June 26, 2008
Speculators Blamed for High Gas Prices
Michael Masters, portfolio manager of the Masters Capital Management hedge fund, thinks Americans are getting hosed at the gas pump.
According to Mr. Masters and others, including Fadel Gheit of Oppenheimer & Co., Edward Krapels of Energy Security Analysis and Roger Diwan of PFC Energy Consultants, the price for a barrel of oil would begin to fall almost overnight if Congress were to write legislation to remove speculators from the energy futures market.
In testimony before the House’s Subcommittee on Oversight and Investigations this week, Mr. Masters suggested that the price of gas would be halved in a month’s time if the Commodities Futures Trading Commission (CFTC) was empowered to close the so-called Enron and London loopholes.
According to the CFTC, speculators now represent 71 percent of the oil futures market compared to 29 percent in 2000. In that time, commodity index speculation grew from $13 billion to $260 billion over that period.
“Record oil prices are inflated by speculation and not justified by market fundamentals,” Mr. Gheit told MarketWatch. “Based on supply and demand fundamentals, crude-oil prices should not be above $60 per barrel.”
Sen. Byron Dorgan (D – ND) told The Christian Science Monitor, “The [commodities] market is broken. It doesn’t work. It is full of speculators and what they’re interested in is to drive up the price. They don’t give a rip about the damage to the economy.”
This month, the CFTC launched an investigation to determine how much of an impact speculators have on the price of oil. The move represents a shift for the CFTC, which had maintained that speculation was not behind the run up in oil prices.
Others agree with the CFTC’s previous view on the issue.
“There’s no evidence of speculative influence. Speculators are not contributing to the demand for physical oil as they almost always roll positions prior to delivery,” said Craig Pirrong, a member of the CFTC energy markets advisory committee and a professor of finance at the University of Houston.
Mr. Masters disagrees. “Even though speculators are not hoarding actual commodities, they have the effect of driving up the price for consumers around the world because of the linkage between the commodities market and the spot market,” he said. “They have the same effect on price as if they were buying real physical commodities.”
Discussion Questions: Is it possible that the recent run-up in gas prices is largely due to factors other than traditional supply and demand? Is it time for Congress to pass regulations to restrict speculation in the oil futures market? What impact would this have on retail operations and consumer product manufacturers?
The Petroleum Marketers Association of America (PMAA), a federation of 46 state and regional trade associations representing roughly 8,000 independent petroleum marketers across the country, has been vocal in its call for Congress to close the loopholes. The PMAA created a separate website called Stop Oil Speculators (www.stopoilspeculators.com) to draw attention to the problem as it sees it.
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While it’s easy to put the blame for an unfortunate situation upon a select group of people, the charge is unfounded when looking at the world’s petroleum market. Supply and demand is always the driving factor in any economic argument. The higher the demand, and the lower the supplies, the higher the price will be. That’s a given factor.
When looking at the entire picture, we need to look at several factors. The main factor is the supply. With China’s rapidly increasing industrial market comes a rapidly increasing demand for oil. The same situation exists in India. The United States is no longer the major player in the oil markets, therefore we no longer have the same influence we once did. Added to this fact is the declining value of the US dollar against world currencies.
We also have to consider that oil was once traded and valued explicitly upon the US dollar. Since Iran opened their own Mideast trading board for petroleum, oil is being traded based on currencies that are increasing in value.
The actual worldwide supply is for the most part within a percentage point of that worldwide demand, keeping almost in lockstep with that demand.
The volatile political situation here in the US is also contributing to the price increases. With the very real possibility of a congressional majority of left wing politicians combined with the election of a left wing President, should Obama be elected, foreign optimism for this nation’s economic future is declining as well. A wholly left wing government will lead to higher taxes and more governmental controls, increasing the cost of doing business, as well a living here in America.
Speculators go after profits, so they follow the money, especially in high volume, high profit deals. The grain, sugar and other speculators work the same way. They follow the market. If the demand did not exist to drive the increasing price of crude, the speculators would not be trading so heavily in the market. The same issue exists in the food markets, driving the costs of corn, wheat and rice up, leading to higher prices for those products as well.
If we want the price of oil to go down, we need to increase the supply on our own terms. This will mean drilling in coastal waters and ANWR.
