Misery Economic Theater 2011

[Prime95]

Originally Posted by cheesehead

Would you want to curb stock market speculation by requiring that common stock could be sold only to the company that issued it, and that no one could purchase stock except directly from the issuing company?

A poor analogy. Excessive oil prices and oil price volatility has a pervasive daily negative impact on the entire economy. Generally, stock market speculation only has a negative impact if and when the bubble bursts.

The common good suggests we adopt effective regulations in curbing this daily negative impact. I'm not saying this is the only possible solution, I am saying it would be effective.

There are already regulations in place to reduce stock market speculation, such as margin requirements, short sale rules, stopping trading in individual stocks and the entire market.

Suppose I'm in a business where I legitimately need a barrel of oil in December. I buy a contract. Then events beyond my control eliminate the anticipated use I had in mind for that barrel.

...

The basic problem with your proposal is that it affects all commodity contract transactions -- both speculation and ordinary legitimate business -- instead of being aimed only at the undesirable speculative transaction.

Legitimate business has many more options than you spell out. If an airline contracts for a million barrels in December but a slowdown causes it to only need 900,000, then the airline can burn the 100,000 barrels in January.

Alternatively, the airline could decide to only hedge 800,000 barrels of its anticipated December need, buying the rest on the spot market.

Which is better for the country: a few businesses forced to take delivery of oil they no longer need and then must resell or a 30% speculation premium on the price of oil for everyone?

(I'm rather surprised that this comes from someone who previously expressed distaste for unnecessary government regulation. :-)

You have grossly misrepresented my beliefs by striking out the word "unnecessary".

[ewmayer]

One point I would like to add the above debate: Unlike your typical hedge fund, an airline clearly has a legitimate business use for the oil (jet fuel, actually) whose price they are attempting to hedge via futures contracts.

Perhaps that, more that forced-delivery, should be the main criterion for entry into the industrial-commodity futures markets.

Physical delivery *would* still makes sense for businesses whose main business is at the wholesale level, e.g. suppliers to airlines and such. We don't want to eliminate that crucial portion of the (legitimate) market, but do need to recognize the different roles of the intermediary distributor and the end users.

Now, the day Goldman Sachs actually starts delivering 90% or more of the oil they speculate in to end users, fine. But all they and their ilk ever do is play in (and manipulate, by weight of sheer buying power and computer-algo tricks) the "paper" markets.

The analogy with the equity markets is indeed poor. If speculators cause the price of company X shares to come at a hefty premium, so what? No productive-economy business needs company X shares to operate. People can simply not buy the shares when the price gets too rich, with no harm to the real economy.

[xilman]

Originally Posted by ewmayer

So it's been an interesting week for the legions of commodities speculators ... oil had a 1-day drop of around 10% last week, another big one today. Of course while oil was rising, gas prices were marching up in lockstep, with little or no time-delay between the two. Now that oil is down over 10% in the past week, gas prices at my local station have dropped a whopping - wait for it - 0.5% fr the cheapest grade, and not at all for the others. Woo hoo!

There are some who believe that higher oil prices are a benefit, and I don't mean the oil producing nations.

An incentive to develop alternative sources of energy and more efficient uses of energy is likely to be beneficial in the long run, even though there may be short term pain. Remember that petroleum (literally "rock oil") came into widespread use because whale oil was becoming prohibitively expensive as the reserves started running low.

I'm personally of the opinion that oil is far more valuable as a chemical feedstock than as a source of energy. We can burn methane, for example, directly to CO_2 and H_2O and extract the energy. Converting methane to more complex organic chemicals is undoubtedly possible but generally requires a large amount of input energy. Cracking higher hydrocarbons into something useful requires much less energy.

Paul

[ewmayer]

Originally Posted by xilman

There are some who believe that higher oil prices are a benefit, and I don't mean the oil producing nations.

An incentive to develop alternative sources of energy and more efficient uses of energy is likely to be beneficial in the long run, even though there may be short term pain. Remember that petroleum (literally "rock oil") came into widespread use because whale oil was becoming prohibitively expensive as the reserves started running low.

