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Re: 70% of oil price is speculation

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  • k_r_johansen
    ... A 3/4 reduction in price of oil-futures, doesn t mean a 3/4 reduction in demand does it? Prices in the final consumer market didn t see the same
    Message 1 of 20 , Feb 28, 2013
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      --- In LandCafe@yahoogroups.com, "Scott on the Spot" <ssbaker305@...> wrote:

      >
      > As for empirical proof, I toss out, again, that oil was $147/barrel in
      > the summer of 2008, and just $35/barrel only 7 months later. Demand did
      > NOT slack off by 3/4!!! We would have been living in unheated caves and
      > bicycling to work if it had...if there was work to go to at all. No,
      > this was a result of speculators being forced, or in some cases,
      > voluntarily, cashing in their long positions in the price-setting
      > futures market, selling their contracts, in other words, or even
      > shorting them. That is what speculation is.
      >

      A 3/4 reduction in price of oil-futures, doesn't mean a 3/4 reduction in demand does it? Prices in the final consumer market didn't see the same fluctuations.

      Kj
    • Jock Coats
      ... We d also need to look at significant off-market business in the period. For example last year there was a period of negotiation leading to the loaning to
      Message 2 of 20 , Feb 28, 2013
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        On 28 Feb 2013, at 13:58, "k_r_johansen" <kjetil.r.johansen@...> wrote:

        >
        >
        > --- In LandCafe@yahoogroups.com, "Scott on the Spot" wrote:
        >
        > >
        > > As for empirical proof, I toss out, again, that oil was $147/barrel in
        > > the summer of 2008, and just $35/barrel only 7 months later. Demand did
        > > NOT slack off by 3/4!!! We would have been living in unheated caves and
        > > bicycling to work if it had...if there was work to go to at all. No,
        > > this was a result of speculators being forced, or in some cases,
        > > voluntarily, cashing in their long positions in the price-setting
        > > futures market, selling their contracts, in other words, or even
        > > shorting them. That is what speculation is.
        > >
        >
        > A 3/4 reduction in price of oil-futures, doesn't mean a 3/4 reduction in demand does it? Prices in the final consumer market didn't see the same fluctuations.

        We'd also need to look at significant off-market business in the period. For example last year there was a period of negotiation leading to the loaning to the US of nearly all the UK's strategic reserves (around the time of the Deepwater problem when production was being affected). This would rapidly, I'd suggest, dampen both spot and futures markets quite significantly, knowing that the world's largest consumer country had sourced reserves off market. It would quickly be reflected in wholesale market prices.

        Jock



        >
        > Kj
        >
        >

        --
        Jock Coats
        Warden's Flat 1e, J Block Morrell Hall, OXFORD, OX3 0FF
        m: 07769 695767 skype:jock.coats?call
        jock.coats@... http://jockcoats.me
      • k_r_johansen
        ... What I meant by that, was that while it may entirely be that the huge fluctuations witnessed indeed is the result of speculation, which makes sense, since
        Message 3 of 20 , Feb 28, 2013
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          --- In LandCafe@yahoogroups.com, "k_r_johansen" <kjetil.r.johansen@...> wrote:
          >
          >
          >
          > --- In LandCafe@yahoogroups.com, "Scott on the Spot" <ssbaker305@> wrote:
          >
          > >
          > > As for empirical proof, I toss out, again, that oil was $147/barrel in
          > > the summer of 2008, and just $35/barrel only 7 months later. Demand did
          > > NOT slack off by 3/4!!! We would have been living in unheated caves and
          > > bicycling to work if it had...if there was work to go to at all. No,
          > > this was a result of speculators being forced, or in some cases,
          > > voluntarily, cashing in their long positions in the price-setting
          > > futures market, selling their contracts, in other words, or even
          > > shorting them. That is what speculation is.
          > >
          >
          > A 3/4 reduction in price of oil-futures, doesn't mean a 3/4 reduction in demand does it? Prices in the final consumer market didn't see the same fluctuations.
          >
          > Kj
          >

          What I meant by that, was that while it may entirely be that the huge fluctuations witnessed indeed is the result of speculation, which makes sense, since the futures market is where the speculators operate, that doesn't prove the claim that 70% of the price of oil when it reaches the consumers, are the result of speculation, as witnessed by the fact that end user prices don't have those erratic movements, even if the long-term price movements correlate exactly. Gas prices certainly didn't drop 3/4.

