"The Evil Speculators?"

[bigeasy]

Congress is debating a bill to rein in speculation. This sounds nice. Speculators are probably unsavory despiccable people who are just greedy.


Wait a minute. This is how markets are made. When I sold Bluefin Tunas to Japan the system was really the same as the oil market. The tuas were dressed, beheaded and chilled. All the fish were put side by side and the buyers (speculators) looked the tunas over. They looked at the core sample for fat content, the overall shape, color of the meat, and made notes in their books to indicate what they thought the tuna was worth per pound on the Tokyo market. They put a note in their book on what they were willing to pay for the tuna. This was confidential. At the end of the auction the bids became known and the tunas went to the highest bidder. The bidder now owned the tuna but he didn't plan to eat the tuna (take delivery). No he made arrangements to ship the tuna to Japan via air (about a thousand dollars) and deliver to the Tokyo market where he hoped the tuna sold for enough to pay for the cost, shipping and handling, and make a profit for his efforts. The bidders who bid too low got no tuna and no chance to make a profit.

As you can see from the above example that the speculator plays a crucial role in bringing a commodity to market. He reads the market, he sets a price (mutually agreed upon), and hopes to resell the product for a profit. Note that he has no control over what the commodity will bring when it gets to market. This is his risk. His risk is diminished when demand is high and supply low. Risk is increased when demand is low and supply is abundant.

The Democrats are smoke screening over excess speculation. There is no market without speculators (buyers). There is only price control. Most students of economics recall that price controls generally lead to a diminished supply as producers are less anxious to bring a product to market.

What are the Democrats up to? I don't think they are ignorant re supply and demand but they don't think much of our ability to figure things out.

Just tell the electorate it is the evil speculators. It sounds good. Don't explain anything. It just confuses them.

Cliff

[Deep C]

Theres a huge difference between the "speculator" you refer to in regards to fish. They actually take delivery of product. The bill being considered would tighten up on "paper speculation" thats driving the market by making them actually take delivery of product.
That would change a whole bunch without upsetting the apple cart. I have speculated in gold and often I have taken the bullion into possession. Thats one thing but say Joe Schmo owns 20,000 barrels. If he actually has to take posession of it the cost of either building or renting tanks would change the game drastically.
Lets take a guy who lives in a big mansion and owns half a million barrels. The cost of a facility to store and maintain it would be prohibitive. Hes not gonna shove it in a safe or put it in his garage...
The bill being considered is bipartisan and would force that issue and suddenly "paper oil" wouldn't be so appealing...

[GALAZIO]

Does the "Tuna Speculator" only have to front 10% of his "buy" bid? Or does he have to come up with 100% of the money to "speculate" the market with?

Just wondering. If it's 100%, then good for them. If it's 10%, well, the "speculator" with enough money can corner 100% of the available market for 10% of gross earnings. Not a bad gig. (if you are a crook or looking to control the market and crush any viable competition...afterall, the Sushi shops need the meat).

[Glenn W]

Congress is debating a bill to rein in speculation. This sounds nice. Speculators are probably unsavory despiccable people who are just greedy.


Wait a minute. This is how markets are made. When I sold Bluefin Tunas to Japan the system was really the same as the oil market. The tuas were dressed, beheaded and chilled. All the fish were put side by side and the buyers (speculators) looked the tunas over. They looked at the core sample for fat content, the overall shape, color of the meat, and made notes in their books to indicate what they thought the tuna was worth per pound on the Tokyo market. They put a note in their book on what they were willing to pay for the tuna. This was confidential. At the end of the auction the bids became known and the tunas went to the highest bidder. The bidder now owned the tuna but he didn't plan to eat the tuna (take delivery). No he made arrangements to ship the tuna to Japan via air (about a thousand dollars) and deliver to the Tokyo market where he hoped the tuna sold for enough to pay for the cost, shipping and handling, and make a profit for his efforts. The bidders who bid too low got no tuna and no chance to make a profit.

As you can see from the above example that the speculator plays a crucial role in bringing a commodity to market. He reads the market, he sets a price (mutually agreed upon), and hopes to resell the product for a profit. Note that he has no control over what the commodity will bring when it gets to market. This is his risk. His risk is diminished when demand is high and supply low. Risk is increased when demand is low and supply is abundant.

The Democrats are smoke screening over excess speculation. There is no market without speculators (buyers). There is only price control. Most students of economics recall that price controls generally lead to a diminished supply as producers are less anxious to bring a product to market.

What are the Democrats up to? I don't think they are ignorant re supply and demand but they don't think much of our ability to figure things out.

