This page has been archived and commenting is disabled.

The scam behind the rise in oil, food prices

ilene's picture




 

Danny Schechter, at Al Jazeera, interviews Phil about excessive speculation in the oil markets.

Speculators and free market believers may argue that they are not to blame, they are simply trying to make money by following the trends and not holding onto cash, as the Fed is busily debasing the U.S. Dollar. There is some merit in that argument, but that doesn't solve the problem.  

Addressing the problem begins with identifying the underlying causes - what is enabling and encouraging so much speculation? What kind of regulation might be reasonable (should this game have rules because people's lives are being turned upside down)?  Who are the biggest speculators? I submit that the problem originates with Federal govt's failure to govern itself and promote a healthy economy, the Federal Reserve's policy of Quantitative Easing, and the lack of intelligent regulation. - Ilene 

The scam behind the rise in oil, food prices 

Speculation on the futures market, rather than supply and demand, is driving up costs, analysts say.

The US uses 18 million barrels of oil each day, so price rises have major impacts on consumers [GALLO/GETTY]

By Danny SchechterAl Jazeera

The global economy and its recovery, and the living standards of millions of plain folks, are now at risk from the sudden rise in oil and commodity prices.

Gas at the pump is up, and going higher. Food prices are following.

The consequences are catastrophic for the global poor as their costs go up while their income doesn't. It's menacing American workers too, who in large part have not seen a meaningful raise since the days of Reagan (keeping it this way is clearly behind the current flurry of attacks on unions).

Already, unrest in the Middle East and many African countries is being blamed for these dramatic increases. It seems as if this threat to global stability is being largely ignored in our media, one that treats the oil business as just another mystical world of free market trading.

Why is it happening? Why all the volatility? Is oil getting scarcer, leading to price increases? Is the cost of food, similarly, a reflection of naturally increasing commodity prices?

Oil speculating

While it's true that natural disasters and droughts play some role in this unchecked price inflation, it also seems apparent that something else is attracting increasing attention, even if most of our media fails to explore what is a political time bomb, while most political leaders shrug their shoulder and ignore it.

President Obama recently said there is nothing he can do about the hike in oil and food prices.

Critics say the problem is that government and media outlets alike refuse to recognise what's really going on: unchecked speculation!

Not everyone buys into this suspicion. In fact, it is one of more intense subjects of debate in economics.

Princeton University economist Paul Krugman pooh-poohs the impact of speculation counter-posing the traditional argument that oil prices are set by supply and demand.

The Economist agrees, summing up its views with a pithy phrase, "Speculation does not drive the oil price. Driving does."

Others, like oil industry analyst Michael Klare of Hampshire College in the US, sees demand outdistancing supply:

Consider the recent rise in the price of oil just a faint and early tremor heralding the oilquake to come. Oil won't disappear from international markets, but in the coming decades it will never reach the volumes needed to satisfy projected world demand, which means that, sooner rather than later, scarcity will become the dominant market condition.

Usually you hear this debate in scholarly circles or read it in political tracts where orthodox views collide with more alarmist projections about the oil supply "peaking".

But officials in the Third World don't see the subject as academic. Reserve Bank of India Governor Duvvuri Subbarao charges that: "Speculative movements in commodity derivative markets are also causing volatility in prices".

The World Bank has held meetings on the issue, because it is seen as a matter of "utmost urgency".

"The price of food is a matter of life and death for the very poorest people in the world," said Tom Arnold, CEO of Concern Worldwide, the international humanitarian agency, ahead of his participation at The Open Forum on Food at World Bank headquarters.

"With many families spending up to 80 per cent of their income on basic foods to survive, even the slightest increase in price can have devastating effects and become a crises for the poorest," he said.

Journalist Josh Clark argues on the website "How Stuff Works" that much of the oil speculation is rooted in the financial crisis:

The next time you drive to the gas station, only to find prices are still sky high compared to just a few years ago, take notice of the rows of foreclosed houses you'll pass along the way. They may seem like two parts of a spell of economic bad luck, but high gas prices and home foreclosures are actually very much inter-related. Before most people were even aware there was an economic crisis, investment managers abandoned failing mortgage-backed securities and looked for other lucrative investments. What they settled on was oil futures.

Whistleblowers on oil speculation

The debate within the industry is more subdued, perhaps to avoid a public fight between suppliers and distributors who don't want to rock the boat.