The rising costs are having a greater effect in the long run on more than just the cost of gasoline and heating fuel, as retailers well know. The cost of manufacturing goods, mostly made in foreign nations, and shipping them to the retail outlets are increasing at a fast pace as well. The solution is not more governmental regulation, but to allow the market to adjust itself. Like most fires, the drastic increase in pricing will eventually burn itself out, or at the very least be reduced to a smolder as demand diminishes in front of increasing supplies.
I say let the market have its day, as it will soon have to pay the price for its uncontrolled actions.
Closing these loopholes is being considered as we write this. The author is correct, in that the price of gas is being driven not by demand and supply, but more so by the artificial demand created by speculators and their abilities to change market conditions based upon their demands. This will not last long, since Congress is already considering legislation to stop this. Once this is done, we will see a more “traditional” market reaction and pricing will level off to reflect this.
People speculate all the time and it doesn’t mean that they are going to win. Look at the investors that speculated in real estate and now are broke. Oil speculators can go broke as well. What if some company takes up John McCain’s offer of $300 million and develops a long-lasting car battery? It would be a disaster.
If consumers switched to battery operated cars, how would they be be able to collect gas taxes to maintain our highways? We would be driving slow and speeding ticket revenue would go down.
People who drive hybrids are cheating the rest of us by not paying their fair share of gas taxes but are using the highways just the same. We will probably have to start assessing hybrid owners a special ownership tax….
Some may think I’m joking, and yes, I am, but the cost of driving will remain high, one way or the other. We still need to maintain our roads and that cannot be done by having cheap transportation.
Re: ” Can you write US Law that will govern these foreign exchanges? If these regulationists want to do something about speculation then they need to find a way to make speculation so risky that only a fool would participate.”
The solution would be to make margin debt uncollectable if it were incurred to purchase oil futures in a market outside the U.S. How’s that for making them risky? And easy to do, too, at a stroke of the pen.
Not that it would do away with all speculators, just U.S. speculators.
So it can be done. That’s not to say that blaming “speculation” isn’t a witch hunt and a distraction from the hard job of making structural changes so we can’t be held for ransom.
It’s simple supply and demand. Most of us in the US have a nice supply of cash and we are willing to pay the price at the pump. If gas goes to $6 or $10 a gallon will we still pay the price? Probably. As long as we have the cash to pay, the prices will go up.
Just like health care. How much is it worth to us to have it? If it mean surviving then we will pay the price. Just wait until food prices start to double. As long as Americans are still filling up their tanks, prices will be high. If we simply stopped consuming gas, prices will drop. Look at the housing market. People stopped buying houses and now home prices are down about 20%.
Extreme price volatility is frequently met with responses of manipulation and curses on the ‘speculator’. Each time extreme volatility arises, it presents an opportunity to remind us of the “natural beauty” of markets and the privileges we have living in a market economy.
Commodity markets are a zero sum game. For every buyer, there must be a seller. At the end of the day, the net position of the entire market is zero–no more buyers than sellers. To suggest “speculators” are to blame for high gas prices ignores a core fundamental of commodity markets, and a market economy. In order for the speculator to buy oil, someone had to sell it to them. Both sides of the transaction value their money equally. All one needs to do if one disagrees with the current price of energy is ‘short the market’–simply sell a few hundred contracts. If you are correct, you’ll win. If you are incorrect, you lose.
Blaming the messenger–the markets–misses the point. The blame belongs on any economy that knowingly positions itself hostage to a commodity it does not control, and then chooses to do nothing about it.
With all due respect to a previous poster, references to “a free market” uses a political term. The economic term would be “competitive market,” and the oil market hasn’t been competitive for a long time.
The oil market is still an oligopoly, and recent events have shown how much the market will bear. They will continue to soak us.
So, while wringing out speculation should reduce prices at the gas pump a little–and I’d appreciate every cent–I’m not under the illusion that we will see $2 gas again in the U.S.
It wouldn’t surprise me at all to find that speculation is at work–and that there’s a bubble about to burst. But this is one case where legislative action would certainly have unintended consequences and do nothing to solve a more basic problem with our domestic gasoline infrastructure, which is that oil companies have for years limited refinery capacity. They’ve often blamed environmental regulation as an obstacle to building more, but restricted capacity has also been its own reward.
