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Source link: http://archive.mises.org/16587/when-in-doubt-blame-the-speculators-%e2%80%93-again/

When In Doubt, Blame the Speculators – Again

April 21, 2011 by

I guess it had to happen sooner or later. Gasoline and oil prices are rising, so someone must be to blame. It must be a plot; those dirty capitalists and speculators are at it again, trading oil back and forth and artificially driving up prices.

How do I know? Chris Cuomo on ABC News tells me. Yeah, Chris, who grew up in a New York political family, which must mean that he knows everything about economics. No one knows economic truths like the political classes. These are people who claim that government can subsidize an economy into prosperity, and tax and regulate goods and services, which in turn will result in more goods and services produced. Everyone knows that.

This is an interview that must be heard to be believed. Beside Cuomo’s “expert,” who claims that oil is not subject to regular laws of supply and demand (which she explains in her, like, whiny, like Valley Girl voice), we hear that oil was not traded on markets before 1983. Right. There was no spot market, no nothing. Instead, we are told that it was government regulation that created prices, and free markets destroy “price discovery.”

One thing that we don’t hear in this whole thing is that oil prices also can fall. Three years ago, we were told that speculators were responsible for driving gasoline prices to $4. However, the same people could not explain why it was that those same dastardly speculators could not keep the price from plummeting to $1.50 a gallon in three months.

We also don’t hear anything about the fact that the Federal Reserve System has been showering the world with dollars, and the U.S. Dollar is the currency in which all oil is traded. No, that would mean that Cuomo would have to blame the political classes, and that is not acceptable, not to him, or to his employer, ABC News.

{ 41 comments }

Bogart April 21, 2011 at 2:18 pm

The amazing part was not flood of economic fallacies out of the lips of both clowns but their attitude. They act like all the oil is ours collectively and that we have a right to “low prices” by their definition. Then government (the efficient manager of what is collectively ours) can just pass some laws and presto: lower prices.

The amusing part is that the two people in the video speak as if this is some great conspiracy among oil speculators and we the little people are so blessed for their wisdom in determining the problem and their solution which is to use force to constrain prices.

The interesting part is that like all the other economic bozos, they have no mechanism that describes how speculators playing a zero sum game can create permanent rises in prices. Speculators can bid future prices as high as they want. Eventually oil gets out of the ground into a ship or pipe, delivered to a refiner, then delivered to a retailer. The price at that point is set by the customer of the retailer and has no relation to the price of the contract. Now if a speculator is insane and offers to buy oil in 3 months for $10000 per barrel then that speculator will get a lot of takers on his contract but he will lose the difference between $10000 and the real price.

jl April 21, 2011 at 3:36 pm

Exactly. You’d have to think that those who went long a few years ago got wiped out pretty quickly. That’s one thing the market does to get rid of speculators who are not very good at speculating!

If people are so sure that the speculators are “wrong” (and they understand any kind of economics), they could put their money where their mouth is and go short.

Jim April 21, 2011 at 2:57 pm

I suppose there could be something to be said for there being excess speculation right now, caused by the Fed. Not the speculators fault; in flooding the world with money, if people don’t want to invest all of it in capital , it has to go somewhere, and I suspect (purely my suspicion) that a lot of that excess money winds up chasing commodities.

Bogart April 21, 2011 at 3:26 pm

New Fed money may go into commodity prices but speculators or the level of speculation does not set the price paid by consumers. In fact higher future prices from speculators will mean that future supply will increase relative to the present. This tends to push prices down not up.

Inflation and its symptom rising prices is everywhere and always a monetary phenomenon.

billwald April 23, 2011 at 9:49 pm

Sounds reasonable, sort of.

Fuel prices rise 30% and sales drop 3%. Prices are to low. Anyone who says it is because of an inelastic demand is not thinking clearly. Most people don’t buy a car for transportation but to create a public image.

J. Murray April 21, 2011 at 3:03 pm

Anyone who buys a stock, bond, or commodity is a speculator. Banning speculation is banning investment.

Oklahoma Libertarian April 21, 2011 at 3:48 pm

To carry it all the way out, anyone who buys ANYTHING is a speculator. When I buy a milkshake, I am exchanging my current $2 for the expectation that I will enjoy myself when I drink it 3 minutes later. When a parent pays to enroll his son in a private school, he is speculating that the son will become more successful, productive, and well-behaved, increasing the parent’s future psychic profit from parenting.

Hell, when Chris Cuomo goes on TV to spread “ideas” he formulated by tossing darts at a glossary of economic terms, he is speculating that viewers are stupid enough to be impressed by him and he will make more money and be more famous in the future.

billwald April 23, 2011 at 9:52 pm

Long time ago my grandfather bought stocks in sound companies which sold a good product at a fair price. These days most stocks are traded by computers that don’t read annual reports. When I was a kid I loved to look at the pictures in the annual reports.