          Kj
        • walto
          ... Right. It may even be the case (as Matt already indicated) that the speculative activities in the futures markets REDUCE the price variations that would
          Message 4 of 20 , Feb 28, 2013
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            --- In LandCafe@yahoogroups.com, "k_r_johansen" <kjetil.r.johansen@...> wrote:
            >
            >
            >
            > --- In LandCafe@yahoogroups.com, "k_r_johansen" <kjetil.r.johansen@> wrote:
            > >
            > >
            > >
            > > --- In LandCafe@yahoogroups.com, "Scott on the Spot" <ssbaker305@> wrote:
            > >
            > > >
            > > > As for empirical proof, I toss out, again, that oil was $147/barrel in
            > > > the summer of 2008, and just $35/barrel only 7 months later. Demand did
            > > > NOT slack off by 3/4!!! We would have been living in unheated caves and
            > > > bicycling to work if it had...if there was work to go to at all. No,
            > > > this was a result of speculators being forced, or in some cases,
            > > > voluntarily, cashing in their long positions in the price-setting
            > > > futures market, selling their contracts, in other words, or even
            > > > shorting them. That is what speculation is.
            > > >
            > >
            > > A 3/4 reduction in price of oil-futures, doesn't mean a 3/4 reduction in demand does it? Prices in the final consumer market didn't see the same fluctuations.
            > >
            > > Kj
            > >
            >
            > What I meant by that, was that while it may entirely be that the huge fluctuations witnessed indeed is the result of speculation, which makes sense, since the futures market is where the speculators operate, that doesn't prove the claim that 70% of the price of oil when it reaches the consumers, are the result of speculation, as witnessed by the fact that end user prices don't have those erratic movements, even if the long-term price movements correlate exactly. Gas prices certainly didn't drop 3/4.
            >
            > Kj
            >


            Right. It may even be the case (as Matt already indicated) that the speculative activities in the futures markets REDUCE the price variations that would occur otherwise.

            W
          • mattbieker
            ... Yes. ... That won t be necessary, as I ve read all of his major works at least several times. ... I find it bizarre that you quote this passage in defense
            Message 5 of 20 , Feb 28, 2013
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              --- In LandCafe@yahoogroups.com, "Scott on the Spot" <ssbaker305@...> wrote:
              >
              > Matt & Harry -
              > Do you really think George agrees with you?

              Yes.


              > You'd better read him
              > again.

              That won't be necessary, as I've read all of his major works at least several times.


              > George (and I) are saying the same thing (I love it when that
              > happens!). George explicitly says speculation is...
              > "Certainly not of speculation in things which are the products of labor
              > -in agricultural or mineral productions, or manufactured goods, for the
              > effect of speculation in such things, as is well shown in current
              > treatises that spare me the necessity of illustration, is simply to
              > equalize supply and demand, and to steady the interplay of production
              > and consumption by an action analogous to that of a fly-wheel in a
              > machine."

              I find it bizarre that you quote this passage in defense of your position, seeing as how I have already quoted it to show that George disagrees with you. You snipped the part directly before, but he's talking about how the cause of depressions is not to be found in speculation in commodities, but speculation in land.


              > Well, that is exactly what I said. It is not speculation in production
              > - that always adjusts to meet the market demand (like a flywheel, as
              > George says).
              > "(I)t must be speculation in land" just as George says (oh, we don't
              > really need to establish that land in classical economics, and under
              > George, means ALL of nature's resources, do we? That includes
              > commodities, like oil, copper, etc.).

              No, false. Copper, oil, and other minerals are classified as land *in situ*. Once extracted, they are no longer land in Georgist theory, but wealth or capital. He's very clear on that. You may argue that he's wrong, but that's definitely how he viewed it.


              > As for empirical proof, I toss out, again, that oil was $147/barrel in
              > the summer of 2008, and just $35/barrel only 7 months later.

              That's not proof. It's evidence, at best. Others have already provided mitigating explanations.


              > Demand did
              > NOT slack off by 3/4!!! We would have been living in unheated caves and
              > bicycling to work if it had...if there was work to go to at all. No,
              > this was a result of speculators being forced, or in some cases,
              > voluntarily, cashing in their long positions in the price-setting
              > futures market, selling their contracts, in other words, or even
              > shorting them. That is what speculation is.

