Friday, July 31, 2009

Oil Speculation?

I received an email from AirTran:

Dear Φ,

Last summer, AirTran Airways participated in Stop Oil Speculation Now, a multi-industry coalition of businesses, associations and concerned citizens united in support of responsible energy policies and prices. Public outrage and congressional debate helped deflate the oil bubble and return prices to reasonable levels. You can help make a difference again this year.

While fuel costs have declined this year in comparison to last, there is still quite a bit of volatility in the prices that affect not only our business, but you personally-- in the prices you pay for fuel for your vehicles as well as goods that are transported to the stores.

Increasingly over the past few years, a growing group of financial players with no direct stake in the physical delivery of oil has exercised undue and unchecked influence on the price of oil, causing great pain for consumers and wreaking havoc on American businesses of all kinds - including airlines and their customers. Recently, the Wall Street Journal reported that continued speculation could "worsen the global economic downturn." We cannot allow this to happen.

We need your help. Get more information and contact Congress by visiting the S.O.S. Now website. You can also follow S.O.S. Now on Facebook and Twitter.

We appreciate your business and want to keep fares low for you. Thanks for being a member of A+ Rewards, and we look forward to welcoming you on a future flight.


Tad Hutcheson

Vice President of Marketing and Sales

AirTran Airways, Inc.

But when gas was $4/gal last summer, Megan wrote:

[Speculators] provide the market with valuable information: a lot of people think that the price of oil is going to go up. The effect of that information is to raise the future price, which makes current consumers unhappy. But in fact, if the speculators are right, they're doing us a service by giving us a basically gradual price rise that helps us conserve. If they are on the money, and Congress chases them out of the market, we'll suffer more later, wishing all the while that we hadn't used the stuff so profligately. If they're wrong, later we'll have cheap gas and more fuel efficient cars, hardly a tragedy.

I'm inclined to go with Megan, but I think both sides of this argument could do with providing some details? Do you think speculation a problem? Who is doing the speculating? If "speculation" involves withholding oil from the market, where is this oil being stored? How much money have speculators made, considering that gas was selling for $4/gallon early last summer, $1.50/gallon late last summer, and $2.50/gallon right now?

On the other side: is there really a global market in oil? Does no oil producing country provide below-market-price gas to its domestic market? Are there really no "special relationships" between exporting and importing countries? I can understand how Katrina shut down gulf coast refineries, but why did the fall 2005 price still fall to around $2/gal? Why did it rise to $4/gal in the summer of 2008? What are the non-speculative production/delivery factors causing these massive changes?

I don't know the answers to any of these questions. But I'm tired of blanket assertions about "bad bad speculation!" on one hand and "good good free markets!" on the other.

1 comment:

Justin said...

The free market argument makes a certain amount of sense, but as I have studied economics more deeply, I have come to see that in today's environment, the unregulated free market is mainly a license for the financial elite to exercise unrestrained power over the masses. The money makers have inordinate power.

The fact is, the interests of the financial speculators are not aligned with the country, or even the real economy. The sheer act of mass bidding or selling can drive prices up or down, independent of supply-demand factors. The financial elite regularly uses their market-making power to create bubbles and shortages, profiting the whole way.

Who does it? Large money holders like hedge funds, as well as commercial banks. These are people with billions of dollars, just waiting for something to invest in to make a profit.

How? Through purchase contracts, bidding them up or down. They can create market momentum all by themselves, and can absolutely destroy any market they want through short selling.

There certainly is a real market based on supply and demand for oil, the constancy of which makes the perfect mark for their gamesmanship. Because the demand for oil is relatively inelastic, they are free to drive up prices as much as they can, knowing that the oil will be purchased pretty much no matter what.

There is not necessarily any withholding of oil in the speculative act, but it can be stored as needed, using underground facilities, or even floating tankers. The worldwide oil market is too big for anyone to corner, so storage withholding is not a strategy employed anymore.

Speculators made tons of money, as long as they weren't holding the contract when the market crashed. Because they are market makers, the financial elite are never the last ones holding the contract.

The biggest "special relationship" in the oil market is based on the deal the U.S. made with Saudi Arabia in the 1970s, to sell oil only in dollars. This makes the US dollar the international reserve currency and gives us incredible international economic power in the financial realm. It leads our real industrial economy to be undercut by cheaper foreign labor, while also leading masses of immigrants to sneak in to take advantage of our overvalued dollar. In short, it is a painful, slow clusterfuck for the American people and our way of life. But the financial elite sure are making out well!