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To begin with between 20 and 30 dollars or more a barrel and not the  15-20 dollars a barrel is what is in the market based on speculative trading of oil. The simple fact is oil should not be priced much higher right now than $80-85 dollars per barrel based on past oil supplies in fact there is now probably a larger oil supply and storage then there was during the last oil spike. The argument that Libya or other countries create price spikes in oil and other commodities at magnitudes 5 or 10X their actually world capacity is absurd. This is simply out of control trading on fear not based on reality of the situation.

1. The simple fact is the only way to stop rampant speculation is to have a ability to revive  requirement to trade commodities especially oil,i.e. you can't bid to buy more than you can actually store in your silos or tanks.

2. There are a large number of speculative Hedge and investment funds out there that are simply trading enormous numbers of oil futures contracts  without ever having an intent to receive the commodity they are biding on  or  having the risk of receiving an overpriced commodity, or expense of having to store or deal with the actual physical commodity. They are simply trading between the numbers sometimes even on margin, with downside hedge protection.

3.The claim that this type that if this speculation was stopped it would be bad for the market, end liquidity etc.  Is false calm by individuals who profit from unless your  driving prices of the commodity far beyond, what is reasonable in a supply and demand based market . The simply fact is if you were bidding to use the commodity people would buy it but just the people who intended to use it.  Which if it is not what a commodities based trading is intended to be, it should be. People who are bidding simply to bid are not adding to price discovery but simply distorting it. Removing this price distortion from the market would greatly lower the prices of commodities and take this stress out of the economy at large.

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Comment Preferences

  •  Trading and speculation have been (5+ / 0-)

    proven to contribute to more volatile markets; higher highs and lower lows, for example. But trading and speculation do not lead to higher (or lower) steady-state prices, especially in large markets such as oil.  The concept that there is an additional $20-$30 in the price of oil due to speculators not only has no evidence to support it, but does not even have any economic theory to support it. Oil producers can, of course, manipulate their own prices, to some extent. But financial speculators do not, and cannot, create higher prices.

    I'm in the I-fucking-love-this-guy wing of the Democratic Party!

    by doc2 on Sat Apr 23, 2011 at 06:35:52 AM PDT

    •  i disagree (1+ / 0-)
      Recommended by:
      Azazello

      First of all i disagree with your non sequitur statement that because something is large it is not easy to manipulate, and the willful blindness to this in economic theory when large traders willfully choose to jack up the price out of fear a minor event, even though it has min. effect on the market continues into a feedback loop lead of higher prices based on nothing other than a fear of something happening in the future, not based on the demand for the product

    •  yeah, sure (0+ / 0-)

      http://finance.fortune.cnn.com/...

      Olivier Jakob, who covers energy markets for Petromatrix in Zug, Switzerland, estimates that traders added 40,000 to 50,000 crude contracts to their long positions in the second half of last week. That would take them up to seven times the Cushing capacity, a level he calls "extraordinary."

      The speculative fervor is so remarkable that the big trading firms now have nearly twice as many long contracts open as they did in 2008, when oil spiked to $147 in the summer, a development that either foreshadowed or caused the global economic meltdown, depending on how you look at it.

      All this seems to point to a further rise in oil prices, which will only add to the squeeze on consumers' wallets. If oil and other commodity prices continue skyward, it is only a matter of time till the economy cries uncle, it stands to reason. $4 gasoline this spring could spell slowdown in the fall or winter, Goldman Sachs economists say.

      "Our analysis shows the maximum impact of oil on growth occurring with a lag of 3-4 quarters, which would point to a peak impact in late 2011," Goldman's Jan Hatzius wrote in a note to clients Friday.

      This is not the ideal time for a big impact from higher oil prices, what with the United States banking on a growth spurt to get out from under a massive debt burden.

      •  This is not a statement that speculation (4+ / 0-)
        Recommended by:
        Ashaman, doc2, dnpvd0111, VClib

        CAUSES price increases.  Instead, it is a statement that speculators are taking a long position -- i.e., agreeing to buy the commodity on a forward contract -- because they believe that prices will go up.  They are not CAUSING prices to go up -- they are looking at the state of the global market -- which is what influences prices --  and betting that, based on the state of the global market, prices will go up.  