Just tell the electorate it is the evil speculators. It sounds good. Don't explain anything. It just confuses them.

Cliff

Speculation is not in itself bad--- indeed it can, and often does stabilize markets. Speculation is not greed (in a derogatory sense), as it usually involves very risky investments.

However, as with many financial securities and transactions, proper well thought out (not guided by politics or special interests) regulation is currently necessary, IMO for oil futures and other oil commodity contract trading practices.
Examples of situations that needed regulation include Selling short on a down tick comes to mind--- the California electric energy mayhem and fiasco resulting from unbridled and uncontrolled speculation should be fresh in everyone's minds.
Other financial examples of good regulation regarding financial speculation include minimum margin requirements, timing delays on trading beyond certain thresholds. regulations involving derivatives (that I don't pretend to understand).

You are right on two counts: price controls almost never work (never sat never), and the other involves the ulta right wing mentality that I will not mention as it will do nothing but cause this discussion to go south

In short, the oil market is indeed out of whack right now, and well thought out, non politically inspired regulation can help stabilze and reduce oil prices and at the same time allow controlled speculation and development of new supply sources---- let it be known that in no way am I advocating price controls, but rather terms of practice controls.

[bigeasy]

to explain a market and the speculators role. Perhaps a fish market is not as sophisticated as the oil market. I wish someone would describe just how oil speculators go about their job and how that tends to drive up prices. Remember if the speculator pays more than the oil will bring, he can lose a great deal particularly if leveraged.

The ability to bid on margin just increases both potential gain and potential loss.

I believe the oil speculator "owns" the oil he subsequently sells to others thereby making a profit. The tuna buyer also owned the tuna he bid on before it was successfully sold on the Tokyo market.

[GALAZIO]

Hey Capt...

I see what you're asking... and trying to put it in simple terms, but I must apologize, I said 10% is all that's needed to "speculate", actually, it's 4.4%.

And the "speculation" takes place LONG before the "fish is at the dock"... another words, If you are the fisherman in your example, and you know that you are on the fish, but if you bring too many fish to the dock, the price will go down the following days, what do you do?

You sandbag your efforts to produce to keep the "speculator" at the price of yesterday or higher... Then you go out tomorrow and bring one more to the dock. (and keep the tuna in pins, afterall, that is your black gold, texas tea... bubblin' crude). You got the fish. He has the market... and in the end, the consumer pays $15 for a piece of fatty tuna on a tea spoon of rice.

[flatbottom]

speculation is fine in the oil market. But. Not at the expense of bringing world markets to their knees. Some one is manipulating this oil market. And raping the American worker. When shops close up, home repossessed, sectors of industry diminished......why??? so someone can recover for bad investments2 years ago......hang the bankers.....after the congress. The mater's begin here. The speculators fools are running ramped with paper tigers in this market. I am tired of waisting my money at the pumps. And now I have to help bail out fanny and freddy. Let see here.....200 billion dumped 60 days ago. 25 billion + for freddy and fanny. On top of this 5.00 per gal @ the pump. What am I made of ?? Money or something. Shave the 60 dollars a barrel off the speculation price and we are back to good ole days. And please remove that woman from her commanding position. She has proven what we thought all along. Where is newt when you need him????

[JD5652]

One other fine point to be made here....the speculators do NOT have to take possession of the commodity....if they did, then they would have to pony up the remaining 95.6% of their bid and this silliness would stop.

I don't pretend to understand all the ins and outs of the speculators..... but what it boils down to in my head is the old adage of the "tail waging the dog". The speculators have huge amounts of cash and actually "overdrive" the market. One expert testimony to congress stated that the speculators had driven up the virtual market to the equivalent of another China.

I too am not for price controls....but congress needs to close the Enron loophole.

[Bert Rodgers]

The problem with the market speculators is the band wagon effect. Unlike stock investments that look for growth based on long term averages, commodity traders are looking to make a turn on their money for quick gain. When you mix technical buyers who buy based on trend lines and fundemental buyers who buy based on the news cycle an atmosphere of "we best jump in here" developes.

Add to the mix hedge fund managers who are looking at losses in finacial and currency markets. These folks have to decide where to move $$ that may be in shakey investments. With oil and precious metals trending up, they jump in.

Supply and demand gets over run by jump on the band wagon short term gain buyers.

As far as Congressional hearings go, I don't see what constitutional grounds they have to jump in. But they don't really care as long as the cameras are running.

Bert

[Bert Rodgers]

I too am not for price controls....but congress needs to close the Enron loophole.

Please explain the so called "Enron Loophole"

Bert