But some officials like Dan Gilligan, president of the Petroleum Marketers Association, representing 8,000 retail and wholesale suppliers has spoken out. 

"Approximately 60 to 70 percent of the oil contracts in the futures markets are now held by speculative entities," he argues. "Not by companies that need oil, not by the airlines, not by the oil companies. But by investors who profit money from their speculative positions."

Now, a prominent and popular market analyst is throwing caution to the wind by blowing the whistle on speculators.

Finance expert Phil Davis runs a website and widely read newsletter to monitor stocks and options trades. He's a professional's professional, whose grandfather taught him to buy stocks when he was just ten years old.

His website is Phil's Stock World, and stocks are his world. He's subtitled the site: "High Finance for Real People."

He is usually a sober and calm analyst, not known as maverick or dissenter.

When I met Phil the other night, he was on fire, enraged by what he believes is the scam of the century that no one wants to talk about, because so many powerful people armed with legions of lawyers want unquestioning allegiance, and will sue you into silence.

He studies the oil/food issue carefully and has concluded:

It's a scam folks, it's nothing but a huge scam and it's destroying the US economy as well as the entire global economy but no one complains because they are 'only' stealing about $1.50 per gallon from each individual person in the industrialised world. 

It's the top 0.01 per cent robbing the next 39.99 per cent – the bottom 60 per cent can't afford cars anyway (they just starve quietly to death, as food prices climb on fuel costs). If someone breaks into your car and steals a $500 stereo, you go to the police, but if someone charges you an extra $30 every time you fill up your tank 50 times a year ($1,500) you shut up and pay your bill. Great system, right?

Phil is just getting started, as he delves into the intricacies of the NYMEX market that handles these trades:

The great thing about the NYMEX is that the traders don't have to take delivery on their contracts, they can simply pay to roll them over to the next settlement price, even if no one is actually buying the barrels. That's how we have developed a massive glut of 677 million barrels worth of contracts in the front four months on the NYMEX and, come rollover day – that will be the amount of barrels "on order" for the front 3 months, unless a lot barrels get dumped at market prices fast.

Keep in mind that the entire United States uses 'just' 18M barrels of oil a day, so 677M barrels is a 37-day supply of oil. But, we also make 9M barrels of our own oil and import 'just' 9M barrels per day, and 5M barrels of that is from Canada and Mexico who, last I heard, aren't even having revolutions. So, ignoring North Sea oil Brazil and Venezuela and lumping Africa in with OPEC, we are importing 3Mbd from unreliable sources and there is a 225-day supply under contract for delivery at the current price or cheaper plus we have a Strategic Petroleum Reserve that holds another 727 Million barrels (full) plus 370M barrels of commercial storage in the US (also full) which is another 365.6 days of marginal oil already here in storage in addition to the 225 days under contract for delivery.

These contracts for oil outnumber their actual delivery, a sign of speculation and market manipulation, as oil companies win government authorisations for wells but then don't open them for exploration or exploitation.

It's all a game of manipulating oil supply to keep prices up. And no one seems to be regulating it.

Danger met with silence

What Phil sees is a giant but intricate game of market manipulation and rigging by a cartel – not just an industry –that actually has loaded tankers criss-crossing the oceans but only landing when the price is right.

There is nothing that the conga-line of tankers between here and OPEC would like to do more than unload an extra 277 million barrels of crude at $112.79 per barrel (Friday's close on open contracts and price) but, unfortunately, as I mentioned last week, Cushing, Oklahoma (Where oil is stored) is already packed to the gills with oil and can only handle 45M barrels if it started out empty so it is, very simply, physically impossible for those barrels to be delivered. This did not, however, stop 287M barrels worth of May contracts from trading on Friday and GAINING $2.49 on the day.

He asks: "Who is buying 287,494 contracts (1,000 barrels per contract) for May delivery that can't possibly be delivered for $2.49 more than they were priced the day before? These are the kind of questions that you would think regulators would be asking – if we had any."

The TV news magazine 60 minutes spoke with Dan Gilligan who noted that investors don't actually take delivery of the oil. "All they do is buy the paper, and hope that they can sell it for more than they paid for it. Before they have to take delivery."

He says they make their fortunes "on the volatility that exists in the market. They make it going up and down."

