The Bad Guy: Oil Speculators
Say Goodnight to the Bad Guy
Was Tony Montana right? Do we need the bad guy to point our fingers at? If that is so, it seems the bad guys these days are the oil speculators. If we listen to all the talking heads and politicians, we would be demanding the end of oil speculation. It might be the one thing that both President Obama and Bill O’Reilly agree on!
I am a contrarian at heart. I love the other side of common knowledge or popular opinion, so I had a big smile on my face when I saw In Support of Speculators. The author actually found quotes from another blog, Rick Perry’s Carpe Diem (no, not that Rick Perry!), but added a little more in terms of other causes.
Here are some arguments against the Bad-Guy-Oil-Speculators-Are-Raising-Gas-Prices Theory:
"People who argue that speculation is destabilizing seldom realize that this is largely equivalent to saying that speculators lose money, since speculation can be destabilizing in general only if speculators on the average sell when the currency (commodity) is low in price and buy when it is high." - Milton Friedman
“Speculators anticipate shortages and buy up commodities early, thereby removing them from the market. This alerts consumers to the oncoming shortage, fulfilling the important financial market role of providing information and allowing them to reduce consumption as prices rise. Later, the speculator sells, ameliorating the shortage while making a profit.
“Speculators anticipate and warn others about shortages—they do not cause shortages. As a result of their trades, price swings are less severe than they otherwise would have been. We do not blame doctors, police, or firemen for profiting from the misfortune of others because it is understood that they help a bad situation. Speculators deserve the same consideration." - Joetta Forsyth, Learning to Love Financial Market Barbarians
There are many different factors affecting energy prices. Increased consumption in Asia, Iran causing havoc in the Middle East, and perhaps decreased oil production in the US over the years.
Here’s an interesting graph of energy consumption:
source: Energy Information Administration
The consumption of energy has drastically increased in Asia as emerging markets in China and India have thrived. While all the conservation policies the United States and Europe that have decreased the consumption percentage and kept expenditure levels relatively steady over the past 30 years, it’s definitely not enough to offset the amount that Asia is now using.
Here’s a quote about Iran’s influence on the market:
“Markets tend to be especially fearful of potential events that can have large negative impacts. The probabilities may be low for a conflict over the Strait of Hormuz or the possibility of additional military action in the MidEast, yet the direct and indirect implications for all the nearby oil-producing countries are extremely severe and the potential negative spillover into the world’s oil supply is huge.”
This is where speculators actually help stabilize prices!
Finally, the US produces roughly 37% less oil today than it did from its highest level in 1985.
I cringe whenever someone attacks “speculation.” First, it smacks of paternalism to me – speculation by those who are properly informed of the risks is entirely healthy, especially in the markets. In fact, it’s required, in my view, for a “natural market” to thrive. Think of it like this – for a trade to happen, someone needs to be willing to take the other side. If you are trading for safety, basically using market mechanisms to design your own “insurance”, who exactly is on the other side of your “safe” trade? It has to be someone “speculating” that you will be wrong. Maybe it’s not that simple, but it is how I see it.
If, as a society, we decide we do want to be so paternalistic as to curb “speculation” – let’s start where the truly misinformed, including many folks who can ill afford the losses, are getting fleeced every day – let’s ban lottery tickets.
TradeKing Bigdog, Chairman and CEO
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[Scarface Image taken from: Natán Calzolari via Google+]
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