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For once, it is the Democrats who have the right idea...we can only hope that the Republicans come along.
Senators Chuck Schumer and Harry Reid are pushing legislation to restore the controls over the oil future's market speculation that existed before brokerage houses like Goldman Sachs and Morgan Stanley set up a commodities exchange in London to evade restrictions imposed by the Federal Commodities Trading Corporation.
The FCTC had allowed those in the oil biz to buy and sell oil futures - essentially bets on how the price will change - but restricted investment by speculators. After the brokerage houses went offshore so as to be able to indulge their passion for a quick buck, the total traded in oil futures soared from $13 billion in 2003 to $260 billion now. It is this tail that is wagging the dog in pushing up the price of oil and gas at the pump.
The FCTC regulations remained in effect all through the Reagan and Bush years. Indeed, they were only repealed after they had been obviated by the off shore move so as not to disadvantage domestic commodities exchanges. We realized that oil is too valuable a strategic and economic commodity to permit its price to be determined by gamblers betting on the future price. So the FCTC let those in the industry, like oil companies and airlines, invest in oil futures but stopped outsiders from doing so.
The Democrats are pushing legislation to restore the status quo ante and stop the brokerage firms from playing the oil futures game. Their bill would apply the restrictions on oil futures’ purchases to domestic American companies even if they trade off shore.
If there is any doubt that it is speculation, not the supply and demand for oil, that is driving up the price, look at this week’s history of oil prices. After Bush announced that he was rescinding his father’s executive order and permitting off shore drilling and after OPEC announced a weakening of oil demand, the futures market price dropped $15 per barrel. No new oil gushed through the system. The speculators just switched their bets from up to down. With the Democratic bill, they will just have to double their bets on horse racing and leave oil futures alone!
Some Republicans are reflexively opposing the Democratic proposal, citing the sanctity of free markets. But even Reagan didn’t want to allow unbridled gambling in oil futures. There is nothing wrong with letting the free market in oil determine the price of the product. And there is a lot right with letting it do so. But it is insane to let gamblers magnify the effect of anticipated changes in supply and demand, that may not materialize, by buying and selling oil futures. Oil is just too important strategically and economically to allow that kind of speculation.
Ultimately, the answer to high gas prices is to do everything. We should drill for oil offshore and in Alaska. We should extract it from shale. We need more nuclear power. We have got to expand wind, geothermal, and solar energy. We need more coal, particularly if we can capture and bury the carbon emissions. We need flex fuel cars. We need more ethanol - from domestic production and from imports. We need methanol, which is just like ethanol but comes from inedible parts of the plant. We need everything.
But to those who doubt the efficacy of off shore drilling, just look at how the mere threat to move in that direction sent oil prices crashing. We need more of same.
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Any stock market guru's on here care to comment? It this feasible?
Very feasible. This is what I have been calling for someone to do for nearly 4 months now. In the other thread regarding the cost of oil, I put a chart showing the cost of oil alongside the volume of futures being traded. It is absolutely out of control and until it is under control the laws of supply and demand will not apply to whatever energy market the speculators want to attack.
All that we have to do is make it so that any large brokerage firm that sets up an energy trading branch outside of the US still will fall under the same FCTC regulations they would if the branch was here in the US. The worst example of this is ICE (InterContinental Exchange), their main office is here in Atlanta, but because they trade their energy futures through foreign markets they are allowed to circumvent the FCTC.
So hopefully this idea will catch on and will pass through the house and senate easily. If it does, the supply and demand numbers for oil in the US brings the price per barrel down to around $63. Which in turn means we would once again see gas in the $1.50-$1.75 range.
I've wondered before what purpose is served by commodities exchanges permitting futures to be bought and sold. Anybody have an answer (and not in regard to the extent to which they harm the market, but how their existence is justified by those exchanges and the federal agency that regulates them (I forget what it's called, but its not the SEC))?