Payam Sharifi, at the University of Missouri-Kansas City, notes that even as the rise in oil prices threatens the world economy, there is almost total silence on the danger:

This issue ought to be discussed again with a renewed interest – but the media and much of the populace at large have simply accepted high food and oil prices as an unavoidable fact of life, without any discussion of the causes of these price rises aside from platitudes.

Danny Schechter made the film Plunder The Crime of Our Time (Plunderthecrimeofourtime.com) on the financial crisis as a crime story. He also wrote an introduction to the recent reissue of a classic two-volume expose of John D. Rockefeller's The Standard Oil Company (Cosimo Books), one of the top ten works top works of investigative reporting in America. 

The views expressed in this article are the author's own and do not necessarily reflect Al Jazeera's editorial policy.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Thu, 04/28/2011 - 11:19 | 1216023 surfersd
surfersd's picture

ilene under your logic all commodity markets should be closed. As if having open interest greater then the available storage is somehow causing prices higher. You never answered my question regarding the collapse in prices over the years, where OI was high going into the delivery window, but came off in price. The last three feb march spreads had the contango out to 3 dollars as supply was greater then available storage.

 

Please quit commenting on a subject is larger then your ability to understand it. Complain to the Bernank he is the problem.

http://www.xtranormal.com/watch/11855451/drill-and-quit-printing-money?listid=22762471

Thu, 04/28/2011 - 03:41 | 1215001 Urban Redneck
Urban Redneck's picture

Phil should stick to stocks, and the scam that is pushing stock prices higher for consumers.  Yes, there are speculative dollars chasing the oil market, although with far less impact than they are in some other commodity markets.  However, citing the volume in the front month crude contracts as proof of rampant speculation demonstrates a thorough MISUNDERSTANDING of how producers & consumers hedge costs.

By the way the identities of these oil laden tour boats would be nice, since actual crude carriers have known names, are relatively few in number, and are well tracked by the industry.

 

Thu, 04/28/2011 - 08:13 | 1215176 Flakmeister
Flakmeister's picture

Here is a gedanken:

A typical Suezmax CC carries about 600-750,000 bbl of oil, lets assume that 100 of them are parked. How much oil is that?  About 60-75 million bbl, sounds like a lot until you realize that is about 18 hours of world production or 36 hours of net exports...

Don't miss the forest for the trees....

Wed, 04/27/2011 - 23:32 | 1214762 Bear
Bear's picture

 

This demagogy always amazes me. Don’t they know that for every buy some is selling … it is a zero sum game? Obama blames oil speculators for raising prices and then praises Ben Bernanke for his handling of the economy. We live in the most upside down world possible.

I read some of the blogs referenced in the article ... UNBELIEVABLE idots 

 

Wed, 04/27/2011 - 20:13 | 1214236 The Alarmist
The Alarmist's picture

Food for thought, but it is not possible for all the speculators to be winning.  I will grant that speculators have added to volatility, but their effect is, ceteris paribus, only transitory.

Wed, 04/27/2011 - 19:27 | 1214109 Flakmeister
Flakmeister's picture

Hey Ilene, afraid to comment on my observations above?? I'll repeat them here:

Could you explain to me about World Net Crude exports being down 10% since 2005? This is the oil that is on the market. SA and other exporters are using more of their own oil. Or maybe, how in the face of minor increases in All Liquids production that the energy content is flat. Counting US Ethanol as "oil" double counts the oil input and moreover, calls a liquid with 65% of the energy content the same thing as "crude oil"....  

 

I would love to hear your thoughts....

Thu, 04/28/2011 - 01:13 | 1214899 ilene
ilene's picture

Flakmeister, I'm not understanding your question. 

Here are some previous articles that might help explain how the process works:

http://www.philstockworld.com/2009/11/11/goldmans-global-oil-scam-passes...

http://seekingalpha.com/article/47541-the-oil-scam-driving-crude-over-80

http://www.marketoracle.co.uk/Article25065.html

Excerpt:

First of all, the NYMEX contracts for January delivery close on Tuesday and there are still 132,168 open contracts or 1,000 barrels each (132M) scheduled for delivery to Cushing, OK, a facility that can handle at most, 45Mb of crude and is, at the moment, full.  The price of those barrels surged from $86.82 all the way back to our shorting target of $89 yesterday, where we once again had a nice ride down.  Now, in pre markets, it is back over $89 again and we'll short it again so I'm not complaining about the action but I am upset that this blatant rip-off of the American consumer can go on right under our "leadership's" noses.  

