1. Mark, Though I disagree with the personal attacks, it's apparent that you understand very little about futures markets, so quit while you are ahead. There ARE circuit breakers in place for oil futures, they're called trading limits. They're in place for every month but the front two months. If there were limits on the front months, that would be called price controls. Bring in price controls and what you end up creating is an artificial scarcity. If you're for that, then you don't understand ECO 101 (but I know you do). Oil is one of the deepest markets out there. You can trade oil futures out 6 years. If the speculators have driven the price so out of whack then that discrepancy would have been arbed out faster than you can blink. Surely, it's not speculators that are trading every contract of every month out there for the next 6 years. Oil prices are high because the current supply/demand is so tight that the slightest hiccup has a big impact on prices. Gasoline prices are up because refining capacity is tight on top of the high oil price. Both of these things are the direct result of demand that has been slowly but steadily increasing over the past few decades because of steadily increasing population growth and economic growth, both globally and in the US. It has now reached the choke point where demand has caught up with supply. As time goes on, due to the same factors just mentioned, demand will surpass supply and prices will go even higher. This has nothing to do with speculators. They just move the price a few dollars (and that's being generous) above and below the level that supply/demand dictates it will be anyway. As far as marking to market hurting, you're completely wrong because your supposition that the overall level is too high because of speculators is wrong. On a day when the price is (for example) $2 too high "because of speculators," the next day it will be $2 too low as that corrects, because the futures market reflect true price discovery better than any other market out there. That's the part you don't get. Now if that two-way volatility isn't reflected at the pump because it seems that the pump price goes up faster than it comes down (which is true and I agree with that), that's a separate issue that has nothing to do with speculators, but with big oil and maximizing profits.

Posted at 11:03AM on Aug 28th 2006 by Andre

2. Andre.. your ability to leave out the variable of the profits sucked out of the system by the speculators with your "zero sum game" argument is amazing. Did you read what Mark wrote? The things you mention that are true- that when the contract is fullfilled that the buyer and seller have come to an agreement is to remove the main point of the argument- your pretending the speculators don't exist. Perhaps you need this broken down to a simpler example... imagine that every time you went to buy an ice cream cone, you couldn't communicate with the actual seller of the ice cream, instead, there was a group betting that the ice cream is underpriced and that you will pay more.. its starts with "he will pay a buck more.. no. a buck 50 more.. no two dollars more". Eventually you get your cone, but by that time the ice cream seller gets his long ago contracted for 50 cents, but the vultures between you and the ice cream get the buck fifty more that they claimed you would pay (and they were right.. just wait until this is water- the next big commodity that we are privatizing globally, the speculation on what you will pay for a drink of water is going to be incredible) I notice many people blaming taxes on the price of gas, but forgetting what these taxes sometimes go to fund- like the subsidized health and public transportation systems of europe. Another myopic region seems to be the "strategic alliances" that are struck between producers and distributors, this used to be called collusion in a less orwellian and more honest age. Both Saudi Arabia and Kuwait have cut production (Kuwait actually having a negative GDP growth rate, thanks to this) So as BP announces their deal with the chinese oil companies, just sit back and be ready for a further tightening of the open oil supply, and another excuse for the psychology of oil to point towards increased prices again. Mark is right, as is John Bogle (ex head of Vanguard funds) when they point out that we have a middle man, or agent economy that leaves those on either end poorer for it. Imagine how much cheaper the Mavericks would be without the middle men (agents, hangers-on, minions and sycophants) between the players and the owners- the same principal applies here, but in spades.

Posted at 11:03AM on Aug 28th 2006 by Rex

3. Count Bush in as he says to Americans to drive less and conserve gasoline(more on Talk About Cars!) some excerpt: Appealing for Americans to cut back on driving, Bush said "We can curtail nonessential travel. If it makes sense for the citizen out there to curtail nonessential travel, it darned sure makes sense for federal employees. We can encourage employees to carpool or use mass transit."