              How do you make money selling low? ISTM, when demand went ultra-low as the world was on the brink of ruin, the speculative market kicked in, supplying cheap oil, thus somewhat offsetting the damage. No doubt, speculators lost their shirts. That's the flywheel effect in action. Prices have largely recovered since.


              > You say "It's pretty basic economic theory that speculators in
              > commodities smooth out prices, thus mitigating sudden shocks. " It's
              > NOT basic economic theory at all. It's Free Market Austrian theory,
              > which is thoroughly discredited by Gresham's Law, among many, many,
              > other practical real-world rebuttals. We live in a gambler's economy,
              > but not even in the benign sense of the casino. In the casino there are
              > consistent rules, and losers get booted out, not bailed out. Really,
              > this is too ridiculous a statement to dissect further.
              >
              > George would understand the oil speculation market completely, and he
              > would be horrified and furious about it.

              I see no evidence for that.
            • Scott on the Spot
              It is certainly the case that retail price variations are less than those in the futures market, but that hardly indicates the futures market is doing its
              Message 6 of 20 , Feb 28, 2013
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                It is certainly the case that retail price variations are less than those in the futures' market, but that hardly indicates the futures market is "doing its job" in dampening price volatility.  It's simply that the lag time, and inherent inertia of the supply chain makes prices relatively more stable at the pump, though the same may not necessarily be true at other endpoints - farming, for example.
                The larger point is why does a speculative market need to exist at all?  Why not tax the oil at as close to the raw price as possible, to return the proceeds to their rightful owners - all of us - while leaving production profits to producers?  In the article I referenced, Ray Tillerson, CEO of Exxon, said there was a natural price for oil somewhere around $90 (today), so the wild fluctuations around that mark are just destructive noise.  The oil market used to be relatively stable, but since the deregulation of trading in the 2000s, has jumped all over the place.  See the following article and chart: http://inflationdata.com/inflation/inflation_Rate/Historical_Oil_Prices_Chart.asp.  Even allowing for Opec's distortion in the 1970s, the last decade since deregulation has seen the wildest jumps in the post WWII period, adjusted for inflation. 
                "The red line on the above chart shows oil prices adjusted for inflation in May 2012 dollars. The black line indicates the nominal price (in other words the price you would have actually paid at the time). As you can see current prices in real (inflation adjusted) terms fell from July 2006 until January 2007 but then rose sharply from January 2007 through June 2008.

                From there we see one of the sharpest drops in history.  Note that the fall from the 1979 peak took until 1986 (7 years) to fall as much (percentage wise) as it lost in only six months in 2009.

                In nominal terms, we see a fall from $126.33 in June 2008 to $31.04 in February 09 but by June 09 it is back to $61.46 and by April of 2011 it was back to $102.15. Fortunately, from there it decreased down to $76.90 in September and then started increasing again. The average for the year was $87.04."

                 Inflation Adjusted Oil Prices
                --- In LandCafe@yahoogroups.com, "walto" <calhorn@...> wrote:
                >
                >
                >
                > --- In LandCafe@yahoogroups.com, "k_r_johansen" kjetil.r.johansen@ wrote:
                > >
                > >
                > >
                > > --- In LandCafe@yahoogroups.com, "k_r_johansen" <kjetil.r.johansen@> wrote:
                > > >
                > > >
                > > >
                > > > --- In LandCafe@yahoogroups.com, "Scott on the Spot" <ssbaker305@> wrote:
                > > >
                > > > >
                > > > > As for empirical proof, I toss out, again, that oil was $147/barrel in
                > > > > the summer of 2008, and just $35/barrel only 7 months later. Demand did
                > > > > NOT slack off by 3/4!!! We would have been living in unheated caves and
                > > > > bicycling to work if it had...if there was work to go to at all. No,
                > > > > this was a result of speculators being forced, or in some cases,
                > > > > voluntarily, cashing in their long positions in the price-setting
                > > > > futures market, selling their contracts, in other words, or even
                > > > > shorting them. That is what speculation is.
                > > > >
                > > >
                > > > A 3/4 reduction in price of oil-futures, doesn't mean a 3/4 reduction in demand does it? Prices in the final consumer market didn't see the same fluctuations.
                > > >
                > > > Kj
                > > >
                > >
                > > What I meant by that, was that while it may entirely be that the huge fluctuations witnessed indeed is the result of speculation, which makes sense, since the futures market is where the speculators operate, that doesn't prove the claim that 70% of the price of oil when it reaches the consumers, are the result of speculation, as witnessed by the fact that end user prices don't have those erratic movements, even if the long-term price movements correlate exactly. Gas prices certainly didn't drop 3/4.
                > >
                > > Kj
                > >
                >
                >
                > Right. It may even be the case (as Matt already indicated) that the speculative activities in the futures markets REDUCE the price variations that would occur otherwise.
                >
                > W
                >
              • Harry Pollard
                Georgism has always included oil and minerals in its discussions. These are natural resources that belong to us - or should. Harry From:
                Message 7 of 20 , Feb 28, 2013
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                  Georgism has always included oil and minerals in its discussions. These are natural resources that belong to us – or should.