In fact, there are theories that the real reason the Bush administration invaded Iraq was to restrict the supply of oil, not to expand it. I have no idea if that’s true; it does seem to have been the short-term result.
At this point, however, I think we’ve seen the future, whenever it arrives. For geopolitical reasons, if nothing else, it’s probably time to get off oil entirely and develop the hydrogen/solar/wind economy–even if the oil bubble deflates and gasoline prices return to sanity.
That way we get the economic expansion and job creation that comes from creating an entirely new industry–not to mention global leadership in a new technology. And we get out from under the thumbs of King Abdullah and Prince Bandar. If there’s any element of our foreign policy that truly gives the lie to our status as the sole remaining superpower, it’s having the vice president of the United States summoned to the court of the Saudis on short notice as if he were a royal subject himself.
I love these regulationists who live in a fishbowl. OK, lets ban speculation in the US! Now, tell me how you are going to enforce it? With the advent of the internet I can sit in my house in Georgia and buy stock from the Hong Kong exchange. Do you imagine that they might be able to sell oil futures on this exchange, or London, or Frankfurt? Can you write US Law that will govern these foreign exchanges?
If these regulationists want to do something about speculation then they need to find a way to make speculation so risky that only a fool would participate. I’ve got a great idea! We have been buying oil for years for the strategic reserve (the strategic reserve is for our ships and tanks and jets….), why don’t we drop this on the world market at a cheap price, which would make futures contracts worthless and bankrupt the speculators? Oh, one small matter, we would have to repurchase this oil at market value. I think we need to pass legislation to reduce the cost of bread which has increased in my local grocery store by 25% in the last 2 months. At this rate, a loaf of bread will cost over $2 by the end of the year! Russia and China tried this–it doesn’t work!
Those suggesting that “real” supply and demand changes could not explain the dramatic increases in the price of oil fail to remember a basic lesson: a shift in highly inelastic demand in the face of highly inelastic supply would deliver just such results. To the extent that “speculators” are driving the market, it would be wise to remember that for everyone in a speculative position betting a price will go up, there is necessarily someone on the opposite side of that trade either hedging (buying insurance-a key economic role performed by futures markets) or speculating with equal fervor that the price will come down. Congress investigating “speculators” is almost as entertaining as theater as criminalizing financial stupidity, but it isn’t going to lower the price of gasoline.
Do I think that speculation is driving up oil prices? Yes. However, who is speculating? NPR aired last night on All Things Considered a story noting that a major portion of oil speculation maybe pension fund, mutual fund, and other institutional investors. Since these institutions are working for the common person, the small time investor, people like you and me, would banning speculation on commodities turn into robbing Peter to pay Paul by reducing returns on our 401(k)s?
I don’t know the answer to that, but I think that news stories about oil and commodity speculation do the news consumer a disservice by not mentioning the role of the institutional investor.
Congress should act!
It’s amusing to hear assertion that rising demand, instead of speculation, is driving oil price increases. It would be easy enough to quantify actual oil consumption; and while demand for petroleum is growing in developing countries, it’s hard to believe that demand has doubled in the last year and a half, as gas prices have.
Let’s shield the economy from this kind of damage. Petroleum is just too important to our national well-being.
Many retailers are now offering some relief at the gas pump with reduced gas prices (usually about 10 cents gallon less) if you use their private label credit card.
And for those gas weary consumers who live near a Meijer Supercenter, they are offering a free gas text alert program to help their customers find some relief from ever increasing prices by giving a text alert notice 2-hours before they raise prices so you can fill up and save some money.
So, the message is, if we as consumers cut back usage by 10% (not a lot if we all do it consistently) and shop around for the cheapest prices we can find every time we buy gas, we can drive speculators back to doing what they do best – raising llama’s on farms in northern Spain.
Commodity speculation has been a big business since the 1800’s. Americans have speculated in cotton, pork, gold, silver, scrap iron, coal, wool, and cattle for over a century. Every speculative-driven boom without a fundamental underlying economic reason goes bust.
Furthermore, the price of oil isn’t rising sharply in Euros. It’s rising sharply in American dollars. The last time the American dollar collapsed was while America was losing the Vietnam War. Currently America is losing 2 wars at once (Afghanistan and Iraq). So why is anyone surprised that the dollar has collapsed? And when the dollar collapses, folks in other countries need more dollars just to stay even in their buying power.
