# Interpret this econospeak for me. **URL:** \ **Category:** Factual Questions\ **Created:** [March 18, 2008, 8:48pm UTC](https://boards.straightdope.com/t/interpret-this-econospeak-for-me/441829 "2008-03-18T20:48:29Z")\ **Posts on this page:** 5\ **Page:** 1
**Author:** ![Knowed\_Out](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/knowed_out/32/7380_2.png) [@Knowed\_Out](https://boards.straightdope.com/u/Knowed_Out)\ **Post date:** [March 18, 2008, 8:48pm UTC](https://boards.straightdope.com/t/interpret-this-econospeak-for-me/441829/1 "2008-03-18T20:48:29Z")
I don’t understand jack about Wall Street. So I’ve selected parts from [this article on oil prices](http://news.yahoo.com/s/ap/20080318/ap_on_bi_ge/oil_prices;_ylt=Aj._L7JY5yDOWMj_whtMo1Vv24cA) and ask that you finincial gurus out there explain them to me. > [@](#): > > In the past several months, rate cuts have fed oil price rallies as investors have bought crude futures to hedge against inflation and the falling dollar. Also, oil futures are priced in dollars, which makes them cheaper for foreign investors as the greenback falls. What are crude futures? What does it mean to hedge? Since oil futures are priced in dollars, does that mean only the US sells them? How does somebody who sells futures make money? For that matter, how does somebody who buys them make money? > [@](#): > > That has sent crude to a series of records in recent weeks despite rising supplies and forecasts calling for lower demand growth this year. On Wednesday, the Energy Department is expected to report that the nation’s crude supplies grew last week. > > “A weak dollar and the associated appeal of the oil as an inflation hedge and safe haven could continue to offset bearish fundamentals for a few more weeks,” said Jim Ritterbusch, president of Ritterbusch and Associates, in Galena, Ill., in a research note. So they produced more oil, but prices still went up? How did that happen? Did investors buy up their own oil and keep it stored somewhere to resell at a more expensive price later? If so, who are they and how are they not getting firebombed right now? > [@](#): > > The rally in the stock market gave investors hope that the economy will weather the credit market problems that forced the Federal Reserve-backed sale of Bear Stearns Cos. to JPMorgan Chase & Co. The Dow Jones industrial average, which fluctuated after the Fed announcement but then moved higher, was boosted by better than expected earnings from Bear Stearns competitors Lehman Brothers Inc. and Goldman Sachs Group Inc. > > Energy investors often view movements in equities markets as a proxy for the economy’s health Bear Stearns did what? They gave loans at low interest to home buyers, right? I get the impression their clients still didn’t have the money to keep up payments. The Feds tried to keep BS in business (how appropriate the abbreviation is in this case), and it still collapsed. So based on that info, why are energy investors buying up their own stores of oil to resell if nobody can afford it? Or did I totally miss the boat here? ---
**Author:** ![Absolute](https://avatars.discourse-cdn.com/v4/letter/a/b2d939/32.png) [@Absolute](https://boards.straightdope.com/u/Absolute)\ **Post date:** [March 18, 2008, 9:02pm UTC](https://boards.straightdope.com/t/interpret-this-econospeak-for-me/441829/2 "2008-03-18T21:02:07Z")
Futures are contracts. You are entering into a contract to buy some amount of oil at a certain price, at some point in the future. For example, I might enter into a contract to pay $100 for 1 gallon of oil on June 1. Come June 1, I make money if I can sell that oil for more than $100 (i.e. if the price of oil has risen) - and I lose money if I have to sell it for less than $100 (if the price of oil has fallen). These contracts are for delivery of actual oil, from an actual tanker, at an actual port. However, if you don’t actually need a lot of oil, and are just playing the system, you can sell your contract before the delivery date to someone who actually does need it. Oil being traded in dollars simply means that the major commodities exchanges quote the price in dollars. Since the dollar has fallen, this means that oil is relatively cheaper for people who have a lot of (for example) euros. This is called arbitrage. Theoretically the three prices should be in sync, but sometimes that doesn’t happen, and people can make money exploiting the difference. ---