        I have never seen an economic study that says that trading in forward contracts actually CAUSES an increase in commodity prices.  I'd be happy to see that, but I haven't yet.  Instead, speculators, for the most part, bet on movement in the global market.  I would suspect that there are isolated instances when that betting on movement in the market has some small effect on the market itself.  Certainly, global commodities trading help direct the commodity to those markets (like China, right now) willing to pay the most for the commodity.  But I've never, never seen any economic study that says that commodities trading has the magnitude of effect that this diary says.  

        •  so (0+ / 0-)

          where are you getting that from the Nymex or the ICE  pr firm

          •  because (0+ / 0-)

            this is the same nonsense that is trotted out every time the government tries to rein this market and it's traders in

          •  Actually, because I'm in New Orleans (1+ / 0-)
            Recommended by:
            VClib

            where the oil and gas industry has a major presence, so I've learned to understand commodities trading and what forward contracts are.   Worldwide oil and gas prices have direct impact in a number of ways on my state.

            There is nothing special or unusual about crude oil commodities trading.  There are a number of different commodities that are traded on commodities markets.  Commodities trading is widespread in agriculture, even livestock.  Commodities trading, for example, is not the CAUSE of the huge spike in gold prices; commodities traders who correctly predicted that huge spike, however, are making a ton of money.  It is the same with every commodity, including crude oil.  

            •  yeah yeah (0+ / 0-)

              i've heard this same story over and over again and have seen hyper spikes based on nothing over and over again and each and every time some large trading company or hedge fund or investment group had gone in and juiced the market

              •  so (0+ / 0-)

                again i don't believe you and have seen plenty of evidence that commodities trade has caused these mythical spikes over and over again

                •  Please provide links to the (1+ / 0-)
                  Recommended by:
                  VClib

                  evidence that commodities trading actually causes big spikes in the price of the commodity.

                  Perhaps you have some evidence that the huge increase in the price of gold was caused by commodities trading?  

                  •  again (0+ / 0-)

                    another non-sequitur argument  gold has actual demand oil does not and several of the other commodities do not. The Oil is going up in spite of Demand destruction and steady or increasing supply that is actually on the market.

                    •  Just wrong. (1+ / 0-)
                      Recommended by:
                      VClib

                      Crude oil prices are increasing because of concerns over what is going on in Libya and other Middle East countries.  The unrest in the Middle East, plus the projected increase in demand from China and Asian countries is generally regarded as the basis for the increase in price.  

                      To talk about what supply is in place TODAY is to fundamentally misunderstand what a commodities market -- any commodities market -- is all about.  Much of commodities trading is done on a futures market -- that is, a prediction of what will happen in the FUTURE.  Every commodity -- even including commodities like grain -- is traded on a futures market.  What is largely credited for the increase is a combination of the concern over what the turmoil in the Middle East will do to future supply plus a growing demand in places like China and the U.S. as the economy recovers.  

            •  Give it up dude. I know you are trying (2+ / 0-)
              Recommended by:
              coffeetalk, VClib

              to educate folks here, but some people just don't want to learn anything if it conflicts with their simplistic current understanding.

              I'm in the I-fucking-love-this-guy wing of the Democratic Party!

              by doc2 on Sat Apr 23, 2011 at 11:49:41 AM PDT

              [ Parent ]

  •  How has devaluing (2+ / 0-)
    Recommended by:
    Johnny Nucleo, HiBob

    the dollar played into commodity price run up?

    "Don't part with your illusions. When they are gone you might still exist, but you have ceased to live." Mark Twain

    by Void Indigo on Sat Apr 23, 2011 at 06:42:16 AM PDT

  •  So how, who is supposed to control (1+ / 0-)
    Recommended by:
    HiBob

    speculation?

    "I've taken up sculpting recently. Landscapes mostly." ~ Yogi Bear

    by eXtina on Sat Apr 23, 2011 at 06:51:53 AM PDT

    •  There are things the DOJ and the SEC can do (1+ / 0-)
      Recommended by:
      OIL GUY

      to rein in speculation.

      Which is what is beginning to happen.

      Look for a slight drop in prices, moving to a stable level of maybe around 3.50 a gallon as this latest phase of "let's play the speculation game so we can have higher stable prices, gouging the consumer while at the same time looking reasonable" that the oil companies do periodically.

