Why Gas Is So Expensive Today (Hint: It’s Not Libya)
cpeterson.org
cpeterson.org
Gas isn't expensive today. What's expensive today are almost all commodities. http://www.indexmundi.com/commodities/
This is a systemic problem. Any valid explanation of price increases in a commodity, e.g., oil (gas), has to explain why prices are rising almost across the board.
Global commodity price increases are being driven by two main factors. The first is rapidly rising standards of living in the developing world as many nations, especially China and East Asian countries, have freed up their markets. This has caused a dramatic rise in living standards and a huge decrease in the number of people living in poverty. These people are now buying the things that we in developed take for granted, and that is driving the prices of copper for cars and new homes, steel for buildings, oil for transport, corn for livestock feed, etc.
The other systemic factor is massive currency inflation in almost all OECD coountries. When inflation happens in more normal circumstances, an inflating country's money falls in price relative to those of other countries, and it's easy to see which countries are destroying their currency and which aren't. People sell the increasingly worthless currency and buy the strong ones. What we have today is almost all OECD countries inflating their currencies at once in a (failed) effort to boost their economies. This means that anyone who wants to protect their wealth needs to invest in something that will rise at least as fast as inflation. That means commodities.
BTW: If speculators can somehow control prices in a way largely independent of constraints, then why aren't they always doing it? It's not like human beings just started getting greedy last year. And why have, for instance, prices of natural gas fallen thru the floor (hint: greatly increased supply due to drilling breakthroughs)? Where are the all-powerful speculators on that?
This is a systemic problem. Any valid explanation of price increases in a commodity, e.g., oil (gas), has to explain why prices are rising almost across the board.
This is almost exactly the point the article is trying to explain: commodity prices are rising across the board in line with the commodities index, but why should there be an index at all? In the market you have the supplier, buyer, and consumer. The "speculator" was placed into the mix with a limited role for providing liquidity; this role was intentional and helpful since in the real world there could be a delay between the time a grower/supplier and buyer/cereal producer actually needed what the other had (raw material or cash); with the speculator there was always the opportunity to buy or sell. However, there were intentional, specific limits placed on the speculator. This was to ensure he couldn't corner the market and artificially skew prices. As long as these limits remained intact the market operated as designed, and the actual price of commodities reflected real world supply and demand (since the main players in the market were physical hedgers - people who actually had stake in/cared about the physical commodity). Goldman Sachs was able to get these "speculator handcuffs" removed. This means the actual market price for commodities doesn't necessarily reflect supply and demand. Rather, it also has the component of speculation priced into it. We can see this even within these last few days. The price of a barrel of oil was skyrocketing above $100; this seemed to make sense due to the unrest in the Middle East, then amazingly with the earthquake in Japan it quickly dropped below $100. In such as short time was there really an escalation then de-escalation in the demand for oil!? Of course not. The price was following speculation, people who are only in the market to make money. The end result is that ordinary consumers must pay at the pump what the whims of investors say, never mind progress made whether politically or technologically, or reductions by consumers in a recession to ease pressure on demand and oil prices. Natural gas is not as attractive to speculators as oil.
It is not entirely clear to me that adding this expectations component is always bad. It can get out of control when it becomes self feeding, but it can also convey valuable information that allows us to react early to fundamental supply and demand issues. We clearly have fundamental supply issues in crude oil and in agricultural products. The blog post is totally wrong on that one. Pointing to falling US demand of crude oil makes no sense in a world where the marginal buyer is in Asia.
That's like me expecting you to say "thanks" for returning an item I took from you when it's speculation which helped drive up prices in the first place.
What speculation really does, in my view, is to insert a component of future expectations in addition to the current supply and demand effects.
That's exactly what it does. Why do we need that?
It is not entirely clear to me that adding this expectations component is always bad. It can get out of control when it becomes self feeding, but it can also convey valuable information that allows us to react early to fundamental supply and demand issues.
React early and do what? This isn't like hurricane preparedness. Again, the point the article is trying to convey is that prices don't reflect supply and demand. We experience sky rocketing gas prices but no longer see gas shortage or rationing lines. In 2008 we had significantly more people go hungry from food shortages, although nothing has changed about wheat farming except, if anything, farmers producing it more efficiently. The wheat harvest that year was the most bountiful the world had ever seen.
