Rising Gas Prices

[WhatMoney]

How's that any different than what your previous post was claiming it was the speculators fault. If it's their fault, remove them. Why do we need a futures market? Isn't that just another form of gambling and last I checked gambling was illegal (with the exceptions of Atlantic City, Las Vegas, some Mississippi riverboats, and Indian reservations).

No, the Futures market is necessary to provide a hedge against future price change for producers and consumers of commodities. That is why it exists and it is absolutely necessary. Hedging has nothing to do with gambling. All of your ill-conceived arguments have already been answered here - but it's clear you either don't read, or refuse to understand. The role of speculators or investors in the markets has been detailed again and again, and you still don't get it. Every time you post you just show your ignorance of this subject. I'm wasting my time talking with you.

[JRScott]

How's that any different than what your previous post was claiming it was the speculators fault. If it's their fault, remove them. Why do we need a futures market? Isn't that just another form of gambling and last I checked gambling was illegal (with the exceptions of Atlantic City, Las Vegas, some Mississippi riverboats, and Indian reservations).

[WhatMoney]

Noone accepts CODs anymore. I've not seen that in several years now. If we are serious about stopping speculation it seems the easiest way is to require payment in full at the time of purchase.

A COD was not a perfect analogy for buying a Futures contract of course - in fact it appears to have continued your confusion over the difference between a Futures contract, and a present time cash purchase.

We already have a market that requires full payment at the time of purchase. It is called the cash or spot market. When you pay cash upfront you expect the product delivered on the spot - not 6 months from now.

If you required 100% margin for a Futures contract it would end the Futures market in this country. A Futures contract only guarantees the price you will sell or buy a commodity for IN THE FUTURE! These contracts can be issued out to 7 years. You really want to pay a producer full price today for something you won't get delivered for 7 years? Would anyone want to fix the price of their product at today's price, and then be forced to sell it for that in seven years?

A Futures market with 100% margins would require a producer to tie up the entire value of his commodity in hard cash in his Futures account for the length of the contract. And most brokers do not pay interest on this margin cash. And the buyer or consumer would also need to tie up the same amount of cash for the contract length. There would be so few participants in such a market that it would be controlled by a few large oil companies and the Saudis. Price would be fixed and controlled by the producers, and it could therefore stay as high as they like. Not a good idea.

[WhatMoney]

Worth repeating, since the politicians have the public (and most here) convinced that it can all be blamed on the evil speculators.

6 Myths About Oil SpeculatorsSome major misconceptions:

Speculators are inherently bad for the economy. There's no doubt that speculators are out to make money, by buying a commodity like oil (or gold, or real estate) when they think the price is likely to rise and they'll be able to sell for a profit. But they also help sustain the market for buyers and sellers and provide ways for individuals and businesses to offset risks.

Many companies, for instance, want to lock in the price they're going to pay down the road for petroleum products and other supplies they need to run their businesses. So they make agreements with suppliers on a price they'll pay next year, or the year after, when they actually take possession of the oil. Buying and selling such "futures contracts" makes these companies speculators by definition, since they're placing a bet on the future price of oil.

Companies doing this kind of hedging include gasoline refiners, airlines, shipping companies, and others that spend a lot on fuel or petroleum. Often they use investment banks or other intermediaries to arrange the deals. They might be gambling, but this kind of speculation actually helps companies run their businesses more smoothly, and if they guess right on future prices, it may give them a competitive advantage against other companies that don't plan as prudently.

There's a Speculator Star Chamber somewhereSpeculators are super-rich market manipulatorsThe government tracks speculators and knows who they areSpeculators are creating a huge bubble in oil.Speculators should be banned. Few, if any, economists or energy analysts advocate this. In fact, some fairly modest regulatory changes could bring greater transparency to oil markets and force them to operate more like stock and bond markets. Buying a contract for oil futures, for instance, typically requires the buyer to put down less than 10 percent of the value of the contract; the rest can be borrowed. That allows buyers to roll up big stakes with relatively little cash. Raising the "margin requirement" to 50 percent, the usual threshold for stocks, would cool demand for oil futures, while still keeping the speculators in business. And maybe get the witch hunters off their case.

[epiphany]

But should we destroy the forests and displace wildlife in Alaska, etc., ruin the coastlines with oil spills, etc., for cheap oil?

We have already proven that we can drill safely. I highly doubt that the coastlines would be majorly affected by oil spills.

I can see where some forests would be destroyed and some wildlife displaced.

But please consider the alternative. Do you really want live to curb to mouth so that squirrels, or mountain lions or whatever can live uninterruped?

I know this sounds cold, but if we are going to go there it really just is a matter of survival and we are animals too.

