Comments (6)

• Mike D

  Recently, the CALPERS (California Public Employees Retirement System) have come under fire for buying commodity index funds and "forcing up the price of commodities". As portfolio managers they have a fiduciary responsibility to shield the retirement funds from inflation. Low treasury rates, caused by Fed policy, and uncertainty with the stock market, from election pandering risk, and the imminent need for the withdrawal of funds to meet the retirement needs of baby boomers, leaves them with little other choice.
  They are not speculators - they are trying to hedge their assets against Fed generated inflation.
  
  BTW. The ICE exchange, who have been targeted as the whipping boy, have an interesting set of articles at

  http://www.oilfuturesmarketfacts.com/

  Published: June 23, 2008 7:34 PM

• Andras Ludanyi

  The interesting truth is that trade is speculation (unless you know the future). The problem with this leftist nonsense is that (as Ronald Reagan told once: "the problem is not that they are ignorant, the problem is that they know so much that isn't so"), politicians don't really understand how the market works and what is the reality. They are in some fantasy world. So yes there is speculators in the market (everyone is one, sellers, buyers), but the price is always set by the law of supply and demand. Even if there is a monopoly, the price won't be higher than the buyers are willing to pay, of course in that case it will be a little higher because the absence of competition, but even in that case there is no "speculators" in a sense the politicians believe.

  If people buy for not immediate use, with a goal to sell it latter when price will be higher, that's a perfectly legal thing, it is your property and nobody can force you how to use it. There is a risk of course because price can go down and in that case you will suffer. Anyway if too many buyers buy to sell later and not to use, that's because they are unable to utilize they capital in a better, more productive way. The politicians should ask, why is that so? What stupid policies they forced on the world are responsible for that situation? It's certainly not the free market. They succeed in transforming this society from a saving society where the standard of living went up in a useful way to a society of extreme consumers where most of the things we buy, we use once, rarely or never. We become an extreme consumer - hoarder society because saving is a way to lose and not a way to gain as it should be. How about that dear Mr. real and harmful "speculators" sitting high in the "Olympus" of politics?

  Published: June 24, 2008 2:37 AM

• Stefan

  I have a question about this article.

  It is said that the market is driven by fundamentals since the demand refuses to decrease in light of higher prices, taking the blame off the speculators.

  If the majority of demand is coming from people who are not on the margin i.e. will sacrifice other goods to cope with the high price of oil, then how can one be certain that speculation doesn't play a larger role? If people will buy at any price in the short term....

  Does this make sense? I'm new to economics and am doing my best!

  Published: June 24, 2008 2:17 PM

• Mike D.

  This article appears to answer the question of speculation
  

  http://www.ft.com/cms/s/0/c3f54e4c-36eb-11dd-bc1c-0000779fd2ac.html?nclick_check=1
  
  
  Governments and the energy industry are urgently looking for solutions. But if we are to act sensibly, we must start with the facts. We must accept the world as it is, not as we hope for it to be.

  Published: June 24, 2008 3:29 PM

• Joseph

  Hi Stefan,

  I'm new to economics as well, someone else here might answer your question better but my guess would be that you have to look at it in terms of overabundance of dollars.

  If consumers were sacrificing other goods in order to purchase fuel than you may see a reduction in price of other consumer goods. Since the CPI has consistently risen (along with the price of most other things not counted in the CPI) and the price of nearly everthing has risen in the last couple of years, it's probably safe to say that the culprit is the one least talked about,......Fed inflation.

  Published: June 24, 2008 9:55 PM

• LanceH

  Bob Murphy as usual argues his case with impeccable logic. The essence of his argument is that if speculators had driven up the oil price beyond its normal market level, then we would expect to see an excess of supply over commercial demand, which would show up as an increase in sellers' or purchasers' inventories.

  Has there has been a increase in inventories? No, says Murphy, looking at the US commercial crude inventories reported by EIA.

  That data, however, does not take into account the SPR (US Strategic Petroleum Reserve). If the SPR data is added to the commercial inventories, then there is a better correlation with the oil price, at least from Mar 2003 to Aug 2006. And yet, over the past two years, when oil has had one of its sharpest runups in price, the combined inventory has still fallen.

  What about inventories outside the US? China is the world's largest consumer of oil after the US, and China is also stockpiling a strategic reserve, but regrettably China does not report inventories.

  What about producers' unsold inventories? BusinessWeek reported last month that there is plenty of oil on the market. Iran has put some 30 million barrels of oil that it can't sell into floating storage. "If we produced more oil, it wouldn't find buyers," says the Saudi source. "It wouldn't affect the price at all." However, this claim is contradicted by EIA's claim of "low surplus production capacity".

  The inventory data, then, broadly supports Murphy's argument that there is no "speculative" component in the oil price, though the evidence is incomplete.

  However, I am not convinced that the role of the modern speculator is as benign as Murphy paints it. In the first place, the Fed Funds rate is extremely low and probably negative in real terms. That in itself is a strong incentive for commodity-speculation. Second, the speculator is probably a hedge-fund manager of other people's money. If he wins then he earns millions; if he loses then he's just out of a job. It's not his own fortune that's at stake. Third, probably three quarters or more of the money he invests has been loaned into existence. Amaranth was using 8-times leverage when it lost billions on natural gas futures.

  Mises wrote: One cannot play speculation and investment. The speculators and investors expose their own wealth, their own destiny. This fact makes them responsible to the consumers, the ultimate bosses of the capitalist economy.

  Yet it would seem that Brian Hunter of Amaranth found a way to play speculation without exposing his own wealth.

  The answer is not a crackdown on speculation, but a crackdown on the statutory privileges of the banking system.

  Published: June 25, 2008 8:21 AM