I'm extremely wary of the term "increased incentives" in light of recent events sparked by this model on Wall St.
and provides funding for averting real future shortages.
We just don't see gas lines to support that argument.
Edit: And what do you mean "provides funding" anyway? Speculative contracts don't raise oil producing levels, nor stockpile oil (as our Strategic Reserve does). The extra money which exists is all used up by the speculators playing the game.
I'm not anti-Wall St. But I am anti-recklessness when it means wreaking havoc on our national (and by extension entire world) economy.
It's difficult to deny that higher prices increase supply and/or destroy demand.
No, it's not. Actually, higher prices usually mean there is decreased supply and increased demand. That's in a normal market. But we don't even have a normal oil market. That's the entire point. When oil prices skyrocketed to record levels above $145/barrel in 2008 it wasn't because of increased demand, and those astronomical prices didn't mean an increased supply of oil either.
Both are true
But that's not the cause of our higher prices. Listen, I can't keep arguing this. Do me a big favor and just read the first 3 paragraphs here:
http://useconomy.about.com/od/commoditiesmarketfaq/p/high_oi...
As a consequence, suppliers now want to supply more and consumers want to consume less.
Suppliers want to supply more. So, if you're some Saudi Arabian sheik witnessing these astronomical oil prices you really want increase oil production and supply more? What will that do to oil prices? Think about what you're saying.
Of course prices are not just influenced by supply and demand. They are also influenced by speculation. I never denied that. What I'm saying is that speculation changes the timing and increases the volatility, but it cannot decouple from supply and demand indefinitely.
So if we're running out of easily accessible oil in, say 20 years, and speculation increases today's prices in expectation of that, that's a good thing. Of course it is a double edged sword. Sometimes future expectations never materialize and speculation ends up destroying value.
> The "speculator" was placed into the mix with a limited role for providing liquidity
This makes no sense. Who did the placing? Every market has speculators, and even end-user-buyers base their decisions in some part on speculation.
The speculator has no altruistic diktat to provide liquidity. The speculator is there to make money, and providing liquidity is a side-effect. i.e. the speculator wants to take on a position, but can only do this if someone else wants to exit a position -- thus making a trade. The seller's interests are served just as much as the buyer's.
Now, there is a clear issue with cornering the market. However, there is a natural check to this behavior, in that taking delivery of millions of barrels of oil is expensive. And if you have no intrinsic need to consume a commodity, then it is very expensive to sit on. If supply is indeed artificially constricted by hoarding speculators, they will need to sell off their supply at some point.
Did you read the article?
These buyers and sellers of real stuff are the physical hedgers. The FDR administration recognized, however, that in order for the market to properly function, there needed to exist another kind of player - the speculator. The entire purpose of the speculator, as originally envisioned by the people who designed this market, was to guarantee that the physical hedgers, the real players, could always have a place to buy and/or sell their products.
>The speculator is there to make money, and providing liquidity is a side-effect.
Yes, speculators making money is fine. The liquidity side-effect is the reason to allow for some speculation in regulations.
> If supply is indeed artificially constricted by hoarding speculators, they will need to sell off their supply at some point.
Yes, that's why, as I said, consumers are subject to volatile price swings from investors, rather than steadier prices which would more accurately reflect supply and demand.
My point is that free and open markets attract participants who exercise their self-interest. There is no central authority saying "you are the buyer", "you are the seller", and "you are the speculator". Speculation is an inherent property in any market participant. So-called "speculators" are merely those having no larger interests (i.e. taking delivery and consumption).
In a split-second, a "real player" can become a speculator, if he sees a market opportunity and takes on a position for which he never intends to take delivery. The point is, identifying who is a speculator and attempting to limit those activities is extremely difficult, because speculation is all about internal motivation, and central authorities have no real insight as to an individual's motivation.
I applaud FDR for not trying to prevent speculation, but I seriously doubt any capability for injecting speculation via "placement".
