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Speculation and Certainty

There have been many stories in the news about the rising price of gasoline.  This was to be expected, given that it is the kind of story that people can relate to easily.  It’s the point where ordinary people meet a dark and strange part of the global marketplace, commodities futures.

The increase in these stories was predicted in Barataria, but that was an easy call.  The potential for this to not go the Republicans’ way was also obvious.  But this could be even more devastating as groups like Better Markets get the message out that unreasonable speculation is the real cause of the recent price spike.  It has the potential to very much change domestic politics completely.

The arguments against excessive speculation are made very well in this op-ed piece by Dennis Kelleher, the President of the adocacy group Better Markets.  What it comes down to is that when prices appear to be rising in the future more contracts are purchased for future oil delivery by people who have no need for the oil but hope to make some money off of it.  Given that there is a rather fixed supply, Iran not withstanding, the increase in demand naturally raises prices.  It has been estimated that for every million barrels of oil increase in futures contracts there is a $0.10 increase in the price of a barrel of oil – adding a net of $23.39 to the price, or about 20% of the total cost today.

That level of speculation does sound excessive by any measure, and it begs reform in the markets.  It also means that the price is likely to crash if additional sources of oil can be found to over-saturate demand, which is why President Obama and Prime Minister Cameron are talking about working together on a release from strategic reserves.  A sudden and large action would cause a lot of pain to speculators and probably make a very big difference.  A high degree of volatility in both directions would indeed prove that the problem is speculation.

Meanwhile, however, the case is being made by Better Markets and many other people and groups.  What is new about Better Markets is that it is not focused on a vague notion along the lines of “We are getting screwed!” but based on specific data and potential reforms to correct the situation.  The effort is highly focused and wonkish.  The partners listed on their site do not have actual commodities trading experience, which would be a big plus.  What they could use more than anything is an endorsement from inside that world, possibly along the lines of Greg Smith’s now famous resignation from Goldman.

Will this message catch on?  We know that the counter from the Republican side is that Obama has restricted domestic oil production.  This is completely ridiculous, given that domestic oil production has gone from 147.3 million barrels per month in February 2009 to 182.2 million barrels in December 2011 – a 24% increase. This comes at a time when our oil consumption has been falling – and for the first time in over three decades the US imports less than half the oil it consumes.

What is important in this debate is that once the numbers make it into the mainstream media the argument from the right will be shown to be baseless.  The counter on the left is not “you are wrong” but that speculators need to be reigned in.  Republicans are very likely to lose this argument – and in the process lose very big on far more issues than the “Drill here, drill now!” they push.  Once the public starts to accept that markets are in need of reform a genuine movement might be started.

As noted before, gasoline prices are not a good issue for the Republicans for many reasons and could easily hand Democrats an platform that will play much better.  As the debate has played out it seems that there is much more than a short-term political gain in the works for the left if it can continue to align itself with specific and detailed steps for market reform.  When it becomes a major movement we can expect some big changes.

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13 thoughts on “Speculation and Certainty

  1. A 24% increase in oil production? We are being lied to yet again. Its like it never ends.
    Commodities have a very strange market and nearly all of it pretty well fixed in price months in advance. You can follow the futures and be very sure what the price of anything will be. So it does not look like something happening in the Middle East really changes it all that much most of the time. I never completely understood it all but I am sure that speculation is at least part of the problem though it is probably more complicated.
    What reforms do Better Markets suggest? I would think that if there was ever any tax reform (I will not hold my breathe!) then some of this might come up at that time. I do know that people who trade in commodities futures tell me that keeping the books can be very difficult and as always that makes a big difference in the taxes owed.

    • We are being lied to by the Republicans. I try to keep cool about election year rhetoric, but saying that oil production is going down when it has gone up 24% is pretty outrageous.
      I would love to know more about commodity markets. I feel that the Obama administration is planning some kind of coordinated action around the world, with both suppliers and reserves, to smack the speculators pretty hard. Robert Rubin did that against US Dollar speculators, saying “The remember real pain” – and they didn’t go after the Dollar again on his watch.
      I’m not entirely sure about the details on Better Markets, but I’m reading up on it. Consider it my recommended reading for the day. :-)

  2. As you said before it is very complicated but I am sure speculation plays a part of it. No matter how much oil we produce here it is up to the global market to set the price. If China is using a lot more than there is a shortage even if we do produce 24% more now than we did. Obama is right that in the long run we have to conserve but right now he has to bring the price down. I hope we do tap the reserves but something tells me that we should conserve that for when it gets even more expensive.

    • You are right – it’s not about us (anymore). So maybe that 24% increase isn’t enough, but I was impressed that we made serious headway towards energy independence. But yes, there will always be Alaskan oil going to Japan even as Venezuelan comes into Louisiana.
      I really don’t know about tapping reserves, to be honest. I would like to see a smackdown, thus proving it’s all speculation, for the short term. In the long term you are right that we should hold it.

  3. High gas prices do us good. It got SUV’s off the road, you hardly see them anymore. That is what it takes to get people to use less. It is good for the environment and everything else. We should let them rise.

  4. what do you think of the latest saudi news? They’ve commissioned some supertankers full of crude and are sending it to the gulf coast.

    • Yes, we will hear more of this. As much as I hate the Saud family, they are reliable lapdogs – er, partners. The price of oil will not stand, and they will sell as much as they can into it. Making a pile of dough in the process, of course. Whatever.

  5. Maybe gasoline prices should be controlled by the federal government to ensure a slow steady increase. That way we can convert to a green economy. Just using market forces will never get us to renewable energy. Renewable energy is less than 1% of the energy picture. Oil speculation should just be banned. Also a BTU tax would help the energy and environment arena.

    • I love how you may even be to the left of me on this! :-) But yes, oil is something so fundamental to our economy that it does cry out for regulation that keeps the number of people with their fingers in the pie to a minimum and the price as predictable as possible.
      I’d hate to end the futures market because when it is functioning properly it should even things out dramatically. But it appears to do the opposite most of the time with oil. If we taxed the bejaysus out of futures contracts held for, say, less than one month it might give the futures market the ability to do what it is supposed to.
      But I also agree that market forces are at best slow progress to renewables. Before we abandon it, however, I’d like to see more challenge grants and serious investment in new techs. That could be funded by a tax on oil at the crude stage.

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