Is Oil the New Gold?
Optional title: " Are Speculators Just Investors by a Less Sweet Name?"
I'm going to reveal my ignorance here, but I believe some Ricocheteer can help me understand this at the layman's level. What is the difference between a speculator trying to make his money work for him by betting on oil futures and an investor trying to make his money work for him by buying gold?
My pastor, in his Easter homily, blamed the rise in oil prices on "speculators". He was giving examples of the fearful times in which we live to remind us to "be not afraid" as Christ has won the Victory for us. Still, I found the charge against speculators, which we hear ad nauseum from liberals, very jarring. How much do speculators affect the market price of oil?
It seems to me people are trying to protect their existing assets in these uncertain times by buying commodities. Hardly anyone has confidence in the dollar, in government planning, in the market, in future employment, etc. Is there an economic or moral judgment to be made between the gold investor and the oil speculator? Isn't the oil market responding to the demand for commodities due to America's national debt crisis, devalued dollar, government malfeasance and general underlying economic sickness just as much as the gold market?
Update: NRO editors have written a nice little summary: In Search of Petrovillains.
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Jun '10
Re: Is Oil the New Gold?
One of my favorite bloggers, Streetwise Professor, gives a reasonable explanation for speculation here . Let me know if it helps. It seemed useful to me.
May '10
Re: Is Oil the New Gold?
Speculators make their money by exploiting geographical or temporal discrepancies in prices. Hence, geographical speculation would involve buying cigarettes in a low tax state and crossing the border to sell them in a high tax state. Temporal speculation would involve buying cigarettes in anticipation of a major reduction in the tobacco supply, when prices are low, and then selling those cigarettes after the supply reduction manifests, when prices are high.
By contrast, investors earn their money from returns on debt and equity instruments that they purchase. When investors buy bonds or shares of stock, they expect to earn a return on their capital (the money with which they purchase said instruments).
Robert Murphy has written a series of excellent articles in defense of speculators:
-The Social Function of Futures Markets
-The Social Function of Stock Speculators
-The Social Function of Call and Put Options
Aug '10
Re: Is Oil the New Gold?
At an Easter brunch, I had a brother in law tell me how bad things were because of the speculators.Not minding the usual liberal tropes, i.e. dont read the newspapers or watch NPR, I wonder where these talking points get their widest distribution. Is it NPR ? The AP, or do these wide-eyed children just believe things that Obama says ? Are the power of his words so strong as to erase knowledge and learning from the minds of his minions ? Hearing a judge, someone who has lots of education and reads a great deal, say something so stupid was a shock.
Jun '10
Re: Is Oil the New Gold?
Your pastor is an economic idiot.The more efficient a market is the more quickly it will respond to new information. In all cases your financial interests are best served by such efficiencies. Speculative responses always move the price of the asset up or down. Your pastor sees the price of oil moving up and automatically thinks speculators are responsible, when in effect a constricted and uncertain supply is the culprit, a condition speculators had nothing to do with. He doesn't know it, but it is this ability to move the price of an asset that ensures your pastor's financial future by putting all on notice of what speculators are betting will happen. If Obama, who is an economic illiterate, wants to bring oil prices down all he has to do is open new areas of the US to oil production, more specifically, Alaska, the western continental shelf, the gulf, and the eastern continental shelf. The market response will be immediate and the price of oil will fall. As an aside, what Obama is doing by demagoguing this issue proves he is an awful human being, and as such is not fit for office.
Re: Is Oil the New Gold?
Speculators, of course, can be found on both sides of a deal. Some think the price is going up. Some think the price is going down. The only way they can make a deal is to be convinced that the other one is wrong. For a speculator to make money, another speculator must lose money. It's zero sum.
All of those mini-transactions paint a pretty accurate picture of which direction the price of a given thing is going, and that benefits everyone.
Gas prices are going up because the choke points -- oil production, refinery capacity -- are stressed. Gas in LA, where I live, is about $4.39 a gallon. Market speculators, no doubt, helped identify the choke points, and some made money on those bets. But some lost money, too. I'll never know why this is so hard for some people on the left to understand.
Feb '11
Re: Is Oil the New Gold?
Many of the participants in futures markets are there for reasons other than speculation. A farmer may wish to lock in the price for next year's wheat *in advance*, even if it means getting less than he could *probably* get by waiting to sell his crop. Conversely, a bakery may wish to lock in wheat prices to guard against a price increase. The same principles apply for oil: an airline, for example, may wish to hedge against a sharp rise in jet fuel prices.