So you can shoot the evil speculators, but they’d go broke if the fundamentals couldn’t support the prices. Why not get out of Afghanistan and Iraq? Guaranteed: the dollar would rise, so oil prices in dollars would decline.
The oil in the Strategic Petroleum Reserve should be sold. The money should be spent on teaching basic economics.
This is not news. Anyone aware of the oil industry knows that the demand/supply ratio has not changed over the last couple of years in a way that would drive up prices as dramatically as they have been.
Regretfully, I don’t believe that any real relief will be in site for quite some time. As the oil companies continue to experience record profits while exerting a strong influence on government policy, the CFTC will just turn a blind eye to it as they already have.
On the upside, I have lost 6 lbs so far from riding my bike to work.
I wish the answer to this question and the solution to the world’s high gasoline prices was so black and white. That having been said, I do believe that part of the reason for high gas prices can be attributed to oil speculators, and am pleased that Congress is looking into this.
If they find that oil speculators have driven up the price, any downward market adjustment would be welcome. If they find that speculators have not contributed to the price increases, pressure will quickly build on Congress to get serious about funding research for alternative (non-food based) fuel solutions and more efficient vehicles. Either way, it’s time that Congress act.
I’m not to0 familiar with the actual supply and demand economics of oil but as a consumer, (and I’m sure others feel the same way) I feel like I’m being violated every time I fill up my car. What used to be a 30 or 40 dollar fill up just a few years ago is now a 70-80 dollar gouge fest! Here in Toronto we are at $1.334 a liter which equates to about $5.336 a gallon in Canadian currency. Perception is not improved when the Saudis and other governments say publicly that there is no explanation or reason for such high crude prices.
The real question is, do we regulate a free market? I’m sure there will be negative consequence if we take speculators out of the market. In the short term it would probably help relieve some of the pricing pressure but by far, it is not a long term solution. The real solution is breaking our addiction to oil and developing other more efficient and cleaner ways of powering this planet.
Contrary to what US Energy Secretary Samuel Bodman says, I don’t think supply and demand are really causing the problem. There are too many other factors at play here. Too many middle men skimming profits. Too much manipulation of supplies and inventories. The price of oil nearly doubled and gas went up a third in just one year and yet figures are coming out that indicate we are using less gas, not more…probably because people are cutting back on gas. That clearly means supply and demand have nothing to do with these prices.
Speculation is driving prices! Lawmakers blame loopholes in commodities trading like the Swaps Loophole or Enron Loophole. Whatever you want to call it, it’s a get rich quick scheme and not much less obvious than a pyramid scheme. There is no way supply is causing this gas crisis. I put the full blame on speculators and commodities traders and I am sick of the smoke and mirrors.
The meeting in Saudi Arabia hasn’t achieved any substantial results from what I can see. The price of oil is still going up. There must be something else that’s driving prices up and I think I know what it is. Although it appears to be a good hedge against inflation, a lower dollar and a low oil supply, in reality nothing could be farther from the truth. The main thing driving inflation is oil prices and as inflation goes higher investors buy more oil driving inflation higher again. Some experts predict this will trigger a worldwide recession. This will result in lower gas consumption and it will free up more gas supplies.
I am no expert but even I can see the writing on the wall. Investors are going to loose their shirts on oil. We may be looking at another ENRON. Hedge funds will topple leaving old age pensioners with nothing. The government won’t be able to bail them out this time because the cost would be far to great. The CFTC and ICE will be too slow to react to the cracks forming in commodities trading so the government will finally step in. By that time it will probably be too late.
The fascinating thing about this debate is that it really is unclear for those of us left to reading newspapers whether the “speculator theory” or the “supply/demand theory” is correct. While it is clear oil prices are rising rapidly, we don’t seem to get a clear read on what is driving them.
From a retailer perspective, however, I’m not sure it makes a difference. High gas prices affect consumer behavior regardless of whether those prices come from demand or speculation. Retailers should be working to adjust their models (in all areas) to get ahead of the energy cost curve. Those that can do so fastest will have a competitive advantage. From what I see, most are in the “hope and pray” mode that this too shall pass.
We believe what we want to believe when our ox is being gored, financially and politically. When it comes to what will really contain gasoline prices, if anything as world demand grows, even honesty about the true facts is a financial speculation.
