Nassty Speculatorssess!

Your Republican presidential nominee today, according to his prepared remarks on oil prices:

There is the further problem of speculation on the oil futures market, which in many cases has nothing to do with the actual sale, purchase, or delivery of oil. [...]

[W]e all know that some people on Wall Street are not above gaming the system. When you have enough speculators betting on the rising price of oil, that itself can cause oil prices to keep on rising. And while a few reckless speculators are counting their paper profits, most Americans are coming up on the short end -- using more and more of their hard-earned paychecks to buy gas for the truck, tractor, or family car.

Investigation is underway to root out this kind of reckless wagering, unrelated to any kind of productive commerce, because it can distort the market, drive prices beyond rational limits, and put the investments and pensions of millions of Americans at risk. Where we find such abuses, they need to be swiftly punished. And to make sure it never happens again, we must reform the laws and regulations governing the oil futures market, so that they are just as clear and effective as the rules applied to stocks, bonds, and other financial instruments. In all of these markets, reform must assure transparency, prevent abuse, and protect the public interest.

Comments

liberty mike | June 17, 2008, 5:42pm | #

Have we reached Peak McCain yet?

Nigel Watt | June 17, 2008, 5:44pm | #

Naturally, no mention of the root cause, the Fed.

MP | June 17, 2008, 5:46pm | #

Are you seriously denying that oil speculation isn't a factor in this marketplace? Or are you simply brushing off calls to regulate speculation on the basis that regulation=bad?

I'm not claiming that regulation=good. But the evidence is piling up that this is a speculators' bubble. Where are the inventory shortages? Where are the oil fields running at max capacity? Where are the refineries running at max capacity? Every day we hear more an more evidence that there is no supply problem at present.

And you're simply shrugging off the speculator angle? C'mon.

liberty mike | June 17, 2008, 5:48pm | #

MP-

I am not.

adrian | June 17, 2008, 5:48pm | #

end the fed

Fluffy | June 17, 2008, 5:50pm | #

This is simply Peronist rhetoric. It's that simple.

He specifically says that an abuse that needs to be punished is "when you have enough speculators betting on the rising price of oil, that itself can cause oil prices to keep on rising." The only other example of behavior requiring punishment that he provides is "wagering, unrelated to any kind of productive commerce".

The real John McCain emerges from hiding more and more every day.

Someone will pop up now to claim that he's just pandering. Well, when you choose to employ collectivist tropes like the "parasitical speculator" who needs to be "punished" as part of your pandering, that means I get to shout to the rooftops that you are a Peronist piece of trash.

Chris Potter | June 17, 2008, 5:51pm | #

Reckless speculators have a way of losing their shirts if their speculations are mistaken. If there really is no shortage of supply, they're screwed once the bubble bursts.

In short, a self-correcting problem, the bane of the politician.

economist | June 17, 2008, 5:51pm | #

I predict that if this is a bubble, in two or so years people who own oil futures will be asking the government for a bailout. Then it won't be funny

Peter K. | June 17, 2008, 5:52pm | #

MP --

"Speculation" is not a problem, because if there is insufficient demand for the commodity on the due date for the future contract, the holder/deliveree/speculator will have no economic use for the commodity on delivery but to sell it at a loss.

That is, if there are too many speculators, they will eventually have to flood the market, driving the price down.

Pro Libertate | June 17, 2008, 5:52pm | #

Are you suggesting that McCain wields the Ring? Huh.

ChicagoTom | June 17, 2008, 5:53pm | #

Are you seriously denying that oil speculation isn't a factor in this marketplace? Or are you simply brushing off calls to regulate speculation on the basis that regulation=bad?

Assuming that the speculator angle is legit (and there is no reason to believe it isnt) -- what can really be done about it?

At which point does speculation become "abuse"?
Which sectors suffer from speculator abuse? Which sectors need to be regulated and watched and which ones don't?

Traders speculate on commodities. That's what the markets are for, no? To me this sounds like just some bullshit populism from McCain.

Chris Potter | June 17, 2008, 5:54pm | #

Of course, the most insidious part of this quote is the notion that The Benificent Government (aka John McCain) determines whether what you do with your money is "productive commerce" or not.

Peter K. | June 17, 2008, 5:56pm | #

When you have enough speculators betting on the Celtics, that itself can cause the Lakers to keep on losing.

Or something like that. As McCain has admitted, economics is not his strong suit.

Fluffy | June 17, 2008, 5:56pm | #

Or are you simply brushing off calls to regulate speculation on the basis that regulation=bad?

Yes, I am.

Because in a free country, if someone engaged in "productive commerce" can buy an item, that means I can buy it, too.

In any event, McCain exposes himself yet again as an economic ignoramus who shouldn't be allowed to run a lemonade stand, let alone the United States. Everyone knows that speculation is what produces liquidity, and that pretty much the value of everything is utterly dependent on the presence of liquidity. Good luck turning any commodity good or negotiable security into cash when you need it in the absence of speculators making a market.

In addition, although it's absurd to talk about there being a "real" price for anything other than its market price, if we entertain the central conceit of what he's saying - that speculation makes the price higher than it might otherwise be during time periods when speculators are betting prices will rise - then I have to ask: What about the time periods when speculators are betting that prices will fall? Wouldn't the price move below its "real" price on such occasions?

stephen the goldberger | June 17, 2008, 5:57pm | #

Look, I don't like John McCain but if Reason just becomes a soapbox so Matt Welch can express his personal hatred for the man I'm not going to bother reading.

Chris Potter | June 17, 2008, 5:58pm | #

Ahh, I can't stop posting! Take this keyboard way from me!

When you have enough speculators betting on the rising price of oil, that itself can cause oil prices to keep on rising.

The degree of economic ignorance in this statement is staggering. Yes, speculation tends to cause prices to rise, but not nearly enough to make up for the money you're dumping into the system. You only make money from speculation if there are independent reasons for the price rise.

liberty mike | June 17, 2008, 5:58pm | #

Honesty and heroism are not his strong suits either.

R C Dean | June 17, 2008, 5:59pm | #

Gawdalmighty, but the man makes it hard to vote against Obama.

Chris Potter | June 17, 2008, 6:03pm | #

stephen, I don't think this is anything personal against McCain. The guy is running for friggin president from the party that supposedly cares about economic freedom. It's important for the public to know about, especially since the MSM is never going to say anything to tarnish the Straight Talk Halo.