You're reading my text too literally. I don't mean to an arm from the sky put speculators in the middle of the wheat market. As you correctly mention, an open market will attract those who exercise self-interest. Speculators are thereby effectively "placed" in a designed market by not regulating them out.
I agree with you about the effect of inflation and the post only covers 15 foods and oil in detail so an argument that speculation is the sole cause of price increases would be false. An argument that speculation is a driver in the prices of all commodities would be an extrapolation that requires more evidence. However, breakthroughs in drilling for natural gas gives a reason for natural gas to be an exception, not for all commodities to be devoid of speculation's influence.
Period, god damn it.
If there is no unsold oil piling up in tankers than oil is currently priced at the level where demand at that price equals the supply. You cannot blame commodity speculators for this!
My understanding is that during the last price speculation bubble, there were oil tankers piling up. If this is not happening now then commodities speculators have got nothing to do with it. Why is this so hard for people to understand?
It's so full that they're building more capacity to store more oil. The situation is the same in other parts of the world.
BTW, this is common knowledge for those who follow the commodities markets. Oil prices are high because of perceived risk of potential supply contraction due to instability in the middle east. It's a risk trade, i.e. speculation.
Speculation could probably have negative effects on markets in theory, but it's so hard to take such claims seriously since they're rarely based on sound economics.
Guess who got hurt in the tulip crisis?
...
The speculators. Their harm tends to be self-contained.
Where is the private incentive that is actually at odds with the public one?
Analogy: let's say I'm Big Co and I want to lock in the price of oil at $90 per barrel in the next 6 months, so I buy a futures contract that will do this for me at a price of $5. If the price of oil increases to $100, then I would've saved my company $5 (price of oil at future rate - strike price - cost of contract).
On the surface, this is a good thing if:
a) There is a liquid market for such contracts b) My company is actually buying and selling oil for the purpose of production of goods and services
Now, consider (a); it's precisely the problem he's describing. Because these banks have large positions in these contracts, it would be in their best interests to see the market value of the oil increase, since it would lead to a corresponding increase in the value of the contract. You can think of it in terms of an insurance "premium". For example, I would pay an insurance premium for my house, car etc because the intrinsic value is high, but an insurance premium for a bottle of water would be negligible in value.
The problem is made worse because the banks are not in the actual business of using oil to produce goods and services of economic value, but in fact have exclusivity to deal in these contracts.
Note that both the demand and supply side of the underlying oil itself has slight bearing on the actual value of these contracts. It's the volatility that determines the prices.
I thought this is only the case with contracts where the payoff is not linear, i.e. limiting the upside or downside. Future contract payoffs are linear f(t) = S(T) − K, so the upside is the same as the downside.
Can you talk more about the exclusivity here? That seems like a regulatory mistake.
Did it ever occur to you that maybe it's no public knowledge how much oil is piled up where within a month of Libyan hostilities breaking out? Or that the demand for oil may be somewhat inelastic? Or that information in the oil market is not perfect?
I mean I don't know shit about commodities markets, but yelling "god damn it" isn't a very convincing argument.
The purported role of the commodities futures markets is to 'provide liquidity' to commodities producers and consumers and allow them to sell the production (and buy their needs) forward.
In fact the futures markets are completely dominated by speculation and leverage. Relatively few buyers and sellers of futures contracts either possess the underlying commodity or have a need for it in the future. Almost all futures contracts are rolled forward. There is much more 'paper' trading than actual commodities exist to back. When leverage is this cheap and loose, (i.e. you have more dollars being constantly created through various borrowing mechanisms) futures tend to be very choppy and whip the spot prices around.
The price you pay at the pump is being driven higher by people who neither own nor need oil, but rather have access to cheap leverage and do it because they can and it makes them money. (This is happening in almost every tradable commodity right now)
You seem to think that this is just the way the world works. But please realize that these are synthetic contracts that are being traded around: works of legal fiction. If the reason society allows people to trade in these contracts is supposedly due to help the market function more smoothly, why should we not consider alternatives to the current state of affairs?