We are all speculators. Each of us who purchased a house in the past 20 years, probably spent a bit more than planned in order to lock in future profits speculating that house prices would always go up. In the last couple of years of the housing bubble, investors were speculating even more by buying and “turning” houses into profits. Where was the screaming then about speculators pushing the market up? Nowhere to be found. We all liked the fact that home values were going up and up since we all participated in the price rise. When the market ran out of people that would continually pay more for houses, prices fell rapidly.
The same phenomenon is happening in the oil market, but this time we don’t like it because the higher prices are not increased value this time – it is increased cost to all of us. The same phenomenon will occur again this time; rapidly falling prices when there are no buyers at the next higher price. Unfortunately, as the world output of oil is 86 million barrels per day and world production is 87 barrels per day, this day may be a long time out.
Don’t blame the speculators; they are merely placing a bet just like we did on our houses. When there are more sellers of oil than buyers, prices will fall. The role that the speculators will have played along the way was to smooth the market fluctuations. This up and down cycle has occurred in every commodity and will do so again. The speculators did not engineer the oil price rise any more than they did any other commodity. They will not engineer oil’s price decline either. A perceived increase in the supply oil will cause the speculators to sell or buy at a lower price. When this happens will we hear the cry, “Stop the speculators from driving the price of oil down”? I don’t think so.
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While it’s easy to put the blame for an unfortunate situation upon a select group of people, the charge is unfounded when looking at the world’s petroleum market. Supply and demand is always the driving factor in any economic argument. The higher the demand, and the lower the supplies, the higher the price will be. That’s a given factor.
When looking at the entire picture, we need to look at several factors. The main factor is the supply. With China’s rapidly increasing industrial market comes a rapidly increasing demand for oil. The same situation exists in India. The United States is no longer the major player in the oil markets, therefore we no longer have the same influence we once did. Added to this fact is the declining value of the US dollar against world currencies.
We also have to consider that oil was once traded and valued explicitly upon the US dollar. Since Iran opened their own Mideast trading board for petroleum, oil is being traded based on currencies that are increasing in value.
The actual worldwide supply is for the most part within a percentage point of that worldwide demand, keeping almost in lockstep with that demand.
The volatile political situation here in the US is also contributing to the price increases. With the very real possibility of a congressional majority of left wing politicians combined with the election of a left wing President, should Obama be elected, foreign optimism for this nation’s economic future is declining as well. A wholly left wing government will lead to higher taxes and more governmental controls, increasing the cost of doing business, as well a living here in America.
Speculators go after profits, so they follow the money, especially in high volume, high profit deals. The grain, sugar and other speculators work the same way. They follow the market. If the demand did not exist to drive the increasing price of crude, the speculators would not be trading so heavily in the market. The same issue exists in the food markets, driving the costs of corn, wheat and rice up, leading to higher prices for those products as well.
If we want the price of oil to go down, we need to increase the supply on our own terms. This will mean drilling in coastal waters and ANWR.
The rising costs are having a greater effect in the long run on more than just the cost of gasoline and heating fuel, as retailers well know. The cost of manufacturing goods, mostly made in foreign nations, and shipping them to the retail outlets are increasing at a fast pace as well. The solution is not more governmental regulation, but to allow the market to adjust itself. Like most fires, the drastic increase in pricing will eventually burn itself out, or at the very least be reduced to a smolder as demand diminishes in front of increasing supplies.
I say let the market have its day, as it will soon have to pay the price for its uncontrolled actions.
Closing these loopholes is being considered as we write this. The author is correct, in that the price of gas is being driven not by demand and supply, but more so by the artificial demand created by speculators and their abilities to change market conditions based upon their demands. This will not last long, since Congress is already considering legislation to stop this. Once this is done, we will see a more “traditional” market reaction and pricing will level off to reflect this.
People speculate all the time and it doesn’t mean that they are going to win. Look at the investors that speculated in real estate and now are broke. Oil speculators can go broke as well. What if some company takes up John McCain’s offer of $300 million and develops a long-lasting car battery? It would be a disaster.
If consumers switched to battery operated cars, how would they be be able to collect gas taxes to maintain our highways? We would be driving slow and speeding ticket revenue would go down.
People who drive hybrids are cheating the rest of us by not paying their fair share of gas taxes but are using the highways just the same. We will probably have to start assessing hybrid owners a special ownership tax….