That's like saying you don't want to see Radley Balko posting his personal attacks against no-knock SWAT raids.

MikeP | June 17, 2008, 6:07pm | #

Look, I don't like John McCain but if Reason just becomes a soapbox so Matt Welch can express his personal hatred for the man I'm not going to bother reading.

Do you realize what you've just done to my options for July delivery of 1200 copies of McCain: The Myth of a Maverick?

I may need to short 500 subscriptions to Reason just to cover!

liberty mike | June 17, 2008, 6:09pm | #

McCain is perhaps the sleaziest solon since Dukakis or Nixon. For you Safires out there, the son of greek immigrants was in the Massachusetts legislature for several terms and all here are presumed to know that the whiz from whittier served three terms as a congressman.

JonaHansen | June 17, 2008, 6:12pm | #

I think Chris Potter ans others have it closer to the truth. Futures may be bets about the future, which can be wrong, but if so, the better loses. The flip side is the potential to stabilize prices and allow buyers to guarantee a price in the future. My take on Welch's report is as he put it: it stands on its own as an example of how little McCain understands economics.

MikeP | June 17, 2008, 6:15pm | #

My take on Welch's report is as he put it: it stands on its own as an example of how little McCain understands economics.

...and/or how much he understands the electorate.

J sub D | June 17, 2008, 6:15pm | #

We are so fucked.

Pinette | June 17, 2008, 6:16pm | #

Someone please explain to me the mechanism that makes this a bubble. A bubble is when prices are driven up by increased demand from speculators. In cases where speculators are directly buying the product with the intention of reselling after prices rise, I can understand it. But oil futures do not involve actually owning oil at todays price in order to resell it at tomorrow price, do they? It's a bet right?
I don't really get how this could be a bubble.

stephen the goldberger | June 17, 2008, 6:18pm | #

Well its just approaching the election, and I'm beginning to see a double standard in how Obama and McCain are treated. McCain is getting slammed for his economic panders on the campaign trail, but Reason is turning a blind eye to Obama's NUMEROUS ones. It seems unfair to me to paint McCain as a poor free-trader based on his speeches when Obama isn't judged according to same standard. For Obama it seems, economic pandering is expected and ignored.

All I'm saying is if you're gonna criticize McCain for Populist Economic Pandering, it seems only fair that you slam Obama for it, given that he's a far worse offender.

Pro Libertate 2725 | June 17, 2008, 6:18pm | #

J sub D,

That's exactly what I said when [President's name omitted by Time Cops] was sworn in. And I was right in more ways than I knew. Thank God for the occupation of the United States by beings from Arcturus in 2011.

liberty mike | June 17, 2008, 6:18pm | #

I suppose one can be a great leader without ever having to have made a payroll, but it says here that one would be wise to refrain from speculating that either cheech or change will be the exceptions.

Pro Libertate | June 17, 2008, 6:20pm | #

Why should a president understand economics or foreign relations? That's what voters seem to have been asking themselves in the last few elections.

Matt Welch | June 17, 2008, 6:30pm | #

It seems unfair to me to paint McCain as a poor free-trader based on his speeches when Obama isn't judged according to same standard.

I've actually singled out McCain for praise on trade, and singled out Obama for oppobrium on same, many many times at this here website.

Chris Potter | June 17, 2008, 6:36pm | #

stephen,

I can see that concern, but I guess it's assumed that Obama is going to be terrible on economic freedom. McCain is painted in the MSM and other sources as some sort of doctrinaire economic libertarian, so it pays to point out that that is not the case.

Sort of like how Ron Paul got held to a much higher standard than any other candidate, because he claimed to be a strict libertarian and constitutionalist. So his minor infractions such as voting for DOMA and the partial birth abortion ban which violated federalism principles were magnified far more than if McCain or Obama had done those things. Those two probably violate the constitution three times before breakfast every day.

stephen the goldberger | June 17, 2008, 6:48pm | #

I've actually singled out McCain for praise on trade, and singled out Obama for oppobrium on same, many many times at this here website.

Ok, I'll continue to read :). I don't remember every article, but I think that was brought up before here in terms of their voting records, not their speeches.

I can see that concern, but I guess it's assumed that Obama is going to be terrible on economic freedom. McCain is painted in the MSM and other sources as some sort of doctrinaire economic libertarian, so it pays to point out that that is not the case.

Yeah its important to get the truth out there that this republican party and their 2008 platform is not economically liberal, or at least as economically liberal as their old platform was.

Its just I'm starting to see myself and numerous libertarians try to talk ourselves into Obama based on the premise that Obama is just BSing on the campaign trail on economics (ie: the earlier article from Naomi Klein) so we should either not worry too much about him, or even support him. If thats the case, then isn't only fair to discard McCain's BS on economics?

Micha Ghertner | June 17, 2008, 7:05pm | #

We've come a long way since the time of Adam Smith:

“The popular fear of engrossing and forestalling [Smith's terms for commodity speculation] may be compared to the popular terrors and suspicions of witchcraft. The unfortunate wretches accused of this latter crime were not more innocent of the misfortunes imputed to them, than those who have been accused of the former. The law which put an end to all prosecutions against witchcraft, which put it out of any man’s power to gratify his own malice by accusing his neighbour of that imaginary crime, seems effectually to have put an end to those fears and suspicions, by taking away the great cause which encouraged and supported them."

- Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, edited by R.H. Campbell, A.S. Skinner, and W.B. Todd, Volume I (Indianapolis: Liberty Classics, 1981), p. 534.

Matthew | June 17, 2008, 7:39pm | #

economist

Yep, and that will be the real tragedy--I have no problem with idiot (or genius) speculators going berserk on all our commodities, just so long as they actually pay the price when they lose, e.g. NO BAILOUTS--which are what really mess up the market anyways. If we really do get into a bad recession soon, it won't be because Big banks treated the subprime mortgage market like a Vegas casino, it will be because they were bailed out by the feds.

Brandybuck | June 17, 2008, 7:54pm | #

1) Notice uncertainty regarding future oil production
2) Speculate in oil futures market
3) Oil prices skyrocket
4) ???
5) Profit!

