Free Markets, Free People

Scapegoating oil speculators–Obama counts on public’s economic ignorance to shift blame for high gas prices

Icould pretty much stop there and say the title tells you the story.  Obama knows high gas prices are not good for his re-election campaign.  He also knows his energy policies have actively worked against ameliorating or lowering the price of gas.

Therefore, it is necessary to find a scape-goat.  Someone or something he can shift the blame too and demonize.  In other words, the usual disingenuous attempt at distraction.

David Harsanyi explains what “speculators”, otherwise known as commodity traders, do:

Let’s start by being thankful for oil speculation — no matter what the motivation of those involved might be. To begin with, speculation allows companies with exposure to fluctuating commodity prices to hedge against rising costs by locking in. Sometimes the bet pays off; other times it doesn’t. But risk and profit are not yet crimes.

Oil speculation also offers consumers and investors information about the future that can help them make informed long-term decisions. Speculators trade commodities based on the information available in the marketplace. They reflect reality; they don’t create it.

But sometimes, unfortunate as it is, prices will rise. "Gouging," the close scaremongering cousin of "speculation," helps persuade consumers not to use what they don’t need. It incentivizes to modify behavior — our driving habits or the size of our cars. We conserve more when prices are higher, so we avoid shortages, and producers intensify their production. (Funny how Democrats get this concept when writing energy policy designed to artificially spike fossil fuel prices.)

In reality, this sort of trading helps moderate the market.  And, being a zero sum game – i.e. if you make money someone else loses it – it is done carefully.  As Harsanyi explains, they “reflect reality; they don’t create it”.  In essence you’re seeing a relatively free market work as it should.

Of course, what Barack Obama wants to do is have government intrude on that market because politically he doesn’t like the reality it is reflecting because it is politically damaging to him.  So:

Speaking from the Rose Garden, the president announced a proposal to spend $52 million to fund increased government oversight of oil futures market trading in addition to harsher civil and criminal penalties for manipulation in energy markets. “We can’t afford a situation where some speculators can reap millions, while millions of American families get the short end of the stick,” Obama said. “That’s not the way the market should work.”

Or, said another way, if you make a profit based on your foresight, you’d be considered a criminal.  If you lose money, I suppose, that’s ok in Obama’s world.

Of course, it’s all nonsense (I mean how would Mr. Obama regulate oil trading in foreign exchanges?).  It is a calculated attempt to use ignorance of how these markets work to cause voters to shift their rage from him to his designated target.  Successful scapegoating means one less issue the opposition has to use against him (not that he doesn’t provide a target rich environment anyway).  He’s counting on this sort of populism to work.

David Kruetzer asks some questions I’d like to see the press ask:

If speculators are making unconscionable profits on energy, why are they only doing it occasionally and not all the time? Why are there only speculators in oil, not natural gas (whose current price is about half of what it averaged over the last decade)? And given how the petroleum market works — for every speculator who makes money on a trade, somebody else will lose money — the president’s theory “requires an endless string of chumps to take the other side of the speculators’ deals.”

And Kreutzer points out the basics of any commodities market, again something of which Obama banks on your ignorance:

For speculation to drive up prices, the speculators must either cause oil production to slow down (which they haven’t) or to pull oil off the market. If the flow of petroleum and its products remains unchanged, the price at the pump will not change. If petroleum is pulled off the market, which can happen even though there are limits to what can be stored, it will eventually come back on the market.

The question becomes, ‘When the oil comes back on the market, is the price higher or lower than when it was pulled off the market?’ The price will only be higher if the amount supplied at that time is lower or the demand is higher. In either of those cases, speculators have helped moderate price fluctuations and will be rewarded with profits. If the price is lower, then the speculators did a bad thing and will be punished by losing money.

So those are the basics of the issue as it concerns such trades and markets.

As can plainly be seen, Obama hasn’t a leg to stand on.  But that doesn’t stop him from claiming that government is the answer to this made up problem. 

