Third Party & Independents Archives

Forget lawyers. Kill all the speculators!

As much as I admire the Bard of Avon, I’m now convinced that William Shakespeare was dead wrong when he wrote in Henry VI, “The first thing we should do is kill all the lawyers.”

As gas prices have sky-rocketed more than 50-cents per gallon in the past two-and-a-half weeks, I’m inclined to edit England’s national poet’s masterwork to say, “The first thing we do is kill all the financial speculators.”

For weeks, we've heard about what COULD happen IF Libyan oil production is interrupted, and IF instability settles upon Libya IF Muammar Gaddafi is ousted from dictatorial power, and IF tensions flare between Libya and Iran, and IF ... blah, blah blah, ad nauseam. And oil prices, and corresponding gasoline prices, have ballooned up faster than Kirstie Alley at an ice cream buffet.

So, if gas prices can so volatilely rise and fall on "if," what happens at the pump WHEN something actually happens? Do the price increases being forced on us now serve as a hedge bet against even more price increases then? I have yet to see any economist or oil company analyst explain, sans jargon and self-contradicting nonsense, why exactly the fluctuation in oil prices overseas immediately results in an automatic price increase of gasoline that's *already in the ground* at gas stations in the United States, especially when part of the justification the oil companies give us for rampant price increases is the cost of the three-to-four month process of collecting/shipping/refining/delivering the oil-to-gas.

And there's little doubt in my mind that we'll see a report in the summer that Exxon posts yet another record quarterly profit from this. My expectation is that we'll actually see Exxon rake in more than $50 Billion in three months of profit as a direct result of the price gouging from speculation now.

Of course, we'll also get yet another bullsh*t excuse that "repairs at the refineries in Louisiana" are the cause again, or "weather conditions in the Atlantic caused delays and a subsequent shortage." But Exxon will still pull in a ludicrous profit, and still get subsidies from the U.S. government for doing so. We see it every single time an oil sheik breaks wind somewhere in the Middle East: The prices at the pumps rapidly leap-frog up 50 cents, 75 cents, a dollar ... and then slowly trickle down 30 cents, 50 cents, maybe 75 cents. But a new "comfort plateau" is established each time that results in the "market acceptable price" of gas being around 25-to-40 cents higher than it was before the latest "crisis." The public is so thankful that prices have "come all the way down" to that new plateau from the previous artificially manipulated all-time-high price, that they're willing to just accept that the "standard price" of gas is now 10-to-20 percent higher than it was last quarter, when Exxon's profits were "only" $48 Billion.

Last May, when U.S. gas prices were hiked up by nearly a dollar because of what MIGHT have happened if oil tankers were interrupted by Somali pirates, the U.S. Congress preened and postured and put on their best faux-indignation faces and saddled up to demonize the oil speculators as the source of rampant price jacking.

“A major contributor (to high oil prices) is the rise in speculation,” said Democrat Senator Carl Levin of Michigan, estimating that speculation added approximately $35 to a barrel of oil. “This is not a supply and demand issue.”

Oil executives, collectively fattened by that quarters new record quarterly profits, testified before Congress that speculation *might* be responsible for half the current cost of oil. Leaders from the five major companies – Exxon, Shell, BP, Mobil and Chevron – a agreed that current supply and demand levels should realistically place the price near $55 a barrel.

“I think it’s a minimum of a dollar a gallon,” said Sean Cota, a regional chairman with the Petroleum Marketers Association of America, before the Senate Energy and Natural Resources Committee.

Trevor Hanger, head trader at Brookline Avenue Partners in Dallas, said speculation had almost as much to do with prices as demand. “There are fundamental reasons why oil will stay high,” Harger said. “It’s my feeling that the move from $60 to $130 in the last 12 months is maybe 55 percent fundamentals and 45 percent speculation.”

Levin and others in Congress have repeatedly called for a closing of the so-called “Enron loophole,” which allows oil futures to be traded electronically in unregulated markets outside of the jurisdiction of the Commodities Futures Trading Commission. Each time the proposal has been submitted for Congressional discussion, it’s been rejected, mocked and otherwise prevented from consideration by Republican senators and representatives, all claiming that “the free market economy would suffer devastating losses if Congress were to being regulating how oil companies are allowed to do business.”