And speaking of jets...I'd bet that this pastor does not understand and would not be able to explain futures markets and speculation at even a kindergarten level---and it is just about as irresponsible for him to harangue on this subject without bothering to study it as it would be for him to climb into the cockpit of a Boeing airliner with a full load of passengers.
Jul '10
Re: Is Oil the New Gold?
The Bolsheviks blamed food shortages caused by their policies on evil speculators. It's been a staple on the Left ever since.
Commodities prices are going up for two simple reasons: increased global demand and a decline in the value of the dollar.
The Federal government exacerbates the rise in the price of petroleum by artificially restricting the extraction of energy resources and by inflating the currency. So-called speculators - among whom I count myself - have profited by anticipating the consequent rise in the cost of oil.
If I saw a return to fiscal sanity and a prudent domestic energy policy, I'd short oil - and be a speculator profiting from the resulting - and welcome - decline in prices.
Dec '10
Re: Is Oil the New Gold?
Thanks, Dave. The Streetwise Professor was very helpful. I especially appreciate his explanation that speculators actually spare us from suffering worse price spikes when the risks they're betting on become reality. It makes sense that the current price fluctuation modifies behaviors (increased storage and production) in a way that mitigates against the worst consequences of supply disruptions. In engineering speak, speculators set up a negative feedback loop and that's a good thing.
However, it does play into the narrative that speculators betting on future price increases cause the current price to increase. That makes the previous argument a tough-sell.
Jun '10
Re: Is Oil the New Gold?
A thing you must know, and never forget, about gold as an investment, is Executive Order 6102. Oil is currently going up but it's a strategic material, it will matter when it starts to disappear for one reason or another (economic, political, you pick 'em). The government is broke, oil is valuable. How long will it be before another president or congress decides to 'nationalize' it as a strategic resource?
I'm not suggesting investing in food, guns, and ammo in these hard economic times (although a good steak does sound nice) but I'd suggest something less volatile would be safer.
Note: I'm not a genius, nor a financial expert, nor do I play one on TV. I'm more of an average Joe (like most of America). But I am a historian (an American historian, I pronounce the initial "H"). I fully expect some really radical economic changes in the near future. I'm not a seer, I don't know what forms the changes will take, but I'd be very wary of heavily investing in anything, especially volatile commodities.
Dec '10
Re: Is Oil the New Gold?
Please don't be too hard on my pastor. His comment about speculators was one item in a list of legitimate fears in our time. It stuck with me because my political sensitivity threshold is pretty low -- especially at Easter Mass.
He must have heard Obama's Saturday address on the subject, which I didn't know about until this afternoon. He also counsels the social justice crowd, so he gets an earful of misinformation from them I'm sure. He has been receptive to my corrections when we speak about issues revealing my conservative views. Now I have more clarity on the subject when I speak with him next. Thanks for your responses.
Dec '10
Re: Is Oil the New Gold?
Kenneth: The Bolsheviks blamed food shortages caused by their policies on evil speculators. It's been a staple on the Left ever since.
Commodities prices are going up for two simple reasons: increased global demand and a decline in the value of the dollar.
Apr 25 at 6:34pm
The devaluation of the dollar has to be a factor, but how much? It's roughly a 25% increase in gas prices. Is the remainder really due to increased demand in recent weeks? Or is it the "fault" of the speculators, who, according to the Streetwise Professor, are essentially better informed investors "exploiting" the conditions created by international events and by our own government's blunders. It's a nuanced argument to have to make.
Apr '11
Re: Is Oil the New Gold?
I should think that there are also end users (shipping companies, for instance) who are stocking up in anticipation of a shortage should there be a revolution in Saudi Arabia or some other major oil producer. I guess that makes them evil speculators, too.
Dec '10
Re: Is Oil the New Gold?
Is EO 6102 the response of the FDR administration during the Great Depression to attempts to hoard gold? I read about this in The Forgotten Man, but that was a year ago and I'm not sure I have it right. Individuals were limited to holding no more than $100 in gold, which some people got around by keeping "collectible" gold coins? Is that right?
Dec '10
Re: Is Oil the New Gold?
People buying futures at prices higher than today's spot price are not causing the price to rise, so much as they are anticipating it's rise and getting in ahead of the curve.
The futures market price goes up or down as the external situation dictates. The prices and speculators follow the projections, not each other.
They are a symptom, not the cause.
If the current and projected future market environment boded well for production and supply, they'd be looking to sell futures contracts at prices lower than today's spot price (but higher than they think the spot price will be come delivery day).