Logic alone dictates that if 132M barrels are on order for delivery to a storage facility that can only handle 45M barrels that the orders are mostly bogus.  You can track the open interest every day right here so don't take my word for it, watch what happens over the next few days as the people who are currently pretending to demand oil in January, roll their contracts to pretend demand for February (already at a ridiculous 268M barrels), March (172Mb) and April (60Mb).  Like the great Carnac, I will put the envelope to my head and predict that, by Tuesday, the January barrel count will fall to under 30,000 contracts, while the new front three months will rise by close to 100,000 contacts.  

This is scam #1 in the energy market and it goes on every month since the "Commodity Futures Modernization Act" of 2000 made it possible for thieves to run the energy markets with virtually no regulations. I've been speaking out on this for years and just this weekend, the NYTimes picked up the ball I tossed up over a year ago (better late than never!), when I pointed out that the Global oil scam was costing us 50 times more than the Madoff scandal EVERY YEAR!  We're not going to go into all that again as I want to highlight scam #2 in the energy markets and that is the weekly manipulation of the oil inventory reports.  

Thu, 04/28/2011 - 07:19 | 1215152 Flakmeister
Flakmeister's picture

Here is an article that I put together that explains the supply-demand issues:

http://flakmeister.blogspot.com/2011/03/drilling-down-in-oil-patch.html

While I do not doubt that the market is flawed, speculators cannot change the underlying trend. They can only exacerbate the moves to the upside and also to the downside. No conspiracy theory is needed.

Wed, 04/27/2011 - 19:08 | 1214051 SwingForce
SwingForce's picture

Why is Bernanke FUCKING AMERICANS and making FOREIGNERS RICH?

That's TREASON!  Cut off his printer finger and stuff it up his ass!

 

Wed, 04/27/2011 - 19:05 | 1214037 Rainman
Rainman's picture

When the franchised retailers start going out of business, the tide will change. They operate on thin margins by volume ..... they must be getting crushed at their retail marts with fewer drive-ins. No doubt a lot of stations are franchisor-financed too. The lines at Costco meanwhile are getting longer and longer. Something in this daisy chain will give way....matter of time.

Wed, 04/27/2011 - 18:52 | 1213997 FunkyOldGeezer
FunkyOldGeezer's picture

BTW, Irene & Phil.

Love the irony of the photo. $4.15 gas price and humungous car being filled up. EPIC FAIL!!!

Wed, 04/27/2011 - 18:42 | 1213954 caconhma
caconhma's picture

Do not forget that  Al Jazeera is a Qatar based media station. Consequently, their agenda is to support and promote their little dictators who are in the CIA pocket.

Somehow  Al Jazeera forgot to mention that the FED and the US Treasury were/are printing money like there is no tomorrow. Well, nobody can print gold, silver, oil, natural gas, corn, wheat, etc., If there is twice as much US$ chasing the same amount of oil, the oil prices must double. It is that simple.

Wed, 04/27/2011 - 18:41 | 1213952 FunkyOldGeezer
FunkyOldGeezer's picture

Wanna do something about the price of gas?

Lobby your politicians (especially in California) to allow diesel cars into the USA and lobby them to give bigger tax breaks to companies developing diesel/practical alternative engine technology. That would be a start.

Doesn't 65-80 mpg sound a whole lot better than the current 20-35 mpg avearge?

Wed, 04/27/2011 - 18:36 | 1213940 nah
nah's picture

if the .gov actually ever gets tired of debt burdens... id imagine theyd just stop making them... till then yeah, someones got better access to government credit and just like you needs to make money in a suffocating economy

.

debt is work is life ask krugman... how you say dow 36000

Wed, 04/27/2011 - 18:33 | 1213937 surfersd
surfersd's picture

Given the logic of this piece, at experiration the price of gasoline will collapse as "speculators" get out of their positions. If they take delivery then, in my mind they are no longer speculators, but traders. Now JPM, MS and JARON (GS) do have large physical books, but done of them are going to take delivery if they can't move it on the physical market at a higher price.

Phil is a pinhead, unfortuantley he could be the mouthpiece for the White House. He has zero knowledge of a contract market. "Who is buying 287,494 contracts" really that is legitimate comment? How about who is selling 287,494 contracts". That is like saying that 90 million shares of Citi were bought today, why are they driving the price up?