Imagine if there was a futures clearing house and futures contracts could only be originated by commodity producers. (and then only in a decaying relationship to their forward production) The set of all futures contracts in existence would actually have some relationship to the forward production of the commodity. Imagine then that in order to purchase a futures contract you had to demonstrate that a) you had facilities available to take delivery of the commodity and b) that your business wasn't just to trade. (Note: the above will never happen) Do you really think commodities prices would be as volatile as they are today?
The poor and middle classes are more affected by rising commodity prices. Even if the bubble will eventually contract (which is what you seem to be saying) Why should they be they be subjected to this just so a hedge fund can make a killing for its customers?
One way to explain this is to look at house prices, and how real-estate agents 'value' these. They will value a property based on the past value of this property, the general increase in price levels since the last sell, and the price of recently sold properties in the area. Properties are not homogeneous, however the 'value' of all properties in a given area will be affected by the price changes of those being bought/sold.
Sorry, they did no wrong. They live in the USA and they have the right to manage their trading/strategies/prices the way they like. As a Tunisian citizen, I'm looking for the government to secure food and energy for the population. We have enough lands and water. This is actually a good thing: Solve the problem once in a time and stop the dependency to foreign countries.
On a related note, what happened in Tunisia was a bubble and not a revolution. The bubble burst, destroyed the political system as it was intimately related to the economical one. I'll leave that for a longer article I'll be publishing this summer, which explains and reveals many facts TVs and media are unaware about.
How are things in Tunisia, in a paragraph?
Politically, we are heading toward democracy, I hope. There will be a constitution of a "Constituent assembly" whose members are elected by the people. This assembly will put the rule of the country, as well as, a temporary government that will prepare for the presidential elections. The election will take place in July, this summer. The delegation rules will be set by the people who made the sit-in of the Kasbah. Aljazeera seems to be following the event: http://english.aljazeera.net/category/organisation/kasbah-go...
I don't think I agree. Let's think about the situation (assuming the posted article is correct): the price of wheat was relatively stable, on the order of $3-$6 per bushel. This system was fine, and stable, for years and years.
Then some financial analysts come into the picture and decide that this is an untapped market where they can make some money. So they do their magic, and -- again let's assume the article is correct and this was actually the cause -- wheat prices jump like crazy.
The result, in real terms, is that a larger portion of the world had to be considered "food insecure," and I'd imagine that some people actually went without food that wouldn't have otherwise.
Is a financial firm's ability to make money (legally, even) more important than people's ability to eat? Or even just more important than people's ability to feel safe and secure in knowing where their next meal is coming from?
From my perspective, that's a resounding no. The ethical and moral obligations easily outstrip the financial benefits.
As you say, maybe it had positive aftereffects, that the Tunisian government stepped back and decided it needed to take local action to make the country self-sufficient. And that's great, but I don't know that that would work everywhere in the world.
So the problem isn't in the price; but in the economy and policy of these countries. If the USA wants to do something about these countries, they just need to stop supporting dictatorial systems.
If you are not going to explain prices in terms of supply and demand, you need to have clear, compelling alternate explanation. Magic and assumptions don't cut it. If the "natural" (i.e. where supply meets demand) price of wheat is $3, it would be very difficult (and likely expensive) to establish an artificial price of $6. I am curious to know what that story is, exactly.
Extremely short & simplified version, because this is complicated stuff: Goldman, among other places, got an exemption to laws limiting how many futures speculators could own. This law was meant to prevent people from buying up tons of futures in order to manipulate the price. With that exemption gone, people who otherwise had little to no interest in the relevant commodity markets would buy tons of them and hang on to them.
The supply actually went up. But because people would repeatedly say things like "give me $N worth of oil," eventually others got wise and started selling oil for $N a barrel.
I've probably skipped important details and garbled something, but that seems like an OK thumbnail sketch.
The price is therefore depends on the suppliers. Normally, competition between suppliers will bring the price down to near the cost of production. However, if there is a futures market filled with overly confident speculators, who buy the grains at a high price and push it even higher, the cost to all the owners of the stock when delivery is due will be far higher than the cost of production; if most of the market paid this same price, there will be no-one with the volume who can afford to compete and push down prices; the final price is likely to strike a balance between the loss of value from throwing away wheat because some people had to starve as they couldn't afford the price, and the revenue from selling the wheat at the highest price.