Why?  Well other that it is his political nature, he can’t sell the nonsense without some sort of “action”.   It becomes much more believable to those who don’t know better if he’s going to spend millions to regulate the contrived problem out of existence.

Of course he knows his actions will not have any positive effect on gas prices, and, in fact, may actually have a detrimental effect, which is why he couches this attempt at scapegoating the problem via government with “none of these steps by themselves will bring gas prices down overnight”.

But he can claim to be taking action while continuing to blame speculators for the problem and counting on general economic ignorance to carry the day for him. 

Pretty typical of the man, I’ve come to learn.


Twitter: @McQandO

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43 Responses to Scapegoating oil speculators–Obama counts on public’s economic ignorance to shift blame for high gas prices

  • Futures markets are deep, dark voodoo to most Americans. Hence, demagogues…like Obama and Erp…can invoke bogy man terms like “speculators”. What few of our fellows realize is that futures markets have IMMENSE utility, or they would never exist. For producers of actual GOODS, they allow the top and bottom of cash price fluctuations to be shaved off, which means they are LESS exposed to risks. Take a feed lot operation, for instance…both its inputs and its finished product have futures available, and any competent feed lot operator has tick-for-tick displays of both futures and cash prices, and takes hedge positions on everything. Those are only possible because actual “speculators” offer those hedge positions.

  • When will Obama start the attacks on those who speculate on commodity futures? Why am I thinking of Eddie Murphy’s movie “Trading Places”?

    • @Johnny Jones Is he Mortimer or Randolph in your version?

      • @looker I don’t think Barrack would be either of them, they just wanted to make money and lots of it. But he wouldn’t be Eddie or Dan either. I think Mortimer and Randolph were much more honest than Obama. But then I think Bernie Madoff is more honest than Obama and the democrats and most Republicans as well.

        • @Johnny Jones Let’s see….that would still leave the part of Clarence Beeks……

        • @looker He did come to mind but any libs lurking would label me a racist. But who cares, they consider us racist because we disagree with him and or didn’t vote for him.

        • @Johnny Jones we’re always something; racists, fascists, misogynists, ignorant redneck hicks, damaged ex-military types, poorly informed cranks, uneducated shills, selfish, heartless, presumably white males.

  • I would pose the question why do we accept the mantra from those who speculate that speculation is good for the market/industry?

    I can understand a producer/consumer of a good trying to arrange a mutually agreeable price for goods that take a long time to come to market, like wheat, corn, hogs, cattle etc etc etc where things have to grow (which was why the Chicago Board of Trade bascially invented futures), but a bunch of Wall Street Investment houses?

    Sorry, I’m not buying it.

    • @dfgardner Do you know how long it takes to get oil and gas to market? Do you know how much it cost?

    • @dfgardner Who the HELL do you think the producer HAS to have as part of the process…?!?!?!? (Hint: “speculators”) BTW, this is a true “win-lose” exchange as pertains to the future traded.

    • @dfgardner Do you think each individual farmer has the time or ability or cash on hand to negotiate future prices with each individual consumer, who also has the time, ability, and cash on hand? Also, as we have been repeatedly told, oil production takes at least ten years to come on line.

      • @timactual As I stated I understand producers and their end customers (refiners, etc etc) setting a price. Got that, happens all the time in wheat corn etc. I understand the purpose of the exchange, which acts as the honest broker, got that too.

        How many entities who currently own a futures contract, take delivery? I would posit that the number is very very very very very small relative to the volume of futures contracts. Therefore, middlemen, who have no intention of taking delivery or delivering anything, are merely passing paper between each other….and few appear to be making losing bets because we’re not innundated with the names of firms that lose money in futures as should happen with any price swing.

        Thats how value to the market is added: no vaule is added if everybody wins.

        • @dfgardner You REALLY don’t know what the FLUCK you are talking about. I have a link above that has other links that will allow you to educate yourself. You can start by differentiating between the futures price and the cash price. Unless the closing future price hits the price paid, SOMEBODY has to lose on each trade. But someone with a hedge position CAN lower their losses relative to a naked cash position.