Let me fill in number 4 for you:

4) Petroleum exploration increases, new refineries open, and overall oil production expands.

TallDave | June 17, 2008, 8:09pm | #

Yeah, this is kind of weird. Of course oil prices are rigged: it's an open conspiracy called OPEC.

To blame speculators is as silly as blaming "Big Oil." They might push the price a little with their carry trades, but that's not half the increase.

GILMORE | June 17, 2008, 8:25pm | #

if there were no speculators, we'd be well beyond thunderdome at this point. They actually make the market semi predictable. If you cant buy futures options...how are you supposed to price? we'd have companies and banks vomiting employees and costs every month.

McCain was at least honest when he said he was economically illiterate.

Anonymoose. | June 17, 2008, 8:27pm | #

4) Petroleum exploration increases, new refineries open, and overall oil production expands.

But that's not happening.

TallDave | June 17, 2008, 8:37pm | #

McCain was at least honest when he said he was economically illiterate

Yeah, his only saving grace is running against someone actively inimical to the free market.

MP | June 17, 2008, 8:43pm | #

it's an open conspiracy called OPEC.

Show me some evidence where OPEC is not meeting current demand.

TallDave | June 17, 2008, 8:43pm | #

4) Petroleum exploration increases, new refineries open, and overall oil production expands. But that's not happening.

Everywhere except for here. There's more of that happening now than ever overseas, where among the uncivilized crude economic concerns still trump the sanctity of Gaia. They just found another huge field off Brazil, which country is buying up so much of the available ocean exploration equipment that oil companies are complaining their rents are tripling.

And even here, huge sums are going into alternative means of producing liquid fuel.

Don't confuse a long roll-out time with an absence of activity.

TallDave | June 17, 2008, 8:44pm | #

Show me some evidence where OPEC is not meeting current demand

You understand they set oil price targets?

MP | June 17, 2008, 8:57pm | #

You only make money from speculation if there are independent reasons for the price rise.

That's simply not true. There's a difference between short term and long term profits. You don't make long term profits on a speculator bubble because, eventually, it pops. But you make plenty of money as the bubble builds...as long as you trade during the expansion and capture your gains.

The best real world example outside the commodities marketplace is the Real Estate market. Florida is the best current example of a speculator driven market. Condos in South Florida were being flipped at a tremendous rate during the bubble expansion. Look at this article from 2005 about condoflip.com. Utter insanity. And guess what...as it has come crashing, a lot of speculators have lost money. But they were the last in. The people flipping during the bubble made a killing.

There has been article after article about how there is no supply shortage. Then what is driving the price of oil right now? Speculation.

Is it the Government's job to proactively prevent, or eventually to prick, bubbles? No. They'd fail spectacularly at it, as their cure would be worse than the disease. And that's why McCain's idiocy should be deservingly ridiculed. But he's right about the speculators driving this oil bubble.

TallDave | June 17, 2008, 8:58pm | #

Are you seriously denying that oil speculation isn't a factor in this marketplace?

It's a factor; you've got financial institutions building huge oil-holding facilities. But carry trades are a symptom of a rising market, not a cause.

TallDave | June 17, 2008, 9:01pm | #

And guess what...as it has come crashing

And how did that happen?

(Hint: it involves supply and demand)

MP | June 17, 2008, 9:14pm | #

You understand they set oil price targets?

You realize that their ability to set price targets is a function of their belief that demand for oil is inelastic, which is proving to be false? There's apparently much more elasticity in oil demand than people thought.

Take a look at this. See any supply crunch in this data? I thought not.

I mean, the US is actually increasing its export of oil. Where is this mythical supply crunch? Where?

(Hint: it involves supply and demand)

Show me the data. Show me that world demand is dramatically outpacing supply since the beginning of the year. Show it, dammit! Stop repeating Econ 101 platitudes and show me that demand has increased 30% (even accounting for the piece of shit dollar) in the last year. Show it!

You can't. Because the data doesn't exist. Because it is a speculators market.

Chris Potter | June 17, 2008, 9:34pm | #

MP,

True, individual speculators can profit if they get in and get out at the right time. That's a pretty difficult trick in practice, since if you sell too early you miss out on even more profits, and if you wait till the last minute you're not going to be able to find anyone gullible enough to buy.

In any case, in the aggregate, during a speculator bubble, the speculator "community" loses money as a whole; the ones who got stuck holding the bag at the end lose more than enough money to make up for the profits made by those who got out earlier.

Joshua Holmes | June 17, 2008, 10:00pm | #

Those Arcturians can't get here fast enough.

John C. Randolph | June 17, 2008, 10:04pm | #

What an ignoramus. Speculators provide liquidity. Without them, financial markets would be damned close to useless.

-jcr

John C. Randolph | June 17, 2008, 10:09pm | #

minor infractions such as voting for DOMA

As I recall, the DOMA exempted the states from having to honor marriages made in other states. I don't think it prohibited the states from registering same-sex marriages.

So, that vote would be perfectly consistent for one who advocates decentralization of power.

-jcr

Beto Ochoa | June 17, 2008, 10:27pm | #

I passed a bite of grilled cheese through my nose when I read the title on this post.

Dave | June 17, 2008, 10:37pm | #

If I buy a future delivery of a barrel of oil, and the price goes up while I hold that contract, I might decide I want the money more than the oil, and sell the contract for future delivery.

at a profit.

There can only be so many contracts for delivery, based on the available supply to be delivered at a given time.

How else are we to buy oil? If we can't buy 'contracts for future delivery', how can we plan to run our refineries and chemical plants and factories? Wait 'til the day we need it to buy it? What if it triples in price while we wait, and we can't afford it when we're finally allowed by government to buy?

seems to me that 'speculation' is another word for buying and selling a commodity.

is he going to make THAT illegal?

MP | June 17, 2008, 10:39pm | #

the ones who got stuck holding the bag at the end lose more than enough money to make up for the profits made by those who got out earlier.

The only people who care who got stuck in the end are those who got stuck. Look at the NYMEX energy futures volume. It's almost double the average of the last two years. This is a red flag of speculator involvement. This huge increase in volume is due to people (speculators) getting in and out of positions frequently.