I've wondered before what purpose is served by commodities exchanges permitting futures to be bought and sold. Anybody have an answer (and not in regard to the extent to which they harm the market, but how their existence is justified by those exchanges and the federal agency that regulates them (I forget what it's called, but its not the SEC))?
The buying and selling of commodities futures is, in a bast case scenario, a way for companies to lock in prices with a producer in advance. The best example I can think of this is Southwest Airlines (SWA). Right now, SWA is using fuel at a price that was determined in the early 80's. Therefore, their fuel costs are very low.
It's like you are in the convenience store business, and you know that you sell 1000 oranges a year. You can go and purchase a commodities contract for the future production of oranges, thus locking in your price way in advance. There are advantages and risks for doing this. Let's say, for example, you purchase a 1 year contract and a 5 year contract (meaning that you have locked in the price of oranges for delivery 1 year from now and 5 years from now). The current price of oranges is $1.00 / ea. You lock in the amount for $2.00 / ea for the 1 year contract, and $3.00 / ea for the 5 year contract.
One year from now, the actual market rate is $1.50 / ea for oranges, so you lose money there. However, in five years from now, the market rate of oranges is $7.50 / ea, so you are now buying them at over a 50% discount when compared with market rates.
Make sense?
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The speculative premium in oil is easily deduced by seeing what the price change is at the expiration of one contract to another.
Real suppliers and consumers tend to take actual physical delivery of the oil, ie they bought the futures simply to lock in a price for future delivery.
When the contract expires the speculators must sell the current front month expiring contract to avoid actual delivery, yes they will show up at your house with the oil.
When they do this they sell the front month and buy the new outer month contracts to put back on the speculation.
If as this buttclown said their was such a huge speculation in oil then the price would nosedive on expiration due to a blizzard of selling.
The only one's still holding the contract would be the end users and they'd set the price of real oil deliveries.
The last futures expiration the good news was 10$ came off the price of oil, the bad news is ONLY 10$ came off the price of oil.
IMO the speculative premium us roughly equal to that 10$ so all you people wishing for 50$ oil, just crap in the other hand and wish in one and see which one fills up first.
The last futures expiration the good news was 10$ came off the price of oil, the bad news is ONLY 10$ came off the price of oil.
IMO the speculative premium us roughly equal to that 10$ so all you people wishing for 50$ oil, just crap in the other hand and wish in one and see which one fills up first.
CD - you got a link for that? I'd love to look at the raw data if possible.
__________________ Playoffs?! Playoffs??! Don't talk to me about playoffs! I just hope we can win another game!
There is a link to a video explaining what I said.
From there you simply need to look into oil futures contracts and see when they expired, I believe it was just last week or so but I'm not sure I don't trade them.
The buying and selling of commodities futures is, in a bast case scenario, a way for companies to lock in prices with a producer in advance. The best example I can think of this is Southwest Airlines (SWA). Right now, SWA is using fuel at a price that was determined in the early 80's. Therefore, their fuel costs are very low.
It's like you are in the convenience store business, and you know that you sell 1000 oranges a year. You can go and purchase a commodities contract for the future production of oranges, thus locking in your price way in advance. There are advantages and risks for doing this. Let's say, for example, you purchase a 1 year contract and a 5 year contract (meaning that you have locked in the price of oranges for delivery 1 year from now and 5 years from now). The current price of oranges is $1.00 / ea. You lock in the amount for $2.00 / ea for the 1 year contract, and $3.00 / ea for the 5 year contract.
One year from now, the actual market rate is $1.50 / ea for oranges, so you lose money there. However, in five years from now, the market rate of oranges is $7.50 / ea, so you are now buying them at over a 50% discount when compared with market rates.
Make sense?
That makes sense, but it begs the question as to who benefits, apart from speculaters that profit by the increase or decrease in price. I can understand the benefit of cost certainty, but can't imagine that that benefit to manufacturers and direct buyers justifies allowing speculators to affect the price one way or another.
