jay21 With due respect, it sounds like you've got a long way to go in your quest for knowledge. But it's an interesting journey so good luck. I could give a succession of detailed replies to address each of your points but I'm not. However, a question for you to ponder... Which is more acceptable - A farmer going out of business because prices are deemed "too low", or a consumer having less or no money in his pocket because prices are deemed "too high"? And who gets to decide this? It becomes a very political matter, depending on your viewpoint. Note that a structural change occurred in the last decade that was in large part the unintended consequence of Government/Fed policies to devalue paper currencies (printing more dollars to reduce the real value of debt in excessively indebted economies). Clearly, you make paper dollars worth less by increasing their supply via QE money printing, and increase the relative attractiveness of real assets and inflation hedges such as commodities. Commodities have developed an underlying appeal to long term investors because they benefit from excessive Fed money printing and sub-1% interest rates. If the Fed started tightening policy to 4-5% again commodities would lose their appeal and paper money would gain in attractiveness to savers and investors. The savers would be happier but the farmers would be complaining, as you would if the price of your produce collapsed. "Speculators" are the whipping boys whenever the price of oil goes up, (just as they are when equities go down - "evil short sellers and hedge funds"!) but speculators are only responding to increased long term investment demand or supply forces. This is pretty obvious really because a speculator by definition will not take physical delivery of an underlying - at that point he probably becomes an investor. A speculator is doing his job well if he is able to make money because his average buy price is less than his average sell price, so he is effectively "smoothing" out the price movements, assisting in some kind of semi-mean reversion process, nudging price towards some kind of illusory equilibrium price, in between price extremes. Earning a profit to enable him to stay in business is the reward for good judgement and prudent risk management. You need both. And so the most competent speculators, by staying in business, continue to assist in the price discovery process, whereas the guys that buy oil when it gets out of line with fundamentals (working against the farmer at low prices by selling too low, and against the consumer at high prices by buying too high) are put out of business... Hope this helps you on your journey.
Wow, you packed more false assumptions into one post than I've seen for quite some time. My advice is don't assume things. Assumptions are the mother of all fuck ups. Second, if you are going to pontificate on economics, it is your duty to inform yourself to an adequate standard *before* entering the debate. "It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a 'dismal science.' But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance." - Murray Rothbard
Just don't call them a speculator, call them a market maker! Why do they never blame market makers for the high oil prices?
Jay, as others have pointed out, the basic flaw in your theory is that: more speculators does not necessarily mean higher prices. The equation is: the more speculators you have, the more accurate the process of price discovery. All of these uninformed politicians that want to blame speculators simply do not understand the basic nature of the markets. They make statements touting that the 'laws of supply and demand' should determine the price. Well what happens when the supply is extremely limited? Prices go sky high. And when supply is abundant the next month? prices go very low. The futures market, through the participation of speculators, helps smooth out these kinds of price swings that would otherwise make commerce a lot less efficient.
More sheer brilliance. What he said also. BTW, you could find faults with just about every human endeavor. And no, restricting speculators would not, in fact, lower prices. At least half of the commerical dynamic hedging community (usually the commercial end-users of the commodity who are by default net short) would need to buy forward contracts. One example might be a fertilizer manufacturer who uses huge amounts of natural gas for production. And not all commericials hedge or hedge at the same levels as other commercials. With Nat Gas prices so low at present, Chesepeake Energy ( a net long producer )may not feel compelled to sell forwards in order to lock in a production margin.
These are two sharpest points I have seen in this thread so far. Yes, I do see farmers in third world country went out of business. Deciding what to plant next season has become a constant speculation for them. If they are wrong, their price went to extreme low, and their business are out. Speculators helped smooth these extremes, and at the same time answers how much profit consumers should reward these farmers. Well said benwm! This thought leads me to another hypothetical question. In a free market, anybody can participate. Would you allow the Fed to secretly participate as speculator to help smooth out the price ? They are immune to margin call, and if they lose, it becomes another reason for them to print more money. Yet if the price gets unrealistically expensive and economy starts hurting, they can immediately bring the price down instead of "rooting out" profiting speculators like what they do now? Please elaborate my false assumptions Ghost of Cutten ! It is a philosophy discussion, so you are welcome to join the debate.
Now the real issue in that scenario would be about personal motives. The man or group in control of secret Fed market manipulation is BOUND to be in bed with special interest groups. If there was some way to guard against this, it would work nicely.