It does not matter to the individual trader if the aggregate marketplace loses value when the bubble pop. Short term traders are focused on the here and now. Bubble psychology is unconcerned with the long term. It is unconcerned with fundamentals. It is only concerned with piling onto the pig pile and making a buck.

And right now, we're neck deep in oil speculators. Just like we were neck deep in real estate speculators three years ago. Just like we were neck deep in Internet speculators nine years ago.

I'll tell you what's propping up this bubble too. The persistence of the MSM and TallDave and practically everyone with a HS course in Economics under their belt to blame supply and demand. They blame the Chinese. They blame subsidies. They blame OPEC. They blame Hugo Chavez.

But the data is simply NOT THERE.

Don Meaker | June 17, 2008, 10:51pm | #

Iran and Venezuala are renting supertankers, filling them with crude, and parking them, full. This removes them from the market, further constraining the supply of oil.

How will regulating speculation change the behavior of two governments who already own the oil?

Sterling | June 17, 2008, 11:01pm | #

Newsflash, everybody: If you own any stocks - especially ones that don't pay dividends - you're a speculator. If you own any equity mutual funds then you're a speculator. If you're holding onto any beanie babies or comic books because they "might be worth something someday", you're a speculator. If you own anything primarily because of what it might be worth in the future, you are a speculator.

Anybody's who's paid any attention to McCain understands that he thinks commerce is dirty, that lucre is filthy, etc. This is who we've got. We get to pick between someone with Peronist tendencies or someone with Marxist tendencies.

I'm voting for the guy who hasn't formed a personality cult around himself.

R C Dean | June 17, 2008, 11:04pm | #

If only this were true:

Petroleum exploration increases, new refineries open, and overall oil production expands.

Instead, we have

(1) Some huge fraction of oil reserves are owned by states, who do a truly shitty job of investing in maintenance, expansion, and exploration; and

(2) Some huge fraction of oil reserves in the United States are blocked off by yet more state action.

Bill Welling | June 17, 2008, 11:07pm | #

When there was excess speculation on the stock market the feds increased margin requirements. The fed could do the same on commodity speculation. This shouldn't be overdone as the futures markets supply liquidity.

Agoraphobic Plumber | June 17, 2008, 11:09pm | #

"Gawdalmighty, but the man makes it hard to vote against Obama."

No he doesn't. McCain is bad on economics and has admitted as much. Obama, on the other hand, not only makes McCain look like the oldest economic hand around, but he considers himself vastly superior to McCain and everybody else.

It's a choice between skinning your knee and cutting your leg off with a lawnmower.

joe | June 17, 2008, 11:22pm | #

Wow, there is an angry anti-capitalist tone to McCain's rhetoric that I can't recall ever hearing from a mainstream American politician. I can't believe what a deaf ear McNasty must have, if he thinks this type of rhetoric about speculators is going to endear him to the sort of goo-goos who'd be interested in oil futures regulation. The proposals he actually got to at the end of his little outburst are about fiscal oversight of an investment market, quite at odds with the anti-investor message his rhetoric sent.

I think he was trying to pander in a manner that would appeal to economic liberals and moderate - basically, those people who aren't movement conservatives - and he screwed it up. He ended up sounding like Peron, as somebody above noted, or even some of the economic crankery that came from the European fascists. "Productive" vs. "unproductive" investment, and an inveighing against some parasitic investor class.

As for the "problem" of "unproductive specultion," whaddya gonna do? There is simply no plausible way to draw a distinction between different types of investing like that. Just make sure it's operating like a functional market, and if somebody is just riding investment trends, that's just how it goes.

Lou Minatti | June 17, 2008, 11:24pm | #

What an amazing coincidence. Gazprom's Alexei Miller says oil will soon be $250/barrel. Nevermind the fact that demand will collapse long before $250. Funny how those with vested interests in this keep "predicting" oil will go up.

Anyone who says the current price is due to market demand is a fool. It's a mania driven by speculators, many of whom are in positions of authority. Note: I am not saying anything should be done to curb the speculation. I am merely pointing out this fact. When the oil bubble collapses it will be spectacular.

The "peak oilers" sound just like the real estate idiots circa 2005. Clued-in people knew there was a real estate bubble, but recognizing bubbles and manias is easy. Knowing when the mania ends is the difficult part.

Steve | June 17, 2008, 11:28pm | #

Would someone address Pinette's point? If I bet you that oil will be $200/barrel next June, how is that going to drive up the price of oil? I am not buying any oil. Neither are you. I will pay you the difference in dollars if oil is under $200, you will pay me if it's over $200. Speculation in land and stocks (not in futures) is not the same thing, because in these cases you actually *buy* and own land or stock, increasing demand now.

joe | June 17, 2008, 11:35pm | #

There is an enormous void in your knowledge of political history and theory if you think this release from McCain is comparable to what Obama, or pretty much any non-fringe Democrat in the last 30 years, is saying.

Look at this: And while a few reckless speculators are counting their paper profits..., while twirling their mustaches and cackling until their monocles fall out most Americans are coming up on the short end. He explicitly sets it up as Group A taking food off the table of Group B. He isn't even talking about actions here - investing in a certain way - he's talking about people. John Edwards and Dennis Kucinich didn't do that.

this kind of reckless wagering, unrelated to any kind of productive commerce, because it can distort the market, drive prices beyond rational limits, and put the investments and pensions of millions of Americans at risk.

"It." Here, he's talking about the "reckless wagering, unrelated to any kind of productive commerce" - i.e., speculative investment in futures ITSELF, as opposed to some kind of collusion or fixing - as causing the problem. He's not talking about somebody exerting some outside force on the market, like OPEC does, actually controlling supply and demand for their own ends. He's talking about the actions of the individual investors themselves.

This is not like what Obama, Kerry, or even Kennedy or Edwards, says about capitalism.

joe | June 17, 2008, 11:46pm | #

P.S. This thread contains perhaps the finest example of using econ babble like a magic amulet that I've ever seen.

Sigh. You just need to take Econ 101.

Jonathan | June 17, 2008, 11:46pm | #

The buyer of a futures contract, if he holds it until expiration day, is required to accept delivery of the physical product. The seller is likewise required to make delivery. The thing is that the delivery could take place at a number of different facilities and you have no control over where it gets delivered. In other words, your product is wherever the seller leaves it. For this reason, most contracts are offset prior to the expiration. The exchange is not a party in the transaction. They provide an orderly, regulated marketplace. You still need a buyer for every seller and vice versa. The speculative buyers are countered by speculative sellers. There are not enough speculators to make a market trend
Demand, or the lack of it, is the only force that can make a market trend up or down.