In effect, against inelastic demand, a futures market and confident speculators have the same effect as rational price fixing by a cartel.
In economies where people are too poor to afford meat, fluctuating food prices are a much bigger issue. But in the US, we use more food than we need to in order to enjoy a luxury commodity.
That is until the bubble pops, those who got in late and can't sell will make a loss. The bid-ask spread widens, in particular there is glut of people wanting to sell at high prices, whilst there are few cautious buyers willing to offer lower prices.
If you think that this is a speculative bubble caused by traders then I suggest you just short the commodities and make some money bursting the bubble and bringing prices down again. Put your money where your mouth is.
It's hard to call it a bubble when all asset classes are inflating.
Edit: Just to be clear i'm not arguing the premise of the article, just that such extreme speculation would not be possible without the enormous concessions made for these banks.
From a political point of view #3 is by far the easiest route. I therefore fear that many countries will "default through inflation". In other words, we will see massive inflation, possible even hyper-inflation. This will be a huge hit to the middle-class. Because people with job but no savings are affected the most by massive inflation.
I'd recommend everyone to watch this short-clip: http://www.youtube.com/watch?v=2I0QN-FYkpw and this film http://www.youtube.com/watch?v=4ECi6WJpbzE
Another interesting video, if you haven't seen it already - Quantitative Easing explained:
http://www.youtube.com/watch?v=PTUY16CkS-k
"Printing money is the last refuge of failed economic empires and banana republics and the Fed doesn't want to admit this is their only idea." Don't worry, it's (partially) tongue-in-cheek.
"In other words, we will see massive inflation, possible even hyper-inflation." Do governments ever learn? This is what happened in the Weimar Republic and is happening today in Zimbabwe.
Where I live (Ireland), the government is trying to do option 1 and 2, without success so far. Austerity measures are hurting the economy short-term by dampening consumer confidence (fortunately, internal consumption isn't everything, as we are an extremely open economy and will pick up as exports grow.) They'd possibly be trying option 3, except the European Central Bank controls our currency and ECB rules state that a country can't run a deficit over 3% of GDP without incurring major penalties.
Austerity measures are painful but necessary. I think that ten years from now you will be better of than the Americans, simply because the austerity measures are stopping all the malinvestment and over-consumption as quickly as possible. I'm Swedish and we went through the same process twenty years ago when our real estate market crashed. Luckily we didn't do like Japan, which still hasn't recovered from their crash from the early 90's (they did what the FED is doing now).
Bankruptcy is never fun but it's the main thing that makes a market driven economy more efficient than a planned economy. You have to stop malinvestments and reallocate resources to something more efficient. This reallocation can be painful but is necessary in the long run. The recession is not the problem, the boom was the problem.
The only "good" thing this is making happen is it's slowly taking extra huge/heavy vehicles off the road as people stop replacing them with the same thing every few years. Low 20s mpg for the city isn't worth it anymore.
Oil is expensive because we'll pay that much and use even more.
Did you know the armed forces pay full top price for fuel in Iraq and Afghanistan?
Rather, the spikes are primarily a result of the speculative market on oil.
Well, uh, what are their speculations based on?
In essence, the presence of speculators exacerbates the price hikes that normally come of a volatile market. This turns the whole market into one giant feedback loop.
(this is all assuming that I understand correctly, of course)
Anyways, in terms of the questions my non-economically-inclined-self has to ask,
Who else knows about this? Are politicians aware? Is it something that's not being addressed because they are afraid of losing the support of their wealthy donors? Do the likes of Obama and McCain not address this and place blame elsewhere because it's too complicated to explain to the American public? Has anyone ever tried? I was born and raised here and have never been presented with anything nearly as lucid as this to understand this system over the past 26 years that I have been alive. To those of us who don't study economics outside of the 1-2 required classes as part of college studies, this type of explanation of Wall Street and the commodities market is never really given to us. We don't even cover investment options in school to be honest - most of us don't know what 401k's, IRA's, etc. are when we get out of college.
So back to the original question - who knows about this and what have they done to make the public aware?
