One of the oldest refrains of those who bash capitalism is that speculators are bad people, inflating the ‘true’ price of X or Y from its supposed ‘correct’ level. It is no surprise that at the moment, those who speculate in the market for oil and other sought-after commodities like copper and gold are getting a lot of abuse. I guess they can take it. As I mentioned in this post on the same issue of the oil price, the level that crude oil is fetching in the market has been pushed to high levels for a whole host of reasons, with speculation playing a part, but not necessarily the major part.
In any field of endeavour where there are different appetites for taking on risk, you will get speculators. Speculators take the risk of a price going up or down that others are unwilling, for whatever reason, to shoulder. If it were not for speculators trading in those mysterious things like interest rate swaps or futures, I would not be able to have a fixed-rate mortgage on my house, for example. At the moment, hedge funds and other operators are willing to bet that the price of oil will go higher, and presumably could get cleaned out if the price turns, on say, a sudden discovery of a major oil reserve, an outbreak of peace in the Middle East, return to political sanity in Venezuela, or whatever. So just as one should not weep over the losses speculators make, it would be equally foolish to carp about the gains they are making now.
As for the Greens, they ought to be praising those strange-sounding investment vehicles called hedge funds. By pushing up oil to near $75 per barrel, they are doing their bit to show the folly of taking one’s children to school in those small trucks called SUVs, leaving the lights on all day and shunning alternative forms of energy. No wonder the share prices of alternative energy firms and even the nuclear sector are looking promising.
UPDATE: And this guy does not think much of the economic grasp of New York legal blowhard Elliot Spitzer, on a related topic.
Anyone who has a disagreement with speculators should cancel all their insurances forthwith.
It’s not the speculators who are the problem anyway, it’s those skittish people who are so worried the prices are going to go up that they’ll buy from the speculators in the first place. In some cases, the risk is realistic that an unreasonably high price might be borne but in other cases, it is just people covering their ass with other peoples’ money.
Rich
Other than providing much needed liquidity, speculators also better approximate the productive value of what they are speculating with. Without such a service our economic calculations are less accurate and everyone suffers.
If there is a piece of land and the highest potential productivity of it requires it to be used a cinema – we can never know for sure, but just say – and it is being used for a video rental store. Then a speculator may spot that, push the price up, and so inform the owner of the store of his mistake.
If the speculator is correct then he is rewarded for his intelligence, and if wrong then he is punished for it. In the case of the former he has benfited everyone and in the case of the latter, the previous owner of the land has received a very good price.
This service is vital to any modern economy, and becomes more and more vital as the economy becomes more layered and complex. Which is the exact reason why there are so many people ‘speculating’.
It can cause problems when the money supply is expanded but that is not the speculator’s fault, but the fault of the nationalised currency and fractional reserve banking system.
For the Brits who do not know the worm called Elliot Spitzer, he is the Attorney-General in New York City who is a blight and a pestilence — okay, he’s a socialist AND populist, and an anti-gun, anti-business zealot.
Worse yet, he’s also probably going to be the next governor of New York State — and if he’s voted into office there, two bad things will happen:
1.) he’ll be the most liberal governor of NY state, ever, and
2.) he’ll use that as a springboard to run for President in 2012.
All I can say is, if he’s elected governor, then New Yorkers deserve everything that happens to them.
Kim,
By “liberal” you mean what, precisely?
Nick M, I think Kim uses liberal in its North American sense: ie., a mild form of socialism. It is such a shame that this word no longer means what it did in the age of the Founding Fathers, as I am sure Kim would be the first to concede.
JP is right. New York state actually has a Liberal Party, which is functionally the socialist wing of the Democratic Party in the state. There is also a Conservative Party that is functionally the conservative wing of the GOP in the state.
NY has an election law that allows candidates for office and presidential elector delegates to be nominated by multiple parties, so the Liberal and Conservative Parties maintain their political viability and influence on the DNC and GOP in NY by nominating their candidates and delegates to the electoral college first, as a means of getting the point across to the DNC and GOP state convention who they need to nominate to get the liberal and conservative turnout (respectively).
So, when Kim says that Eliot Spitzer is Liberal, it is both literally and in the general US definition of liberalism as socialist, even though the socialists essentially coopted the name (as their luddite bretheren have ironically adopted the word “progressive”).
People complaining about resources being at the ‘wrong’ price really mean, it is at a price that they don’t want to pay. Which is the point. The market is signalling that a resource is or could soon be more scarse and so it would be a good idea to substitute something else. Why can’t they understand that this isn’t a failure of the market, but a sign of it working properly?