Today's situation is similar to Enron vs the ISO. California said...we will buy electricity, regardless of the price because we will lose the election if there are blackouts. Enron said let's see if they really mean it.

OPEC is pumping out oil at record levels and its still not enough to meet world demand. Demand increases, prices increase, OPEC now gets 10-15 BILLION US Dollars a day, the Arab countries sell the dollars and buy gold, this weakens the dollar. Then other commodities react to the billions of dollars being dumped each day. In dollar terms things look expensive but in Gold terms things are still cheap. The Fed cannot change the fundamentals of Crude oil prices

Chris Potter | June 17, 2008, 11:47pm | #

There is an enormous void in your knowledge of political history and theory if you think this release from McCain is comparable to what Obama, or pretty much any non-fringe Democrat in the last 30 years, is saying.

Hillary is a fringe Democrat now? Not that I'd be upset at that label, but I'm not sure I believe it.

However, I must credit you for being eminently reasonable in this thread. It creeps me out a little, cause I get that feeling in my gall bladder that you're about to spring a trap.

Art-P.O.G. | June 17, 2008, 11:54pm | #

Chris Potter,

This is where you use Admiral Akbar like a canary in a coal mine.

Chris Potter | June 17, 2008, 11:56pm | #

The only people who care who got stuck in the end are those who got stuck.

And the only ones who regret having sex with that girl with HIV are the ones who get infected.

ie, by getting into that situation, you're risking being the one who gets stuck. So if it looks like the price rise is just due to speculation, you're taking a much bigger risk than if it's based on real supply/demand issues. It's not like speculators can jump in and out of the market at will, they have to find willing buyers to get out.

Chris Potter | June 17, 2008, 11:58pm | #

I prefer Lando's sidekick with the six layers of lips or whatever.

joe | June 18, 2008, 12:08am | #

Chris Potter,

Got a quote? Got a link? Just invoking Her name doesn't make your point.

Dave,

How else are we to buy oil? If we can't buy 'contracts for future delivery', how can we plan to run our refineries and chemical plants and factories? Wait 'til the day we need it to buy it? Your point is true, as far as it goes - the act of an individual putting in an order for oil at a locked-in price is the same for the homeowner filling his tank and for the speculative investor. That is why there isn't any way to regulate speculation in and of itself, regardless of how one feels about it.

But there is a difference in how speculators and consumers act - in the patterns of how and when they buy and sell, how they react to market signals. If all of the oil purchases were made by people keeping their boilers running, the market would behave very differently than if a third of the purchases were speculative investments.

joe | June 18, 2008, 12:26am | #

Chris,

The reason I sound "reasonable" to you on this thread is because lashing out at a parasitic speculator class who are secretly screwing us all is some pretty extreme stuff.

It's like something from another time and place, and you'd be hard-pressed to find anyone within sight of the political mainstream who believes this stuff.

I don't believe for a second that John McCain believes it, either. He thinks this is the type of talk that can get him on the good side of people who lean a little left, or who are at least inclined towards populism. It's like a white guy who tries to get on the good side of the patrons of a majority-black bar by calling everyone "My Man."

shecky | June 18, 2008, 12:28am | #

I like this little McCain-ism:

"I trust the people and not the so-called economists to give the American people a little relief,"

Sounds as if his audience liked it as much as I did.

Art-P.O.G. | June 18, 2008, 12:34am | #

I prefer Lando's sidekick with the six layers of lips or whatever.

Nien Nunb. Scary that I knew that.

horsewithnonick | June 18, 2008, 12:37am | #

Do you realize what you've just done to my options for July delivery of 1200 copies of McCain: The Myth of a Maverick?

I may need to short 500 subscriptions to Reason just to cover!

I'm confused - do we drink on that, or not?

John A. Fleming | June 18, 2008, 12:40am | #

As I understand it, the speculators are the fund managers of public servant pension funds, which are badly undercapitalized (they have promised the public employees unions far more in benefits than they have capital for, and they have incorporated unrealistic investment gains into their financial projections). Before the oil bubble, they were all invested in mortgage backed securities. Notice how oil started rising big-time right after the mortgage market cratered?

So, if you think either Johnny Mac or Barry is going to punish all these public employee retirement fund managers and expose the deceit, well ...

Jesse | June 18, 2008, 12:43am | #

Speculators equals commodity trading. Not much different than trading stock options, of course. And, of course, speculators actually help the market even out what would otherwise be wild swings in prices and availability of necessary commodities.

Methinks, McCain and other economic neophytes and kindergartners should watch "Trading Places" and get an effing clue.

I don't think that McCain, Obama or the majority of our Senators and Representatives could pass a 9th grade economics course if it was open book.

Micha Ghertner | June 18, 2008, 12:59am | #

So for all these people who think the rise in oil prices is due to a bubble -- and I'm not saying it isn't, 'cause I honestly don't know -- shouldn't they put their money where their mouths are and sell oil futures short? I mean, if the high prices are due to speculation and not fundamentals, and if you think you know the fundamentals better than the speculators, shouldn't you be able to beat them at their own game and get rich in the process?

Chris Potter | June 18, 2008, 1:25am | #

micha,

If it is a bubble, it's a high-risk game, even for pro speculators. Usually those guys represent interests that have enough cold cash to survive losing some seriously expensive shirts occasionally.

An ordinary person with five-figure assets would have to be crazy or desperate to try to play that game. You'd have to risk everything you own.

Gordon | June 18, 2008, 1:34am | #

Amaranth?

peter jackson | June 18, 2008, 1:46am | #

Didn't California's recent experience with phony electricity deregulation teach us anything? California eliminated futures trading in electricity which had the effect of putting all of California's electricity eggs in one basket: the spot market. If the Federal government did to oil what California did to their electricity, the only question is whether or not gasoline will hit $100 per gallon before it becomes completely unavailable. The results would be so drastic that such an ignorant policy tried by either Obama or McCain would probably be self correcting. Or at least I would hope so...

yours/
peter.