Chris repeatedly mentions that commodities trading bets long and they mostly bet on the prices to go up. "But in commodities, where almost all speculative money is betting long, betting on prices to go up, this is not a good thing—unless you’re one of the speculators."
So my question is, would it balance itself out if we required the banks to allow their investors to bet on prices to go down as well as up?
Is this something the banks are abusing their power with - meaning now that they have the letters making them authorized as physical hedgers rather than merely speculators, are they abusing this power by not presenting their investors with the option to bet on prices going down?
Why can't we just revoke these letters given to the banks? What are the downsides? Basically, all these questions are simply my logical brain trying to figure out "Ok, you presented the problem spectacularly well; now what's the solution?" That seems to be my naturally-triggered response to reading your post. I hope he'll oblige with a follow-up or some other readers have answers to these questions.
Sigh... You are responding to rhetoric. That's why it's an emotional rollercoaster. Bad guys are identified and vilified, so you can feel like a righteous victim.
Markets tend to reflect overall sentiment and expectations about the real world. There are a lot of tricks that bad guys can play to defraud markets, but speculation is assuredly not one of them.
Also, if this type of story is interesting to you, I highly recommend Paul Krugman's blog at http://krugman.blogs.nytimes.com/ . Also NPR's planet money (blog & podcast) has great information and is much less slanted than Krugman's. http://www.npr.org/blogs/money/ .
The issue is that oil producers have no incentive to increase supply: they have a fixed amount of oil under their land, and releasing it slowly makes them more money. Commodities speculators are also tying up some supply (in offshore tankers), but there is more oil in the earth than there is in investment-bank-owned tankers.
The article's comparison of Chinese oil consumption with speculator purchases was also specious. Without knowing how much speculator oil was then sold back to consumers, we can't draw any conclusions. To see why, imagine a world that consumes 2.5B barrels of oil per month, and where it takes a month for oil to make it from field to refinery. Now imagine that someone invents a way for oil companies to lock in their price at the time they pump the oil, and not have to wait until they can sell it on the market. We'll call it a futures contract, but it's really exactly the same mechanism that your retail store works by. They buy the goods at one point in time, hold on to them as inventory for the time needed to bring them to market, and then sell them on the open market. At no point does the futures contract holder physically take possession of the oil (this is where financial markets differ from retail trade).
At any given time in this model, financial firms own all of the oil on earth - 2.5B barrels of it. As soon as it comes out of the ground, they buy it, and when it's refined, they sell it. Yet the physical industry - the amount of oil produced and consumed, the means of production, and the price of that oil - hasn't changed one bit. The only difference is that financial firms now bear the risk and reward for any change in the price of oil between when it is produced and when it is consumed.
This model isn't all that different from how the industry actually operates (including the numbers), but some details have been simplified.
Anyway, my point isn't that speculators aren't to blame for the price of oil. My personal opinion is that it's a combination of speculation, peak oil, a rise in consumption by China, geopolitical instability, and plain old price inelasticity, with speculation and peak oil being minor factors and the major ones being China and price inelasticity. But the article has presented no useful data - he quotes a bunch of articles and statistics, but the stats he quotes are not relevant to the actual dynamics of how the industry operates.
20 of those times nothing is transported, refined, added... Meaning it was pure speculation buy/sells.
And when you remove that speculation, prices go down 50%.
A lot of the speculation on comm is because monied people believe that US monetary policy will end with uncontrolled inflation rather than the soft landing the fed is hoping for. To my understanding this is a greater picture case of supply and demand. It's just that the product isn't crude it's insurance.
The author doesn't claim any special knowledge, yet makes a rather vacuous guess: "The primary culprit [for the reinflating of the commodities market] is the reinflating of the commodities market"
He's arguing that the reason commodities (in particular oil) is so expensive now is that commodities are expensive.
There are many domains where I lack any sort of expertise, and I defer to the experts for their analysis and opinions. It doesn't appear that the author maintained the same restraint.
We're all going to change our cars for bikes soon. Or we're going to have something similar to what happened in Libya focused on the oil companies.