If the price of fuels in USA were high bc of taxation put on them (like they are in Europe), I guess nobody would question that?
If speculators lose the money, well that’s just dandy, but if they gain money, oh no we can’t allow that? And it doesn’t go through public’s thick skulls that it’s only “other” people that the public wants to engage in this irrational activity? If it were done on public, it would scream blue murder, but if the legislation forced “bad” people like speculators to subsidize the loss & never be allowed to make the profit, that’s just grand?
They don’t connect to the fact that they are using the resources at high rate precisely because they are cheap? And that 5 minutes later they’re whining that oil is running out and “we” (read: govt, for taxpayers money again) “need to do smth about it”?
It doesn’t get through their thick skulls that speculators account for future risks and problems and raise prices on this potentially scarce resource before it runs out, whether it is scarce land or oil?
And finally, they don’t get that if you taxed the oil through the roof but left other sources of energy untaxed or taxed lower that is precisely the political game of preferential treatment, lobbying and corruption-inducing game of criminals sitting in parliaments and criminals parasiting on all us in legal firms thanks to legal-regulatory complex they lobbied to create that the public hates on the other day? They don’t get that the one may relation to the other and that we all would be better off skipping the entire game?
Politically, the people are idiots.
American Democrats want the government to force everyone to drive high fuel mileage vehicles (CAFE standards) in order to keep demand for fuel down, and then force oil companies to provide product for less than market price. In short, they want to substantially modify other people’s behavior so they personally can burn cheap gas.
American Republicans want the market to set the price of fuel. Then let people make their choice of how much to spend on fuel when they purchase and drive their cars.
The first approach reminds me of an idiot I saw at a party who announced he had been taking downers and then balanced them by taking uppers, therefore he was sober.
Off-topic dross deleted by editor
Being a rather conservative libertarian myself I would simply suspend futures trading in crude and refined petroleum products and see where the prices go. The current run up of prices in these products and the subsequent costs to everyone on the planet I feel is unacceptable. The futures markets were conceived originally to lessen the volatility and price swings of commodities, however the exact opposite is true concerning petroleum products. Every bit of information, be it truth or fiction causes wild swings and increases in price. Seems that the speculators have found a golden goose here. Hopefully the price will tank and all of them will find themselves in the same situation as the Dukes did with FCOJ.
Regards.
Bill Place
The current run up of prices in these products and the subsequent costs to everyone on the planet I feel is unacceptable.
I simply cannot agree with this strange reasoning, Bill. So what sort of procedure would you use to decide if a futures market was behaving “oddly” or not? Markets are nothing more than the sum total of the transactions made by people on the basis of what value they attach to a particular commodity, etc. You may think that the futures price of Brent crude oil is “unacceptable”; I may think that the price of X or Y at a level higher than I can afford is “unacceptable”: and if enough folk think that, the price will come down.
Commodity prices have already started falling, due to concerns that central banks will raise interest rates, some peaking of growth in commodity-hungry China; development of new supply sources, etc. You are simply complaining that the market is at variance with what you think is “fair value” of a commodity and want that market to be closed down. For a libertarian, you seem to hold some rather mercantilist views on economics.
Hello Johnathan.
When the products of trade are not required for normal life, i.e. new furniture, household goods or other disposable income items I would tend agree with you. However, fuel, be it natural gas, electricity or petroleum are a requirement for existence in the world today. We closely control the costs of products provided by monopolies because of the enormous potential for profiteering. Many years ago Standard oil, under control of the Rockefellers was forcibly dismantled because of monopolistic and profiteering practices. Unfortunately we have arrived at a similar situation today. I certainly have no problem with corporations or individuals earning profits, however the huge margins being earned by the energy industry due to the speculation is alarming. Various analysts have differing opinions concerning this, but the consensus seems to be that at least ten and possibly thirty dollars of the cost of a barrel of oil is due to fears and worries. It seems ludicrous and counterproductive that the price of the most important and strategic product on the planet is governed by such things. I believe that some control of the situation is warranted. There seems to be no problem with the government raising interest rates to control the inflation being caused by the situation and of course the working individual who has debt is the one who is financially injured by this practice. The futures markets are now simply a siphon by which speculators earn profits from enterprises that they are never associated with. It would be an interesting experiment in economics to remove this faux level of distribution in all commodities and see where prices of the goods in question settle out. Not to be, sad to say, because of the power and control wielded by the institutions and individuals involved but still a fascinating thought experiment.
Many thanks for the discourse.
Best regards.
Bill