By the way when one rolls their length into the back months, they have to sell that spot long to someone. Which would force the gasoline market into major contango. Unfortunately, the article didn't see the fact that gasoline is in backwardation, a sign that there is a shortage of prompt availabilty.

ilene best if you not post drivel like this any more.

 

http://www.xtranormal.com/watch/11855451/drill-and-quit-printing-money?listid=22762471

 

 

Wed, 04/27/2011 - 18:29 | 1213885 FunkyOldGeezer
FunkyOldGeezer's picture

This article sounds like the rant of a spoilt schoolkid, on one level.

And just what did you and your fellow Americans do when 'gas' was $2.50/gallon, not so long ago. Did you ever stop to think how incredibly cheap it was? Did you ever hold the thought, for even one nanosecond, that $2.50 (or whatever price it has been in the USA, at any time) was actually ridiculously low and might become unsustainable at some point? At least the politicians had the foresight to build strategic storage facilities, so give them some credit.

I'm not bashing Americans per se, because the whole of the world is shocked when the price of oil goes up as much as it has done recently; but when I see Americans harping on about $4.00 'gas' being soooooo expensive and see the 'gas guzzler' mentality still holds sway, it makes me see red and makes me realise what an incredibly dumbass mindset the average American must have. They really only have themselves to blame, for relying on underpriced commodities such as oil, for waaaaay too long, wasting resources on an epic scale and thinking everything was hunky dory in make believe town.

Newsflash---Newsflash---

THE PARTY'S OVER!

$4.00 gas...bleat, $4.00 gas...bleat, $4.00 gas

Wed, 04/27/2011 - 18:07 | 1213859 GottaBKiddn
GottaBKiddn's picture

 

Futures investing has always been an inflationary force, even though the industries behind the markets have claimed that it was necessary to "provide liquidity". (Which simply means that your money flows from you to them.) Oil tankers have always drifted just beyond the sight of the regulators who are supposedly monitoring the amount of fuels available to the markets. The Fed has always devalued the dollar, while claiming it was unavoidable ordinary inflation. And what about the effect of precious metal purchasing and the devaluation effect it has on almost every currency.

Chill out Phil, it's just a little more monopoly money between friends.

 

 

Wed, 04/27/2011 - 18:45 | 1213963 surfersd
surfersd's picture

GottaB, your comments are as clueless as Phils. Futures trading is an inflationary force? What was happening in '86 mid- 90's when crude was trading $10 on NYMEX? You could work for American Airlines who didn't hedge fuel costs on the run-up in '08 and had their clocked cleaned by Southwest who did. Not everything is a conspiracy. The Bernank is the real cause for the inflationary forces at work not the futures market.

Are you going to tell me that these evil companies who buy futures/insurance in the middle part of the curve to protect against a Mid East Inferno are causing inflation?

Hope you live in the northeast and use heating oil, which you did not contract forward for, should be a cold winter.

 

 

Wed, 04/27/2011 - 18:15 | 1213852 steve from virginia
steve from virginia's picture

 

And the expert's expert ... he's coming ... the one who has all the answers ... drumroll please ...

 

... (Phil's Stock World.)

 

Huh?

 

That's right, Phil's stock world. He's the capo di capi the Boss of the expert bosses. He became the expert's expert by killing off a bunch of other experts in a firefight or something:

http://www.youtube.com/watch?v=IDECNrX6jGo&feature=related

He bought a bunch of stuff in a store like John Galt. He blamed the 'Speck You Late Oars' just like you but unlike you he did something about it. He got his shit together and massacred the other experts with a machine gun. That's how he got to be the man he is today! Mindless violence. If he had had a drone he would have used that instead of the machine gun!

Americans have a constitutional entitlement to cheap gasoline into the far distant future. Not only Phil's Phucking Stock World but a bunch of high- powered economists have said the same thing: unlimited exponential growth on a finite planet with finite resources including but not limited to crude oil.

But ... everyone knows the oil is unlimited, but out of reach ... due to hippie faggots and communists who envy our freedom (to sit in endless traffic jams).

So ... what to do! Please help us Mr Phil ... Stock World!

First thing is to get your hands on some speculators so as to make examples of them. Have some dogs chew on their testicles and private parts. Burn some of them @ the stake. Pull out the entrails of some in front of their families then massacre their families by hitting them in the heads with hammers. You can have sex with all of them while they are being put to death. Break some on the wheel and roast others slowly over an open fire after flaying. You can set the screams to a 'rap' backrgound or maybe REM or Amy Winehouse.