Posted at 11:03AM on Aug 28th 2006 by Sarah McBride

4. Interesting comments about oil commodity speculation here. My limited knowledge of commodities exchanges hinders me to know about the degree of effect this may have on current oil prices. I'm assuming the most knowledgeable experts will be oil company executives since they have to pay open-market prices that affect their humungo profits... Having said that, it's informing to read what their internal memos revealed in a Senate investigation on oil price-fixing in 2001. http://news.bbc.co.uk/2/hi/business/4296812.stm Essentially, the Seven Sisters and auto companies took these steps over time: o Block any additional refineries from re-opening to eventually reduce refining capacity (~1995 memo) o Over time, this will create a tenuous supply-demand balance that will be sensitive to any supply problems (~now) o Be certain to not reduce the demand-side by fighting CAFE standards legislately o Insert legislation that will classify SUVs as "truck-based," thus avoiding fuel-economy standards (exempt), pollution standards (5x more than cars), enforcing safety standards (rollover deaths increasing every year, while overall traffic fatalities go down). o Ergo truck-based SUVs have highest profit margin of any class of vehicles sold by Big 3 (because it costs less to make a "truck-based" SUV with no muffler, less safety technology, and low gas mileage engine) o Be sure that Vice President asserts on national TV that it's Americans' "right" to buy whatever SUV and use as much gasoline as they want...(avoiding softening demand-side) ....equals $6.5 BILLION profit (and rising) for ExxonMobil (and all other oil companies) last quarter (and the previous 2-3 years). Note that because of Katrina/Rita (and the President finally asking for conservation), demand-side has softened by 2.4%, despite supply shortfalls from 10% refining capacity being knocked out from the Gulf Coast... making oil prices go DOWN. http://olympics.reuters.com/news/newsArticle.aspx?type=businessNews&storyID=2005-10-14T094304Z_01_MAR363155_RTRUKOC_0_US-MARKETS-OIL.xml (Things that make you go "hmm.")

Posted at 11:03AM on Aug 28th 2006 by KT

5. How about getting rid of the boutique gas that raises production costs across the country? Wouldn't it be nice if the same fuel could be shipped to every county in the same state, then to every state? P.S. Don't forget how Hillary made her fortune...

