ThinkProgress: Eric Cantor Promises Oil Speculators That Republicans Will Block Financial Regulations

[twa]

This is where my thinking leads. You can't set prices so low they are below the cost of the commodity. A certain profit can be regulated ala the electric utilities. They apply to SCC for rate changes if needed.

Electric utilities are entirely domestic generation....unless you want to start major drilling,ect.,it is not comparable

We could certainly regulate how much refining profits are,but that is not the cost driver

[zoony]

This is where my thinking leads. You can't set prices so low they are below the cost of the commodity. A certain profit can be regulated ala the electric utilities. They apply to SCC for rate changes if needed.

The main issue here is that gas was FAR too cheap for FAR too long. It was around $1 / gallon until what... 2000 or 2001? That is absolutely preposterous. Someone correct me if I'm wrong but I think the price of gas went up about 12 cents over 20 years.

[techboy]

Speculation is vastly overrated in terms of driving oil prices. James Hamilton, an economics professor at UC San Diego, focuses on oil prices, and wrote this in 2008, during the last big spike when everybody was blaming speculators:

I do believe that speculation has been another factor that contributed to recent high oil prices. However, a key element of the bubble story is that there needs to be a very limited response of quantity demanded to the price increases, which the most recent data persuade me is no longer the case. Some of the estimates I've been hearing of the size of the contribution speculation is currently making to the price are therefore difficult to defend. Here I explain why, essentially elaborating on Paul Krugman's theme.

Yes, that Krugman (Nobel Prize winner, uberliberal, etc.). Here's what he wrote:

One of the things I find puzzling about the whole oil market discussion is how complicated people seem to make it. They get all wrapped up in stuff about forward markets, hedge funds, etc., and lose sight of the fundamental fact that there are only two things you can do with the world’s oil production: consume it, or store it.

and

Now it’s true that oil supply responds very little to price, and that empirical estimates of the short-run price elasticity of demand, like this one, suggest that it’s low — say -.06. But even so, the math of a sustained, large bubble quickly becomes daunting. Say the demand elasticity is -.06, and that you believe that the current price is 40% above the level at which end-use demand equals supply. Then you have to believe that 2 million barrels a day is disappearing into secret hoards somewhere — secret, because it’s not showing up in the OECD inventory data. That’s a lot of oil. And bear in mind that people have been claiming that there’s an oil bubble for years.

So my challenge to people who say there’s an oil bubble is this: let’s get physical. Tell me where you think the excess supply of crude is going.

And, here's something very recent from Dr. Hamilton again:

Every day, futures prices can and do move in response to how many people want to buy or sell the contracts. As I explained in a recent study in Brookings Papers on Economic Activity, inventory arbitrage forces the spot price to move along with the futures price. But as I also explained there, this does not mean that sentiment or speculation alone can put the price of oil at any arbitrary value. Ultimately, the critical question is whether the spot price is one at which the physical quantity produced is equal to the physical quantity consumed. Whether today's price indeed accomplishes this was the focus of my discussion of these events last weekend.

It's easy to use speculators as scapegoats, but I don't think it makes good economic policy, especially when you're talking about the kind of heavy handed intervention in the markets that can have all manner of unpleasant side effects. Just ask Nixon about his price controls (after the Rapture tomorrow, of course ).

[stanleys]

The GOP stopped screaming deregulation and self regulation for a while after the housing collapse. Perhaps a tiny part of me hoped they had learned their lesson and realized how destructive their positions on this issue are.

The housing bubble was caused by overregulation...the government required banks loan to uncreditworthy people. In order to compensate the banks for these awful loans, the goverment allowed them to "spread" the risk. Banks took that little nugget and ran with it, creating a shell game that was eventually going to fall apart.

Without overregulation, there would have never been the near collapse.

[HOF44]

Electric utilities are entirely domestic generation....unless you want to start major drilling,ect.,it is not comparable

We could certainly regulate how much refining profits are,but that is not the cost driver

The fuels used by electric companies are sometimes imported. But the reality is most of the crude would be imported while the opposite is true for electric generation. The point is the "windfall profits" the oil companies make would not be there any more. A more reasonable profit regulated by SCC would be there instead. The cost will be what it is based on crude prices, but the "windfall" profits would be passed on as lower gas prices to consumers.