                   

                  Harry

                   

                  From: LandCafe@yahoogroups.com [mailto:LandCafe@yahoogroups.com] On Behalf Of John
                  Sent: Wednesday, February 27, 2013 2:40 AM
                  To: LandCafe@yahoogroups.com
                  Subject: [LandCafe] 70% of oil price is speculation

                   

                   

                  Scott Baker hit upon a good point. 70% of oil - which is land as it is a natural resource extracted from land - is because of private speculation. Geonomics would spot this one of course, LVT, Georgism, would not, but how?

                  Scott says oil should only sold to those who use it - of course. Oil sits in large tanks and may be bought and sold many times. Oil is also sold in tankers as they sail the open ocean. The oil in the ships may be bought and sold 2 or 3 times on route, which is out of countries' jurisdictions.

                  People in Europe are finding it difficult to pay for the heating bills. It is either eat or heat.

                • Harry Pollard
                  John, To repeat, Georgists have always included oil and minerals in their analysis. In fact, while urban rent collection will finance a city s infrastructure -
                  Message 8 of 20 , Feb 28, 2013
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                    John,

                     

                    To repeat, Georgists have always included oil and minerals in their analysis. In fact, while urban rent collection will finance a city’s infrastructure – but not much else – oil, gold, minerals seem adequate sources of revenue for state and national treasuries. However, we wouldn’t tax it, but rather own these bounties and lease them to those who want to extract the goodies.

                     

                    Our philosophical right to the bounties of nature has never been in question. This list is less a Georgist list than an LVT list which perhaps accounts for the endless time spent on exemptions. The Brits have many LVT advocates and among them are Georgists but you don’t have to be a Georgist to appreciate Milton Friedman’s “least-bad tax”.

                     

                    Harry

                     

                    From: LandCafe@yahoogroups.com [mailto:LandCafe@yahoogroups.com] On Behalf Of John
                    Sent: Wednesday, February 27, 2013 4:49 AM
                    To: LandCafe@yahoogroups.com
                    Subject: [LandCafe] Re: 70% of oil price is speculation

                     

                     

                    --- In LandCafe@yahoogroups.com, "walto" wrote:

                    >
                    > --- In LandCafe@yahoogroups.com, "John" wrote:
                    > >
                    > > Scott Baker hit upon a good point. 70% of oil - which is land as it is a natural resource extracted from land - is because of private speculation. Geonomics would spot this one of course, LVT, Georgism, would not, but how?
                    > >
                    > > Scott says oil should only sold to those who use it - of course. Oil sits in large tanks and may be bought and sold many times. Oil is also sold in tankers as they sail the open ocean. The oil in the ships may be bought and sold 2 or 3 times on route, which is out of countries' jurisdictions.
                    > >
                    > > People in Europe are finding it difficult to pay for
                    > > the heating bills. It is either eat or heat.
                    >
                    > I also find it difficult to pay for my heating bills,
                    > but I sincerely doubt that requiring me to buy my
                    > oil directly from OPEC is a sensible solution.

                    By the time the oil get to the retail outlet that sells you the refined oil, speculators (economic freeloaders) have driven up prices to extortionate levels. That is obvious. Geoism will tackle that but Georgism, concentrating wholly on LAND, will not.

                    Bank are the biggest oil speculators, keeping tankers outside the limits until the can make a gain and bring them in.

