$2 Gas in 30 Days, or Senator Sununu? You Choose.

70% of trades on NYMEX are speculation (0.00 / 0)

Another interesting tidbit from that same article:

Speculators now account for about 70% of all benchmark crude trading on the New York Mercantile Exchange, up from 37% in 2000, said Rep. Bart Stupak, D-Mich., chairman of the investigations subcommittee.

Although if I'm reading it correctly this NYMEX press release seems to say that the trades on NYMEX aren't utilizing the "Enron loophole"; see the fourth paragraph that talks about the "Amaranth debacle," which appears to be an instance of the loophole in the electronic trading loophole in the CMFA2K being used to evade NYMEX compliance efforts.

---

by: Vis Unita Fortior @ Wed Jun 25, 2008 at 04:44:59 AM CDT

Exactly (0.00 / 0)

It is starting to look like the only people who don't want to do anything about oil speculation are John Sununu, George Bush and Drew Cline.

Energy and persistence conquer all things.

Benjamin Franklin

I'm a strategist for the NH Coordinated Campaign

---

by: Kathy Sullivan @ Wed Jun 25, 2008 at 05:49:17 AM CDT

I don't fully grasp (0.00 / 0)

the distinction between "speculation" and legitimate trading. Where is the line drawn?

---

by: Alex Gallichon @ Wed Jun 25, 2008 at 11:10:42 AM CDT

[ Parent ]

I believe the line is drawn (0.00 / 0)

according to whether the buyer has any intention / business plan for actually taking possession of the commodity.

---

by: elwood @ Wed Jun 25, 2008 at 12:46:50 PM CDT

[ Parent ]

Or, (4.00 / 1)

the difference between betting on the horses and owning a stable.

---

by: Tim C. @ Wed Jun 25, 2008 at 15:36:34 PM CDT

[ Parent ]

And there ARE legitimate, conservative reasons (0.00 / 0)

for futures trading. If an oil refinery can count on extra futures revenue if the real oil it must buy next year costs more, it can plan better.

So there are at least three types of trading:
a. Intent to really buy the commodity
b. Risk reduction / management
c. High-roller, high-leverage speculation

Designing regulations to allow b) but minimize c) is tricky but worthwhile.

---

by: elwood @ Wed Jun 25, 2008 at 15:45:45 PM CDT

[ Parent ]

a. & b. (4.00 / 1)

ex. a corn ethanol producer may hedge its corn costs for a couple of seasons out, maybe 4-5 years so that spikes, which will occur due to any number of reasons including the recent Iowa floods, are evened out. They can always take delivery when its advantageous to them, beacuse they use the commodity as a raw material.

This is not a novel to be tossed aside lightly. It should be thrown with great force.

   Dorothy Parker

---

by: JonnyBBad @ Wed Jun 25, 2008 at 17:21:41 PM CDT

[ Parent ]

House Votes to Curb Energy Market Speculators (0.00 / 0)

http://www.nytimes.com/reuters...
WASHINGTON (Reuters) - By REUTERS
Published: June 26, 2008

Filed at 6:08 p.m. ET
The House of Representatives on Thursday overwhelmingly approved legislation that directs the Commodity Futures Trading Commission to use all its authority, including the agency's emergency powers, to "curb immediately" the role of excessive speculation in energy futures markets.

okay, I'll bite, the market is already tanked so what's the effect going to be financially ? I doubt gas prices at the pump will be changed by this move in the foreseeable future...a.k.a between now and the elections....

This is not a novel to be tossed aside lightly. It should be thrown with great force.

   Dorothy Parker

---

by: JonnyBBad @ Thu Jun 26, 2008 at 17:28:37 PM CDT

[ Parent ]

Don't forget Judd Gregg! (0.00 / 0)

--

---

by: Douglas E. Lindner @ Wed Jun 25, 2008 at 20:40:39 PM CDT

[ Parent ]

Interesting point made on NPR's Marketplace last night. (0.00 / 0)

A counterpoint to limiting US oil speculation was made suggesting that if the US puts a stop to oil speculation in the US, then the speculation would just move offshore to places like Dubai.

Now I'm not sure of all the ins and outs of this, but making Dick Cheney(and like types) a billionaire while US firms are cut out due to regulations does not make for a good solution in my opinion.

Now that's just the way I took it, and I admit and hope that I'm ignorant on the subject of speculative finance, but I think it's a point worth considering.

Could anyone shed some light on this for me/us?