El Tonno April 21, 2011 at 3:12 pm

It’s not like uncertainty in the Arab lands helps either.

Can’t wait for Hillary Clinton to chime in. She was rather quickly on the megaphone with threats against “gougers” during the New Orleans debacle.

Tyrone Dell April 22, 2011 at 1:55 am

I don’t think we’re in enough Arab countries yet.

Dick Fox April 21, 2011 at 3:51 pm

Is the speculator the one who buys or the one who sells?

jl April 21, 2011 at 4:11 pm

Both. There have to be two sides to every transaction.

Peter April 21, 2011 at 10:17 pm

I expect that was the point of the question ;)

Freedom Fighter April 22, 2011 at 10:07 am

When the price goes up and we don’t like it, the speculators are the ones who buy and hold, hoping to sell at a higher price.

When the price goes down and we don’t like it, the speculators are the ones selling and short selling hoping to stop losses or make money in a down market.

The “speculator” are always the ones we think are making money off our backs.

In reality, there is two sides to a transaction and speculation affects speculation, not the consumers.

Speculators have contract term limits and must sell before the contract ends or face the consequences of having to take delivery.

The Anti-Gnostic April 21, 2011 at 4:05 pm

–Trillions in new dollars seeping out of reserves?
–Record levels of deficit spending?
–Supply chain disruption/uncertainty?
–Environmental restrictions?
–Competing consumption by government military operations?

–or–

–Speculators?

Must be the speculators.

Edward King April 21, 2011 at 4:12 pm

I find it funny that the economic illiterates never point out that speculators can make just as much money if the price of a commodity, stock, bond, or other financial instrument declines in price. Some how they believe that the only way to profit from speculation is through rising prices.

Mr Whipple April 21, 2011 at 5:48 pm

Short sellers are evil!!!!

[/sarcasm]

Mortomes April 22, 2011 at 7:17 am

Short selling is unpatriotic

J. Murray April 22, 2011 at 6:08 am

And they frequently lose just as much money when they’re wrong.

Walt D. April 21, 2011 at 4:26 pm

Blame the proctocrats.

Peter April 21, 2011 at 10:15 pm

Pthui. I’m currently paying the equivalent of $6.50/gal (give or take a few cents as exchange rates vary).

Greshams-law April 22, 2011 at 8:08 am

The most amusing refutation of the ‘evil speculators’ argument was delivered by Jim Rogers on CNBC the other month. Basically, the CNBC clown says something like ‘you evil speculators are driving up the price of oil!’, and Rogers replies; ‘What are you talking about? For every buyer in the commodities markets there’s a seller, so who are you condemning? Those who are buying oil or those who are selling it?’:

http://www.youtube.com/watch?v=rk1beTw2IXk

jl April 22, 2011 at 8:23 am

There are only two ways to drive up the cost (other than money printing, which is a given.) There is either actual consumption, or the longs have to take delivery and store it somewhere. My understanding is that it’s really hard to store lots of oil. That’s probably why the only culprit in regards to hoarding is our friend, the U.S. government, which has to resort to pumping it underground into salt domes to store any noticeable amount.

So the government is the real culprit! Evil hoarder!

victor April 22, 2011 at 9:27 am

Ah… I see the 70′s t-shirt slogans coming back, “Kick Arabs’ @$$! And take their gas.” But I guess with 3 theatres of war, things aren’t working out for the plebs who supported striking back since 2001.

Freedom Fighter April 22, 2011 at 9:50 am

Speculators have no real effects on the price of gas.

Take the price of gas as a product of supply and demand, supply from the manufacturer and demand from the end user. Let’s say we have a price graph in front of us showing the natural supply & demand price evolution.

Well, speculators seeing an upside might buy and hold and drive the price up, but at some point they will have to sell to take profits and sell to take their losses and drive the price down.

Speculators bring volatility, but it’s in the forms of higher highs and lower lows. It all averages around the natural commodities market and in the long run, end users who buy at regular intervals don’t see the effect of speculation.

Speculators affect speculators, not consumers.

Because of speculators, you will now pay a higher price than normal for gasoline, but later down the road you will pay a lower price for gasoline. It all evens up.

Anthony April 23, 2011 at 12:24 am

Speculators stabilize prices by aligning supply with the (predicted) future demand. The instability is a result of an uncertain future… absent speculators things would be worse.

billwald April 23, 2011 at 9:58 pm

Agree! Why should retailers sell for less than customers are willing to pay?

Some retailers use the gas as a loss leader and make their money on beer and ciggybutts. They set the bottom price in an area.

