Matthew Yglesias has a piece making the fairly obvious point that geopolitical tensions cause the price of oil to rise. He adds that speculators are right to bid up the price of oil because of that:
In the grand scheme of things, if the Iranian nuclear program really is a dire threat to American security, maybe something as petty as the fate of the economy doesn’t matter. But make no mistake, a war with Iran would have enormous consequences on the global price of oil, and it’s perfectly reasonable for speculators to take to the futures markets to try to bet on it.
How big of an impact on oil prices are we talking about? In January, UC-San Diego energy economist James Hamilton looked at four previous supply disruptions: the 1973 OPEC embargo, the Iranian Revolution of 1978, the 1980 Iran-Iraq War, and the 1990 Persian Gulf War. Hamilton found that at peak “these events took out 4-7 percent of net world productions and were associated with oil price increases of 25-70 percent.”
Iran, in case you were wondering, is currently responsible for 4.9 percent of world oil production.
So that’s big. Of course, an American or Israeli bombing of Iranian nuclear facilities wouldn’t mean that all of Iran’s oil would come off world markets. But then again, it might. This hard-to-assess probability is catnip for speculators. While it’s completely plausible to suggest that speculation is a factor in driving current prices, the speculators here are clearly the symptom, not the cause. This is what happens when there’s underlying uncertainty about whether or not 4.9 percent of global oil production is going to vanish.
All of this is fine. Speculators are a distant early warning system here, and they are telling the policymakers about an impending disaster should war with Iran come to pass.
But just because the speculators happen to be right about the impact of war with Iran on oil prices doesn’t mean that they should be given carte blanche to dominate the oil futures markets. Nor does it mean that speculation is somehow not a problem. The problem isn’t that speculators are running up the price in a faulty way, it’s that they have an inordinate degree of oil futures contracts. The most recent data shows that speculators make up 64% of the market. This is extremely dangerous, and it’s where the market gets out of balance.
Consider the last real spike in oil prices: mid-2008. What geopolitical problem drove the price of oil to $148 a barrel in that case? Iraq was at a lower ebb relative to previous years in terms of violence, there was no Arab Spring yet, and Moammar Gadhafi was still our friend. The world wasn’t a safe place, but there wasn’t some screaming siren that speculators were justified in setting off. They ran up the prices because they profited from it. And everyday customers of gas lost in the exchange.
Speculation can be justified and also an actual problem. I agree with Yglesias that President Obama’s oil speculation task force won’t do anything. Fortunately, it doesn’t have to. The Commodity Futures Trading Commission can set position limits that are far more stringent than the weak speculation rule they already announced. Even that rule is getting challenged in court, and we’ll have to see how that turns out. But the CFTC has authority in this area, and they can balance the market with respect to speculators in a way that’s healthy. Right now, a volatile market based almost entirely on speculation serves no interest.
The Administration can work to lower oil prices by tamping down on the overheated Iran rhetoric. Fortunately, the President did that the other day. But they can also work to rebalance the commodities markets so they’re not controlled by Wall Street speculation. Both things can be true. It’s not an either-or situation; it’s both-and.




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Speculation and roving asset bubbles are natural consequences
of the current interest rate environment.
Nominal interest rates are close to zero and real rates (after inflation) are negative.
Free money for the 1% to go out and have some fun.
Since rates are not going up anytime soon, how about a Tobin Tax on commodity futures?
Yes, a ” … both-and …” reality.
Much appreciated, DDay.
(Even if the astute scratch their [where ever they ... scratch] and mumble, “… whocouldamagined, whocouldathunkit …?” three or four dozen times.)
DW
Unless the speculators actually take physical possession of the commodity and store it, they ought not be allowed to buy and sell it. Speculation is just one more way for the rich to make money on nothing.
And there are getting to be fewer & fewer places where bubbles are possible.
I’m totally ignorant on commodity trading rules but it seems that the big players can game the system very easily. It would seem that if it were required that the players in large investments in commodities be made public it would allow common investors to see if the rise carries weight or just a pump and dump operation.