Some lawmakers have proposed changing the margin investors must pay to speculate. Stock speculation, for example, requires a 50-percent margin, but commodities like oil demand a lower threshold of just 5 percent or 7 percent. The “free market economy” excuse has been delivered, almost as though on cue, from the same Republican opposition each time.

So who are these speculators, and why/how are they to blame? What insidious schemes are they executing that literally pulls money out of your wallet every single day? Those are the real, relevant and fair questions. But the conversation in Washington is never allowed to get that far. The cameras are forced off before Batman arrives at the crime scene.

To say we are in a crisis is a massive understatement. It’s like saying there the people of Pompei had to endure a little lava when Vesuvius blew. Meanwhile, the two-faced, bought-and-paid-for corporate puppets in Washington continue to babble and blather the same empty, do-nothing rhetoric we’ve been stomaching for decades: “We need to study this” and “It’s a serious problem that requires a serious solution.” Isn’t it amazing how that solution has been painfully obvious to me throughout my entire adult life, but seems to forever elude our “best and brightest” decision-makers.

But the blame game works. The politicians have an easy target in speculators. But if they never actually identify “the speculators,” there’s never a “clear course of action” they must take. So the bovine fecal matter rhetoric continues unchecked and unchallenged.

They claim that the problem is this: “If the politicians restrict legitimate speculation, they will cripple the free market and actually cause prices to surge even higher.”

I know this will come as a shock to some of you, but our politicians couldn’t be more wrong.

Speculation shapes market margins – most of which cannot function correctly without some element of comprehensive restrictive speculation at the margins. Politicians don’t (or won’t) acknowledge or understand that. Either way, it’s a critical mistake to be grandstand and posture and preen before the cameras, saying what “sounds good,” instead of delivering real answers.

As Richard Rahn of the Cato Institute wrote in The Washington Times, "Many members of Congress make up ‘solutions’ to things they do not understand and cause problems where there are none or make real problems worse, almost always because it’s a convenient political hot-button that can generate a knee-jerk reaction, get them some camera time, and maybe a bump in the popularity polls. This explains the current run-up in gasoline prices."

But did you notice last July – when oil prices slipped from record highs and even had their biggest one-week drop in history – nobody was calling for speculators’ heads? There were no congressional hearings into the matter, just silence.

Why? Because the great American sloth had been placated. The fast food drive-thrus were open, the iPods worked, and the TV was on. Joe Average no longer had a reason to bitch. So the wheels on the bus went round and round – but it cost an additional 38 cents-per-gallon to fuel the bus.

Despite massive evidence to the contrary, Americans are not stupid. We’re lazy, yes. We’re self-absorbed, yes. We generally couldn’t care less what happens unless we’re inconvenienced, yes. We’re more concerned with who are politicians are in bed with physically than we are by who they’re in bed with financially. But we’re not stupid, in general. We can all recognize that *something* wrong is going on when the price at the gas station you pass on the way in to work is 9 cents higher when you pass it on the way home. And if your blood pressure doesn’t spike when you see gas prices change TWICE in one day, be thankful for Obamacare so you can trot over to your nearest hospital to have your head examined.

The bottom line, as it is for everything that’s wrong with America, is that you know you’re being ripped off and laughed at by the politicians and oil executives doing the ripping. But as long as you continue to allow it to happen, and do nothing to change – or force Washington to change – the situation, you really have no right to complain.

That’s one positive throughout any artificially manufactured “energy crisis”: It costs nothing to fuel your rage.

Posted by Gary St. Lawrence at March 2, 2011 11:07 AM
Comments
Comment #319456

I agree with much that Gary has written about speculation in commodities. And, there is more to the story than simple greed. Commodities are increasingly being used as a substitute for the dollar and the many dollar-linked currencies. This increases the demand for such commodities, which increases the demand for oil used to produce the commodities. But this, like the direct excess demand for oil futures, goes away if or when the dollar resumes stability or another stable currency takes over from the dollar.