We can also have President Obama look into the problem.

"Um, I hate to break into your reverie fellas but the real problem is peak oil. Read IMF, IEA, EIA, Department of Defense and a bunch of other defense agencies, Lloyds Group and many others. The Fed Chairman Whatzizname mentioned this afternoon he cannot print oil. You Americans have wasted it all!"

Who are you?

"Just some dude who watches and enjoys schadenfreude. Your asses have slipped on the banana peel. It's your cars which are now worthless. Your houses, your jobs, towns, your suburbia, your businesses, your futures, everything in them, your childrens' and grandchildrens' too. I need a laff sometimes and you are It!"

 

Gee mister, does this mean I cannot kill speculators?

 

"Of course you can! Kill as many as you like since that makes things better. Less people, less carz, less freeways, less teevees (lying machines), less crap and a better chance for some kind of future for the survivors."

 

That's not very optimistic ...

 

"We are in our Wile E Coyote moment and YOU are Wile!

 

 

Wed, 04/27/2011 - 18:01 | 1213839 duncecap rack
duncecap rack's picture

I agree with Phil.It seems that if you buy a contract you should have to take delivery or sell it to someone else. It should expire worthless like a stock option if it is out of the money. But on the other hand I have no idea how these markets work.

Wed, 04/27/2011 - 17:48 | 1213779 Racer
Racer's picture

I paid £1.36/Litre today (1L =0.246US gallons, current spot GBP/USD 1.66) and I couldn't bring myself to put more than enough in the tank to get me home and back to the shops again for even higher racked up prices.

I used to enjoy driving a lot, now I hate it and spend as little time as possible going out in the car

Wed, 04/27/2011 - 17:55 | 1213810 falak pema
falak pema's picture

change your avatar to bicycle racer or marathon man!

that is close to 9.5 USD/gal

Wed, 04/27/2011 - 17:52 | 1213761 michigan independant
michigan independant's picture

because so many powerful people armed with legions of lawyers want unquestioning allegiance, and will sue you into silence.

Yea we figured that out with already. The Office does not care. The Senate was dismissed to local affairs so long ago no one remembers any more. Get used to it. And you think when the Sheriff comes to evict you when you cannot pay the property tax do you think you may see a problem? Wake up as the Founders told you! 

Wed, 04/27/2011 - 17:29 | 1213725 FunkyMonkeyBoy
FunkyMonkeyBoy's picture

If you change your mindset from "The FED is there to do it's best for the people and the U.S. economy" to the actual agenda of "The FED is there to rob the populous blind for the benefit of their masters, the elite banking families, the owners of the privately owned FED", then all becomes clear and logical.

It's not ultimately about the money, as the elite have all the money they could ever want. It's about control, so robbing the masses means they are then controllable.

It's called fascism, and the U.S. is fascism hotspot No.1 at this time in history. The lie is so big people don't see it or can't believe it and don't want to see it.

Wed, 04/27/2011 - 18:51 | 1213991 Creed
Creed's picture

yep it's fascism

 

starting with the public employee unions that pay off & elect those who reward them

Wed, 04/27/2011 - 17:39 | 1213753 FIAT_FixItAgainTony
FIAT_FixItAgainTony's picture

couldn't have said it much better myself.

spot on, i fully agree.

you move up a rank! 

did you seek the "department of sheeple mind correction" or the more direct "office of official sovereign intervention"?

we have openings in both departments!

silver bullets & shields bitchez !

Wed, 04/27/2011 - 17:26 | 1213716 Elliott Eldrich
Elliott Eldrich's picture

 

The stated goal of "free and open markets" is to make it possible for people who have stuff to sell to connect with people who want to buy their stuff, arrange a transaction, the seller gets their money, the buyer gets the goods, there's probably a broker somewhere who gets a cut, and everyone is happy. So far, so good.

 

Now I have to ask this question: How much of a problem is it when other people begin participating in any given market, people who are notable by the fact that they are neither producer or consumer of the goods being traded? Keep in mind that the problem is not simply binary, because there's also the question of what percentage of the people trading in any given market are speculators. Is speculation something to be concerned about if 10% of the market is speculators? What about 20%? How about 50%? Is there a threshold where the ratio of speculators to consumers / producers becomes a problem?

