Gentlemen, I wanted to get your thoughts on this article, specifically if it is correct in its assertion that speculation raises gas prices. http://money.howstuffworks.com/oil-speculation-raise-gas-price.htm My understanding is that speculators serve a valuable function in a free market economy by helping equilibrate markets. When prices are high, they sell, bringing prices back down and alleviating the scarcity. When prices are low and the commodity is abundant, they buy, thereby protecing against overuse and providing for times of scarcity ahead.
Speculation can certainly raise gas prices. In a freed market, that would be a good thing if it were moderating the supply of gas as you described. The question is what are speculators investing with today? Partially, they are using lots of cheap credit produced by the central banking systems of the world. Speculators aren't nessecarily risking their own capital, but leveraging their speculations with credit. The more credit available, the more money that can be invested, and the higher the price. Speculation in oil can be a mal-investment, just like speculation in housing.
Threads already started on this...
See here, here, here.
I found this PDF from a Bob Murphy to be very helpful when researching this topic. It's only 2 or 3 pages. Murphy also released a Youtube video within the last 2 or 3 weeks that helps explain this as well. Hope this helps.
http://www.instituteforenergyresearch.org/2008/06/23/speculators-not-to-blame-for-high-oil-prices/
Define speculation.
z1235:Define speculation.
The article talks about futures and derivatives trading, from the article:
"An oil future is simply a contract between a buyer and seller, where the buyer agrees to purchase a certain amount of a commodity -- in this case oil -- at a fixed price [source: CFTC]. Futures offer a way for a purchaser to bet on whether a commodity will increase in price down the road. Once locked into a contract, a futures buyer would receive a barrel of oil for the price dictated in the future contract, even if the market price was higher when the barrel was actually delivered.
As in all cases, Wall Street heard the word "bet" and flocked to futures, taking the market to strange new places on the fringe of legality. In the 19th and early 20th centuries it bet on grain. In the 21st century it was oil. Despite U.S. petroleum reserves being at an eight-year high, the price of oil rose dramatically beginning in 2006. While demand rose, supply kept pace. Yet, prices still skyrocketed. This means that the laws of supply and demand no longer applied in the oil markets. Instead, an artificial market developed.
Artificial markets are volatile; they're difficult to predict and can turn on a dime. As a result of the artificial oil market, the average price per barrel of crude oil increased from $31.61 in July 2004 to $137.11 in July 2008 [source: DOE]. The average cost for a gallon of regular unleaded gas in the United States grew from $1.93 to $4.09 over the same period [source: DOE]."
What speculators do is bet on what price a commodity will reach by a future date, through instruments called derivatives. Unlike an investment in an actual commodity (such as a barrel of oil), a derivative's value is based on the value of a commodity (for example, a bet on whether a barrel of oil will increase or decrease in price). Speculators have no hand in the sale of the commodity they're betting on; they're not the buyer or the seller.....
As a result of speculation among these and other major players, an estimated 60 percent of the price of oil per barrel was added; a $100 barrel of oil, in reality, should cost $40 [source: Engdahl]. And despite having an agency created to prevent just such speculative price inflation, by the time oil prices skyrocketed, the government had made a paper tiger out of it."
"while demand rose supply kept pace" How in thw world is it possible to measure this?
I would really like to know how to calculate it so I can be the richest man in the universe.
While demand rose, supply kept pace. Yet, prices still skyrocketed. This means that the laws of supply and demand no longer applied in the oil markets.
He forgot about inflation of the money supply.
Instead, an artificial market developed.
What is an artificial market?
As a result of speculation among these and other major players, an estimated 60 percent of the price of oil per barrel was added;
Not sure how this works. If speculators merely place side bets [=derivatives], neither buying nor selling actual oil, how do they raise the price of oil at all, not to mention 60%?
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