive the evil away, while also driving away the honest investors who make up most of the market? Or should we pay attention and catch the evil and prosecute the evil as necessary?

No, I advocate that during this time of deflation and high unemployment that speculation on essential commodities should not be allowed. That way we don't have to worry about prosecuting the untouchable, evil speculators.

 

[LibertarianfromGermany]

That is not necessarily true. The bankers taking bailout money to speculate on oil and drive the price to $150 a barrel is not juvenile; it's evil.

http://www.huffingtonpost.com/raymond-j-learsy/your-tarp-money-being-use_b_160249.html

It's not the speculating part that is evil, but the bailout money is. Speculating in itself is very important, it reflects expectations about future supply and demand and is an important tool in fighting government overstepping, especially in times like these. As an example: If people were somehow not able to speculate, governments could exploit their citizens forever by printing up more money since if people would not change their demand in light of expecting future inflation, fiat money would always retain a certain, if diminishing, market value. Only through speculation can people through the market successfully combat inflationary policies.

Of course, that is by far not the only application of speculation, in a sense it is much broader: If you want to be accurate, ALL action by each and every individual is speculation. Because your actions can never effect the immediate present and even the closest future has to be met with uncertainty, you speculate in everything you do all the time.

In a market economy, the speculators (i.e. in the more narrow sense the people who buy things expecting their market value to rise in the future so they can sell at a profit) coordinate production and consumption over time. A high oil price is most likely very desirable, because it directs entrepreneurs who are motivated by profit in the direction of alternative energy sources. If that would not occur and we still have an highly oil-dependent economy by the time that oil resources are depleted (not saying that they will be in the close future, just saying that is the assumption that most oil investors operate under; if it turns out that they are wrong, they will be punished by the oil they acquired dropping in price as word gets out that there are more oil resources than expected), most of the economy would likely collapse. Instead, oil speculators are driving the market towards alternative energy sources by making them comparatively cheaper in relation to oil prices. So if speculators who were previously selected by the market to be able to invest capital (i.e. they acquired their wealth in the market; here the government bailouts come into play and create problems) turn out to be correct, they saved our economy from depending on a resource that is no longer available. If they're wrong, they will make losses and other people, who predicted the future state of events more accurately, will take over parts of their capital and be selected by the market to coordinate the market in future times.

 

[hugolp]

It's not the speculating part that is evil, but the bailout money is.

This.

 

[brandon]

No, I advocate that during this time of deflation and high unemployment that speculation on essential commodities should not be allowed.

Everything is speculation. If I decide to buy two boxes of cereal instead of one this week, because I think it is going to be more expensive next week, I am now a speculator. What you are advocating would have an absolutely devastating effect on our economy and our personal freedoms.

 

[angelatc]

\


This "blame the speculators" nonsense is juvenile and ridiculous.

You might enjoy this: My husband was repeating this meme, until I pointed out that he routinely does the exact same thing with the commodities that he purchases.

 

[angelatc]

" If a bread maker wants to lock in the price of wheat at it's current value for purchase in 1 year, the speculator will allow him to do that; transferring risk from the bread maker to the speculator ensuring society gets bread regardless of what happens in the wheat market.

That's only true if the bread maker can continue to produce bread at or below the current price. If wheat suddenly becomes more expensive, the bread maker is still on the hook for low priced bread.

But if wheat suddenly takes a dive, the speculator is stuck with a season's worth of bread that his competitors are selling at lower prices than he can buy it for.

A gas station is speculating every time he purchases gasoline. He has to guess how long his inventory will last. I can't even begin to fathom how a strictly supply and demand system would work.

The producers couldn't start refining the oil until they had an order for it, and the retail sellers couldn't make orders until the trucks and cars needing gas were empty?

 

[theoakman]

The fuel for the oil price spike in 2008 was the dropping of interest rates to near zero levels. It encourages speculators to leverage up. Had interest rates not been manipulated, the incentive to speculate upwards wouldn't have existed.

 

[YumYum]

It's not the speculating part that is evil, but the bailout money is. Speculating in itself is very important, it reflects expectations about future supply and demand and is an important tool in fighting government overstepping, especially in times like these. As an example: If people were somehow not able to speculate, governments could exploit their citizens forever by printing up more money since if people would not change their demand in light of expecting future inflation, fiat money would always retain a certain, if diminishing, market value. Only through speculation can people through the market successfully combat inflationary policies.