Freedom Fighter April 22, 2011 at 9:53 am

Hoarding is not evil, what is being hoarded now will be released and made available later. Nothing is forever. Had the oil not been hoarded in the past, it would not be available in the future.

It’s like Keynesians who frown upon saving money. Well, savings are delayed consumption, delayed spending and delayed investments. What people don’t spend now, they will spend later.

Instead of complaining about saving, take advantage of the actual saving to invest for future spending and consumption.

Daniel April 23, 2011 at 2:32 am

While that’s true, anyone with a brain can see the folly of the SPR

Walt D. April 22, 2011 at 10:05 am

While we are on the topic of finding a scapegoat for stupid government policy, the Prime Minister of Greece appears to have found a new one!
http://www.google.com/hostednews/ap/article/ALeqM5gXVOXv63k4RT8thlLeP9zpKMHgrw?docId=481394dcda814ac2a968637cf99f7013

Chris Cook April 22, 2011 at 3:56 pm

What we have seen in the commodity markets generally, and the oil market as a sub-set, is what happens at the zero bound of dollar interest rates when the printing presses get rolling and investors lose confidence in the currency.

The present correlated commodity bubble has little to do with speculators in search of transaction profit, although they have entered the oil market following recent geopolitical events thereby causing a ‘spike’.

In every organised commodity market where financial buyers may participate – generally via the new breeds of exchange traded funds and structured finance products – we have seen the entry of ‘inflation hedger’ investors who are off-loading the risk of holding dollars in favour of holding commodities.

The motivation of these investors who are buying anything but dollars is fear, not greed, and their presence in the market since 1995 (when Goldman set up the GSCI fund) has gradually led to the markets becoming financialised and parting company from the real world of physical supply and demand.

In the oil markets, the advent of new techniques enabling financial oil leasing – where funds lend dollars to producers and producers lend oil in return to the funds – has meant that oil producers have essentially been able to support the oil price at the upper bound where demand destruction sets in.

Ask yourself Cui Bono from high oil prices?

If the history of commodity markets – eg the tin crisis of 1985; the Hamanaka copper manipulation; cocoa, coffee and diamond cartels and monopolies – tells us anything it is that if producers CAN support prices then they WILL. By using dollars borrowed interest-free from risk averse inflation hedgers the producers have been making out like bandits.

But as I forecast in the conclusion of my article in Asia Times last year,

http://www.atimes.com/atimes/Middle_East/LA16Ak02.html

the market is now, I believe, suffering a de-stabilising shock and ‘spike’, and a dramatic collapse of the market price to the lower bound is IMHO inevitable sooner rather than later.

Ned Netterville April 22, 2011 at 4:04 pm

At the end of his interview describing how speculators–not supply and demand factors–are driving up the price of gasoline at the pump, Chris Cuomo asks rhetorically: “What better [problem] to address than this?”

I don’t suppose anyone here will be surprised to learn today (Good Friday) that Obama has appointed a task force headed by the attorney general to look into how speculation is contributing to the run up in gasoline prices! (I don’t suppose an investigator from DOJ will bother to question Bernanke about his role in the “fraudulent” run up in the price at the pump.) The timing of Cuomo’s report and Obama’s announcement of forming a task force is interesting. Do you suppose Obama got his cue from Chris Cuomo, or vice versa?

http://www.bloomberg.com/news/2011-04-21/obama-says-u-s-team-to-study-whether-speculators-driving-up-pump-prices.html

Walt D. April 23, 2011 at 1:11 am

This is eerie – straight out of Nazi Germany and the old Soviet Union. The Justice Department is becoming the Gestapo. The administration is strong-arming companies, like threatening bond holders not to pursue their rightful priority, like forcing BP to not only pay for the Gulf spill cleanup, but also forcing them to pay for costs associated with the (unnecessary) ban on drilling in shallow water, and now using the Justice Department to go and see if they can trump up charges against speculators. The country is down the toilet when the government does not respect the rule of law and makes capricious decisions and uses the “Justice ? ” Department to go after enemies and find scapegoats.
This goes way beyond being wrong about speculators from an economic point of view.

Saildog April 23, 2011 at 10:02 am

For the record I also think the speculator argument is rubbish. I also agree that equities and commodity prices are being driven higher by QE (or your own epithet of choice). What is more interesting is that no one has mentioned good old supply and demand. In October 2004, the quarter when oil supply last increased, prices were around $55 per barrel. Supply has remained more or less constant since then yet prices have been as low as $35 per barrel, as high as $147 per barrel and are currently around $111. Clearly supply is more or less completely inelastic and whatever is produced is taken up at the prevailing price. This begs the question: Why hasn’t oil supply increased? Could it possibly be that it cannot increase? That geological constraints and the associated human feed back loops (government interference, war, high food prices, riots, exploding oil rigs, insufficient trained people, ageing infrastructure etc) means that it will never increase again?