If it were only the cost of gas, then maybe most of us could adjust and manage to do without in order to afford transportation to work and heating our homes, etc. But expensive oil is driving up the cost of everything and making it in some cases impossible to afford the essentials.

Not only that, businesses are laying off people in record numbers as their costs are increasing because of the oil prices. We had layoffs a couple months ago and there are rumors of another wave coming.

I also believe that if there was a reverse to the non drilling laws we have here, that speculation would cease to play a huge part in this and drive the price of oil way down.

I would love to preserve our pristine views and wonderul wildlife, I am just not sure that we have that luxury.

Alternative fuels sound great but none have been proven in any serious way. Sincere exploration of this should have started years ago. Most of us can't wait another 20 years for these to come to fruition.

A lot of us will be living curb to mouth before then. I think we need hold our nose and drill.

ep

[JRScott]

Noone accepts CODs anymore. I've not seen that in several years now. If we are serious about stopping speculation it seems the easiest way is to require payment in full at the time of purchase.

Pa we can safely extract the oil without endangering the environment. There is no short term fix and quite frankly our economy cannot survive high gas prices for long. 70% of the GDP is consumer spending. Within 10 years if nothing is done gas will be at least twice what it is today. We need the oil in the outer continental shelf and ANWAR to tide us over until the alternative energies can be made universal. For example it could take 15-20 years for hybrids to see major use due to cost, the poor can't afford new cars, so they have to wait for the richer folks to buy them then for them to trade them in. Hydrogen Fuel Cell cars are held back by a lack of infrastructure as much as anything, only CA and NY have any fueling stations and even then that's only like 6 stations between the 2 of them. It would probably take 15 years just to build enough infrastructure and another 10-15 years for the cars to become cheap enough for the poor to afford them.

The Earth will continue to warm irregardless of what man does. It is part of the natural cycle of the planet. The only events we know of that can delay or reverse the trend is the eruption of a supervolcano or the impact of an asteroid. Both of those events generally also kill off between 60-90% of all life on the planet when they occur. There will be years that are cooler than others, but overall the Earth has been overdue for a warming period for about 70,000 years when the last supervolcano erupted (It was Lake Toba). Yellowstone is overdue by geological records for eruption too.

The warming Earth is experiencing though is not limited to Earth. Recent studies have shown a rise in global temperatures of Mars, Neptune, and Triton as well. It is possible it is sun related but we don't have enough information really to determine that as fact. It could also be caused as the Sol System approaches the galactic equator, again not enough data to say.

[epiphany]

Whew, that was fun. Traded commodities for 15 years, so I should know this stuff.

WhatMoney, thank you very much for taking the time. I never truly understood how that worked and I do now. And you did it in less than 50 pages!

ep

[PaKettle]

But should we destroy the forests and displace wildlife in Alaska, etc., ruin the coastlines with oil spills, etc., for cheap oil?

I wonder if that's really necessary or if in fact we could instead develop alternative fuels?

But of course, the oil barons want to extract that oil in Alaska and all the other environmentally endangered areas... so no doubt that is what we will end up doing, when they can make enough money out of it...

"To hell with the wildlife and environment!" is what they will say.

The bottom line is, it's all a scam. You think it's just COINCIDENCE that all this happened under Bush, an oil man from an oil family, with Saudi friends?

[robivi3]

BKPinoy, that cartoon is NO BS. It is literal. My new Civic is broken in and now getting, NO BS, 31.5 city, 38.5 on our Orlando trip. Took it for service today and Rick Case Honda here has an Express Garage in addition to the regular garage, service was beyond excellent. Sold on Honda's. I like the NO TIMING BELT deal also, done more than my share of them.

[WhatMoney]

6 Myths About Oil Speculators
June 27, 2008 10:22 AM ET | Rick Newman

So now we know who's really responsible for $4 gas. Finger-pointers from Washington, the International Monetary Fund, and even Saudi Arabia no longer seem to buy the idea that the demand for oil around the world is simply growing faster than the supply, driving prices to record highs close to $140 per barrel. There must be a more nefarious reason, it seems. So now entering this drama is a villain everybody can hate: The Evil SpeculatorSome major misconceptions:

Speculators are inherently bad for the economy. There's no doubt that speculators are out to make money, by buying a commodity like oil (or gold, or real estate) when they think the price is likely to rise and they'll be able to sell for a profit. But they also help sustain the market for buyers and sellers and provide ways for individuals and businesses to offset risks.

Many companies, for instance, want to lock in the price they're going to pay down the road for petroleum products and other supplies they need to run their businesses. So they make agreements with suppliers on a price they'll pay next year, or the year after, when they actually take possession of the oil. Buying and selling such "futures contracts" makes these companies speculators by definition, since they're placing a bet on the future price of oil.