Obsessed is just a word the lazy use to describe the dedicated.

---

by: Justin Credible @ Wed Jun 25, 2008 at 06:51:56 AM CDT

The "London Loophole" - funny you should ask (0.00 / 0)

Here's a London Financial Times op-ed by a CFTC commissioner talking about exactly that, and saying that the CFTC needs to be given powers to effect regulation of over-seas trading.

---

by: Vis Unita Fortior @ Wed Jun 25, 2008 at 08:47:53 AM CDT

[ Parent ]

I believe it HAS that authority (0.00 / 0)

but chose to allow US firms to speculate overseas.

Per Shaheen's op-ed:

The problem is that loopholes have allowed speculators to evade federal oversight and drive up prices.

In 2000, Enron lobbyists were able to slip language into legislation exempting large traders like hedge funds and investment banks from any regulation when they trade on over-the-counter electronic exchanges. Then, in 2006, the CFTC decided U.S. crude oil futures could be traded by American traders electronically on the London futures exchange without any reporting to the CFTC.

---

by: elwood @ Wed Jun 25, 2008 at 08:51:51 AM CDT

[ Parent ]

I don't know any more about it than what the Times piece said (4.00 / 1)

The Dec. '07 NYMEX press release I linked to above was also talking about trading moving from NYMEX to ICE in London, btw.

---

by: Vis Unita Fortior @ Wed Jun 25, 2008 at 09:15:57 AM CDT

[ Parent ]

It can only have authority abroad to a point (0.00 / 0)

Say Delaware Corporation Example Traders, Inc. starts trading in London, CFTC tries to intervene, and so the principals of Example Traders, Inc. incorporate Example Traders of London, Ltd. as a legal body organized under the laws of England.

Then they're pretty much exempt from any US regulation, to the extent they operate wholly outside the US. You could be really onerous about it and enact currency controls or strict Cuban embargo style laws, but this would be an affront to the interests of anyone who wants to do business abroad and therefore very unpopular.

---

by: Alex Gallichon @ Wed Jun 25, 2008 at 11:05:52 AM CDT

[ Parent ]

Perhaps I'm not getting it, but (0.00 / 0)

how would those regulations prevent foriegn speculators from taking the place of US firms?

I think the case was made that if the US investors didn't do it, a Dubai based company, or some other foreign entity, would step in to take their place.  

Obsessed is just a word the lazy use to describe the dedicated.

---

by: Justin Credible @ Wed Jun 25, 2008 at 11:59:27 AM CDT

[ Parent ]

It's just a question of where (0.00 / 0)

the capital is.

Holding options on $150 bbl oil is only a smart move if there are enough buyers to form a liquid market. (Get it? Liquid oil market? I slay myself.)

If US-based oil companies and financial firms cannot participate, that shrinks the market a LOT.

Does that bring it below critical mass and make speculation too risky? Maybe; I don't know.

---

by: elwood @ Wed Jun 25, 2008 at 12:45:21 PM CDT

[ Parent ]

I'm starting to get it. (4.00 / 1)

But wouldn't there be a huge rush to form companies in foreign countries that would try to take up the slack?
Especially knowing where it could go and stay.

I'm just really skeptical that this could be a short term solution with long term negative consequences.
I think the solution is larger than the US, and would/should involve the major oil consuming nations.
Pipe dream, I know.

Obsessed is just a word the lazy use to describe the dedicated.

---

by: Justin Credible @ Wed Jun 25, 2008 at 13:10:24 PM CDT

[ Parent ]

Noted, but for the US (0.00 / 0)

the time for skepticism was when the rules tightly controlling this sort of commodity futures market were suddenly relaxed without any concern for what would happen to the price of the commodities themselves.

The proposal is to return to the status quo ante of maybe eight years ago.

---

by: elwood @ Wed Jun 25, 2008 at 13:14:01 PM CDT

[ Parent ]

50% drop in 30 days?? Come on... (4.00 / 1)

I'm no energy expert, and I know that those 4 testifying are supposed to be, but it's a bit tough to swallow that a full 50% of current pricing on the barrel and at the pump is due to speculation.

For every 4 analysts who say something along these lines, there are 4 who disagree.  Some percentage, sure - but come on.

I don't believe we can reasonably expect to be able to regulate this commodity and its pricing and not suffer other problems later on.  Managing (dare I say, manipulating?) markets and commodities trading is not a great place for Government to be.