I agree with most of what you say. I am not against speculation, which in a sense is a form of gambling. Speculators can keep prices in check. Farmers can hedge against crop failure. But my concern right now is not inflation, but deflation, and as the price of non-essential goods decrease, essential commodities will continue to be in demand, and when rich people, using taxpayer's money, manipulate the market, people suffer unnecessarily.

Of course, that is by far not the only application of speculation, in a sense it is much broader: If you want to be accurate, ALL action by each and every individual is speculation. Because your actions can never effect the immediate present and even the closest future has to be met with uncertainty, you speculate in everything you do all the time.

I agree. And my speculations can either benefit me or hurt me. Speculators that manipulate the market for personal gain end up hurting innocent people that are already struggling.

In a market economy, the speculators (i.e. in the more narrow sense the people who buy things expecting their market value to rise in the future so they can sell at a profit) coordinate production and consumption over time. A high oil price is most likely very desirable, because it directs entrepreneurs who are motivated by profit in the direction of alternative energy sources. If that would not occur and we still have an highly oil-dependent economy by the time that oil resources are depleted (not saying that they will be in the close future, just saying that is the assumption that most oil investors operate under; if it turns out that they are wrong, they will be punished by the oil they acquired dropping in price as word gets out that there are more oil resources than expected), most of the economy would likely collapse. Instead, oil speculators are driving the market towards alternative energy sources by making them comparatively cheaper in relation to oil prices. So if speculators who were previously selected by the market to be able to invest capital (i.e. they acquired their wealth in the market; here the government bailouts come into play and create problems) turn out to be correct, they saved our economy from depending on a resource that is no longer available. If they're wrong, they will make losses and other people, who predicted the future state of events more accurately, will take over parts of their capital and be selected by the market to coordinate the market in future times.

I am all for alternative energy and getting away from fossil fuels. I agree that higher prices at the pump bring investors and innovative people to the table. But then another problem can be created. When oil prices are artificially pumped up due to speculation, the bubble that was created eventually crashes, wiping out the little guy who got in too late, and the investors and inventors are left holding the bag, since the demand for their product no longer exist. So, I am for speculating based on supply and demand. I am against speculation that is driven by manipulation. The gold bugs on this forum complain frequently how the central banks are manipulating gold. I could care less about gold. My concern is the manipulation of oil and food.

 

[Brian4Liberty]

I agree with most of what you say. I am not against speculation, which in a sense is a form of gambling.

Speculators are the gamblers, Goldman Sachs is the crooked casino. Both will disagree with you on this.

 

[LibertarianfromGermany]

I agree with most of what you say. I am not against speculation, which in a sense is a form of gambling. Speculators can keep prices in check. Farmers can hedge against crop failure. But my concern right now is not inflation, but deflation, and as the price of non-essential goods decrease, essential commodities will continue to be in demand, and when rich people using taxpayer's money manipulate the market, people suffer unnecessarily.

If you think that the problem is going to be falling prices (depending on the definition of deflation, of course), what is your point then? If all speculative demand were gone (as other people already said, it's not possible, since every market-transaction or to be precise, every action as such is speculative), prices would drop drastically.

I agree. And my speculations can either benefit me or hurt me. Speculators that manipulate the market for personal gain end up hurting innocent people that are already struggling.

Depends what you mean by manipulating. If you don't mean tricking or using force on other market participants, you're wrong. Speculators who use their judgment in order to gain a profit and succeed help society and are rewarded for their service. If they are mistaken, they are punished.

I am all for alternative energy and getting away from fossil fuels. I agree that higher prices at the pump bring investors and innovative people to the table. But then another problem can be created. When oil prices are artificially pumped up due to speculation, the bubble that was created eventually crashes, wiping out the little guy who got in too late, and the investors and inventors are left holding the bag, since the demand for their product no longer exist. So, I am for speculating based on supply and demand. I am against speculation that is driven by manipulation. The gold bugs on this forum complain frequently how the central banks are manipulating gold. I could care less about gold. My concern is the manipulation of oil and food.