Some may think I’m joking, and yes, I am, but the cost of driving will remain high, one way or the other. We still need to maintain our roads and that cannot be done by having cheap transportation.
Re: ” Can you write US Law that will govern these foreign exchanges? If these regulationists want to do something about speculation then they need to find a way to make speculation so risky that only a fool would participate.”
The solution would be to make margin debt uncollectable if it were incurred to purchase oil futures in a market outside the U.S. How’s that for making them risky? And easy to do, too, at a stroke of the pen.
Not that it would do away with all speculators, just U.S. speculators.
So it can be done. That’s not to say that blaming “speculation” isn’t a witch hunt and a distraction from the hard job of making structural changes so we can’t be held for ransom.
It’s simple supply and demand. Most of us in the US have a nice supply of cash and we are willing to pay the price at the pump. If gas goes to $6 or $10 a gallon will we still pay the price? Probably. As long as we have the cash to pay, the prices will go up.
Just like health care. How much is it worth to us to have it? If it mean surviving then we will pay the price. Just wait until food prices start to double. As long as Americans are still filling up their tanks, prices will be high. If we simply stopped consuming gas, prices will drop. Look at the housing market. People stopped buying houses and now home prices are down about 20%.
Extreme price volatility is frequently met with responses of manipulation and curses on the ‘speculator’. Each time extreme volatility arises, it presents an opportunity to remind us of the “natural beauty” of markets and the privileges we have living in a market economy.
Commodity markets are a zero sum game. For every buyer, there must be a seller. At the end of the day, the net position of the entire market is zero–no more buyers than sellers. To suggest “speculators” are to blame for high gas prices ignores a core fundamental of commodity markets, and a market economy. In order for the speculator to buy oil, someone had to sell it to them. Both sides of the transaction value their money equally. All one needs to do if one disagrees with the current price of energy is ‘short the market’–simply sell a few hundred contracts. If you are correct, you’ll win. If you are incorrect, you lose.
Blaming the messenger–the markets–misses the point. The blame belongs on any economy that knowingly positions itself hostage to a commodity it does not control, and then chooses to do nothing about it.
With all due respect to a previous poster, references to “a free market” uses a political term. The economic term would be “competitive market,” and the oil market hasn’t been competitive for a long time.
The oil market is still an oligopoly, and recent events have shown how much the market will bear. They will continue to soak us.
So, while wringing out speculation should reduce prices at the gas pump a little–and I’d appreciate every cent–I’m not under the illusion that we will see $2 gas again in the U.S.
It wouldn’t surprise me at all to find that speculation is at work–and that there’s a bubble about to burst. But this is one case where legislative action would certainly have unintended consequences and do nothing to solve a more basic problem with our domestic gasoline infrastructure, which is that oil companies have for years limited refinery capacity. They’ve often blamed environmental regulation as an obstacle to building more, but restricted capacity has also been its own reward.
In fact, there are theories that the real reason the Bush administration invaded Iraq was to restrict the supply of oil, not to expand it. I have no idea if that’s true; it does seem to have been the short-term result.
At this point, however, I think we’ve seen the future, whenever it arrives. For geopolitical reasons, if nothing else, it’s probably time to get off oil entirely and develop the hydrogen/solar/wind economy–even if the oil bubble deflates and gasoline prices return to sanity.
That way we get the economic expansion and job creation that comes from creating an entirely new industry–not to mention global leadership in a new technology. And we get out from under the thumbs of King Abdullah and Prince Bandar. If there’s any element of our foreign policy that truly gives the lie to our status as the sole remaining superpower, it’s having the vice president of the United States summoned to the court of the Saudis on short notice as if he were a royal subject himself.
I love these regulationists who live in a fishbowl. OK, lets ban speculation in the US! Now, tell me how you are going to enforce it? With the advent of the internet I can sit in my house in Georgia and buy stock from the Hong Kong exchange. Do you imagine that they might be able to sell oil futures on this exchange, or London, or Frankfurt? Can you write US Law that will govern these foreign exchanges?