It’s all about how cheap the money is, i.e., how low is the interest rate and therefore the carrying cost of holding a position over time, and, more importantly, how much leverage is permitted to be used. There are plenty of good reasons to keep money loose enough to maintain decent liquidity, as well as allowing a certain amount of leverage, but there is really no justification for “free money,” or allowing someone to control $50 worth of something with capital of only $1, which is normal in today’s futures markets. The arithmetic power available with that kind of high leverage is what makes real market manipulation possible to create and sustain incorrect price levels over time. Without such extreme leverage ratios, the market will have enormous forces operating to bring the price back into the proper range.
Indeed…”They toil not, neither do they spin”.
Damn leeches on society!!!!
Looked at a monthly chart of L.A. oil prices from 1978 – 2000 (Google it). They averaged around a BUCK over that 22 year span. The minute Gramm’s Oil futures deregulation kicked in (2000) we started to see $2-$3-$4 multi- month averages for the first time EVER. Unless I missed something, it’s clear as a bell what caused high gas prices.
Thanks for that contribution. So that’s ANOTHER thing we need to fix when we re-organize the country after the impending collapse. That, and standardinzing the size of pizzas. 12 inches is NOT a LARGE pizza.
How would you like to invest in Upstate whitewater rafting futures?
That even has it’s drawbacks, when you have unfettered greed like this.
When you have unlimited funds and a commodity that’s urgently needed the crooks can set their price.
Phil Gramm, always one of my favorite guys to hate.
Jeeze. I guess there should be no shock in that, but…
Looking on the bright side, though, it’s got to cost a lot of money to hire ships and crews to loiter around in a holding position until the price is right to make a profit. At least requiring possession acts as a deterrant for speculators.
I know! Family size is the new large! There oughtta be a law.
Just how might you imagine that “the market” will divest itself of “such extreme leverage ratios”, rc? Understand, I consider that you have the “mechanics” of the situation “correct”, but the capitalism Uh-nightmare-cuh is “playing” it is going to have to go “off the rails” completely, be run smack(!!!) dab into the ground(!!!) … at full-tilt, full throttle … it’s “end-game” “they” are ginned-up on.
Be a hell of a crash, HAVE to be, don’t ya think … BEFORE, ALL of the fanta$y bubble$ are bur$t?
If you foresee some other “futures”, short of implementing what ysd suggests @ 3, just for instance, then what, in the name of all aardvarks to all zebras, do you consider will stop the “astute” charge, on all accounts, on a dead-end, hand-basket ride to … heaven knows where?
How, in other words, may the damned “fulcrum” be shifted?
You realize, of course, that I’m inviting you to hold forth in the most friendly and encouraging of ways, rc.
I simply do not see this “market” correcting itself, because the big “players” don’t give a rat’s ass about other human beings or the planet, especially in the midst of a lucrative endless war on reason, sanity, and humanity … remember, the war is everywhere and the Preznit has declared that “we” are the enemy …
Mebbe “they” can contract out the final solution?
DW
Boy….don;t get me started.
I went in to Mcdonalds and ordered a “small” orange juice. They said, “We don’t have small. We only have medium and large.”.
STFU…..you CAN’T have only medium and large. Get me Ronald McdDonald on the phone damn phone RIGHT NOW!!!!!
You crack me up. No discussion of speculation in the commodities market is complete without sniping at Ronald McDonald for selling a “medium” 8 oz cup of corn syrup water.
Had to get that off my chest.
I’m OK now.
Twelve inches is a TOO LARGE if it has anchovies on it. It’s a WAY TOO LARGE if it has pineapple on it.
As wealth has been consolidating and regulations have been removed or made obsolete commodities seem to be the playground of fast money for the Capitalists.
Don’t forget to save a goodly measure of hate for his wife Wendy, who was Commissioner of the Commodities Futures Trading Commission, and definitely did her part. Gender equality, and all that.
I have at least 3 problems with these articles.
64% of the futures market may be speculation. That doesn’t mean it sets the price for the spot market, or other contracts under which real oil is sold.
The average cost of a Canadian barrel is meaningless unless there is some way for them to increase production at that cost. There may be, but it takes years to ramp up more production and the people of Alberta aren’t exactly thrilled about it.
