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15 May 2011

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PirateLaddie

Thanks for sharing, Col.
Yeah -- trouble is all those "ijits" out there who preach the religion of "free markets" combined with unbound capitalist exploitation and various supply/demand hedging devices (of course let's not forget the required massive govt. subsidies for the industry).
International treaties are fine & dandy, but don't hold a candle to a well thought out and enforced national energy policy.

Lysander

If speculation is a real worry, you might disallow or severely restrict trading on margin.

But that doesn't get at the heart of the problem, which is, IMHO, money printing by central banks world wide. It encourages commodity speculation, which is why food and gold are also expensive. Which is why we had a housing bubble followed by a bust. There really is no way to have such a loose monetary policy and then regulate away the inevitable side effects. The ultimate answer is the gold standard.

Also, call me kooky, but peak oil is real. Why did the Exxon bigwig say 60-70 rather than 10-20? That's what it was as recently as 2000. How does one explain the 50$ difference? Iraq? The GWOT?

walrus

Some speculation is necessary for market liquidity. However there need to be better rules enforced by exchanges around the world to prevent the gaming of the system.

For example, I'm hoping to buy a U.S. made aircraft in the next Six months. I can "lock in" the cost of the necessary U.S. dollars today by buying an option on the dollars I need at todays exchange rates. Gold producers similarly can protect some of their revenues by forward selling. These are legitimate risk management activities involving speculation.

As an aside, the crime of "engrossing", along with "forestalling" and "regrating" was recognised in medieval English common law, from Blackstone:

"engrossing - the getting into one’s possession, or buying up, large quantities of corn, or other dead victuals, with intent to sell them again. This must of course be injurious to the public, by putting it in the power of one or two rich men to raise the price of provisions at their own discretion."

eakens

$10 has to do with money printing and demand, not peak oil.

Green Zone Cafe

Matt Taibbi explains it:

http://www.rollingstone.com/politics/news/the-great-american-bubble-machine-20100405?page=5

The only change is Bernanke's printing (loaning) money for the banks. That money has to go somewhere. Commodities like oil is one place.

Hey, it's good for Iraq, when they get up to 12 million bbl per day that will be about $500 billion per year at $100 per barrel.

R Whitman

The biggest problem is that ETF's have made it too easy for anyone to play in the commodities market, hence too many new players, too much artificial market instrument creation, too much activity, none of which benefits any economy other than the sponsors of the ETF's.

Note to PirateLaddie: The Soviets had what they thought was a well thought out national energy policy and look what happened to them.

PirateLaddie

Surely the fall of the Soviet state isn't so easily traced to its "national energy policy." Rather, a fundamental misunderstanding of human nature and incentives undercut their whole gameplan.
Kinda like what's happening over here in the West under rampant, ideologically-driven hypercapitalism, with all its "slice & dice" of financial instruments and worship of our own oligarchs.
Guess that's why Br. Whitman's so upset by the presence of "li'l folk" in the ETF game -- should be reserved to our betters, I guess.

Ingolf Eide

Speculators aren't particularly wedded to the long side of markets; they're equally happy to sell short if that's where the path of least resistance seems to lie. Let's not forget speculators were also blamed for trashing the shares of various financial institutions only a few years ago.

Sure, when there's too much money playing the momentum game they increase volatility, exaggerating both upmoves and downmoves. Still, only those few lightfooted enough to get out of their positions in time can succeed at this particular game longer term. Most will eventually be chewed up by the fluctuations.

The real distorting factor (as Lysander and R Whitman allude to) isn't so much speculators as investors. Commodities are now widely viewed as an asset class and institutional (as well as other private) money has poured in over recent years with the total invested at the end of 2010 estimated at $376 billion. In 2009/2010 alone, net inflows to the sector were estimated at $134 billion.

There's no way that isn't going to have an impact on price. Commodity markets aren't geared for this kind of activity; they're not used to dealing with large long-term inventory accumulators (whether direct or via derivatives). There was an early run at this back in the late 70s but it was cut short by the subsequent commodity crash.

In part, it's just another reflection of the monetary/credit madness that's affecting everything (note the late 1970s were similarly confused and volatile, albeit at much lesser absolute and relative levels). In part too, the widespread readiness to buy the commodity story reflects deep-seated concerns about resources more generally: peak oil of course, population pressures, climate change, the "shortage" of agricultural land and potential losses of productivity, and so on. Maybe some are exaggerated, maybe some are just plain wrong, but the fact is they've entered into people's consciousness and necessarily affect all their actions.

What to do about it? Tough question: one thing I'm pretty sure of is that trying to squelch particular manifestations is a waste of time. The distortions are just going to pop out somewhere else.

In time (and probably not all that much time) we'll see the flip side of these soaring prices, much as we did in late 2008/2009. And, along the way, quite a bit of this newly enthusiastic investment money will retreat to the sidelines, licking its wounds. Perhaps even vowing "never again".

Then too, in the much bigger picture the longer exaggerated prices stay around the greater the impact will be on creating new supply and developing substitutes.


SAC Brat

If you're not going to physically handle the commodity (distill, transport or use), should you be allowed in the market? Who benefits? Society/country or paper pushers?

William R. Cumming

An interesting chart would be the years since 1910 in which oil supply exceeded demand and therefore only artificialities kept the price up. Adjusted for inflation of course.

Norbert M Salamon

There are two sides:
1., Saudi Arabia needs more tha $80-90 to keep the population from uprising.
2., The Futrures market turns over more than 5 times available oil [paperchase].

As an Aside the Foreign Exchange market turns over $ 4 Trillion daily, which is about the third of EU's GDP, or about a quarter of the USA GDP. [and about

William R. Cumming

Apparently Senate staff of the Energy Committee issued some kind of finding prior to the Senate vote on repeal of tax subsidies to the big oil firms indicating that repeal would at most decrease profits of those companies by 5% and have NO impact on oil prices or exploration. The Senate voted in favor of repeal of the subsidies but HOUSE unlikely to do so, IMO!

blowback

Just thought you might be interested in this:

"But on Tuesday, federal commodities regulators filed a civil lawsuit against two obscure traders in Australia and California and three American and international firms."

"The suit says that in early 2008 they tried to hoard nearly two-thirds of the available supply of a crucial American market for crude oil, then abruptly dumped it and improperly pocketed $50 million."

http://www.nytimes.com/2011/05/25/business/global/25oil.html?hp

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