 

To my mind, it seems pretty straightforward to come to the conclusion that a certain percentage of speculation in any given market is probably healthy, from a liquidity point of view, but that when speculation exceeds certain thresholds then it becomes increasingly disruptive to the economy. 

 

Wed, 04/27/2011 - 18:47 | 1213987 Creed
Creed's picture

well, how about we leave hedging to the PRODUCERS ONLY

 

otherwise you take delivery of what you've bought

 

hahahaha

Wed, 04/27/2011 - 18:46 | 1213984 Kickaha
Kickaha's picture

Liquidity is of no interest whatsoever to the people who manufacture or use a commodity, especially in a huge market like oil.

Liquidity is desired only by daytraders/speculators.  It does not help with price discovery.  It only produces the volatility and price uncertainty that benefits daytraders.

Why would anybody believe that liquidity provided by speculators stabilizes a market?

 

Wed, 04/27/2011 - 18:11 | 1213858 moneymutt
moneymutt's picture

totally agree, to me markets a tool, not a religion. Markets are a way to get the greatest good for the most people, a way to make macro-economy work. Competition keeps costs under control. Profits incentivize people to work hard, innovate, predict wants and desires of consumers, provide things that make be happy, full, give them shelter etc. But sometimes markets actually deliver less for more money than say, a regulated monopoly, hence the reason we have public utilities or heavily regulated utiltiy monoplies. Shoot my home town, St. Paul does not do any garbage collection, so we all buy from competing rubbish haulers, and on average, cities like mine and their residents pay 20 percent more for garbage collection than cities that do it thru taxes and govt employees collecting.  Also the big trucks wear out roads way more than cars, so we get all the noise, extra pollution, extra traffic congestion of having many different trucks from different companies cover same routes.

If a market gets cornered by a monopoly, we all understand it's in the best interest of common wealth to apply anti-trust laws and break up market for competition. Similarly, other regulation, like limiting speculation, can provide the consumer with better deals.

Use markets to the extent they maximize value for consumers, keep economy thriving and innovating, and incetivize people to deliver needs and want of consumers....Regulate markets when are not helping consumers or general economy and are not delivering any value to consumers.

To the extent most oil is produced outside US, any increase in price is a dollar that leaves US. So that dollar you could have spent on rent, food, computer, movie whatever, is now completely gone to US economy. To the extent the extra money goes to someone who is adding no value, who is just skimming money because of market knowledge, market muscle, it is just like a monopoly making a super profit, it is a waste and it is worst than a tax....at least a govt tax gets spent on something that goes back into our economy and provides some value to some of us, a hedgie making more dollars probably only helps him and maybe a few prostitutes.

Wed, 04/27/2011 - 20:27 | 1214302 SaveTheBales
SaveTheBales's picture

So, what you're saying is, for us Little People to tap into the Government Stream, we should open a porn site forthwith and recapture our revenue in order for capital to form. 

I'm on it.

 

 

 

Wed, 04/27/2011 - 17:51 | 1213811 pirea
pirea's picture

And I would say, when speculators are full of easy money coming from irresponsible printers.

A good example of what can do speculation to a commodity, take the history of natural gas the last 5 years.

Wed, 04/27/2011 - 17:23 | 1213704 jpintx
jpintx's picture

1. for every buyer there is a seller,

2. go look at the St Louis Fed's chart of the monetary base, $800B to $2400B in 3 years and climbing

3. what is China (for example) doing with its $? might they prefer more oil in storage over $

4. crooked federal government, I think we should get rid of oil company subsidies the same day we get rid of ethanol subsidies

 

Wed, 04/27/2011 - 21:40 | 1214527 Common_Cents22
Common_Cents22's picture

for every buyer there is a seller doesn't make sense.  Because price adjusts to keep a market equilibrium.   It is price we are discussing.   I think both speculation and monetary debasement are significant factors.

Wed, 04/27/2011 - 17:20 | 1213688 gorillaonyourback
gorillaonyourback's picture

its is simply a devalued dollar, and its going to cost more dollars for that oil to very soon, a lot more

Wed, 04/27/2011 - 18:03 | 1213848 duo
duo's picture

I'm looking at a roll of 1956 quarters.  Each quarter back then would buy a gallon of gas.  Today, they are worth about $9 ea.  Either silver is overpriced by 2x, or oil is underpriced by half.

