Thursday, July 10, 2008

Quit Blaming 'Speculators' (futures and options traders)

Economist Walter Williams had a great column on this. I quote the best part of it:

Congressional attacks on speculation do not alter the oil market's fundamental demand and supply conditions. What would lower the long-term price of oil is for Congress to permit exploration for the estimated billions upon billions of barrels of oil domestically available, not to mention the estimated trillion-plus barrels of shale oil in Wyoming, Colorado and Utah. Some politicians pooh-pooh calls for drilling, saying it would take five or 10 years to recover the oil. I guarantee you we would begin to see a reduction in today's prices even if it took five to 10 years for us to get the first barrel. Put yourself in the place of an OPEC member knowing there would be a greater supply of U.S. oil five or 10 years, hence maybe driving oil prices lower to say $40 a barrel. What will you want to do now while oil is $130 a barrel? You would want to sell as much oil now and OPEC's collective efforts to do so would put downward pressures on current oil prices. Right now the U.S. Congress is OPEC's
staunchest ally.

Why did crude oil futures run up? Because futures contract traders (rightly) believed long-term demand would continue to outstrip supply, leading to an increase in price. This is why all it took was President Bush getting rid of the executive order banning U.S. offshore drilling to give the market the perception that we were about to get serious and increase the supply a little, to drive the price back down a little. If it took crude oil futures topping $145/barrel and gasoline hitting $4.50 per gallon to get our weenie politicians off their asses and allow us to go after our own natural resources, and "the speculators" were 100% at fault for driving prices to these levels, then they should be given medals and have heroic folk songs written about them.

Now I can just hear some of you quibbling about lowering demand rather than raising supply. In a world of growing Chinese, East Indian and other oil demand, fat chance, no matter how much it may make you feel good to conserve. Not that effective fuel substitutions wouldn't be a bad idea. (Hint: try making ethanol from sugarcane, not corn). But just look around your desk or walk around your house and count all the petroleum derived plastic and vinyl parts--we need petroleum, and we will for a long time to come.

With commodities, both buyers and sellers are absolutely necessary components of a functioning market. What it comes down to at the end of the day is that the nefarious and shadowy "Speculator" is an easy target for demagogic eco-weenie politician to blame for high gas prices in an election year since most of the public has no idea what one is.

Make no mistake that these crypto totalitarians are secretly desiring price and other controls on us, and "speculator" demagogery is useful in this aim. They tried demonizing the oil companies for years, but it has become apparent to all that oil companies are small fry compared to many "oil governments". Funny now nationalized oil companies always escape such criticism, isn't it?

Seriously, folks, the futures and options trading market for oil is NO different than the ones for gold, silver, wheat, pork bellies, or frozen concentrated orange juice (for those of you who remember the comedy "Trading Spaces").

Do airlines hedging their exposure to jet fuel costs ever plan to take delivery of the barrels of crude oil they order? Too funny that it was these liberal political asshats petioning the public to remove "the speculator" from the markets. Speculator defined as one not taking possession of physical barrels. (And yes, for every airline or trucking company trying to hedge against future oil price spikes, there's a so called "evil speculator" who has to buy or sell in the opposite direction.)

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