Honest question: what exactly is "artificial demand" and how does it differ from any other kind of demand?
No, it isn't. Theft is taking someone's property without their consent. Speculation on oil involves purchasing someone's property with consent on both sides, at an agreed price & time. Using the violence of the police power to curb free trade in oil between consenting parties - i.e. what you are advocating - is far closer to theft than even the most rank speculation. Just in case you still aren't aware - US consumers don't own the oil. U.S. business (apart from the oil companies) don't own the oil. It is not their property. They have NO right to it whatsoever, unless the owners of the oil choose to sell it to them voluntarily. Thus, not only is oil speculation nothing remotely resembling theft, not only would any attempt to cap the price be tantamount to theft, but the alleged wronged parties have no right to the oil and thus have not been wronged in any way whatsoever. Which pretty much blows all your arguments out of the water. If certain US business and consumers chose to take a gigantic open-ended price risk by failing to hedge their future oil consumption, then that is their responsibility and they should bear the consequences, not use violent force to impose it on those with better foresight and the balls to back it with real money.
Artificial demand means they do not want to consume the commodity, they believe commodities are an asset class, as index trackers they need to buy as money comes into their funds. If Oil is going up they and they have a lot of cash flowing into their fund, they have to buy, basically they are price insensitive. Hence "artificial demand" By the same token they will take it too low on the downside as people withdraw funds and they are forced sellers thus creating "artificial supply" The producers of commodities hate index trackers because they damage the end user market. High oil prices force users to find alternatives, for example swap your SUV for a hybrid, in the long term its not good for the producers. Better to sell a lot of oil at $100 than a bit at $135 and then a lot at $50.
But why is it artificial? Surely wishing to preserve purchasing power, diversify pension assets, reduce the risk & volatility to pension savers, are goals just as legitimate as seeking to turn a buck in the oil industry, or the oil-consuming industry? Why is someone who runs a 12mph Hummer in LA traffic jams 250 days a year providing "real demand" whereas someone wanting to optimize the savings of their company's workforce, to avoid penury for thousands of people in old age, is only providing "artificial demand"? Pension funds have just as much right to buy, own, and invest in oil as any other business or individual. I think the term "artificial demand" is extremely misleading. It should be described more accurately as "investment demand" for pension funds etc, and "speculative demand" for hedge funds, speculative traders, and so on.
By that logic, aren't index trackers good for consumers? If a bit of oil is sold (and thus bought) at $130, and a lot is sold and bought at $50, oil consumers have got a better deal than if the index trackers were not around.
Consumption is not the same as demand. This is an elementary error that first year economics students (and new fundie analysts at any reputable firm) are taught. Secondly, price elasticity is not set by demand alone (let alone consumption alone), but rather by demand AND supply (and supply is not the same as production). Third, it is quite possible for a 1% increase in consumption to have a 33% increase in price. There have been many market environments where consumption has *fallen* yet the price has increased way more than 33%. Price does not follow present consumption in a linear fashion, since prices are also influenced by expectations for the future, not just present supply & demand. Another factor you have ignored. Come back once you have mastered some 1st year economics, then you might actually be able to respond coherently when people point out the elementary errors in your knowledge and reasoning.
why I keep hearing of the supposed 'price insitivity' of index investors?you dont think people sold because oil 'run too high' or got scared it was a bubble or were 'waiting for a pullback'?thats nonsense, they are sensitive just as anybody else, I dont see people saying there is a bubble in GOOG because the investors are price insensitive. its not like human nature all the sudden changed because its a new asset class
I have no problem with a pension funds right to buy commodities if they think thats a good hedge against inflation. The problem with index trackers is that they are trying to replicate the index. So as they get cash in, they must buy or risk not replicating the index. As such they are not price sensitive and a producer/user/hedger or a speculator is. If they get $1 in they must spend it they can't say gee this market looks overbought I think I will wait for a pull back. I don't know the Oil market well, but in the platinum market, I do know that when an ETF fund started up the two biggest producers of platinum refused to sell to them. (I suppose they could end up trading with them indirectly). Basically the mines felt they the ETF operator, would drive the price of platinum up and damage the end users. Basically when the price of platinum gets too high end users start looking for substitutes. Which causes the price to be lower in the long term. Well thats their argument anyway. Watch Oil over shoot on the downside as pension funds/investors start withdrawing from the commodity indexes. The problem is that they are causing commodities to overshoot, and that can affect all sorts of things in the economy, from airline tickets to the cost of plastic bags. Problem is the shock to the economy, businesses can find it difficult to adapt to such volatility. I definitely do not believe that they are doing it intentionally to damage anybody. Also remember guys like Jim Rogers (and I am not sure about Pickens ) Run commodity index trackers so it pays then to try and obscure the issue.
what makes index ETF funds get $1 of cash?discretionary decision by the investors who are price sensitive