Free Markets, Free People


Why Obama’s war on oil speculators is economic poppycock (onions or corn?)

Economist Dr. Mark Perry has a series of posts at his blog Carpe Diem which makes the case that “speculators” play and key and positive role in commodities markets.

One of the more intriguing posts deals with onions and oil.  Oh, and corn.   Perry quotes a 2008 Fortune magazine article:

"Before the government starts scrutinizing the role that speculators may have played in driving up fuel and food prices, investigators may want to take a look at price swings in a commodity not in today’s news: onions.

The bulbous root is the only commodity for which futures trading is banned. Back in 1958, onion growers convinced themselves that futures traders were responsible for falling onion prices, so they lobbied an up-and-coming Michigan Congressman named Gerald Ford to push through a law banning all futures trading in onions. The law still stands.

And yet even with no traders to blame, the volatility in onion prices makes the swings in oil and corn look tame, reinforcing academics’ belief that futures trading diminishes extreme price swings."

The proof is in the charts.  The first chart compares the volatility in the onion market, in which futures trading was banned, with that of the oil market.

onions

 

Compare the mean and standard deviation differences in the two markets.  Remember blue – no futures trading.  Red – futures trading.

So, you say, comparing onions and oil is like, well, comparing onions and oil!   OK, how about onions an corn.  Again the same difference applies.  No futures trading for onions but there is with corn.

Result?  The same:

corn

The point, of course, is those futures contracts help moderate a market.  Or as Perry says:

The fact that the volatility of onion prices is so much greater than the volatility of corn prices lends further statistical support to the notion that markets with futures trading like corn have lower price volatility than markets without futures contracts like onions.

Bingo.  So, the President’s war on “oil speculators” is an obvious distraction.  But here’s the other side of that – if successful, you may end up seeing oil act like onions.  Is that something most of us would prefer?  Given these facts, it seems the height of folly to attempt to regulate or ban futures trading in oil, doesn’t it?

A few more charts to finish the point.  First, futures trading in natural gas:

natgas

If oil speculation (or, as implied, greed) is the cause of rising oil prices, why aren’t natural gas prices rising as well in futures trades (not as “greedy”)? 

In fact, it is because of “speculators” that we’ve seen the price of natural gas go down.  So futures markets do what?  They react to market signals on supply and demand.  What this tells us is we most likely have an over abundance of natural gas.

So what does the market do? It adjusts the price to the reality of the supply v demand – in this case, the price goes down.  And it also does things like this:

rigs

When natural gas price were up and oil prices down, more drilling rigs were allocated by those markets to natural gas.  As oil prices have risen dramatically recently, while natural gas prices have fallen, there’s been just as dramatic a shift in the allocation of drilling rigs from natural gas to oil.

The success in the natural gas sector has driven supply up while demand has yet to increase proportionately.  Meanwhile, we’d had an abundant supply of oil, which has now become very tight (geopolitics, folks – governments at work and war) driving up the price of crude.  The market is reacting.

And as it reacts, guess what?

cme2

Crude futures are down as they obviously see future supply growing as the market adjusts and reacts.  All driven by “speculators” who are, right now, in the middle of moderating the market.

So, as President Obama continues with his “blame the speculators” nonsense, you have a choice. 

Onions or corn?

Markets or bureaucrats?

PS – if you’d like to read some academic pieces on why “speculators” are a key to a market economy, read this.

~McQ

Twitter: @McQandO

  • Facebook
  • Twitter
  • LinkedIn
  • Tumblr
  • Digg
  • Reddit
  • email
  • Print
  • Google Bookmarks

10 Responses to Why Obama’s war on oil speculators is economic poppycock (onions or corn?)

  • So, the President’s war on “oil speculators” is an obvious distraction.
    ————————————————————————————————
    Only if by “distraction” you mean, “BIG FAT LYING ATTACK ON CAPITALISM”. Then…yeah…

  • And, note that you can go back in history and find spot-market charts PRE-FUTURES for everything listed on a futures market. Then you can see WHY futures markets exist. They have HUGE UTILITY for producers and consumers of the commodities offered. But people like Obama look at them and have no FLUCKING idea of what they do, how they work, or the value they have.

    • @Ragspierre does he understand them or not? Does it matter? He’s has his political gig and his worldview, and he may not actually care that speculators serve a usefull function, he might very well favor volatility in the market. He could leverage it politically.

  • For some reason I don’t think those folks who think big government will save us are going to like this.

    • @Johnny Jones Most of them won’t find out about it, and the few who do will simply reject it since it isn’t the answer they want.

  • As seen on Drudge: an EPA bureaubot confesses he intends to “crucify” oil and gas companies to set an example ( http://weaselzippers.us/2012/04/25/epa-official-were-crucifying-oil-and-gas-companies/ ).

    But they blame those wascally speculators

  • I have never been a big fan of oil speculation a the major cause of the of gasoline price fluctuations in this country. Most of your graphs represent information on the ‘price of oil’ on the international market, e.g., the effect of speculation in the moderation of fluctuation of oil prices, and do not necessarily represent the ‘price of gasoline’ to the consumer.

    Also, the study you mention—though appearing to be very thorough—at the end of your piece, consistently uses the term “there is no evidence” in respect to the conclusions on many issues. Do you understand that that means that although the evidence does not support the thesis, neither does it deny it? In other words, just as it’s not valid to infer from the evidence that speculation may have specific effects on the oil market, it’s also fallacious to assume the contrary.

    • @tadcf Before you put your “MORON” on display, you should check into how closely correlated oil prices are to gasoline prices. What an idiot.

    • @tadcf “Do you understand that that means that although the evidence does not support the thesis, neither does it deny it?”
      ===========================================================================================
      Bwa ha ha ha ha…. this from the genius who was lecturing all and sundry on understanding the scientific method only a few days ago. I think he got his science training from Lysenko, among other luminaries.