“In our current circumstances commodities are usually safer than government debt denominated in the fiat currencies of the same governments that owe that debt.

That’s why the current flight to safety involves commodities as much or more than it involves government debt, and indeed the debts of less robust governments (ranging from municipalities in developed countries to the national debts of less developed countries) are no longer considered safe.

It is well known by now that U.S. Treasuries are “safe deposit boxes” that pay negative real rates of interest — i.e. one must pay for the privilege of storing one’s wealth in a form backed by the vast future revenues of the IRS. They are a way of losing one’s wealth with less rapidity and volatility than with many alternative investments, not a way of actually building wealth.

Commodities also store rather than build wealth. By contrast to Treasuries, commodities are more volatile, but are not subject to unknown future amounts of fiat currency inflation. A mix of U.S. Treasuries, European debt, and commodity derivatives now forms the ideal safe “store the cash under your bed” portfolio. Government debt alone is far too risky during periods when central banks are not strongly committed to reigning in money supplies.”

We often live under a grand illusion that that the dollar is a stable standard of value and thus the dollar prices for commodities provide an accurate measure of supply and consumption demand for those commodities. They don’t, and it’s not even close. The supply and demand for the dollars is the far more dominant factor, and on top of that the demand for commodities as money rather than for consumption becomes, in times of inflation, much more important than “fundamentals.” Those who just look at dollar prices have a wildly distorted view of economic reality.

Oil prices today reflect the best consensus estimate of what oil prices will be in the future. Regardless of how high oil prices get, they don’t provide substantially more incentive to pump, because how high they are today doesn’t say anything more than low prices about whether prices will be higher or lower five years from now. These commodities behave very differently from a widget where you either make it now or lose the sale.”

http://unenumerated.blogspot.com/2008/04/hoarding-and-speculation-of-commodities.html

Posted by: Royal Flush at March 2, 2011 3:14 PM
Comment #319461


Oil at $55 per barrel would do a lot to help our economy recover.

I have no use for speculators, but you don’t need them to know that the price of oil will continue to climb and that the only thing that can curb it is large scale abandonment of the product for energy consumption.

George Washington Mohammad has called on foreign countries to help overthrow King George the Gaddafi. Should Obama respond?

Posted by: jlw at March 2, 2011 4:32 PM
Comment #319464

Royal Flush-
The negative rates are only for those who park it short term. Long term, the rates are higher, but not that much. If you park your money for forty years, you get not much better than 4.5%. Was this the system you were calling a Ponzi scheme earlier?

Posted by: Stephen Daugherty at March 2, 2011 4:58 PM
Comment #319473

Mr. Daugherty asks; “Was this the system you were calling a Ponzi scheme earlier?”

If I recall correctly, the Ponzi scheme was one you advocated. It involved spending money we don’t have on payroll we don’t need so taxpayers could pay taxes on their borrowed money.

Posted by: Royal Flush at March 2, 2011 6:39 PM
Comment #319492

Financial Speculators are proving that the Repiblicans are wrong about the need for regultion from Big Brother. However, shooting them is not the answer and IMHO higher taxes will only add fuel to the fire. So what do we do if we don’t want Big Brother or higher taxes?

Well, we could limit the impact Speculators have on the economy by limiting the number sold on any given day. We could require the Seller to provide higher proof in the need to raise offering prices. However, I think the best way to lessen the impact of Speculators on the economy is to mandate how long one must hold the unit before they can sale it.

One to two years is not unreasonable and though it will eliminate much of the profit taken by the Market and Speculators in the short term. The Market could prove they can Self-Regulate by such a move. For why Speculators do have a place in our economy, they have proven they can only drive the car into the ditch since our Institutions and Market face futher burdens. Not to mention the impact the Specultators have on Americas’ Consumers.