**Author:** ![Absolute](https://avatars.discourse-cdn.com/v4/letter/a/b2d939/32.png) [@Absolute](https://boards.straightdope.com/u/Absolute)\ **Post date:** [March 18, 2008, 9:09pm UTC](https://boards.straightdope.com/t/interpret-this-econospeak-for-me/441829/3 "2008-03-18T21:09:26Z")
Oil prices went up because people expected them to go up. It sounds like it makes no sense, but it does. If I expect oil to rise to $100 by June 1, I will pay anything up to $100 to get my hands on some oil, so I can sell it for a profit by then. Lots of people doing this tends to drive the price to $100. Similarly, if I expect oil to drop to $90 by June 1, and I have some oil sitting around, I will sell it for any price above $90 (unless I expect it to be higher in the meantime). Lots of people doing this tends to drive the price to $90. The price of oil is currently driven significantly by people’s expectations of the price in the future, and not actual demand. This is called speculation, and it’s what causes bubbles. The dot-com bubble, the real-estate bubble, etc. People pay money not because of the intrinsic value of something, but because they think it will be worth more in the future. I am not qualified to say whether there is a bubble in oil prices, but I wouldn’t think there is. At some point in the future, demand alone will drive the price to $100, and beyond. ---
**Author:** ![mbh](https://avatars.discourse-cdn.com/v4/letter/m/a6a055/32.png) [@mbh](https://boards.straightdope.com/u/mbh)\ **Post date:** [March 18, 2008, 9:12pm UTC](https://boards.straightdope.com/t/interpret-this-econospeak-for-me/441829/4 "2008-03-18T21:12:10Z")
> [@](#): > > What are crude futures? A futures contract is a contract to buy or sell a product at a particular price on a particular date. If you are worried that the price is going to rise, then you take out a contract to buy the stuff in X months at today’s prices. If you are worried that the price is going to fall, then you buy the stuff today, and take out a contract to sell it in X months at todays prices. > [@](#): > > What does it mean to hedge? By taking out a contract now, at today’s prices, you protect yourself against unpredictable price swings. > [@](#): > > Since oil futures are priced in dollars, does that mean only the US sells them? No, but a large percentage of the world’s business is conducted in dollars. It’s easier to convert stuff to and from US dollars, than to convert stuff to and from Saudi currency. > [@](#): > > How does somebody who sells futures make money? For that matter, how does somebody who buys them make money? Theoretically, the purpose is not to make money, but to protect yourself from losing money. In the real world, futures contracts are bought and sold like any other item. If you correctly predict what the market price of the product will be, then you can make enormous fortunes. Of course if your prediction is wrong, you can lose enormous fortunes as well. > [@](#): > > So they produced more oil, but prices still went up? How did that happen? Supply increased a little bit. Demand increased a lot more. ---
**Author:** ![Absolute](https://avatars.discourse-cdn.com/v4/letter/a/b2d939/32.png) [@Absolute](https://boards.straightdope.com/u/Absolute)\ **Post date:** [March 18, 2008, 9:22pm UTC](https://boards.straightdope.com/t/interpret-this-econospeak-for-me/441829/5 "2008-03-18T21:22:18Z")
## Uh, replace gallon with barrel in my earlier post. Regarding Bear Stearns, as best as I can tell, they made some very bad bets, by investing in high-risk mortgages. No one really knows how bad their situation really is, but there were enough doubts for many people to want to “withdraw” their money from Bear Stearns. If enough people did this at once, Bear Stearns would have been forced to sell their holdings quickly in order to give people their money. Selling things quickly means selling them cheaply. If Bear Stearns was forced to sell many of their assets at 50% of market price in order to free up cash, they probably wouldn’t generate enough cash to satisfy everyone withdrawing - and they’d declare bankruptcy, and collapse. Note that this could happen, even if Bear Stearns had enough _money_ to pay all it’s obligations. There’s a difference between money and cash, in that it can take time to turn money into cash. If Bear Stearns owned a $500 million building, and they had to sell it within a week, they might only get $250 million for it, whereas if they had 6 months to sell it, they’d probably get full price. Bear Stearns collapsing would be a colossal disaster, so the Fed decided to bet that they actually had enough money to satisfy their obligations, and loan them an enormous amount of cash to hand out to worried people demanding their cash right away. However, that still didn’t reassure people, and so the Fed engineered a takeover by the reluctant JPMorgan, who paid a ridiculously low amount for Bear Stearns. It seems like JPMorgan made out like a bandit here - they paid $270 million or so for a company that seems on the surface to be worth significantly more (at the very least, their headquarters in NYC is worth $1.2 billion) - but if Bear Stearns is a real disaster underneath, they might still lose on the deal.