Why not take them out of the loop? Growers and wholesalers negotiate prices as products near the market place (as the salmon industry in Alaska does, the fishermen collectively negotiate price paid to all wholesalers immediately prior to the start of the season). I don't see any reason why that wouldn't work, and why that wouldn't decrease price by taking otherwise uninterested parties out of the equation.
That makes sense, but it begs the question as to who benefits, apart from speculaters that profit by the increase or decrease in price. I can understand the benefit of cost certainty, but can't imagine that that benefit to manufacturers and direct buyers justifies allowing speculators to affect the price one way or another..
That's the point - speculation doesn't help anyone but the speculators. It would be better to take them out of the equation all together.
Quote:
Originally Posted by Kolobotomy
Why not take them out of the loop? Growers and wholesalers negotiate prices as products near the market place (as the salmon industry in Alaska does, the fishermen collectively negotiate price paid to all wholesalers immediately prior to the start of the season). I don't see any reason why that wouldn't work, and why that wouldn't decrease price by taking otherwise uninterested parties out of the equation.
You're confusion geography with the law. The commodity exchanges are simply convenient points for people and companies to go in order to trade. It's very similar to how Wall Street was founded - originally, Wall Street was under a tree at the edge of town where traders would meet to buy and sell stocks in companies. If you were looking for some stock to buy - go down to Wall Street under the tree, and there will be some men there who have some stock to sell.
There is no way to prevent speculators from operating to some degree, unless you completely remove any company or person that has no business there (and how do you define that?), and even then, there are loopholes.. However, you can reduce it to a great degree.
Your example of fish sorta works, but to make it more properly fit the situation, if the fishermen were negotiating next season's contract (instead of this season's contract), it would make more sense. If that was the case, what's to prevent me from going down to the docks and saying "Look, everyone here is buying your fish for $1.00 per pound. I'll buy it for $1.25 per pound, because I speculate that the price of fish will be $2.00 per pound next year, and I want to make as much money as I can." That's speculation, and it can happen anywhere, not just at the commodities markets.
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That's the point - speculation doesn't help anyone but the speculators. It would be better to take them out of the equation all together.
You're confusion geography with the law. The commodity exchanges are simply convenient points for people and companies to go in order to trade. It's very similar to how Wall Street was founded - originally, Wall Street was under a tree at the edge of town where traders would meet to buy and sell stocks in companies. If you were looking for some stock to buy - go down to Wall Street under the tree, and there will be some men there who have some stock to sell.
There is no way to prevent speculators from operating to some degree, unless you completely remove any company or person that has no business there (and how do you define that?), and even then, there are loopholes.. However, you can reduce it to a great degree.
Your example of fish sorta works, but to make it more properly fit the situation, if the fishermen were negotiating next season's contract (instead of this season's contract), it would make more sense. If that was the case, what's to prevent me from going down to the docks and saying "Look, everyone here is buying your fish for $1.00 per pound. I'll buy it for $1.25 per pound, because I speculate that the price of fish will be $2.00 per pound next year, and I want to make as much money as I can." That's speculation, and it can happen anywhere, not just at the commodities markets.
I'm a Republican and dyed-in-the-wool conservative and writing this makes me want to puke, but why not regulate who can buy and sell? It works relative to collective bargaining between employers and unions (and make that twice in this post I've nearly vomited).
I'm a Republican and dyed-in-the-wool conservative and writing this makes me want to puke, but why not regulate who can buy and sell? It works relative to collective bargaining between employers and unions (and make that twice in this post I've nearly vomited).
The problem is how do we define who should buy and sell? For example, going back to the oranges, let's suppose that in the 4th year, the price of oranges were at the market rate of $10.00 per each. Now, I have a contract to buy them at $2.00 per each, and I have a legit reason to buy and sell oranges for my business.