If these regulationists want to do something about speculation then they need to find a way to make speculation so risky that only a fool would participate. I’ve got a great idea! We have been buying oil for years for the strategic reserve (the strategic reserve is for our ships and tanks and jets….), why don’t we drop this on the world market at a cheap price, which would make futures contracts worthless and bankrupt the speculators? Oh, one small matter, we would have to repurchase this oil at market value. I think we need to pass legislation to reduce the cost of bread which has increased in my local grocery store by 25% in the last 2 months. At this rate, a loaf of bread will cost over $2 by the end of the year! Russia and China tried this–it doesn’t work!
Those suggesting that “real” supply and demand changes could not explain the dramatic increases in the price of oil fail to remember a basic lesson: a shift in highly inelastic demand in the face of highly inelastic supply would deliver just such results. To the extent that “speculators” are driving the market, it would be wise to remember that for everyone in a speculative position betting a price will go up, there is necessarily someone on the opposite side of that trade either hedging (buying insurance-a key economic role performed by futures markets) or speculating with equal fervor that the price will come down. Congress investigating “speculators” is almost as entertaining as theater as criminalizing financial stupidity, but it isn’t going to lower the price of gasoline.
Do I think that speculation is driving up oil prices? Yes. However, who is speculating? NPR aired last night on All Things Considered a story noting that a major portion of oil speculation maybe pension fund, mutual fund, and other institutional investors. Since these institutions are working for the common person, the small time investor, people like you and me, would banning speculation on commodities turn into robbing Peter to pay Paul by reducing returns on our 401(k)s?
I don’t know the answer to that, but I think that news stories about oil and commodity speculation do the news consumer a disservice by not mentioning the role of the institutional investor.
Congress should act!
It’s amusing to hear assertion that rising demand, instead of speculation, is driving oil price increases. It would be easy enough to quantify actual oil consumption; and while demand for petroleum is growing in developing countries, it’s hard to believe that demand has doubled in the last year and a half, as gas prices have.
Let’s shield the economy from this kind of damage. Petroleum is just too important to our national well-being.
Many retailers are now offering some relief at the gas pump with reduced gas prices (usually about 10 cents gallon less) if you use their private label credit card.
And for those gas weary consumers who live near a Meijer Supercenter, they are offering a free gas text alert program to help their customers find some relief from ever increasing prices by giving a text alert notice 2-hours before they raise prices so you can fill up and save some money.
So, the message is, if we as consumers cut back usage by 10% (not a lot if we all do it consistently) and shop around for the cheapest prices we can find every time we buy gas, we can drive speculators back to doing what they do best – raising llama’s on farms in northern Spain.
Commodity speculation has been a big business since the 1800’s. Americans have speculated in cotton, pork, gold, silver, scrap iron, coal, wool, and cattle for over a century. Every speculative-driven boom without a fundamental underlying economic reason goes bust.
Furthermore, the price of oil isn’t rising sharply in Euros. It’s rising sharply in American dollars. The last time the American dollar collapsed was while America was losing the Vietnam War. Currently America is losing 2 wars at once (Afghanistan and Iraq). So why is anyone surprised that the dollar has collapsed? And when the dollar collapses, folks in other countries need more dollars just to stay even in their buying power.
So you can shoot the evil speculators, but they’d go broke if the fundamentals couldn’t support the prices. Why not get out of Afghanistan and Iraq? Guaranteed: the dollar would rise, so oil prices in dollars would decline.
The oil in the Strategic Petroleum Reserve should be sold. The money should be spent on teaching basic economics.
This is not news. Anyone aware of the oil industry knows that the demand/supply ratio has not changed over the last couple of years in a way that would drive up prices as dramatically as they have been.
Regretfully, I don’t believe that any real relief will be in site for quite some time. As the oil companies continue to experience record profits while exerting a strong influence on government policy, the CFTC will just turn a blind eye to it as they already have.
On the upside, I have lost 6 lbs so far from riding my bike to work.
I wish the answer to this question and the solution to the world’s high gasoline prices was so black and white. That having been said, I do believe that part of the reason for high gas prices can be attributed to oil speculators, and am pleased that Congress is looking into this.
If they find that oil speculators have driven up the price, any downward market adjustment would be welcome. If they find that speculators have not contributed to the price increases, pressure will quickly build on Congress to get serious about funding research for alternative (non-food based) fuel solutions and more efficient vehicles. Either way, it’s time that Congress act.
