Oil speculators. What do they do?

[sailor]

@Chessic_Sense

Essentially, speculation is a pyramid scheme that builds a house of cards. Eventually, it all comes crashing down and you witness the current housing and oil prices.

I disagree with the pyramid characterization. A pyramid scheme requires a constant, ever-growing stream of new investors in order to pay the previous ones. Speculation does not work that way at all any more than the stock market does.

A pyramid scheme can never work. When speculating the normal situation is some people will win and some will lose but that is not an intrinsic condition because the losses of the late comers do not go to pay for the gains of the earlier investors as they do in a pyramid scheme.

Take this simple example. I bet oil will go up so I buy futures. When the contract is up it turns out the price of oil did go up and I make money. Whoever buys the oil uses it. End of story. No pyramid.

The problem is not because it is a pyramid, which it isn’t. The problem is people get over excited and misjudge and over-invest and get bitten.

One other very important thing to take into account is that the net influence of speculators over time is ZERO. In whatever measure they drive prices up or down now they will drive them down or up later. There is no way around that and it is important to remember that.

[Trom]

@sailor

I disagree with the pyramid characterization. A pyramid scheme requires a constant, ever-growing stream of new investors in order to pay the previous ones. Speculation does not work that way at all any more than the stock market does.

A pyramid scheme can never work. When speculating the normal situation is some people will win and some will lose but that is not an intrinsic condition because the losses of the late comers do not go to pay for the gains of the earlier investors as they do in a pyramid scheme.

Take this simple example. I bet oil will go up so I buy futures. When the contract is up it turns out the price of oil did go up and I make money. Whoever buys the oil uses it. End of story. No pyramid.

The problem is not because it is a pyramid, which it isn’t. The problem is people get over excited and misjudge and over-invest and get bitten.

One other very important thing to take into account is that the net influence of speculators over time is ZERO. In whatever measure they drive prices up or down now they will drive them down or up later. There is no way around that and it is important to remember that.

Good points.

Speculating in the futures markets is a zero sum game. For every speculator that makes $1,000 betting oil will go up, another loses $1,000 betting it will go down. On the day the contract expires, people long the contract (buyers) have to take delivery. People short the contract (sellers) have to deliver the oil. If one doesn’t want to make or take delivery on 100,000 barrels of oil one MUST flatten out his or her position. Thus, in the final trading session, speculators have already liquidated, or are in the process of liquidating, their positions. The only traders holding contracts that determine the “real world” (cash market) of the commodity are commercial users. The final price on the day of expiration is the price absent any speculators.

[UltraVires]

@Cliffy

Yes you can. Just don’t drive it as much. Indeed, that’s exactly what happened this summer when gas prices skyrocketed – people stayed home.

–Cliffy

I generally only drive to work, to take my daughter to school, and to the grocery store here and there.

If gas is 80 cents a gallon, or $5.00 a gallon, I can’t see any adjustments I can make.

[sailor]

@jtgain

I generally only drive to work, to take my daughter to school, and to the grocery store here and there.

If gas is 80 cents a gallon, or $5.00 a gallon, I can’t see any adjustments I can make.

Let us suppose that’s true for a moment. What makes you think the entire rest of the world is like you? You don’t know anybody who drives for fun? Holidays? Movies? To visit friends?

How do you explain gas consumption has dropped?

After thinking about this for a moment do you realize your post was dumb and not really thought through?

[UltraVires]

@sailor

Let us suppose that’s true for a moment. What makes you think the entire rest of the world is like you? You don’t know anybody who drives for fun? Holidays? Movies? To visit friends?

How do you explain gas consumption has dropped?

After thinking about this for a moment do you realize your post was dumb and not really thought through?

I was just answering the question that was posed to me.

Of course overall societal demand changes, especially in a severe recession, but that demand is still very inelastic compared to onions.

[guizot]

@Trom

Good points.

Speculating in the futures markets is a zero sum game. For every speculator that makes $1,000 betting oil will go up, another loses $1,000 betting it will go down.

I agree. It’s just guys sitting in front of computers gambling. If I win $1,000 in Vegas, others are losing the same amount, if not more.

And yet they call it Gross Domestic Product. What exactly is the product? They aren’t producing anything. (Except obscenely high bonuses.)

[Trom]

@guizot

I agree. It’s just guys sitting in front of computers gambling. If I win $1,000 in Vegas, others are losing the same amount, if not more.

And yet they call it Gross Domestic Product. What exactly is the product? They aren’t producing anything. (Except obscenely high bonuses.)

They provide liquidity and transparency to the market.

Also, I just found this paper - “Oil Prices: The True Role of Speculation” by
EDHEC Business School. For those interested in this subject, I’d say it’s worth a read.

Link:

EDHEC Risk Climate Impact Institute

(pdf)

Abstract:

In US dollar terms, the price of oil rose 525% from the end of 2001 to July 31, 2008. This
position paper argues that, despite the appeal of blaming speculators, supply-and-demand
imbalances, the fall in the dollar and low spare capacity in the oil-producing countries are
the major causes of this sharp rise. It also identifies many of the excessively opaque facets
of the world oil markets and argues that greater transparency would enable policymakers
to make sound economic decisions. Oil futures markets are shown to contribute to the
greater transparency of oil markets in general. However, as the paper shows, futures
trading can have short-term effects on commodity prices. In general, it is nearly impossible
to pinpoint a single cause for recent oil price movements; indeed, an overview of the
geopolitics of the major producing regions underscores the complexity of attempts to do
so and points to a multiplicity of structural causes for what this paper—recent falls in oil
prices notwithstanding—terms the third oil shock.