Mar '11
Re: Is Oil the New Gold?
I know Glenn Beck is a conspiracy theorist, thereby violating Ricochet's rules of engagement, but he gave a very believable explanation of all this today, emulating Paul Ryan with lotsa graphs.
His explanation - the whole world has to buy Oil from OPEC in dollars ( a hangover from when the Dollar was the World's currency). The dollar is being devalued by the Fed (to make the Stock Market look like it is going up), OPEC compensates by increasing the price of Oil in dollars.
The value of Gold is increasing, relative to the Dollar, at about the same rate as Oil (I'm not sure about this bit - turmoil in the Middle East is also a factor). Therefore, in effect, Oil is being priced relative to gold, and is fairly constant.
So, Mr Obama blames those evil Capitalist speculators - Harvard genius!
So, Oil is Gold - Drill Baby Drill!
Oh, except Mr Obama is not in favor of drilling, except off the coast of Brazil :-(
Oh, and Sarah Palin is stupid.
Edited on Apr 25, 2011 at 9:35pmJun '10
Re: Is Oil the New Gold?
Western Chauvinist
Is EO 6102 the response of the FDR administration during the Great Depression to attempts to hoard gold? I read about this in The Forgotten Man, but that was a year ago and I'm not sure I have it right. Individuals were limited to holding no more than $100 in gold, which some people got around by keeping "collectible" gold coins? Is that right? · Apr 25 at 8:16pm
I'm not sure how folks got around it. I am sure many didn't and were ruined by it. And I am afraid of something similar happening again. After all, it worked before...
Apr '11
Re: Is Oil the New Gold?
The price of oil is going up a) because of the devaluation of the US dollar and b) because of increased global demand for oil. The price of gold is going up for exactly the same two reasons.
Jesus said that holding gold is the worst thing you can do with your money. It is better to put your money in the bank, or buy bonds, where you at least can earn interest.
Even better is to invest your money in stocks and mutual funds. Best of all is to "speculate", that is to buy merchandise low and sell it high. Remember the jeweler who found a pearl of great worth, and sold all he had to buy it?
My advice to anyone who bought gold at a lower price than today's price, is to sell it, and enjoy your profit. Invest in a good mutual fund. Or start a business.
People who criticize "speculators" are ignorant of basic economics.
Aug '10
Re: Is Oil the New Gold?
Not all criticisms of "speculators" are without merit. The comic book industry was inundated with a wave of speculation in the early 90s when Jim Shooter started his Valiant label. The book runs were advertised as "print to order" and comics "as investment" was a hot topic. A number of speculators came into the market and ordered multiple copies of each book...a number of existing fans attempted to be speculators by ordering multiple copies of each book. This had the effect of exaggerating demand while simultaneously creating perceived scarcity of Valiant titles. Some Valiant books were selling in the $100s within days after release.
Eventually, within a year or so, the speculators and fans tried to sell their "extras" which were all highly valued in price guides. Some few made money, but the flood led to even the rarest Valiant books being found in the $0.25 bin today.
A lot of fans left the hobby, few if any speculators remained. In 1990, Marvel and DC each had titles that sold 500k a month by the mid-90s a good book sold 100k -- a great book today.
Speculators proved comics weren't an investment. This was Good and Bad.
Dec '10
Re: Is Oil the New Gold?
JoBeth Gerrard:
My advice to anyone who bought gold at a lower price than today's price, is to sell it, and enjoy your profit. Invest in a good mutual fund.
Yeah, that's a hell of an idea. That way it can go from being a tangible asset to a wisp of vapor (that can blow away when the winds change).
A better bet would be to plow it into firearms and ammo. Guns don't lose value unless they rust, so you should also buy a good stock of Remoil.
Or maybe storage food ('cause you can't eat guns).
Inflation favors the prepared and those who hold tangible assets (likely one in the same).
Aug '10
Re: Is Oil the New Gold?
Your pastor might be a man of God but he has no understanding of free markets. I will be hard on him. If you don't understand what you are saying don't say anything at all.
Evil Speculators are good. They drive up prices which in turn signal suppliers to produce more or for new suppliers to enter the market. If the government is restricting supply and limiting new firms entering into the market through regulations then shockingly prices keep going up.
Along with soviet style regulations the reason gas prices are rising is because of the massive Federal deficits passed by the Republican House, Democratic Senate and White House. As the Treasury issues debt and the Federal Reserve buys most of the debt the dollar loses value driving up the prices of goods.
Find a new economist and read Frédéric Bastiat