Third, there’s the assumption that because US stocks are fairly well filled, there is no shortage. It’s simply not true. There are some longstanding shipping problems that have led to WTI being $18 cheaper than pretty much every comparable grade in the world. If US speculation is holding prices up, why are US prices the lowest?
Even Barbie gets this.
It’s been O K for decades to dis anchovies but pineapple? c’mon man
Hang loose brudda alohaha
It’s actually infuriatingly simple. Just raise the margin requirements on positions to a more reasonable level, which reduces the leverage. This can be done with the stroke of a beaurocratic pen. It is the will that is lacking, because the big players that like the high leverage have more influence than they should.
I can see that you would have deeply-felt loyalties on the subject, my friend, but my half-Sicilian DNA gives me an absolute right to scorn any toppings but sausage, pepperoni, mushrooms, or onions. So sorry, no offense intended. I will gladly defer to your expertise when the topic is, “where is the best body part to receive a shark bite?” ;-)
Duly noted.
I agree. Pineapple on a pizza was one of the great discoveries of the 20th century. Canadian bacon, pineapple and whatever you want is delicioso!
Granted, rc, and “the will” shall, always and all ways, be found… “lacking”.
Therefore, if this assertion of yours and mine is correct, as it assuredly and obviously is … then how, short of unmitigated disaster, may “things” change?
As you and I are, just as obviously, not “buying” the “work within the system” perspective, for the reason that neither of us see ANY evidence that those who get “inside” do not, all too soon, become either corrupted or complacent, then we must further agree that the “economic system” and its willing cohort in crime, the “legal system” cannot “fix” themselves, nor do they intend to do so.
Thus the infuriatingly “simple” solution is, simply, a nonstarter, a non-goer, and a non-finisher …
So, what do you propose, as an admirer of aspects of capitalism that we, I being little given to admiring capitalism, together should consider to be among actual solutions, short of violent upheaval which we , or I, at least, hold to be a most fatal mistake, in general, as it would ruthlessly be clubbed into the bloody dust.
Are we to bide our time, “educating” others, such as we might, about the nature of “current reality” and of future possibilities, whilst we await the inevitable total collapse of civil society, the Rule of Law, and due process as we, both of us, appreciate all three for what they are and what shall happen in their destruction and absence?
Were you to have but one, any single, suggestion about how capitalism might “right” itself, beyond the obvious but likely impossible, then I should be not merely impressed with you and with capitalism, but I should breathe a sigh of complete relief and saunter off to do a few things which I’ve not felt the time for, nor much found the opportunity of engaging in, these last, fifty-odd years.
Perhaps were we to possess or insist upon actual democracy, of the participatory sort …?
Ah, well …
;~DW
You know I Hold you in the highest regard. And your statement on pizza. Absolutely correct EXCEPT…..sometimes youhave to think “out of the box” (pun not intended). Pineapple and artichoke, excellent!
Local pizzeria has a new european style pizza……sit down, take deep breath…..tomato and alfredo pizza sauce, prosciuto and arugula. Looks like a pile of lawn clippings after you’ve mowed. But it’s delicious.
Late to the thread but wanted to recommend Chris Cook’s work on oil speculation.
Yves Smith over at nakedcapitalism had couple posts from him that were exceedingly well written and understandable to this lay person.
Me, I was at a Denny’s once (or twice, I forget), and behind the cash register was a sign if you had a reason to inquire about something “Call 1-800-Denny’s”, so I told the cashier I’d call and complain that my phone don’t have no apostrophe but I can’t cuz my phone don’t have no apostrophe. (And I ♥ Apostrophe’s !)