What if that is the case? There are no substitutes. No combination of nuclear, used french fry oil, wind, shale gas, tar sands or anything else packs the punch oil does. After all, it the reason the US has meddled in the Middle East for so long (badly). We have a limited buffer of greater efficiency, but we are essentially in uncharted waters.

If you asked my opinion for the faltering recovery I think it is high gas prices. According to Liebigs Law of the Minimum, this is now the limiting factor on the economy. We will see alternate periods of recession and recovery closely fallowing the rising and falling oil price.

tfr April 25, 2011 at 1:06 pm

Could someone who is fluent in futures trading write us a “futures for dummies”? Perhaps something along the lines of “futures markets are like auto insurance because…”
I’m having trouble fully understanding this.

Ned Netterville April 25, 2011 at 9:46 pm

The firm of Lind / Waldock, which has a presence on the web, can probably give you a basic course in trading futures and answer any and all of your questions. I haven’t traded commodities since the 1970s, and back then I used L / W as my broker with very good results, but that was too long ago for me to endorse them now. http://www.lind-waldock.com/new_to_futures.shtml

tfr April 26, 2011 at 9:22 am

Thanks, however I’m looking for an understanding of how and why futures markets absorb risk and shocks to the system, through pricing, rather than an understanding of how to trade futures. I can’t imagine trading futures is much different than trading stocks, with which I am familiar.

Ned Netterville April 26, 2011 at 9:51 am

You might try a search of the Mises site. There are probably some articles addressing the subject, and L / W may have that kind of info as well as trading. Maybe not. Sorry I can’t be of much help. Maybe someone else will see our discussion and jump in, but unfortunately this thread is waning.

Jeremiah Smith April 30, 2011 at 3:56 am

So if the speculators aren’t to blame, what is? There’s currently NO supply problem going on here in the nation. The oil companies have BILLIONS of barrels stockpiled at this point in time. There’s NO issues of supply and demand is as high as ever.

If the prices were driven by “supply-demand”, then why in the hell are gas prices CONTINUING TO RISE!?

Ned Netterville May 2, 2011 at 9:47 pm

Jeremiah, Gasoline is increasing in its dollar cost because the price of oil, from which gasoline is refined, is rising. And the price of oil (and thus the gasoline you purchase) is rising because oil is bought and sold with dollars, and the government, by engaging in inflationary practices through the actions of the Federal Reserve, has been eroding the value of the dollar as compared to oil (and lots of other commodities like gold, coffee, silver, palladium, food, etc.) So it is not the case that gasoline is increasing in value but that your dollars are declining in value, so you get less gas per buck, or put another way, the dollar price alone is rising because the dollar has become worth less. Obviously, speculators are not to blame for the Fed inflating the supply of dollars.

Perhaps you would have a better understanding of what is happening to the the price of gasoline and why if you compare the price of gasoline to the price of gold. Why gold? Because gold is real money and it is the one commodity most people look to as a hedge against dollar devaluation (aka, inflation). A year ago (5/2/10) gasoline was $2.93 per gallon (average US price) and today (5/2/11) it is $3.93. A year ago, gold was $1170 per ounce and today it is $1540 per ounce. If you do the math you will see that the price of gasoline in terms of dollars is up by 34 percent, but in terms of gold gasoline is only up about 2 percent, or virtually unchanged. So you see, it could be said that gasoline really hasn’t increased in price, rather those US dollars of yours are rapidly losing their purchasing power.

Jeremiah, are you not a speculator yourself? I know I am. Suppose you go by your neighborhood gas station in the AM and notice the price: $3.50. During the day you learn that oil on the NY Merc has increased by a whopping $10.00 a barrel. On the way home you see the price of gasoline at your local gas station is unchanged. My guess is that if you have some room in the tank of your car and money or a credit card in your pocket, you will pull in and fill up your tank before the price increases, which, based on your experience, you know it will. That is usually called being prudent but it is really speculating!

Speculators in oil may be affecting the price of oil because they anticipate that the Fed will keep on devaluing the dollar, so it is simply prudent to buy and hold oil or gasoline off the market in anticipation of the Fed’s reckless behavior. As long as government is in control of the money supply, and there are idiot savants like Krugman with the ear of the government, there will be inflation. Anyone who is forced to do business in dollars finds it prudent to hedge against inflation as best one can. The prudent ones will be decried as speculators by those who do not understand economics, but they will not be impoverished by inflation as their wining detractors will be.

John James May 4, 2011 at 3:27 am

Seriously it’s like some mad scientist went out to genetically engineer the purest form of human douchebag imaginable, and succeeded with flying colors.

“That’s good, you answered my question with a fact, very nice. Very nice.”

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