Haden | June 18, 2008, 2:14am | #

Speculators are absolutely essential to the functioning of a liquid, orderly futures market. If you are Southwest Airlines and you would like to hedge against an increase in the price of oil, you need to buy oil futures. Without a speculator (ie, someone who thinks the price is going to drop), who will take the other side of this trade? Nobody. If you think eliminating futures and moving all activity to the spot market is the answer, you have no knowledge of commodities markets. Such a move would be an absolute catastrophe.

nick | June 18, 2008, 2:42am | #

Hey campers. Remember the futures market is made up of "hedgers" and "speculators". That's the design which has been around for a couple hundred years. airlines got to bet on the long side of this market for the past two years to hedge against rising prices. Producers now get to sell into this bubble and capture historic high prices for production. Oil will break this "corner" and the producers will be rewarded. Let it happen, don't mess with it.

Robert H | June 18, 2008, 3:35am | #

Folks, almost everyone here is correct. And nearly everyone appears to be both more intelligent and knowledgable about economics than I am. So it pains me to say this, but nearly all of these posts are irrelevant.

Yes, there IS an oil price bubble. Yes, oil producing countries ARE driving up prices, both by withholding production and by failing to invest in oil field maintenance. Yes, speculators ARE making it far worse. Yes they ARE doing so by using normal market mechanisms that are necessary for capitalism to survive.

BUT the 800 lb Gorilla in the room is that demand cannot cause supply to increase because of the Dem/Environmentalist jihad against energy production in this country.

Much of western Europe produces it's electricity with nuclear power. We haven't build a new plant in some 30 years. Nazi Germany, half a century ago, supplied it's war time needs with coal-to-oil, as does 3rd world South Africa today. We have enough coal to fully supply our oil needs for over 200 years.

Anwar has proven reserves equal to what we get from Saudi Arabia, for Mohammed's sake. Which we could have developed 13 years ago, were it not for Clinton's veto. We have at least 30 years of total oil needs sitting in oil shale in the Rocky Mountains, the development of which was just voted down in committee by a strict party line vote, Dems 15, Rep 14. There are huge untapped off-shore reserves, along all 4 of our coasts. The Chinese and the Brazilians are getting permits to drill off the coast of Cuba for oil we could be taking off shore from Key West, but are not.

Does anyone see a pattern here? The US is potentially the greatest oil producer in the world and then some, and yet we keep shipping off Billions of dollars to petty 3rd world dictators because we don't want to produce our own. We not only have tied our left hands behind our own backs, we are also punching ourselves in the face with our right fists.

Russia, Venezuela, Iran, etc. keep getting richer and richer "doing work that Americans aren't willing to do"; ie. drill for oil, develop shale reserves, and build nuclear plants.

But no one wants to talk about that. We would rather have a pointless argument about speculators and market forces, and whether McCain is ignorant or Peronist, or both; and how he compares to the first credible Marxist candidate for POTUS Obama.

To paraphrase Bill Clinton:

IT'S ABOUT THE PRODUCTION OF ENERGY, STUPID.

Forget Econ 101, this is kindergarten playground level reasoning. Bring your own lunch, or pay the going price for someone else’s PB and J sandwich. Produce our own energy, or pay thru the nose to those who will.

I will note that despite all my misgivings about McCain, today he took a huge political risk by calling for reopening off-shore drilling. I suggest we all get behind him on this point at least.

Almost Ali | June 18, 2008, 5:02am | #

Just stay out of Anwar, you'll kill their tourist business.

Sorry, McCain is brain dead. He flat-lined after ramming through the Incumbent Protection Act (i.e., McCain/Feingold).

MP | June 18, 2008, 8:24am | #

There can only be so many contracts for delivery, based on the available supply to be delivered at a given time.

That is simply not true. One is not obligated to hold a futures contract to expiration. The availability of contracts is in no way tied to underlying commodity supply.

I'm amazed at the amount of bubble denial on this thread. If you don't think this is a bubble, then show me the fundamentals that support the oil price rise of the last year. Show me how demand is far outstripping current supply.

Again, this is not a call to reorganize the futures market under the all-knowing guidance of McCain and the SEC. But let's put all the facts on the table before going "Speculators? Bah!".

Fluffy | June 18, 2008, 8:29am | #

No he doesn't. McCain is bad on economics and has admitted as much. Obama, on the other hand, not only makes McCain look like the oldest economic hand around, but he considers himself vastly superior to McCain and everybody else.

It's a choice between skinning your knee and cutting your leg off with a lawnmower.

I think what you're missing here is that McCain also has contempt for basic civil liberties and wipes his ass with the Constitution every morning after he takes a shit.

In order to make up for that, he has to be the reincarnation of Hayek himself on economics.

If in addition to his many other flaws, he's also a Peronist on economics, that makes him pretty much the worst possible Presidential candidate from a libertarian perspective. You could probably rightly say that he's even worse than Nader or McKinney, and not just Obama.

Shem | June 18, 2008, 9:04am | #

I'm confused - do we drink on that, or not?

When in doubt, drink. When not in doubt, still drink. Hell, just drink and don't stop until reinacting the gold standard sounds like a good idea.

This means some of you should cut back so that the rest of us can have a share, by the way.

Speculator | June 18, 2008, 9:12am | #

Goddammit, I dropped my monocle in the toilet

Reformed Republican | June 18, 2008, 9:21am | #

Fed pumps too much money, creating inflation. Prices rise. Speculators see rising prices and try to profit (or at least hedge against inflation).

As someone else pointed out, speculation is a symptom of the bubble, not the cause.

William | June 18, 2008, 9:36am | #

Everyone seems to ignore that a large part of large fuel users hedging against future price increases (you can call that speculating) is the risk factor - the fact that the greatest current supply of oil is in the least stable areas of the world. Drilling for our own is the solution to this, but instead of looking for our own resource, Congress is looking up its own ass for the alternative energy dream. Consider this: To relieve the reliance on oil, a competatively priced product able to SUBSTANTIALLY replace oil, and be as readily avilable as gasoline is today across the 4,000,000 square miles of the US, will take decades to realize. Not only must this product replace oil, it must be usable in the two hundred million vehicles currently in use in America, unless one finds the capital to replace or modify them all. We are decades away from this dream. Its time for Congress to wake up to reality and start drilling.

creech | June 18, 2008, 9:57am | #

Robert H and William have it essentially right.The United States of America is no longer a serious nation. Bob Barr needs to pound on this energy issue. Rather than cover the landscape with wind turbines and solar panels, it makes more sense to build a few more power plants and pump jacks.