      "Nothing in all the world is more dangerous than sincere ignorance and conscientious stupidity." --M. L. King "You can't fix stupid" --Ron White

      by zenbassoon on Sat Apr 23, 2011 at 07:06:17 AM PDT

      [ Parent ]

  •  Oil Speculation (1+ / 0-)
    Recommended by:
    Ashaman

    Why should oil be $80 dollars a barrel?  What is the basis of your claim?  We live in a nation using 25% of the world's oil while owning 2% of the world's oil reserves.  The US is hardly in a position to determine the price of oil in the world.  World oil production stands at about 82 million barrels a day.  When China and India reach the oil per capita of 2002 South Korea they alone will need 90 million barrels a day!  China's oil consumption is increasing far more rapidly than any expert had predicted so will be reaching that level in the very near future.  While there may be speculators the oil markets are reacting more to reality than anyone is ready to admit.  Why, because it would cause even more panic to tell the world there is indeed a supply crunch.  If just 1 million barrels is taken off the world market today it has consequences far greater to the overall supply.  That is why taking Libya's oil off the market is having such a global impact.  Think of it as the straw that broke the camel's back!  America has very little time to find an alternative energy source or face the impact that steadily rising oil prices will have on our economy.

  •  You are being naive.. (2+ / 0-)
    Recommended by:
    Ashaman, HiBob
    The simply fact is if you were bidding to use the commodity people would buy it but just the people who intended to use it.  Which if it is not what a commodities based trading is intended to be, it should be.

    In a perfect world, perhaps.  But we live in nothing even close to a perfect world.  Nor, does the United States have the power or control to make the market into what "it should be".

    This is simply out of control trading on fear not based on reality of the situation.

    Duh.  That's almost the definition of speculation.  Of course it has nothing to do with reality.  It has everything to do with possibilities - risk - fear.

    There is a risk in buying large quantities of oil that you simply fail to grasp.  We pay more for today's oil when there is a risk that tomorrow's oil may be much more expensive.

    A few scenarios...  Ships moving through the Suez Canal get disrupted.

    Iran blocks the Straights of Hormuz.

    Saudi Arabia erupts in violence and revolution.

    While unlikely, there is a very real elevated risk that supply will be disrupted.

    All of these scenarios are assigned probabilities - The Saudi shutdown is of course the worst-case scenario, but it has a fairly low probability.  All these factors are built in to the price of oil - a price distributors are willing to pay to guarantee their supply.

    Don't start monkeying around with oil markets - things will just get worse.

    And one other thing - oil price spikes have really very little to do with the health of the economy.  It is only when our government overreacts to oil price spikes (like raising interest rates for fear of inflation) do we get into trouble.

    •  no the point is (0+ / 0-)

      you shouldn't be allowed to speculate at all into commodities markets you either need to be willing to take it or not be able to bid on a commodity. Those examples are why speculators need to be cut out of the market completely. This is the same load of garbage the traders make up to keep this game going. There is no reason for it and the premiums they are creating in the market are absurd distortions even based on the those far fetched possibilities. Just letting the market do what ever it wants is not a good option and it's quite clear that this the same type of irresponsible behavior that got us into the last crisis.

  •  Why not put a small tax on each transaction? (0+ / 0-)
    •  I'd love that solution (0+ / 0-)

      for a lot of speculation-based market abuses-
      except that if the tax is onerous enough to prevent the abuse, then the speculation would just move out of jurisdictions that have the tax.

  •  better answer is to move forward on other energy (0+ / 0-)

    sources to deflate the oil bubble more quickly and more thoroughly.

    Imagine how different our country would be if our government REGARDLESS of which party held power wasn't beholden to Exxon/Mobil, BP/Shell, etc.

    LBJ & Lady Bird, Sully Sullenberger, Molly Ivins, Barbara Jordan, Ann Richards, Drew Brees: Texas is No Bush League! -7.50,-5.59

    by BlackSheep1 on Sat Apr 23, 2011 at 08:59:42 AM PDT

  •  do as the founding fathers supporters would... (0+ / 0-)

    tar and feather then hang the speculators from the lampposts on wall street

  •  People are paying the price at the pump (0+ / 0-)

    so your speculation argument makes no sense.

    And further there was plenty of speculation after the price of oil dropped in 2008.

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