I'm no fan of commodity traders or the markets  but rather than getting all riled up at the markets for doing what markets do, why not get serious - because the truth is we have not been serious to-date - about working on the demand side of the equation?  The only way Oil pricing can go is up as long as demand exceeds actual or perceived supply (note:  I do not favor cheap shots like "open our oceans / ANWR to drilling" as a way of trying to manage the latter).

We have a lot more control over demand than we do over supply.  It amazes me that we're feverishly attacking the markets and that some are talking about "Oil Shale", additional drilling instead of just going after demand and boosting other (safe) sources of energy supply such as solar - with even a marginal amount of gusto.

I'm not a Sununu fan, but if you want to go after him, go after him on refusing to allow Americans (and particularly Granite Staters who are heavily dependent on Heating Oil) to get serious about Solar.  

It's expected that he and Gregg will side with markets and "Big Oil", but give Independents cause to question him on why he will not get serious on allowing Solar to work for us in parallel with his expected behavior.  

---

by: Rep Serlin @ Wed Jun 25, 2008 at 12:16:08 PM CDT

Thanks for coming to BH, Rep. (0.00 / 0)

As to your comment:

* On long-term solutions, we have been going after Sununu (and Gregg) time and again.  They have no long-term plan other than more drilling, drilling, drilling, which is a deeply flawed long-term plan, in my opinion, compared to developing alternative energy solutions.

* On short-term solutions, this is the only one I've heard where it looks like some difference can be made, and the fact that Sununu's ideology of non-regulation of markets made it possible makes it a perfect point to highlight, I think. Whether it can come down in 30 days is a question for the experts.  That the price is artificially high because of legislators uninterested in accountability is a great question for the voters, and one I hope to repeat often.  

Wonder if Sununu's fired now.

---

by: Dean Barker @ Wed Jun 25, 2008 at 12:37:49 PM CDT

[ Parent ]

But we DID (0.00 / 0)

I don't believe we can reasonably expect to be able to regulate this commodity and its pricing and not suffer other problems later on

This is not a proposal to embark on some new uncharted form of regulation. The proposal is to put back in place the rules and regulations we had until maybe eight years ago.

---

by: elwood @ Wed Jun 25, 2008 at 13:16:00 PM CDT

[ Parent ]

Has all this has been modeled against what we had? (4.00 / 1)

OK, thanks for the comment.

Does anyone know whether all the price increases of the past 7-8 yrs have been modeled against what we had to see what we would have now given all the other realities of that same past time frame?  Maybe that's not possible...still, hard to think we would have "$2 gas" right now even if those rules had never gone anywhere.  

---

by: Rep Serlin @ Wed Jun 25, 2008 at 13:25:09 PM CDT

[ Parent ]

I'm also skeptical on that. (4.00 / 1)

After all, a big part of higher gas prices is the weak dollar.

It should be pretty easy to build a timeline of per bbl prices in Euros rather than dollars...

---

by: elwood @ Wed Jun 25, 2008 at 13:38:44 PM CDT

[ Parent ]

Here's one comparison... (4.00 / 1)

http://www.chycho.com/?q=node/...

Cited but not fact-checked.

2000-2008 price increase when Oil was at "only" $118 per barrel

Euros: + 74%

Dollars: + 237%

---

by: Rep Serlin @ Wed Jun 25, 2008 at 13:51:01 PM CDT

[ Parent ]

I think 50% is overly optimistic (4.00 / 1)

But this discussion, while admirable in exploring the issue, has slightly diluted the point. The Enron loophole, as I understand it, is an overly specific designation: energy futures on electronic platforms are exempt from regulation.

Even if we assume that the loophole had merit at the time, electronic trading is so prevalent now that it's hard to see an argument for exempting one commodity.

---

by: JimC @ Wed Jun 25, 2008 at 16:41:30 PM CDT

[ Parent ]

Thanks Rep (0.00 / 0)

You're absolutely right here.

Speculation can't raise prices unless it ties up supply. You've got to either store the oil somewhere, or leave oil you could extract in the ground.

There's no place on earth that can store enough oil to push the price up to double. You'd need a storage tank the size of a small state.

And the second option (it's being left in the ground) requires that the oil producers are trading in futures, but no one has explained how that would work to me in any clear way. Plus there's no data I've seen to show a cut in supply.

"Speculators" are what conservatives blame when their cheap oil world starts to fall apart, and they can't admit it. Liberals shouldn't fall for the line at least without a decent explanation of how speculation without hoarding could possibly affect anything.