Mike | June 18, 2008, 9:57am | #

1. Speculation IS what is driving the price of oil. There weren't any major changes in the supply chain or in demand that would justify the massive increases.

2. It doesn't need to be regulated. What needs to be regulated is the #$@#@ FED lending money at a rate below inflation.


Shadow Inflation (basically, the actual level of inflation) is at 10%. Lending at anything below that is basically paying people to borrow money. Putting that much credit into the economy is weakening the dollar and making hard commodities a hedge. What you are seeing is the next bubble.

Bankers. First against the wall when the revolution comes.

KenB | June 18, 2008, 10:05am | #

MP wrote: "Are you seriously denying that oil speculation isn't a factor in this marketplace? Or are you simply brushing off calls to regulate speculation on the basis that regulation=bad?"

Prices are ultimately determined by supply and demand. Speculators bet on what the sweet spot between supply and demand will be in the future, but they influence neither supply nor demand. They can create temporary speculative bubbles by making demand seem higher than it is, but if you are worried about that, don't play in the market.

Ultimately the actual demand will become apparent, and speculators who made stupic bets will lose their shirts. Is that not punishment enough?

Robert Arvanitis | June 18, 2008, 10:19am | #

Speculators can't change markets by very much, or by very long.

But instead of reverting to basic tenets, how about a fact? The max total asserted money flows from hedge funds and other speculators amounts to 21 days of world oil trade. Not insignificant, but clearly limited.

joe | June 18, 2008, 10:20am | #

Robert H,

Except there is no shortage. Everyone has their own PB&J. You're simply assuming facts not in evidence - facts that don't actually exist, as MP has repeatedly pointed out.

Nobody's taken him up on his challenge, btw, to show that this "constricted oil supply" that can't match demand actually exists. So much for the "environmentalists jihad" theory.

Ken B,

The key word being "ultimately." Ultimately, you and I will be worm food. So?

joe | June 18, 2008, 10:24am | #

So, are bubbles a natural and inevitable outcome of the existence of investment markets, or are they a consequence of something other than millions of individual decisions influencing the market?

Or is the question, "When are bubbles natural and inevitable, and when are they a consequence of something else?"

Bramblyspam | June 18, 2008, 11:00am | #

In my semi-uninformed opinion, the oil prices are also factoring in the risk of a war with Iran. Iran could supposedly shut down the straits of Hormuz if it so wished.

As for how big this risk is, and how it would affect oil prices, your guess is as good as mine.

R C Dean | June 18, 2008, 11:11am | #

Wow, there is an angry anti-capitalist tone to McCain's rhetoric that I can't recall ever hearing from a mainstream American politician.

Set the wayback machine to the Enron hearings.

Or listen to nearly any Dem on the left end of the spectrum (and many populist Reps). I suspect a keyword search for "Walmart" or "Exxon" would be productive.

If you think eliminating futures and moving all activity to the spot market is the answer, you have no knowledge of commodities markets.

Exhibit A: the California electricity debacle, which, as I vaguely recall, put limits on forward contracts for electricity, forcing people into the spot market, which is much, much easier to manipulate.

TallDave | June 18, 2008, 11:19am | #

You realize that their ability to set price targets is a function of their belief that demand for oil is inelastic, which is proving to be false? There's apparently much more elasticity in oil demand than people thought.

Apparently not a whole lot, if the end users are largely willing to pay $135 for what they were recently paying $20.

In any case, OPEC's raison d'etre is to influence the price of oil.

The availability of contracts is in no way tied to underlying commodity supply.

Well, at some point it is. You can't march over to Wall Street and sell a futures contract for a trillion barrels of oil to be delivered next Tuesday. No one would believe you could deliver. There are certainly limits on what speculation can do in a consumable commodity market.

Oil prices are significantly higher than the most expensive barrel produced because the global economy is growing faster than oil production was planned for over the past ten years.

The persistence of the MSM and TallDave and practically everyone with a HS course in Economics under their belt to blame supply and demand.

Hell, why not just blame Adam Smith?

brotherben | June 18, 2008, 11:37am | #

I'm chalking it up to McCain speculating on an angry voter bubblefor a November delivery.


Any prognostications on the next bubble for when the oil bubble poops? Just for shits and giggles?

Fluffy | June 18, 2008, 11:55am | #

Nobody's taken him up on his challenge, btw, to show that this "constricted oil supply" that can't match demand actually exists.

As TallDave alludes to in his post, the best piece of evidence I can provide as a general observer outside the industry is that available supplies of oil continue to be cleared as the price rises.

If MP is claiming that the price has risen far beyond what demand will bear, why do inventories continue to decline?

Bill R. | June 18, 2008, 11:58am | #

My brother (who is actually in the oil industry) tells me that the number of futures contracts for oil is unusually high, 13 times the amount of oil that is actually going to be delivered during any given period. He agrees that the current market is being driven by speculators.

And if he could figure out when the bubble is going to pop, he'd have more money than he does now. :)

brotherben | June 18, 2008, 12:13pm | #

grain of salt reference:

O'Reilly just reported as fact that the total investment in the oil futures in 2003 was 13 billion dollars. Today that investment is 260 billion dollars.

joe | June 18, 2008, 12:14pm | #

Set the wayback machine to the Enron hearings.

Or listen to nearly any Dem on the left end of the spectrum (and many populist Reps).

Once again, got a quote? One in which a "Dem" expresses angry hostility about the act of engaging in commodities training itself, and not manipulating markets or some other behavior OTHER THAN just bying and selling? Because that most certainly was not the criticism of ENRON.

I know that some people like to throw out "commie this" and "socialist that" every time someone observes that a bad outcome occured, or criticizes market manipulation, but this is a whole 'nother can of worms. McCain is singling out people for denunciation based merely on the fact that they bought and sold.

No, RC, I don't recall ever seeing that from an American officeholder.