Companies doing this kind of hedging include gasoline refiners, airlines, shipping companies, and others that spend a lot on fuel or petroleum. Often they use investment banks or other intermediaries to arrange the deals. They might be gambling, but this kind of speculation actually helps companies run their businesses more smoothly, and if they guess right on future prices, it may give them a competitive advantage against other companies that don't plan as prudently.

There's a Speculator Star Chamber somewhereSpeculators are super-rich market manipulatorsThe government tracks speculators and knows who they areSpeculators are creating a huge bubble in oilSpeculators should be banned. Few, if any, economists or energy analysts advocate this. In fact, some fairly modest regulatory changes could bring greater transparency to oil markets and force them to operate more like stock and bond markets. Buying a contract for oil futures, for instance, typically requires the buyer to put down less than 10 percent of the value of the contract; the rest can be borrowed. That allows buyers to roll up big stakes with relatively little cash. Raising the "margin requirement" to 50 percent, the usual threshold for stocks, would cool demand for oil futures, while still keeping the speculators in business. And maybe get the witch hunters off their case.

[FLBK7]

Whew, that was fun. Traded commodities for 15 years, so I should know this stuff.

I really enjoyed your last futures post! I've never dealt in this and in fact, was totally ignorant on how it worked. Your post explained it quite clearly and I have some idea now. Thank you!

[WhatMoney]

Whew, that was fun. Traded commodities for 15 years, so I should know this stuff.

[WhatMoney]

Yet if I pre order something I have to pay for it before I get delivery. Should not the same rules apply to them?

Nope, think of it as a down payment on a COD order. A Futures contract is an agreement to buy something that will be produced in the future. Why would anyone expect cash upfront for something that hasn't been produced or delivered? Cash on delivery is how the world works. Why should I risk advancing some midwest farmer $400,000 for his corn crop for the fall harvest, when I don't even know if it will really be there. I'm not a bank making a risky loan.

But I might buy 10 Corn September '08 contracts expiring in September using $20,250 margin from my account at the Chicago Board of Trade today, that would give me the option to then pay the farmer $400,000 next fall for his corn crop. Now if the farmer's corn was actually worth $500,000 next fall, now I have a contract where he must deliver it for only $400,000 so I have hedged against a price increase when I will need the product in the future. The farmer also hedged his crop today, by selling 10 Corn contracts, for $20,250 margin - in fact he or someone else had to sell 10 contracts so I could buy them. Farmer now has locked in his price for his fall crop. He's hedging against a fall in Corn prices with his Futures trade.

Corn at $8/bushel, 5000 bushels/contract, $2,025 margin required/contract. 10 contracts equals 50,000 bushels, and at $8/bu would give an underlying value of $400,000. A speculator would buy the same 10 contracts for $20,250 margin and control $400,000 worth of corn. If he holds the 10 contracts until before expiration, and the price of corn has risen to $10/bushel by then, then the trader has a $100,000 profit when he sells his contracts at $10/bushel. He has nearly a 500% profit on a price rise of only 25%. This is the leverage that makes Futures trading profitable (or a disaster if your price prediction is wrong.) It is a zero sum game.

Same with oil - oil prices rise because oil refiners want to lock in a lower price now for a future supply, because they think prices will keep rising. This demand for oil contracts causes the price for an oil contract to increase, which causes the actual cash/spot market price to follow. Most of the activity, 75%, is coming from the commercials, the oil companies themselves, not the speculators. Which was the point 'pit trader' was making in my earlier post.

I understand it a lot more now but it sounds like a big scam where you just say your gonna get it then sell it to someone else.

LOL - There is no obligation to hold any contract until it expires. Daytraders buy and sell contracts every day. The timeframe for holding a futures contract can be as little as 1 minute, or as long as its entire life. The commercials buy and sell longer term as hedges, while the speculators or traders buy and sell very short term. It is the short term speculators that provide the contract liquidity - which narrows the bid and ask spread, gives instant price discovery, and keeps a ready supply of contracts on the open market. This is an important function in any market. That's what traders do: buy it and then sell it, or sell it and then buy it back. It is no scam; futures hedging of commodities (and all trading markets - stocks, bonds, and options) has been around since the Tulip Bubble in 1636.

Details on NYMEX Light Sweet Crude Oil Futures Contract (symbol CL):
http://www.nymex.com/CL_spec.aspx
.

[BigJohn]

Call my Congressman - I live in Arizona.

[JRScott]

Yet if I pre order something I have to pay for it before I get delivery. Should not the same rules apply to them?

I understand it a lot more now but it sounds like a big scam where you just say your gonna get it then sell it to someone else.