Remember the first principle of economics -- supply and demand. It has to tie to one of those, or it's nothing but voodoo.

I support Obama  for President.

---

by: Mike Caulfield @ Thu Jun 26, 2008 at 15:02:51 PM CDT

[ Parent ]

Um, no, Mike. (0.00 / 0)

The supply is not the oil itself - the supply is the contracts for oil.

Speculation pushes up the price of stock shares all the time, without any increase in the number of shares issued.

There was no major change in the number of tulip bulbs in the 1600s bubble.

---

by: elwood @ Thu Jun 26, 2008 at 15:22:00 PM CDT

[ Parent ]

Um, Elwood, demand for oil is unaffected by futures (0.00 / 0)

While demand for tulips surged.

Then the supply of tulips -- the actual physical supply -- got tied up in speculation, which detached the market from consumer demand.

We are talking about an oil futures market, not speculative hoarding of oil.

There is a huge difference. One affects supply, and one doesn't.

I can tell you right now that I will buy 2,000 pounds of sugar in a year for $20 a pound.

That only changes the price of sugar if

a) you go out and buy them the sugar and hoard it, taking it off the market, or compete with other people to take it off the market

or b) Stores, knowing they can get a better price in a year, don't bring forward thier stock, or say they'll only release it at the futures price.

In either case you would see excess inventory, supply taken off the market by speculation. We don't see that; inventories are shrinking or stable.

I don't doubt it might have a minor influence on the price of oil, if we assume the Saudis have excess capacity they are not tapping into, and we assume (I guess) that the producers are taking the futures bets.

But no one has done a shred of work to show anything of the sort. And to state that speculation has a bigger impact than a million barrel increase in actual demand is voodoo.

I support Obama  for President.

---

by: Mike Caulfield @ Thu Jun 26, 2008 at 17:38:02 PM CDT

[ Parent ]

This is sloppy. (0.00 / 0)

I can tell you right now that I will buy 2,000 pounds of sugar in a year for $20 a pound.

That's not what futures markets - speculative or not - are about. Money changes hands. You buy from me the right to purchase 2000 pounds of sugar at $20 each - paying maybe $1 / pound.

I may sell that right on the same ton of sugar to 20 people - The Producers is about that - believing that I will be able to buy sugar at $15 a year from now.

If I guess wrong I may have to pay a premium for sugar. That will tend to drive prices up.

None of this requires me to have a sugar tank.

---

by: elwood @ Thu Jun 26, 2008 at 18:09:20 PM CDT

[ Parent ]

You still aren't getting it (0.00 / 0)

Yes, I know that money changes hands in futures trading. You're nitpicking, and refusing to follow your own argument to it's conclusion.

Let me make this simple. You are at the pump, buying gas.

A person is somewhere else, buying futures.

You are not competing for the same resource. Your tulip analogy is as sloppy as it gets. Speculators and planters competed for tulip bulbs.

The only way your gas price can be affected is indirectly. Explain how that happens. What is the mechanism that makes your bet today on the future price of oil affects the price today.

You haven't done that yet. In your analogy, you pay more for sugar, your suppliers get it for $20 a pound, and they sell it at what the market will support.

And what the market will support, by and large, is determine by how much oil is for sale and how much demand there is for that oil.

Sure all these machinations made that oil more expensive to some people in that chain, if certain options are exercised. But that's irrelevant to the person at the pump, unless people take such a bath they are willing to hold back inventory rather than sell at the current market price.

But here I am, trying to come up with mechanisms for this -- what's your mechanism?  

I support Obama  for President.

---

by: Mike Caulfield @ Thu Jun 26, 2008 at 18:55:23 PM CDT

[ Parent ]

Response (0.00 / 0)

What is the mechanism that makes your bet today on the future price of oil affects the price today.

There is none. That's a red herring.

But my bet today, on a futures contract that matures six months from now, affects the price six months hence. And there is a rolling set of bets in the market. And depending on how the bets are structured they can change the demand curve without any oil changing hands. At least for stocks, puts and calls often expire unexercised.

We must be talking past each other. I'm hearing you say that the existence of derivative markets doesn't affect the price of the underlying goods. I must be misunderstanding you.

---

by: elwood @ Thu Jun 26, 2008 at 21:48:36 PM CDT

[ Parent ]

I think we are talking past each other (0.00 / 0)

I'm not saying they can't affect the price. They can. Speculation absolutely could do this.

But they do that by shifting a demand curve forward in time, in the manner described in the long comment I left below.