Fluffy,

If MP is claiming that the price has risen far beyond what demand will bear, why do inventories continue to decline? Because the demand by consumers of petroleum products is fairly inelastic - not as inelastic as a lot of us assumed three years ago, but pretty darn inelastic. Also, see Bill R.'s comment.

economist | June 18, 2008, 12:47pm | #

"no, RC, I don't recall ever seeing that from an American officeholder"
Similar accusations were levelled by William Jennings Bryan in his "Cross of Gold" speech and formed to basis of a New Deal law which temporarily banned the holding of gold for "speculative" purposes. Inveighing against financial markets and speculators in particular has formed a considerable part of every populist Democrat's rhetoric.
brotherben,
I usually take anything O'Reilly says with several pounds of salt. That guy's show is even worse than Lou Dobbs's shit. I hope one day the slimy bastard gets run over by a truck. Maybe that's wrong, but I really don't give a damn.

economist | June 18, 2008, 12:54pm | #

"Are bubbles a natural consequence of investment markets or something else?"
I'm not really sure. Not knowing that much about speculation myself, I looked it up on Wikipedia. According to the article,some economists think that bubbles could result from a "positive feedback loop" in which large-scale speculation pushes up the price, driving further speculation, until there are not enough new speculators buying the speculated goods at the asking price, causing a price drop in a panic that eventually pops the bubble.

MP | June 18, 2008, 1:03pm | #

If MP is claiming that the price has risen far beyond what demand will bear, why do inventories continue to decline?

Inventories are a poor indicator of demand. It is complete unsurprising that inventories are decreasing. Why? Increased carrying costs.

Again, I'll refer back to this report. The report is in line with the EIA STEO, both of which show rising demand from China and India. But they don't show demand rising at a pace that far outstrips supply growth (yes, supply is in fact growing), especially in light of the fact that OECD demand is flat/falling. In addition, if you look at the trend lines for China and India demand, they certainly aren't reflective of the hockey stick price curve of sweet light crude over the last year.

MP | June 18, 2008, 1:05pm | #

Anyhow, this thread is probably dead now. I'll be biding my time for the next Oil thread.

TallDave | June 18, 2008, 1:19pm | #

In addition, if you look at the trend lines for China and India demand, they certainly aren't reflective of the hockey stick price curve of sweet light crude over the last year.

Marginal price increases for commodities with relatively inflexible demand usually aren't linear above a certain point. The graph typically looks exponential.

joe | June 18, 2008, 1:38pm | #

economist,

Just to be clear, I agree completely with you abour Bryan, such language used to be common. Bryan is a fine example. I meant to refer to contemporary society, in my 3-4 decade lifetime.

Inveighing against financial markets and speculators in particular has formed a considerable part of every populist Democrat's rhetoric. I guess none of the Democratic presidential nominees since Wilson were populists, then.

Steve Verdon | June 18, 2008, 2:13pm | #

There has been article after article about how there is no supply shortage. Then what is driving the price of oil right now? Speculation.

Yes, and no.

You are leaving out the role of the Fed and really low interest rates in regards to the real estate market. Similarly with oil as well. Suppose you have an oil well and you can earn say, $5,000,000 pumping oil. What do you do with your $5,000,000? Spend some of it, and invest the rest? Well if the real interest rate is low, your investments wont be as good, and thus you'll have less incentive to pump oil. In short, as real interests go down, commodity prices go up. Now that doesn't mean that there isn't any specualtion going on or that there is a bubble.

Another factor are future prices. If the future price is believed to be higher than todays, I should wait and pump at a later date. Pumping now means I'm giving up those future profits. So, is there a shortage of oil today? Are refineries having problems locating oil to refine? Or is there plenty of inventory?

In non-bubble market the price increases should equal the increases in the real interest rate. In a bubble market, the price increases should exceed the increases in the real interest rate. In this case, the futures price would generally underpredict the future price and speculators can make money.

Overall we have three possible explanations:

1. Markets are always being surprised at how strong demand is and how weak supply is.

2. Markets are always being surprised at how low the real interest rate is.

3. There is a bubble.

It is possible that 1 & 2 were true, which lead to 3.

MikeP | June 18, 2008, 6:25pm | #

Meanwhile, in today's news, Obama does some depandering...

The general campaign is on, independent voters are up for grabs, and Barack Obama is toning down his populist rhetoric - at least when it comes to free trade.

In an interview with Fortune to be featured in the magazine's upcoming issue, the presumptive Democratic nominee backed off his harshest attacks on the free trade agreement and indicated he didn't want to unilaterally reopen negotiations on NAFTA.

"Sometimes during campaigns the rhetoric gets overheated and amplified," he conceded, after I reminded him that he had called NAFTA "devastating" and "a big mistake," despite nonpartisan studies concluding that the trade zone has had a mild, positive effect on the U.S. economy.

Does that mean his rhetoric was overheated and amplified? "Politicians are always guilty of that, and I don't exempt myself," he answered.

GILMORE | June 18, 2008, 8:20pm | #

Mike | June 18, 2008, 9:57am | #

1. Speculation IS what is driving the price of oil. There weren't any major changes in the supply chain or in demand that would justify the massive increases.

Uh.

Yeah, you're right. China, India, and Brazil dont exist in Lala Land.

GILMORE | June 18, 2008, 8:23pm | #

Bramblyspam | June 18, 2008, 11:00am | #

In my semi-uninformed opinion, the oil prices are also factoring in the risk of a war with Iran. Iran could supposedly shut down the straits of Hormuz if it so wished.

As for how big this risk is, and how it would affect oil prices, your guess is as good as mine.

Iran + nigeria and venezuela political instability apparently is factored in about 15-20% of current crude supply prices. According to a NYT journalist covering the oil trade market on the News Hour last week.

Brian | June 18, 2008, 9:31pm | #

MP -

It is not the supply of OIL that has decreased, it is the supply of DOLLARS that has INCREASED.

Inflation ALWAYS increases the prices of commodities. The speculators are a) anticipating this and b) facilitating the market's correction for inflation.

Listen to the rumblings coming out of OPEC meetings. The value of the dollar is a major concern.

In conclusion: It isn't a bubble until the dollar is strengthened.

Jack | June 19, 2008, 1:48am | #

Don Meaker wrote: "Iran and Venezuala are renting supertankers, filling them with crude, and parking them, full. This removes them from the market, further constraining the supply of oil."

Wasn't that the plot of Superman III?