Fri, 04/29/2011 - 00:12 | 1219230 FIAT_FixItAgainTony
FIAT_FixItAgainTony's picture

oooh oooh i vote the later !  gotta love the true value of silver coins.

silver bitchez !

Wed, 04/27/2011 - 17:26 | 1213717 FIAT_FixItAgainTony
FIAT_FixItAgainTony's picture

spot on gorilla.  like lindsey williams says, the oil price has been stable recently at around 50 a barrel.  but the frn has no strength (73-).  hence, obummera raising the false flag of "those damned speculators".  f him.  what a pukepet.

gas is incredibly cheap at barely over ten cents in real silver money in reality.

come on folks, the sooner we quit thinking in terms of frn's the sooner we can repair the issues.  openly discuss at will with everyday people you meet.  i do.  many will listen.  some won't.  matters not to me, i try my best.

people died to found this great country, i have respect for them and at least try to uphold their vision.

Wed, 04/27/2011 - 18:17 | 1213880 Confuchius
Confuchius's picture

No one complains anymore about paying $10 for a bottle of wine that the winery will sell you for a dollar or two. Get used to the rip-off or convert your car to run on wood...

Wed, 04/27/2011 - 17:12 | 1213671 Robslob
Robslob's picture

If Speculators a.k.a Banks weren't getting free money from the Fed then prices probably wouldn't be rising as fast...if at all...

Wed, 04/27/2011 - 17:55 | 1213829 moneymutt
moneymutt's picture

just pension funds and hedgies could do a lot of damage, they almost never speculated in commodities previous to 2000, now they buy and hold....I agree with you on banks getting free money, but big money, even when it has been earned and saved, can make fundamental everyday markets unneccesarily volatile and inflated...just as an uneding appetite for private MBS that Wall Street sliced and diced and sold to private suckers mad housing outragious expensive in US ( of course along with other issues.) Countrywide and Cali housing bubble was almost all privately funded this way. 

Thu, 04/28/2011 - 07:59 | 1215200 AnAnonymous
AnAnonymous's picture

Abundancy only conceals speculation.

Now speculators have grown and grown over the centuries of abundancy.

When scarcity times come back, bigger speculators than ever...

Wed, 04/27/2011 - 17:25 | 1213709 alien-IQ
alien-IQ's picture

because if the banks weren't getting all that free money...then that would likely mean that the dollar would not be dropping as dramatically as it is...hence...it always comes back to the value of the currency with which the commodity is priced.

Wed, 04/27/2011 - 17:20 | 1213690 ilene
ilene's picture

That's what's so insane, isn't it? I was trying to convey that in my intro. 

Wed, 04/27/2011 - 18:46 | 1213970 Creed
Creed's picture

great job ilene

Wed, 04/27/2011 - 19:22 | 1214097 ilene
ilene's picture

Thank you, Creed, Phil has been very passionate about this issue, and it's not a joke to say that powerful people with "legions of lawyers" will sue outspoken people into silence.  It doesn't matter so much if those who wish to speak are right, the threat of a lawsuit is chilling itself. 

Wed, 04/27/2011 - 18:10 | 1213866 Confuchius
Confuchius's picture

@ilene;

A lot of whinin' goin' on.

So in Venezuela and Saudi a tankful is about a dollar.

In the rest of the world $1 to $3 per liter is about it.

So why all the waaaaahhhhhhhhhhh like little babies with their toys put away?

Wed, 04/27/2011 - 17:25 | 1213710 Flakmeister
Flakmeister's picture

Could you explain to about World Net Crude exports being down 10% since 2005? This is the oil that is on the market. SA and other exporters are using more of their own oil. Or maybe, how in the face of minor increases in All Liquids production that the energy contenti is flat. Counting US Ethanol as "oil" double counts the oil input and moreover, calls a liquid with 65% of the energy content the same thing as "crude oil"....  

Wed, 04/27/2011 - 17:13 | 1213670 falak pema
falak pema's picture

when the USD crashes and the role of reserve currency changes we will have a new paradigm. All these western HFs will have lost their liquid assets, their ability to leverage 20:1, and their shark teeth in the process...TPTB if the want to create stable world economic growth will have to create better financial control instruments and INTERDICT WORLDWIDE NAKED derivative trades.

Do NOT follow this link or you will be banned from the site!