Here is the most recent DOE report. It shows that inventories are lower than usual, at least in the U.S.

In other words all the oil coming in is getting consumed at the normal rate with no increase in inventory. (Once again, se the longer excerpt below to understand why this is important).

So where is that futures based demand shift?

Not in the data.

I support Obama  for President.

---

by: Mike Caulfield @ Fri Jun 27, 2008 at 06:33:11 AM CDT

[ Parent ]

Here you go, explanation of why mechanism requires inventory (0.00 / 0)

The enterprise at the end of the chain in July, the ultimate final buyer of the July contract, is someone who actually wants to take physical delivery of oil in Cushing, Oklahoma some time in July. That would be a refiner who wants to turn it into gasoline. The demand for oil from a refiner in Cushing is responsive to the spot price through two mechanisms. The first is the demand elasticity that's ultimately inherited from the motorists who use the gasoline. If consumers face a higher price for gasoline, they will reduce their purchases, by which mechanism ultimately the refiner would want to buy less crude when the spot price goes up. But, particularly in recent years, that consumer demand response is very small.

A much more important way in which the spot price of crude would affect the refiner's demand for the product is through an intertemporal calculation. Given my customers' demand, I'm going to need to buy the product sooner or later. If you charge me a lower price today than you're going to charge me next month, I'd choose to buy more today to put it into inventory. If you charge me a higher price today, I'd rather run down my inventory and buy the oil next month, and of course the futures market allows me an opportunity to lock in a price for doing just that. Thus by far the most important factor in refiner's demand for July oil will be the August futures price. If my production plans left me willing to buy July oil for $124.25/barrel when August oil was selling for $124/barrel, I'll probably want to buy July oil for $126.25/barrel now that I'm forced to pay $126/barrel for August oil. Thus to a first approximation, the spot price would move by exactly the same amount as the near-term futures price. A $1 increase in the August futures price would shift the demand curve for July spot oil up by $1. In this fashion, an ever-increasing volume of speculative purchases of the near-term futures contracts would drive the spot price up with them.

From here.

We get to the problem of inventory again -- at the point where futures can actually influence inventory, you do need a tank.  

I support Obama  for President.

---

by: Mike Caulfield @ Thu Jun 26, 2008 at 21:30:26 PM CDT

[ Parent ]

More from (0.00 / 0)

Marketplace:

Ryssdal: So just to be clear, you do think that we're in a bubble, then?

Greenberger: I believe it and I'm certainly not alone in my belief. If you talk to anybody who trades in these markets on a regular basis, they will tell you that the markets are completely dysfunctional and out of control because of speculative activity.

Ryssdal: How long is it going to take then if we are, as you say, in a bubble, for it to work its way through and us to get back to something more realistic for the price of a barrel of oil, whether its 50 bucks or 80 bucks?

Greenberger: From my own experience as a commodity regulator, I believe that if the Bush Administration were serious about its regulation, we could begin seeing prices drop within a month. If we don't get the kind of regulation that has been done for decades and the market proceeds along the pace its proceeding, we will have to go through a very, very serious recession. The question is do you want to deflate the bubble by that kind of suffering or do you want to deflate the bubble by applying tight U.S. regulatory controls?

Ryssdal: Michael Greenberger used to run the Division of Trading and Markets for the Commodities Futures Trading Commission. He teaches law at the University of Maryland now. Mr. Greenberger, thanks a lot for your time.

Wonder if Sununu's fired now.

---

by: Dean Barker @ Thu Jun 26, 2008 at 22:05:33 PM CDT

I've been trying to get my head around (0.00 / 0)

this bubble idea. It strikes me that it might be a bubble if you think the dollar is going to get stronger. I just spent a little while doing homework involving money creation through the banking system, and I wonder if the declining availability of credit will make the dollar stronger because there's less "money" to go around. That would mean you could buy more oil for fewer dollars because dollars are rarer and more valuable.

I don't know how you else you can bet in favor of the bubble view, other than buying dollars, which means, you have to have some fundamental confidence that it's not going to continue to sink and in fact will rise, rather than level off.

But, I think there's a number of other factors that could keep the dollar low, maybe make it lower (they say the threat of inflation is on the rise? I think there's a lot of inflation, just maybe not according to the conventional measure-- and if the threat is on the rise, I imagine that means it's going to get worse).

---

by: Alex Gallichon @ Thu Jun 26, 2008 at 22:40:33 PM CDT

[ Parent ]