For $.20 cents a gallon may not sound like a lot of money. Looking at 1,000 gallons, one has to spend $200.00 more on the same product which eliminates sales in the economy. And when we are talking about 1,000,000 gallons we see an increase of $20,000.00 which clearly affects the bottom line of thousands of Americans Business. So if the Market can’t or won’t find a solution, I don’t see no other recourse wxpect letting Big Brother regulate and heavily tax Speculatos to the point that it costs them a zero gain on short term profits.

Posted by: Henry Schlatman at March 3, 2011 7:08 AM
Comment #319498

There will always be speculators…and bubbles with their ignomious ‘crashes’ or market ‘corrections.’ I don’t like speculators either, but they’ve existed for centuries and create a lot of ‘good’ in the overall free market.

Opposing forces ultimately cancel out such speculative investment.

Saudi Arabia (whether they’re alruistic or not) has increased their oil production to offset the interruption in Libya’s oil production. Such widespread uncertainty in the world will indeed negatively affect April’s oil contracts on the commodities exchange.

Btw, your ‘Kill all Speculators!’ title is a bit over-the-top, don’t you think?

Posted by: Kevin L. Lagola at March 3, 2011 11:34 AM
Comment #319504
Btw, your ‘Kill all Speculators!’ title is a bit over-the-top, don’t you think?


Not if you read the article and knew the context of it, it isn’t.

Posted by: Gary St. Lawrence at March 3, 2011 3:01 PM
Comment #319532

Kevin,
Let the Speculators drive the economy back into the ditch right vefore the 2012 Elections and see if you won’t wan to take out back and kill them non-violently of course. In fact, given the way the so-called Free Market is going come Christmas 2011 Americans could find themselve facing more cuts in their wages as Local, State, and the Federal Governments are forced to raise interest rates and taxes. For how many American Consumers will be supporting the Free Market when gas hits over $4.00 per gallon?

Posted by: Henry Schlatman at March 3, 2011 7:10 PM
Comment #319552

The single worse thing that our fiscal and financial leaders can do is to do a ‘knee-jerk’ and mess with price controls, etc.

No matter how well-intended a ‘fix’ or ‘measure’ may be, it is enormously dangerous business to play with fire.

Instead, there are other, economic tools and measures that can be utilized without upsetting the apple cart. Indeed, $4 to $5 gas prices will crush our economy - again.

Food prices and other inflationary items are already starting to creep up. But gas is the real anchor. It affects basically everything in our county’s value chain.

If anyone saw that scary report regarding the Pentagon and how the Financial Crisis of 2008 could’ve been precipitated by economic terrorists, it’s game over. The CIA and the Pentagon have been looking at this possibility by creating numerous scenarios and what-ifs.

Remember, the main goal of al Qaeda for the 9/11 attacks was to cause economic chaos, fear and panic ostensible, to bring down our economy. I know this sounds conspiratorial and even a bit diabolical, but I saw one expert explain how foreign investors, with as little as $50 to one billion dollars could technically use specific comodities margin tricks to cause widespread chaos.

I guess when one looks at it that way, it’s no surprise that there are many among us, Tea Partiers included, that keep gold and money hidden, not to mention a survival bunker. It’s not my style, but you get the picture.

I’ll tell you what. Gun purchases would go through the roof.

Posted by: Kevin L. Lagola at March 3, 2011 10:45 PM
Comment #319570

Kevin:

Survivalists hiding in their bunkers will be easy pickins. Not as easy as some, but easy none the less.

Bob built a bunker for his family and stocked it with 3 years worth of food. Let’s go over to Bob’s to get something to eat, more guns, ammunition and gold.

If foreign investors can do it so can domestic ones.

I wonder if the Pentagon and the CIA has explored the possibility that if whistle blowers in 1999, 2000, 2001, 2002, 2003, 2004, 2005, 2006, and 2007 had been listened to, the financial collapse of 2008 could have been avoided.

Posted by: jlw at March 4, 2011 3:57 AM
Comment #338040

Be careful what you wish for. Take the Speculators out of the market and see what happens; the efficient flow of the market will cease slowing the process which will have a negative mark on the economy. Think the dollar isn’t circulating now, put your theory to work and cringe at the results.

Posted by: Vince Campillo at March 9, 2012 12:15 PM
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