First, for all those long only positions, for each of them, there needs to be a corresponding short position. The article never explained where all those short positions will come from.
Second, the article said that when the futures contracts expired and there was settlement, the funds would just "roll over" their positions, that is, by selling their long positions in the expiring contracts and buying long positions in the next contract.
The problem is, just why can the funds be sure not to lose money during this roll over process?
Or, if wheat should sell for $5 a bushel and some fund bought wheat at $100 a bushel and doesn't want to take delivery, then the fund needs to sell the wheat they bought (and would take delivery on), and who's going to pay them $100 a bushel for their wheat (position)?
But prices have gone up. I just suspect that there's more to the system than in the article.
You might have glossed over the food section of the article - it discusses exactly that.. basically, that the market has transformed from a balance of long- and short- positions to only long, made possible because regardless of whether the price went up or down, the big names would make money (if prices went up, they make money the normal way, and if prices went down, they make money via their profits gained through replication).
So long as corporations like Goldman Sachs are making this sort of crazy money regardless of whether prices go up or down, you're going to be in a world of hurt.
So if commodity prices go down in the long run, why does anyone invest in a commodity fund long term?
So even if the investors lose a little in day-to-day trading, in the long-run, they're gaining because contrary to what logic says, the prices aren't going down in the long run, they're actually going up (at least until the bubble explodes).
Basically, if we all agree to continue buying something at whatever price it's at regardless of whether we're losing or not, in the long run, we'll drive the prices higher and our own (as investors) profits with them. And then the bubble bursts... only to start over again.
That's not how futures markets work though. If someone else said, you can only go long in a contract if someone else goes short. You can put in a BUY order, but until it matches someone else's SELL it just sits there in the market.
This is because futures don't work like stocks or shares, or even actually buying a commodity now and sitting on it. This is why some banks rent supertankers full of oil - they can't achieve the same hoarding effect on a futures exchange.
They had a subsidiary company sent a letter to the commission asking for exceptions to the rules.
The head person at the commission was someone who actually worked for Goldman Sachs before and after (maybe even during) working at the commission. And they approved this.
When someone inquired about these exceptions they eventually says: ‘We have to clear it with Goldman Sachs.'
They do not believe in the whole 'fossil fuel' business.
Link for those interested: http://www.dailykos.com/story/2010/04/27/861354/-Peak-Oil-My...
I believe I initially gained this knowledge over on theoildrum.com, and those people know their oil.
(Having given up my car, I do not expect to ever own a car again, having nothing whatsoever to do with peak oil. The short version is that some of the really scary infections that people with my medical condition sometimes get, which doctors don't know how to effectively treat and which 'normal' people don't typically get, are used by environmental scientists for bioremediation of petrochemical spills -- ie they eat petrochemicals. I have come to believe that people like me absorb petrochemicals more than average and that this fact contributes to our seriously negative health outcomes, including picking up infections that think petrochemicals are yummy. I have done much better, health-wise, without a car. Compared to what is supposed to happen to someone with my diagnosis, a little walking is a minor burden.)
Furthermore, I imagine that even if I did get everything locally grown/made, the price of gas would still have an impact -- unless the farmers were all Amish or something and didn't use gasoline-powered farm equipment.
That's a far cry from someone who commutes 20 miles to work in an SUV and spends $60/week just on gas. These people are hurting now. If you have the opportunity to re-arrange your lifestyle so that it's a bit less sensitive to oil prices, it may be a good idea to do so.
Massive speculation would be curtailed by increased production. Higher prices mean more exploration/drilling. Either we're being screwed over by a massive price fixing scheme, (which seems unlikely to me) or we've used up most of the easy to get oil.
I suspect we'll go up and down for many years while it gradually becomes more and more expensive to drill oil all the time. The supply and demand fluctuate due to speculation, unsold reserves, and reactivity of demand of oil, so it will be hard to see the bottom line. It's not going to be cheaper than today in 20 years, and that will inevitable manifest in the global economy.
... and since bernanke is printing money and making stockmarkets go up, therefore the oil exporters also are printing what they have, i.e.oil, making their "valuables" go up...
bla bla end
signature: soylent green is sheeple.