You'll get no disagreement with me there - And if the price premium were actually going to help us wean ourselves off our addiction by e.g. funding alternate-energy R&D, that would be great. But instead all those hundreds of billions of dollars per year in price-excesses are going straight into the pockets of the market-riggers and professional speculators, who in fact want to keep the worst of both worlds for the real economy: They want to (a) keep prices inflated, and (b) preserve economic dependence on oil, because that`s easy money for them.

[xilman]

Originally Posted by ewmayer

You'll get no disagreement with me there - And if the price premium were actually going to help us wean ourselves off our addiction by e.g. funding alternate-energy R&D, that would be great. But instead all those hundreds of billions of dollars per year in price-excesses are going straight into the pockets of the market-riggers and professional speculators, who in fact want to keep the worst of both worlds for the real economy: They want to (a) keep prices inflated, and (b) preserve economic dependence on oil, because that`s easy money for them.

I would suggest that the price premium is helping us to wean us. For example, ordinary consumers are showing tendencies to drive less and to purchase fuel-efficient cars. According to the news suppliers I use, this appears to be a world-wide phenomenon and, indeed, one which started back in the seventies. Average fuel efficiency hasn't been increasing monotomically throughout that period but the correlation between efficiency and time is significantly positive.

Paul

[ewmayer]

Originally Posted by xilman

I would suggest that the price premium is helping us to wean us.

Perhaps I wasn't sufficiently clear - my point above was not whether the high price was leading to less fuel consumption - it indubitably is - but that I would greatly prefer the price premium to go toward furthering that same end goal (e.g. via an alternative-energy-R&D-funding carbon fuel tax) rather than into lining the pockets of Wall Street iBank and hedge-fund douchebags.

[Christenson]

Originally Posted by ewmayer

Perhaps I wasn't sufficiently clear - my point above was not whether the high price was leading to less fuel consumption - it indubitably is - but that I would greatly prefer the price premium to go toward furthering that same end goal (e.g. via an alternative-energy-R&D-funding carbon fuel tax) rather than into lining the pockets of Wall Street iBank and hedge-fund douchebags.

Or put it into social changes that make less energy use possible...including mass transport and getting freight and possibly even people on rails.

[Prime95]

Originally Posted by Christenson

Or put it into social changes that make less energy use possible...including mass transport and getting freight and possibly even people on rails.

These policies should all be independent. I agree with Ernst oil should be taxed heavily to encourage less consumption. The proceeds go to the general treasury. A rational approach then forms a budget based on money available and national priorities. There is no reason to waste all this revenue on dubious alternative energy projects. In case no one has noticed, the U.S. has a rather large deficit that needs to be reduced.

A pet peeve of mine is mindless insistence that tax revenues raised from some source must be spent in a certain way.

[Christenson]

Hey, yeah, a big piece of that deficit comes by and large from sending troops to the mideast to secure our oil supplies....and I know a bridge that needs repairs pretty badly, so I'm not too concerned if the money is earmarked, just think that funding Wall Street Tycoons is my *last* priority....

[cheesehead]

Originally Posted by Prime95

A poor analogy. Excessive oil prices and oil price volatility has a pervasive daily negative impact on the entire economy. Generally, stock market speculation only has a negative impact if and when the bubble bursts.

My point was to analogize your proposed solution, not to claim that the effects of speculation matched.

The common good suggests we adopt effective regulations in curbing this daily negative impact. I'm not saying this is the only possible solution, I am saying it would be effective.

... and I was pointing out the faults of the solution you had proposed. You hadn't proposed any other.

There are already regulations in place to reduce stock market speculation, such as margin requirements, short sale rules, stopping trading in individual stocks and the entire market.

So, why didn't you simply propose the same sorts of things for commodities contracts?

Legitimate business has many more options than you spell out.

I merely gave an example, for illustrating a point.

I never claimed anything about other options.

I was simply showing why _the solution you had proposed_ was obviously bad.

Which is better for the country: a few businesses forced to take delivery of oil they no longer need and then must resell or a 30% speculation premium on the price of oil for everyone?

False dichotomy. Neither is necessary. There are many possibilities besides those.

You have grossly misrepresented my beliefs by striking out the word "unnecessary".

Okay. I apologize for that.

[Prime95]

Originally Posted by cheesehead

I was simply showing why _the solution you had proposed_ was obviously bad.

We'll just have to disagree on that point.