I’m not to0 familiar with the actual supply and demand economics of oil but as a consumer, (and I’m sure others feel the same way) I feel like I’m being violated every time I fill up my car. What used to be a 30 or 40 dollar fill up just a few years ago is now a 70-80 dollar gouge fest! Here in Toronto we are at $1.334 a liter which equates to about $5.336 a gallon in Canadian currency. Perception is not improved when the Saudis and other governments say publicly that there is no explanation or reason for such high crude prices.
The real question is, do we regulate a free market? I’m sure there will be negative consequence if we take speculators out of the market. In the short term it would probably help relieve some of the pricing pressure but by far, it is not a long term solution. The real solution is breaking our addiction to oil and developing other more efficient and cleaner ways of powering this planet.
Contrary to what US Energy Secretary Samuel Bodman says, I don’t think supply and demand are really causing the problem. There are too many other factors at play here. Too many middle men skimming profits. Too much manipulation of supplies and inventories. The price of oil nearly doubled and gas went up a third in just one year and yet figures are coming out that indicate we are using less gas, not more…probably because people are cutting back on gas. That clearly means supply and demand have nothing to do with these prices.
Speculation is driving prices! Lawmakers blame loopholes in commodities trading like the Swaps Loophole or Enron Loophole. Whatever you want to call it, it’s a get rich quick scheme and not much less obvious than a pyramid scheme. There is no way supply is causing this gas crisis. I put the full blame on speculators and commodities traders and I am sick of the smoke and mirrors.
The meeting in Saudi Arabia hasn’t achieved any substantial results from what I can see. The price of oil is still going up. There must be something else that’s driving prices up and I think I know what it is. Although it appears to be a good hedge against inflation, a lower dollar and a low oil supply, in reality nothing could be farther from the truth. The main thing driving inflation is oil prices and as inflation goes higher investors buy more oil driving inflation higher again. Some experts predict this will trigger a worldwide recession. This will result in lower gas consumption and it will free up more gas supplies.
I am no expert but even I can see the writing on the wall. Investors are going to loose their shirts on oil. We may be looking at another ENRON. Hedge funds will topple leaving old age pensioners with nothing. The government won’t be able to bail them out this time because the cost would be far to great. The CFTC and ICE will be too slow to react to the cracks forming in commodities trading so the government will finally step in. By that time it will probably be too late.
The fascinating thing about this debate is that it really is unclear for those of us left to reading newspapers whether the “speculator theory” or the “supply/demand theory” is correct. While it is clear oil prices are rising rapidly, we don’t seem to get a clear read on what is driving them.
From a retailer perspective, however, I’m not sure it makes a difference. High gas prices affect consumer behavior regardless of whether those prices come from demand or speculation. Retailers should be working to adjust their models (in all areas) to get ahead of the energy cost curve. Those that can do so fastest will have a competitive advantage. From what I see, most are in the “hope and pray” mode that this too shall pass.
We believe what we want to believe when our ox is being gored, financially and politically. When it comes to what will really contain gasoline prices, if anything as world demand grows, even honesty about the true facts is a financial speculation.
We are all speculators. Each of us who purchased a house in the past 20 years, probably spent a bit more than planned in order to lock in future profits speculating that house prices would always go up. In the last couple of years of the housing bubble, investors were speculating even more by buying and “turning” houses into profits. Where was the screaming then about speculators pushing the market up? Nowhere to be found. We all liked the fact that home values were going up and up since we all participated in the price rise. When the market ran out of people that would continually pay more for houses, prices fell rapidly.
The same phenomenon is happening in the oil market, but this time we don’t like it because the higher prices are not increased value this time – it is increased cost to all of us. The same phenomenon will occur again this time; rapidly falling prices when there are no buyers at the next higher price. Unfortunately, as the world output of oil is 86 million barrels per day and world production is 87 barrels per day, this day may be a long time out.
Don’t blame the speculators; they are merely placing a bet just like we did on our houses. When there are more sellers of oil than buyers, prices will fall. The role that the speculators will have played along the way was to smooth the market fluctuations. This up and down cycle has occurred in every commodity and will do so again. The speculators did not engineer the oil price rise any more than they did any other commodity. They will not engineer oil’s price decline either. A perceived increase in the supply oil will cause the speculators to sell or buy at a lower price. When this happens will we hear the cry, “Stop the speculators from driving the price of oil down”? I don’t think so.