        • The so called speculators in fuel are the big users like shipping companies, airlines, and trucking companies. They are trying to lock in prices at a certain date because they believe that the price will be higher. To some extent this causes the prices to indeed go up, but it is not based upon blind speculation, it is based upon reasonable expectations.@dfgardner

        • @kyle8 Actually, kyle, those are hedge positions. Interests who will use a commodity as a factor of production “buy” (or sell) positions from speculators who “sell” (or buy) the future. Whether a hedge position is a buy or sell depends on what you think the price at maturity will be.

        • @dfgardner “I understand the purpose of the exchange, which acts as the honest broker”——————-So what is the difference between an honest broker and a speculator? Neither takes delivery.— “…are merely passing paper between each other”———True, but so what? Every bank and securities dealer in the world, not to mention Fannie and Freddie, do the same with real estate and other assets.

        • but they are not necessarily just hedging, in some cases they are trying to lock in delivery as well. If their lifes blood is having an uninterupted supply of fuel then they have to make sure they have a constant supply at a reasonable rate.@Ragspierre

        • @kyle8 A futures contract is NOT about delivery. IF supplies are limited, NOBODY who sold a futures contract could assure delivery. Think of the futures market as PURELY paper BETS. That is ALLLLLL they are. Many people who sell and buy pork bellies are observent Jews, and would not know a package of bacon, much less than 10,000# of pork bellies.

    • @dfgardner Well before you go heaping all of your ire on speculators, let me ask you a question: How can you tell a “speculator” for any other “investor”? Let me know when you can tell the difference!

      • @sshiell Ah well, you see, SPECULATORS are those trying to prevent Baracka from being re-elected WHILE they make more money to increase the gap in wealth between the rich and the poor and while they PAID a lower tax rate then their secretaries (and you’re supposed to think that means they actually paid less money too) AND they haven’t donated one single red cent to the Re-Elect Baracka the Magnificent campaign fund. It’s pretty simple really.

        • @looker AND it is oil, dude. They are speculating on dirty Gaia-poison, man. An’ they’re rich, an’ stuff…

      • @sshiell A speculator is one who never actually takes delivery of the product nor produces it.

        • @dfgardner No. Pretty much NOBODY ever takes delivery of a futures contract. NOBODY. Try again.

        • @dfgardner The inference is that they all MAKE money, and that just can’t be possible.

        • @looker Right! Unlike a stock trade…which can be a “win-win” over the long haul…futures trades (unless the contract closes at the sale price) HAVE to have a winner and loser. Someone with a hedge position CAN be very happy to lose, depending on the CASH price of the commodity (i.e., they lose a little on their futures position, but make MORE on the cash price, AND reduced their exposure via their hedged position).

  • he is a poor excuse for a human being, isn’t he? Oil speculation = bad, but currency speculators like soros = virtuous.

  • Another “shiny object” similar to the dog on roof tale, Ann Romney’s choice to be a stay at home mom, the Buffett tax, the contraceptive brouhaha etc to distract voters from the miserable record of this incompetent administration.

  • I am still waiting for the results of the previous investigations of oil speculation. I think the futures contracts on the production of those results will be very affordable, very close to zero in fact.

    • @timactual As they said in the movie Raiders of the Lost Ark…”This is being studied by top men!”

    • @timactual I’ve noticed that many places there are referring to the President asking Attorney General Eric Holder to “reconstitute” a task force investigating oil and gas speculation. Holder started working on this in 2009, apparently found nothing (or at least that the right Democratic contributors were making most of the windfall) and disbanded without a public report. Do we really need Holder doing anything more when it’s pretty obvious that he has lost control of the DOJ already ?

  • At the White House this morning, Pres. Obama behaved very much like a North American version of a banana-republic Generalisimo: posing as a tribune of a People besieged by nebulous devils, he blames those devils for the ill-consequences of his own bad policies and announces that he’s unleashing his henchmen to track down and subject the devils to the People’s justice. And as is so frequently the case with generalisimos, the devils are speculators.