---------- Post added May-20th-2011 at 03:13 PM ----------

The housing bubble was caused by overregulation...the government required banks loan to uncreditworthy people. In order to compensate the banks for these awful loans, the goverment allowed them to "spread" the risk. Banks took that little nugget and ran with it, creating a shell game that was eventually going to fall apart.

Without overregulation, there would have never been the near collapse.

So to get on Zoony's kick here a simple regulation capping leveraging at say 8x would not have helped avoid the whole mess??

[Predicto]

The housing bubble was caused by overregulation...the government required banks loan to uncreditworthy people. In order to compensate the banks for these awful loans, the goverment allowed them to "spread" the risk. Banks took that little nugget and ran with it, creating a shell game that was eventually going to fall apart.

Without overregulation, there would have never been the near collapse.

Everytime I read this myth, I stand in awe once again at the effectiveness of the GOP message creating machine. Here is 662 pages of the official report destroying that simplistic myth.

http://www.washingtonpost.com/wp-srv/business/documents/fcic-final-report.html

[techboy]

For another angle on this, I turn to one of the most respected posters on the board :

On the other hand I understand that mcsluggo is a Phd economist, so I might just listen to him when he speaks on this subject.

Hmm... Good idea...

these types of conversations always perplex me....

first of all people are blending two types into one "category": speculator. Most "speculators" are just MD5. They've got some sort of information that product/stock/commodity X is hot, and is only going to get hotter for the near future... they saw what happened LAST time, with product/stock/commodity Y, which they THOUGHT about buying but never pulled the trigger. They are NOT going to be left on the sidelines THIS time.

So ... Prices go up.... lots of schlubs see rising prices as an indication of future trends and jump on the bandwagon and buy buy buy buy. this temporarily pushes the price higher until SOMETHING happens to chang the common information on X, and suddenly EVERYONE knows that X is yesterday's news, and EVERYBODY wants out of it. This is USUALLY the actual defining type of speculation, but it isn't the sinister villian most people complain about --- it is herd behavior, and yes, it can amplify market fluctuations.

but I think what MOST people that complain about speculators are talking about are some sort of pro-active market manipulators (the Hunt brothers, or Enron in the California energy market, or the crusty old farts in Trading Places). But THESE guys, USUALLY make money on a really short fluctuation of a just few pennies--- the enron in Califronia cases require some seriously effed up markets/market controls, and just don't happen all that often. And when they DO happen it is in a market that is somehow isolated from the massive tidal waves of COUNTER speculation that would otherwise kill this sort of manipulation.

Capital is liquid: and the oil markets are HUGE and fairly open. It wold be pretty hard to explicitly manipulate these markets against their fundamentals for any period of time. Herd mentality? sure that happens EVERY time, and there will be people trying to capitalize on theis by trying to time the inflection points. But for every winner there, there is his mirror image loser.

[stanleys]

Everytime I read this myth, I stand in awe once again at the effectiveness of the GOP message creating machine. Here is 662 pages of the official report destroying that simplistic myth.

http://www.washingtonpost.com/wp-srv/business/documents/fcic-final-report.html

I'm sorry but a government report blaming everyone but themselves isn't exactly my view of impartiality.

The bottom line was that both parties panderiing for votes by pushing the myth that everyone deserved the opportunity to have a home, followed by giveaways to financial institutions to pander for the big money donations was the root cause.

[Hubbs]

If anyone was still unclear about why gas is $4 a gallon despite ample supplies and dwindling demand, look no further.

I have no idea what you're referring to, but worldwide demand certainly isn't "dwindling." It's exploding.

---------- Post added May-20th-2011 at 03:45 PM ----------

You could quit loaning them next to free money

How dare you suggest that QE can have negative effects!

The housing bubble was caused by overregulation...the government required banks loan to uncreditworthy people. In order to compensate the banks for these awful loans, the goverment allowed them to "spread" the risk. Banks took that little nugget and ran with it, creating a shell game that was eventually going to fall apart.

