[X3pilot]

Not that this is a surprise, but I seriously need a sanity check on my perception of free market rules. Supply and demand drive prices in a free market, yes? I (we) all know that Wall Street has driven prices on commodities but how is that good?

Wall Street is driving up oil prices

But wait a minute. If the global economy is using less oil, and supplies are more than adequate, why are oil prices at $80 a barrel in the first place?

The answer, according to oil analyst Peter Beutel at Cameron Hanover, is that investors are driving the price of oil — not the people who use it.

“The sovereign wealth funds, college foundations, union pension plans — all this big vested money has been sold on the idea that your investment portfolio is not complete without 10 percent in commodities,” Beutel said.

Soooo, if Joker or one of you finance majors can explain how this works to the good, please go ahead.

The administration is trying to help the economy recover, but gas prices are a large part of the average consumers spending. Doesn't it make more sense to keep gas prices low so more people can spend on other things? I know this isn't an environmentally correct position, especially on a bike forum, but we as a nation have slowed demand, bought more efficient cars and while it would be great if we could stop our dependence on oil and use alternate sources, the reality is we are a oil consuming nation, we need to drive to get most places so why not apply a fair rule of commodity trade that doesn't threaten to stop our economic growth?

In other words, why can we not go back to the theory if you bid on a barrel of oil, you better take delivery of a barrel of oil.

And Wall Street wonders why we hate them (or just don't give a damn)

Rant complete.

 

[Silver]

In other words, why can we not go back to the theory if you bid on a barrel of oil, you better take delivery of a barrel of oil.

Because when you aren't dealing in actual product, transactions costs are low and leverage is theoretically unlimited.

If I was playing with borrowed money and I had access to rule makers, I'd rig the game that way myself...

 

[X3pilot]

Because when you aren't dealing in actual product, transactions costs are low and leverage is theoretically unlimited.

If I was playing with borrowed money and I had access to rule makers, I'd rig the game that way myself...

Ahhhh, I forgot that part.

 

[skatetokil]

Because when you aren't dealing in actual product, transactions costs are low and leverage is theoretically unlimited.

If I was playing with borrowed money and I had access to rule makers, I'd rig the game that way myself...

I wont disagree that OPM (other people's money) plays an important role here, but there is some market theory to understand as well.

The idea behind allowing speculation is that they will drive todays market price so that it reflects the best information society has about future supply and demand conditions. Basically, speculators are betting that supply will shrink (peak oil) and demand will increase, and are bidding up the price now in accordance with that prediction. The beauty of market economics is that the high price of oil will slow consumption of a scarce resource and create incentives for entrepreneurs to invest in alternative energies today rather than 50 years from now when oil actually runs out. If it works like it should, it means we avoid a catastrophic collapse but instead make a gradual transition. Now lots of things can go wrong obviously (for example when we generously subsidize existing energy companies and set up barriers to market entry for new firms), but that's the basic idea.

 

[Westy]

You will see change once pork belly commodities drive up bacon prices.

 

[skatetokil]

You will see change once pork belly commodities drive up bacon prices.

Like Lenin said: "The worse the better."

 

[MMike]

 

[jonKranked]

solution: youth in asia.

 

[stoney]

STK pretty much nailed it. As long as you need not take physical delivery of product, and the contracts are relatively cheap compared to the amount of product you can control, speculation will exist.

 

[jasride]

STK has the logical explanation for this topic but this author dives a little more into the corrupt side of it. I didn't get to read this book but I heard about a 20 minute radio interview with the author a few months ago and it all sounded interesting.

 

[stoney]

Does that book come with Tibetan Prayer flags and an obama bumper sticker?

 

[skatetokil]

I don't fall into the oil is evil camp, but it's clear that our society pays a great deal more per gallon than we see reflected at the pump. In my view, the role of the government is to make those implicit costs visible to the people making consumption decisions. That's the only way to ensure that commerce doesn't have horrible and destructive consequences for other parts of society.

The government's own statistics indicate that the true price of refined gas is somewhere between $10-15 per gallon accounting for direct subsidies, protection from competition, environmental damage, and our foreign wars to control the supply. If we had included the full price of these activities in the sale of gas rather than rolling it into the general budget, we would have shifted to alternative energy decades ago.

The way I see it, market theory is just a description of the way people make decisions in the face of incentives. "The market" is like gravity, a measurable if somewhat mysterious force that we ignore at our peril. However, people who understand it can leverage it for the benefit of society.

Take the recent example of the DC "bag tax" which was intended to keep trash out of the river. For those who don't know, retailers are now required by law to charge $.05 per plastic bag at the register to defray the costs of cleaning up local waterways. In the month of January when the law went into effect, consumption dropped from 22.5 million bags to 3.3 million, and $150,000 was raised for cleanup.