    I (along with many other scholars) have written on speculation and how it’s easily misunderstood – and, hence, why it’s so tempting for power-mongers to turn speculators into political scapegoats. See, for example, here, and here. If the spirit moves me, I might write more on the economics of speculation in the near future.

    Follow the links…

  • So what ever happened to all of Obama’s talk of coordinating a release from the Strategic Petroleum Reserve with the British ? … or did that do the way of the Marvinas ?

  • So what ever happened to all of Obama’s talk of coordinating a release from the Strategic Petroleum Reserve with the British ? … or did that go the way of the Marvinas ?

  • It’s so arrogant to think people ignorant because they don’t believe the same right-wing position as you. One can quote just as many liberal columnists who take the opposite opinion on oil speculation as your conservative authorities—yet you tend to label as truthful those who believe and spout the same party-line as yourself.

    Actually, demand for gasoline in this country has decreased by 4.5%, and supply has increased such that we are a net exporter of fuel—but the price continues to go higher. Supply and demand has little to do with cost of fuel in America—contrary to what would be purported by the ultraconservative propagandists that you quote, and seem to believe. Corporatists have learned to manipulate the system to such a high degree, that even the ‘invisible hand’ no longer serves as the moderator.

    • @tadcf Meh. You are clearly too ignorant to live. Prices send HUGE amounts of information through a market, and NOBODY purchases enough oil or gasoline to effect that. You are like a dog watching an artist paint a masterpiece. Ooops…did I say “dog”…best watch your six…

    • @tadcf It has nothing to do with “belief”, it has to do with cold, hard facts. And the fact is our President is counting on your ignorance of how commodity markets work to push his scapegoating. As usual, you comply.

      Aren’t you the one that likes to remind people that oil is a global commodity, or am I giving you too much credit? Yet here you are concentrating on one country.

      If you’re really interested in why oil prices are up, read this:

      Perhaps then you’ll understand why, when we talk about supply and demand, we actually have a clue, unlike those who would believe our President.

    • @tadcf “…demand for gasoline in this country has decreased by 4.5%, and supply has increased such that we are a net exporter of fuel—but the price continues to go higher. Supply and demand has little to do with cost of fuel in America…”

      China, India, and other countries are expanding their industry and importing more oil, thus increasing GLOBAL demand. Those countries will continue to increase their oil imports, thus driving up the price of this commodity. Increasing producing in the US may not outstrip the increased GLOBAL demand, but if your solution is to not even try to produce more, just extend that “logic” and halt all oil production in the US. Shut down all the wells, throw up your hands, and give up.

      You’d do better to just shut up about these things and save yourself the embarrassment.

  • How much does it cost to pull out of the ground and refine (I don’t know this number)? How much is it sold for (I sure as hell do know this number)? Considering its a mature industry, if there’s a persistent large difference between those two someone would have to make a strong that someone somewhere isn’t pulling something.

    • @jpm100 Look up “pure profit”. It is an economics term, so it will be new to you.

      • @Ragspierre, Competition. Look it up since it happens so rarely these days and may be new to you.

    • @jpm100 There’s a reason the vast majority of reports on oil company finances focus on the raw profit number with no reference to total sales. The actual profit margin (percentage wise) is near the average when compared to other industries, and most of the improvement in profits over the decade before the recession was in refining. Likely reasons:
      A) Oil is fungible
      B) A new gas station is relatively easy to open in a few months. Even though it takes a long time to set up a new company to pull from the ground, some companies and countries can ramp production up and down relatively quickly depending on prices because it’s easy to let a well sit until prices rise. There was no fast way of adding capacity because of the amount of equipment needed and the regulations meant they are inherently large and no company would want one sitting idle. You don’t see many mom-and-pop refineries, but there are people that have oil wells in their yard or own just a single gas station.
      With the recession, there is some refining capacity available, so that profit margin has tightened the last few years.

  • “But sometimes, unfortunate as it is, prices will rise.” That’s odd, people typically don’t complain when their income rises…