Without overregulation, there would have never been the near collapse.

Hi there. One of the board's resident libertarians and economic dorks here. The CRA was, at most, a small part of the housing bubble. In fact, the work of some unorthodox economists (who have been proven to be much more correct than most orthodox economists over the past few years) would suggest that virtually all subprime activity would have occurred anyway, because of the nature of an asset-backed debt bubble.

(That doesn't mean that the CRA was a good idea. Only that claiming that the housing bubble was "caused by overregulation" is about as accurate as claiming that blowing a .3 on a breathalyzer was caused entirely by your first beer.)

[stevenaa]

I have no idea what you're referring to, but worldwide demand certainly isn't "dwindling." It's exploding.

Consumption has been flat, there are reserves and refineries are at or below average capacity. Demand is not driving the current prices.

[Hubbs]

Consumption has been flat, there are reserves and refineries are at or below average capacity. Demand is not driving the current prices.

I said worldwide. Oil demand is global. The developing world's demand for oil is rapidly accelerating.

[Predicto]

I'm sorry but a government report blaming everyone but themselves isn't exactly my view of impartiality.

The bottom line was that both parties panderiing for votes by pushing the myth that everyone deserved the opportunity to have a home, followed by giveaways to financial institutions to pander for the big money donations was the root cause.

But that is not what you said before.

[twist]

This is an issue I'm turning around on. I could be convinced to strictly regulate oil in this country. We do it with electricty, and it works very well.

Can you imagine the commodities markets speculating on the cost of your electric bill on a daily basis? Not sure why we allow it with our oil.

You don't have to imagine it, we already tried that:

http://www.cbsnews.com/stories/2004/06/01/eveningnews/main620626.shtml

[Darth Tater]

Why the hell would speculators not like government financial regulation? The economy will do what the economy will do despite all the government's attempts to prevent it from doing so. At best, such misguided regulatory attempts do is delay the problem so it hits even harder later. Any attempt by the government to regulate the oil speculators just creates better speculation opportunities. The ONLY reason to use government regulation here is to ensure profits for certain favored companies for as long as possible then **** you and me in the ass to fix the malinvestment thus caused.

[mardi gras skin]

And last I checked, we produce the hell out of oil, and we have the largest shale reserves in the world.

Can't touch it. PeterPM says its poison.

[twist]

Why the hell would speculators not like government financial regulation? The economy will do what the economy will do despite all the government's attempts to prevent it from doing so. At best, such misguided regulatory attempts do is delay the problem so it hits even harder later. Any attempt by the government to regulate the oil speculators just creates better speculation opportunities. The ONLY reason to use government regulation here is to ensure profits for certain favored companies for as long as possible then **** you and me in the ass to fix the malinvestment thus caused.

The speculation doesn’t mean the market is free, it means people are free to place bets on it and manipulate it.

A buy and hold strategy was made possible with commodity deregulation in the mid 90's that allowed institutions to hold commodity futures where as in the past they had to either sell or take delivery at a specific date. Ever since then commodity speculation has become rampant where more speculators and funds are in the commodity market than are actual producers and receivers of products.

http://www.answerbag.com/q_view/2417454

A view that only the government manipulates markets is incorrect, especially when those with huge amounts of money to invest decided to move a market that is smaller than their ability to move it.

[Destino]

The housing bubble was caused by overregulation...the government required banks loan to uncreditworthy people. In order to compensate the banks for these awful loans, the goverment allowed them to "spread" the risk. Banks took that little nugget and ran with it, creating a shell game that was eventually going to fall apart.

Without overregulation, there would have never been the near collapse.

You should be upset with whoever told you that because by repeating it you're making yourself look like a damn fool.

Also I want to touch on this "trust the experts" thing that I always see in threads discussing economics. We talk about when those with degrees and experience have to say as if we were referring to scientists or engineers. We aren't. Economics isn't a science and the walls of those that brought us wall street deregulation are covered in awards and degrees from the best schools in the country. When banks ran out of mortgages to package and sell they push to expand the pool of who qualified began. Richard Syron and Daniel Mudd were more than happy to oblige as they made millions on this game of hot potato as well. All of these highly educated very well respected economists, CEOs, and experts... screwed the ever living **** out of the US.