As you well know, dear friend, there is no “one” thing (regardless of what Curly said in City Slickers). Right you are that a violent revolution would be crushed. Right I believe I am in my conviction that though what is needed is mostly just a return to what we used to have before the runaway corruption and distortions of the last four decades, still, I can’t see how that can ever happen without removing all or most of the determinedly bad players from the field, and I don’t know how to do that non-violently; I just know they will sabotage any attempt to get back to reasonableness and honesty. Frankly, I’d be willing to see them killed if that was the only way to get them out, I think that could be morally justifiable, in that they act to destroy so many other lives, but I certainly am not going to do that, and they have all the weapons on their side. I also believe capitalism is not the problem per se. It is an exchange system that is imperfect but as good as any other, until it is allowed to get out of control. It is now wildly out-of-control. Don’t make the mistake of thinking that what we are living with now is capitalism. This is a corruption and an abomination of a basically workable set of concepts. Money and finance was always supposed to be in service of production and distribution of needed goods and services. Now we have a total wag-the-dog travesty, where the emphasis is on moving money around without regard to production or distribution of goods and services. I don’t think there is any easy way to pay all the “free lunch” bills that are coming due.
I may have lived too long.
Speculation as public service? And here I was, thinking it’s immoral.
Matt Yglesias once again willfully misunderstands. It’s what he’s good at, and what he’s paid to do.
Also: I missed where the admin tamped down the Iran rhetoric.
I read Cook’s post. It is very informative. The Enron model of accounting that got Arthur Andersen accounting firm taken down, was to cook the book’s to appear loans were assests.
Cook goes deeper in detail of how the oil futures market is a price fixing scam that we all pay for in so many ways that it is not in any way funny.
> Twelve inches is a TOO LARGE if it has anchovies on it. It’s a
> WAY TOO LARGE if it has pineapple on it.
Um, twelve inches is not too large if it has whipped cream on it.
Interesting assessment of Obama cum Israel in Salon:
http://www.salon.com/2012/03/08/obamas_aipac_trifecta/
Whipped cream on 12 inches.
The mind boggles. If I only…..
Who let this one in? Suddenly, I feel insecure . . .
They only let “story” out on Wednesdays and Thursdays. That’s when the ECT machine is serviced. :-)
“Consider the last real spike in oil prices: mid-2008. What geopolitical problem drove the price of oil to $148 a barrel in that case?”
Excellent post, but I would add the question: “What drove down the price of oil (and gasoline prices) in 2008?”
I remember from 2008 that oil barrel prices plummeted, causing the price of a gallon of gasoline to similarly plummet, with a gallon of gas at the pump dropping below $2.00 a gallon, falling over half from what it had been during the height of the 2008 gasoline price spike only a month earlier. What happened? I don’t remember any huge surge in oil supplies and refining output (supply and demand). I don’t remember the Commodities Futures Trading Commission (CFTC) setting limits on oil futures trading (especially with the CFTC packed with GW Bush appointees and oil industry hacks). So what on earth caused oil barrel and gasoline pump prices to drop so precipitously in 2008?
Oh right, market liquidity froze, Wall Street firms almost crashed, the stock market index plummeted and the liquidity of the oil futures traders was impacted along with everyone else on Wall Street. IOW, trading limits occurred, not intentionally on the part of the Wall Street firms and oil futures speculators (or the CFTC), but as a result of the fraud-driven housing bubble finally bursting and investment gamblers seeing their readily-available cash supply freeze and then start melting away, unstoppable, unless a major cash infusion occurred from somewhere. (GW Bush, $700 billion in taxpayer money; Federal Reserve, $7.7 trillion in loans and guarantees to Wall Street firms, investors AND the oil futures speculators).
It is pretty clear to me why we are seeing a repeat of 2008 relative to skyrocketing oil barrel and gasoline gallon prices, with only two options available to drive down gasoline prices at the pump, 1) the CFTC sets strict trading limits on the oil futures speculators, or 2) another worldwide financial crisis occurs, freezing the markets, with this economic catastrophe placing limits on oil futures speculation, like what happened in 2008. And there’s no way we can drill our way out of this, or shift to alternative energy sources fast enough to put the brakes on skyrocketing oil barrel and gasoline prices, not with the bailed-out oil futures speculators and bailed-out Wall Street firms constantly putting upward pressure on oil barrel and gasoline prices.
Spew! You owe me a keyboard lol.
That wasn’t very nice.
I am pretty sure he was kidding, he don’t have a mean bone in his body that I’ve ever seen. Take it with a smile. ;-)
> Take it with a smile. ;-)
Now you’re talking like Rush too.
Ouch. That’s gonna leave a mark lol.