Thursday, June 26, 2008
Speculators do not believe that speculators keep the price of oil high
Today, at least three interesting things happened in the oil market.
First, various "analysts" testified before Congress that the price of oil would fall by half if Congress some how "limited" speculation in energy futures.
Second, Democratic Representative John Dingell flapped his gums on behalf of regulating energy trading:
"Energy speculation has become a growth industry and it is time for the government to intervene," said Rep. John Dingell, D-Mich., chairman of the full committee. "We need to consider a full range of options to counter this rapacious speculation." It was Dingell's strongest statement yet on the role of speculators.
Third, oil soared to a new record price in excess of $140, causing me to lose a bet.
From this I conclude that oil speculators do not believe that the regulation of speculation, which is presumably ever more probable as a political matter (given the Congressional sturm und drang and that both presidential candidates have mumbled dark regulatory mumbles), will in fact reduce the price of oil.
10 Comments:
By 
, at
Thu Jun 26, 05:21:00 PM:
Of course they don't. Unlike Congress, they have a clue.
By , at
Thu Jun 26, 06:11:00 PM:
Dingell is the congressman that was proposing the carbon tax. Where does he get off complaining about high oil prices.
alan
By , at
Thu Jun 26, 06:12:00 PM:
How do these people get elected? To lower the price of oil futures, you simply pass a law allowing oil exploration offshore and on federal lands. No kidding Congresspeople: It really is that simple.
By , at
Thu Jun 26, 06:29:00 PM:
If we have another record down day on the market and go into a full recession, I can promise a reduction in the price of oil. Demand will drop like a rock in the USA. A USA recession would hurt China and India and slow their economies down. It is a painful way to get lower oil prices.
By , at
Thu Jun 26, 07:08:00 PM:
There is no plausible way that speculating about what the price of oil might be tomorrow can actually affect the price of oil tomorrow. The outcome of the speculation -- whether the speculators make or lose money -- is determined by what the market does.
This whole flap about oil speculators is a dust cloud raised by a stampede of idiots who don't understand finance, attempting to control finance by fiat. Like the natural-born damn fools they are, they don't take their ignorance about finance as a reason not to try to fix it.
By 
Purple Avenger, at
Thu Jun 26, 07:13:00 PM:
There is no plausible way that speculating about what the price of oil might be tomorrow can actually affect the price of oil tomorrow.
Substitute "tulip bulbs" for "oil" and replay that sentence and see how it sounds.
By Pax Federatica, at
Thu Jun 26, 07:15:00 PM:
How do these people get elected?
In most cases, by running in Democrat-safe districts or states.
By , at
Thu Jun 26, 09:51:00 PM:
Oil will act as a dynamic break on any economic expansion until we have a radical restructuring of our energy production and consumption.
Drilling isn't a radical restructuring, but it can buy time while we do.
The best way for Government to assist in the restructuring is to protect Venture Capital investments with a Oil Floor Tax (say $90 and indexed).
By Escort81, at
Thu Jun 26, 10:22:00 PM:
Our financial markets are perfectly capable of mispricing assets in the short run such that their valuation becomes detached from reality (in either direction, but what makes the most noise are overvaluations). In the 1980s, it was unsecured high-yield bonds financing LBOs (junior to the secured debt), in the 1990s, dotcom stocks such as Internet Capital Group based here in suburban Philly and CMGI near Boston. Eventually, the market sorts things out as buyers and sellers get better information and adapt to changing conditions.
Is there a speculative premium associated with spot oil prices right now? Undoubtedly, although it is difficult to quantify with any precision, and it is certainly small compared to the underlying supply and demand fundamentals. A robust increase in worldwide demand and much slower growth in supply have caused prices to escalate quickly (duh).
New supply is out there to be had, and we should certainly undertake more domesitic drilling, while at the same time adopting a long-term floor price as was suggested above, which has the effect of encouraging massive new investment in alternative energy (since the floor sets a $/btu benchmark or bogey that alternative technologies will have to beat to become viable), while at the same time also raising CAFE standards somewhat (although the market is already doing that - SUVs effectively have very little trade-in value) and encouraging conservation.
By , at
Fri Jun 27, 12:14:00 PM:
Our financial markets are perfectly capable of mispricing assets in the short run such that their valuation becomes detached from reality.
This is it exactly. Everyone from Ahmadinejad to posters here agree that present supply of oil exceeds the supply implied by forward prices. Libya went so far as to say yesterday that they're going to withhold supply from the market because of a glut! Iran has excess oil being stored in tankers in the Gulf. This is a speculative bubble that can be turned around violently and quickly.