You don't need a PhD to understand that profit is a powerful motivator. You think these experts didn't realize that the mortgages being packaged were dangerous? That they didn't know what a no-doc loan was or that the subprime lending going on was a bad idea? I think most of us on this forum if asked in 2002 if lending money to someone without checking anything about them at all was a good idea we could have accurately said "no". The logic behind it was even better. Since the prices of homes were rising it didn't matter... apparently we're supposed to believe that all those experts didn't see a problem with that logic when applied over time

Now we're being told to continue the process of deregulation and self regulation. Imagine that.

[techboy]

Consumption has been flat, there are reserves and refineries are at or below average capacity. Demand is not driving the current prices.

Dr. Hamilton writes on May 8:

What I believe should instead be the first place to begin any discussion of recent oil prices is the broader global trend of supply and demand. The graph below plots world oil consumption over the last 15 years. This increased by 7.3 million barrels per day between 2000 and 2005, but by only 1.2 mb/d between 2005 and 2010. But very importantly, consumption by China increased by 1.7 mb/d between 2005 and 2010.

Please note the necessary implications of this arithmetic: if China is consuming 1.7 mb/d more, but the world as a whole is only consuming 1.2 mb/d more, that means that people outside of China, as a group, have decreased our consumption by 500,000 b/d over the last 5 years. And the first question to ask anybody who claims that the price of oil has been "too high" recently, is, how much of a price increase do you think would have been necessary to persuade consumers outside of China to reduce consumption by a half-million barrels per day over a five-year period?

The speculation doesn’t mean the market is free, it means people are free to place bets on it and manipulate it.

If you're going to cite sources, I'd suggest that a competitor to "yahoo answers" where anybody can write anything is probably not the best place to start.

Also I want to touch on this "trust the experts" thing that I always see in threads discussing economics.

"The race is not always to the swift nor the battle to the strong, but that's the way to bet." ~Damon Runyon

[Destino]

"The race is not always to the swift nor the battle to the strong, but that's the way to bet." ~Damon Runyon

"The use of a growing array of derivatives and the related application of more-sophisticated approaches to measuring and managing risk are key factors underpinning the greater resilience of our largest financial institutions .... Derivatives have permitted the unbundling of financial risks." -- May 2005 Alan Greenspan.

[techboy]

"The use of a growing array of derivatives and the related application of more-sophisticated approaches to measuring and managing risk are key factors underpinning the greater resilience of our largest financial institutions .... Derivatives have permitted the unbundling of financial risks." -- May 2005 Alan Greenspan.

Yes, I make it a policy to ignore all experts in any field where anybody has ever been wrong.

You're starting to sound like Eric Cantor or Sarah Palin. Is your next post going to include a line about "Real America"?

[twist]

If you're going to cite sources, I'd suggest that a competitor to "yahoo answers" where anybody can write anything is probably not the best place to start.

The person answering the question cited their sorces.....

52 of them actually.

[techboy]

The person answering the question cited their sorces.....

52 of them actually.

Yes, the person in question apparently quoted a line or two from 52 sources, but there is no indication of context, the overall thrust of the paper, or even if the quotes are accurate.

[twist]

Yes, the person in question apparently quoted a line or two from 52 sources, but there is no indication of context, the overall thrust of the paper, or even if the quotes are accurate.

I'm not doing your work for you, google is your friend.

By copying any of the sorces into google you can track it down and read the context yourself:

Or you can read this one:

http://www.reuters.com/article/2011/03/31/hershey-speculators-conference-idUSN3126028420110331

Or this one:

http://in.finance.yahoo.com/news/Goldman-spooks-oil-reuters-2429412258.html?x=0

[techboy]

I'm not doing your work for you, google is your friend.

First Sarah Palin, now 9/11 conspiracy theorists. The level of discourse in this thread is stunning.

[twist]

First Sarah Palin, now 9/11 conspiracy theorists. The level of discourse in this thread is stunning.

So your going to argue that commodity speculation is not distorting the markets?

Or not?

Because you have yet to actually disagree with a thing I've said.