                  • Harry Pollard
                    Scott, People don t understand rent collection but they do understand taxes. Hence the Single Tax. However, we should understand that collecting rent is not
                    Message 9 of 20 , Feb 28, 2013
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                      Scott,

                       

                      People don’t understand “rent collection” but they do understand taxes. Hence the Single Tax. However, we should understand that collecting rent is not a tax. It’s really a charge. You want $100 land – you pay $100. You want $1,000 land, You pay $1,000.

                       

                      In similar fashion, you don’t heavily tax oil to stop speculation. The oil belongs to us (or should) and what the drillers pay for is the right to extract the oil. (This can be established by bidding.)

                       

                      Speculators are an important part of the free market and shouldn’t be unjustly criticized. The easiest way to keep oil prices down is to build another refinery or two. However, NIMBY is a problem (Not In My Back Yard). Also, politicians are reluctant to pursue such building. One needs little imagination to guess why.

                       

                      In California, our gas prices are hovering around $5 a gallon. Our Sacramento idiots even added sales tax to gas! Meantime, our refineries are partly closed down.

                       

                      Oh, well.

                       

                      Harry

                       

                      From: LandCafe@yahoogroups.com [mailto:LandCafe@yahoogroups.com] On Behalf Of Scott on the Spot
                      Sent: Wednesday, February 27, 2013 8:09 AM
                      To: LandCafe@yahoogroups.com
                      Subject: [LandCafe] Re: 70% of oil price is speculation

                       

                       

                      It's not a matter of buying oil from OPEC. It's a matter of
                      establishing a system where the price of the undrilled oil - that is,
                      oil still in the ground, below the wellhead, if possible - is taxed
                      heavily to discourage speculation. And further that anyone who drills,
                      processes, ships or sells the oil after that be able to keep the profits
                      from the difference between production costs and raw costs, minus the
                      taxes for pollution and land use for drilling areas, refineries, gas
                      stations etc.
                      The volatility - I pointed to the 3/4 drop from the summer of 2008
                      ($147/barrel) to the winter of 2008-09 ($35/barrel) is pure market
                      manipulation. In the summer, there were tankers held by many of the
                      largest financial firms - Morgan Stanley, Goldman Sachs, etc. - parked
                      offshore, waiting for price appreciation - then these holdings were
                      dumped on the market, simultaneously with the beginning of the meltdown,
                      which also resulted in oil traders being forced to cover their margins,
                      driving prices down even more.
                      This kind of instability distorts buying decisions, causes millions to
                      go hungry and even starve (in developing countries, food, which is
                      highly dependent on oil availability/pricing, can be 70% of a family's
                      budget). It makes it impossible for businesses to make long-term buying
                      decisions without engaging in hedging themselves - something that would
                      be unnecessary in a Geoist system in which the surplus was taxed and
                      passed back to the people (well, we are being hopeful here!).
                      A good first step is to demand that those who BUY the oil take
                      possession of it.
                      The oil market - or, for that matter, the stock market - is often
                      compared to an auction market, but it is not that. When I buy a
                      painting at an auction, I have to take it home with me. There is no
                      market in speculating the price at which the final buyer will purchase
                      the artwork will be (maybe I shouldn't bring that up, or some Wall
                      Street type will create one!). You buy it, you own it, ought to be how
                      all commodities markets work.

                      --- In LandCafe@yahoogroups.com, "walto" wrote:
                      >
                      >
                      >
                      > --- In LandCafe@yahoogroups.com, "John" burns-john@ wrote:
                      > >
                      > > Scott Baker hit upon a good point. 70% of oil - which is land as it
                      is a natural resource extracted from land - is because of private
                      speculation. Geonomics would spot this one of course, LVT, Georgism,
                      would not, but how?
                      > >
                      > > Scott says oil should only sold to those who use it - of course. Oil
                      sits in large tanks and may be bought and sold many times. Oil is also
                      sold in tankers as they sail the open ocean. The oil in the ships may be
                      bought and sold 2 or 3 times on route, which is out of countries'
                      jurisdictions.
                      > >
                      > > People in Europe are finding it difficult to pay for the heating
                      bills. It is either eat or heat.
                      > >
                      >
                      >
                      > I also find it difficult to pay for my heating bills, but I sincerely
                      doubt that requiring me to buy my oil directly from OPEC is a sensible
                      solution.
                      >
                      > W
                      >

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