However, I think that the price of oranges has to go down. I think I can make more money selling my contract now at $9.00 / ea than receiving the oranges and selling them in my store. Or maybe, my store is about to go under, and what the fark am I going to do with 1,000 oranges that I have to receive under my contract (other than throw them at The Mulli)? So, I sell my contract, which is due in one year (4 years since the purchase of the contract, and the contract was for delivery in 5 years).
Now, who is to say that I speculated? Perhaps my business will go under, perhaps it won't. Perhaps I didn't want to sell any more oranges. Perhaps I was purely speculating. The point is, no one, other than me, knows.
That's a very gray situation. However, I do believe that you can limit it by doing several things. First, it is my understanding that these contracts are bought and sold many times over. So, if you wanted to stop that practice, prevent the selling of a contract more than three times (just an example), unless hardship or other legitimate reason can be shown to the CFTC.
Another way is to license everyone who buys or sells these commodities. I would then have to go down to the CFTC and show them that I have a legit reason to buy and sell futures contracts for oranges, and would have to ensure that anyone I bought or sold to had the same license. This would keep out, for the most part, companies that had nothing to do with the commodities in question.
However, this too can be compromised - suppose Exxon found out that they can make a terrific fuel made out of oranges that is usable in cars - since Exxon is in the fuel business, and oranges are now usable fuel, that means that they could step in.
What if, for example, Bear Stearns (I know they're defunct now) bought out my store, for the express reason of obtaining my orange trading license? Then they could, using my license, speculate on oranges.
There's a third way - we could have an active oversight panel that would call a halt to any futures trading (much like India did with rice) if it got too out of control. That's similar to price controls.
I think, in the end, we have to employ all of these regulations in order to try to restrain, to some degree, the speculation.
__________________ Playoffs?! Playoffs??! Don't talk to me about playoffs! I just hope we can win another game!
The problem is how do we define who should buy and sell? For example, going back to the oranges, let's suppose that in the 4th year, the price of oranges were at the market rate of $10.00 per each. Now, I have a contract to buy them at $2.00 per each, and I have a legit reason to buy and sell oranges for my business.
However, I think that the price of oranges has to go down. I think I can make more money selling my contract now at $9.00 / ea than receiving the oranges and selling them in my store. Or maybe, my store is about to go under, and what the fark am I going to do with 1,000 oranges that I have to receive under my contract (other than throw them at The Mulli)? So, I sell my contract, which is due in one year (4 years since the purchase of the contract, and the contract was for delivery in 5 years).
Now, who is to say that I speculated? Perhaps my business will go under, perhaps it won't. Perhaps I didn't want to sell any more oranges. Perhaps I was purely speculating. The point is, no one, other than me, knows.
That's a very gray situation. However, I do believe that you can limit it by doing several things. First, it is my understanding that these contracts are bought and sold many times over. So, if you wanted to stop that practice, prevent the selling of a contract more than three times (just an example), unless hardship or other legitimate reason can be shown to the CFTC.
Another way is to license everyone who buys or sells these commodities. I would then have to go down to the CFTC and show them that I have a legit reason to buy and sell futures contracts for oranges, and would have to ensure that anyone I bought or sold to had the same license. This would keep out, for the most part, companies that had nothing to do with the commodities in question.
However, this too can be compromised - suppose Exxon found out that they can make a terrific fuel made out of oranges that is usable in cars - since Exxon is in the fuel business, and oranges are now usable fuel, that means that they could step in.
What if, for example, Bear Stearns (I know they're defunct now) bought out my store, for the express reason of obtaining my orange trading license? Then they could, using my license, speculate on oranges.
There's a third way - we could have an active oversight panel that would call a halt to any futures trading (much like India did with rice) if it got too out of control. That's similar to price controls.
I think, in the end, we have to employ all of these regulations in order to try to restrain, to some degree, the speculation.
It's at this point that I usually concede that it'll take more effort than I'm willing to give to understand an issue well enough to speak with real confidence, so I'll assert my general ignorance and in the future take Larry Kudlow's word for it.
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