Speculative demand DOES NOT mean that a bubble is forming. Only if the speculators are wrong does a bubble arise out of speculation and in that case the speculators will lose much of their invested capital and not be able to make that mistake a second time. If people speculate in oil because they think the oil supply is drastically sinking while demand is rising and it turns out that they're right, why would prices crash? Instead, what the speculators also do is by pushing the price higher to store oil in order that it is only used by people who are ready to pay a higher price (and therefore expect to get use it in a more revenue/satisfaction gaining way than people who would only pay a lower price) which means that oil would be allocated most efficiently.

Manipulation and speculation are two entirely different things btw. The manipulation most gold bugs are talking about occurs when people, as for example in gold, think they are buying resources but those resources don't actually exist. For every ounce of gold that exists in the vault of COMEX, there are roughly 100 owners who hold a claim to that ounce who have the right to ask for delivery. Through paper gold a demand is satisfied by a supply that is nonexistent and only survives on the fact that not enough people have used their right for delivery (yet). Because if people start asking for delivery, COMEX will not be able to deliver all goods that people have a claim on and the phony supply of paper gold will evaporate revealing that the demand of gold can at current prices not be satisfied by the real supply.

 

[YumYum]

LibertarianfromGermany:

When I talk of speculating with a negative connotation, I mean speculation that is for the purpose of manipulating the market.

You must remember that oil is the only energy that the government allows us in the U.S. to use in our vehicles on a large scale. We have no competing fuel alternatives. So, our hands are tied. If the government had allowed different fuels, as well as battery and steam powered cars, to be used by the consumer, then the rich and greedy could manipulate oil all they want. But since we depend solely on oil as a fuel, speculation for the purpose of manipulation shouldn't be allowed.

Let's say that all world's wealthiest people and all the oil producing nations secretly met and drove the price of oil to $300 a barrel, only to dump it. Do you think that is fair to the little guy who depends on oil and has no other fuel source? In a truly competitive economy your view would be 100% correct, but again, we don't live in a truly competitive economy. Since that is the situation, oil should be only speculated on based on supply and demand, or not speculated on at all.

 

[LibertarianfromGermany]

LibertarianfromGermany:

When I talk of speculating with a negative connotation, I mean speculation that is for the purpose of manipulating the market.

You must remember that oil is the only energy that the government allows us in the U.S. to use in our vehicles on a large scale. We have no competing fuel alternatives. So, our hands are tied. If the government had allowed different fuels, as well as battery and steam powered cars, to be used by the consumer, then the rich and greedy could manipulate oil all they want. But since we depend solely on oil as a fuel, speculation for the purpose of manipulation shouldn't be allowed.

Let's say that all world's wealthiest people and all the oil producing nations secretly met and drove the price of oil to $300 a barrel, only to dump it. Do you think that is fair to the little guy who depends on oil and has no other fuel source? In a truly competitive economy your view would be 100% correct, but again, we don't live in a truly competitive economy. Since that is the situation, oil should be only speculated on based on supply and demand, or not speculated on at all.

At first, new car technologies utilizing different kinds of fuels are already relatively far advanced and maybe I'm not familiar enough with U.S. law, but I haven't seen any law yet that forbids for example the usage of electric cars in the U.S.

Secondly, EVEN IF oil was the only viable fuel, your economics is still fallacious. You cannot simply buy lots of oil to push up the price and then sell it all at that higher price; I would recommend learning about the formation of monopoly prices and how they really work (mises.org is a good place to start). In short: The more oil you buy, the more you have to pay for it, the more you sell, the less you can sell it (i.e. the individual unit of oil) for. Manipulation in the way you described just doesn't work.

 

[Brian4Liberty]

You cannot simply buy lots of oil to push up the price and then sell it all at that higher price; I would recommend learning about the formation of monopoly prices and how they really work (mises.org is a good place to start). In short: The more oil you buy, the more you have to pay for it, the more you sell, the less you can sell it (i.e. the individual unit of oil) for. Manipulation in the way you described just doesn't work.

Correct, but that assumes a single participant. Those who profit from manias and pyramid schemes are the people who get in first, and sell at the height. Obviously someone gets stuck in the end, but not the early insiders.

The worst case scenario is when the scheme gets so big that it threatens to collapse the whole system. That is what happened with the mortgage derivatives bubble. Even though Goldman Sachs got out before the crash (and passed the hot potato to less sophisticated buyers), the crash was taking down the entire system, which was going to effect them anyway. Of course the government bailed them out (through AIG and supporting the system in general), so in the end, there was no risk for the biggest insider player.

 

[LibertarianfromGermany]

Correct, but that assumes a single participant. Those who profit from manias and pyramid schemes are the people who get in first, and sell at the height. Obviously someone gets stuck in the end, but not the early insiders.

If you're talking about manias, that's a different story. In that case the traders that buy at the height and don't manage to sell before the fall get stuck with the bill, but it's their fault for participating in that already highly bid up market and not making good judgments about when to get in/out. And how does that harm society btw? Some speculators making gain at the expense of other speculators should in my opinion not be viewed as a problem but a healthy process that picks out the good speculators from the bad ones.

The worst case scenario is when the scheme gets so big that it threatens to collapse the whole system. That is what happened with the mortgage derivatives bubble. Even though Goldman Sachs got out before the crash (and passed the hot potato to less sophisticated buyers), the crash was taking down the entire system, which was going to effect them anyway. Of course the government bailed them out (through AIG and supporting the system in general), so in the end, there was no risk for the biggest insider player.

That's exactly my point. The problem here were the bailouts, if it weren't for them the people that made the poor judgments would have failed and rightfully so. About passing the hot potato to the less sophisticated buyers, this is the fault of those buyers then. If you're getting into a complicated financial market and are not sophisticated enough, that's your mistake and you should go bankrupt for exercising poor judgment. And obviously GS wasn't able to get out completely or else they wouldn't have required the AIG bailout; if it weren't for the bailouts, this would've most likely worked out comparatively well.

 

[YumYum]

At first, new car technologies utilizing different kinds of fuels are already relatively far advanced and maybe I'm not familiar enough with U.S. law, but I haven't seen any law yet that forbids for example the usage of electric cars in the U.S.

Senator John Kerry admitted to Bill O'Reilly that every congressperson, including John Kerry himself, took bribes from the oil companies to not allow alternative fuels nor usage of electric cars. I witnessed the interview myself first hand. Under Obama it seems that finally things may improve some.

Secondly, EVEN IF oil was the only viable fuel, your economics is still fallacious. You cannot simply buy lots of oil to push up the price and then sell it all at that higher price; I would recommend learning about the formation of monopoly prices and how they really work (mises.org is a good place to start). In short: The more oil you buy, the more you have to pay for it, the more you sell, the less you can sell it (i.e. the individual unit of oil) for. Manipulation in the way you described just doesn't work.

Please read the article I provided:

http://www.huffingtonpost.com/raymond-j-learsy/your-tarp-money-being-use_b_160249.html

The article states:

Billions upon billions of TARP dollars have been made available to the likes of Morgan-Stanley. And you know what the money was meant to be for -- to finance business and to take pressure off the housing market by helping homeowners avoid foreclosure.

But then again the first $350 billion was released virtually without strings by the Bush administration and its appointees, and you can well imagine the winks and nods that went on behind closed doors. "Home mortgages? C'mon. I've got a better plan. And it's going to be a big help to all the fans of Bush and Cheney in the oil patch. We're going to do our damnedest to prop up the price of oil, and if we buy enough we'll keep it from falling and push up the price of gasoline as best we can. Just think of all those dummies out there. We take in their tax bucks and hit them again with higher oil and gas and heating oil prices. Guys, we're on a roll!"
​

So, how exactly did the price of oil go to almost to $150 a barrel if the banks did not initially purchase large quantities of oil only to dump it later? Our economy was collapsing and oil skyrocketed. Why is that?

Do you realize the strain that higher oil prices put on our economy? When gas prices were at its zenith, it prevented our economy from snapping back from the crash. Diesel fuel was too high and transportation costs were prohibitive. If fuel costs had been cut, it would have had a much greater benefit on our economy at the time than any "tax cuts", which is what the Republicans were screaming for.

Why did the American consumer have to suffer? We had no control whatsoever over the price increase of oil. It was manipulated by big money. If not, how was the price driven up so high, only to shoot straight down?