Posted at 11:03AM on Aug 28th 2006 by Ken

6. Rex, Your attempt at obfuscating the facts with a pithy hypothetical example that has no basis in reality, though valiant, is completely off the mark, so let's come back to the real world for a minute. Firstly, don't put words in my mouth, or incorrectly paraphrase. Nowhere to I say or even imply that I "pretend that speculators don't exist." The truth, and what I say, is that while speculators do impact the hour-to-hour or even the day-to-day volatility in energy prices, the ultimate price is determined by the true supply and demand. There's nowhere this is more true than in the oil market. If the oil price is (for example only, this is an example which I don't believe but just for the sake of argument) $15 too high because of the "speculators." Then there would have to be oil tanks all over the place filled with oil that is not being consumed, but is being hoarded by these speculators that believe they can profit from it. That clearly is not the case. The oil is being consumed (ergo - demand). There was in fact a good example of this type of trading going on when the Hunt brothers tried to corner the silver market in the 79-80. Ultimately, the price came down to where supply/demand dictated it would. The reason why they had success for a short period of time and moved the price of silver up manyfold before it collapsed and they were bankrupted was specifically BECAUSE they were able to not only buy the futures but also buy all the physical warehouse supply they could and hoard it. This CANNOT happen in the oil market because there is no significant long term storage capacity anywhere in the world in any significant quantities (besides the Strategic Petroleum Reserve and that is a drop in the bucket representing 9 days of global oil demand or 29 days of US demand) and hence it is precisely why the oil price is one of the most accurate reflections of true supply and demand and true price discovery that exist. So by Mark's (and yours I presume) logic if we were to eliminate all the speculators we would get an instant $15 (using the prior example) reduction in the price of oil. Let's look at some facts now using real world stats, not made-up ice cream stories. The Oct 11 Commitment of Traders report shows Commercials (true, declared hedgers, or primary users and suppliers of oil) position on Oct 11 increased by 14,126 contracts (that's 14 million barrels of oil or nearly 1 billion dollar's worth of oil) over Oct 4. That increase would have to be offset by other traders (the speculators) reducing their positions by that same amount. Now if you don't understand this point, then stop reading this and go open a National Enquirer or something. So in a week where speculators liquidated almost $1B worth of oil, or almost 40% of their net long position, what happened to the oil price? On Oct 4 it closed a shade under $64 and on Oct 11 it closed about $63.70. Hmmmmmmmm. I never brought up the zero sum game argument, I am talking about the fact that price discovery in oil futures is more representative of true supply and demand (and hence the true price) more closely than practically any other commodity out there, but the zero sum argument proves my point even more. In your laughable ice-cream example, there are only people betting that I will pay more. If there were also a group of people betting that I would pay less, it wouldn't go up very much because the economic value of that ice cream cone is not much more than 50 cents. Let's look at a more realistic example like sports betting. There's two teams (long and short) and we are permitted to bet either way. Some bet Indy, some bet St. Louis. The odds are the ultimate price at which that game "costs" to bet. It is determined solely by the amount of money being bet on either team. All bets, both long and short are treated equally, they are not subdivided by hedgers and speculators, they are not divided by Colt fans or Ram fans, or by men and women. The flow of money, or the supply and demand for each team, determines the price, or the odds. At a certain odd, there is an equal amount of Ram betters as Indy betters. This is called price discovery. If you want to talk about the vultures (bookies) taking their cut, that's another issue and has nothing to do with the price discovery. If a bookie wants to make his own bet, do you then count him as a speculator and his money is treated differently? Not at all. It is all a part of the same price discovery mechanism and has no impact on the price other than what the price would have been regardless of the source of the bet. Don't forget, if he's betting Indy (long), there's someone on the other side betting St. Louis (short). Just like the futures markets. One other illustration of this point of the long term non-impact of speculators can be found at http://eneken.ieej.or.jp/en/data/pdf/276.pdf There's a graph on p.15 that shows the relationship between WTI prices and speculators from 2002 to 2004. Again, this is real data, not a made up example. The first point on the chart where the net speculative position was flat in Feb 2002 was when oil was approx $24. The last point on the chart where the net speculative position was also flat was Nov 2004 when the oil price was approx $50. Lots of squiggles in between that can be interpreted any way you want on a short term basis (and on a short term basis, specs DO impact the price), but over the long term, oil prices doubled and the specs had ZERO impact. That's purely supply and demand and cannot be interpreted any other way. Game, set, match. A couple more things and I'm done. I need to correct a couple more of your erroneous facts. "Both Saudi Arabia and Kuwait have cut production." Go to http://www.eia.doe.gov/emeu/cabs/saudi.html About 1/4 of the way down is a chart labelled "Saudi Arabia's Oil Production......." Apart from the period between 1982-1985 I don't see any production cuts there apart from rounding errors. For Kuwait, go to http://www.eia.doe.gov/emeu/cabs/kuwait.html Again, apart from the first Gulf War in 1990, I don't see anything that would support your claim. With oil prices at $60, every company and country in the world is producing every single drop of oil they possibly can. They would be stupid not to. Especially since everybody knows oil prices are too high and it's all because of the speculators. (can you feel the sarcasm in that sentence?) OPEC (which is the ultimate strategic alliance) was releveant at one time when there was spare production capacity in the world. Today there is not a single oil well anywhere that is lying idle by choice. This makes OPEC irrelevant. If you want a better look at the true nature of the Saudi oil situation, read "Twilight in the Desert" by Matt Simmons. One final point of yours that just magnifies the point of supply and demand is water. You are absolutely right that the cost of water will skyrocket. The exact same reasons that are causing energy prices to rise will also cause water prices to rise. It's called supply and demand. Slow but steady demand growth due to global population increases and increased conversion of forest to farmland in order to feed this growing population just serve to increase the demand for clean, potable drinking water. There is only so much available due to the depletion of natural, cleansing aquifiers and the steady increase of pollution and sewage that comes with population growth, so the rationing factor in the future will be the price. Now I'm not so pollyanna-ish that I don't think there will be profiteering and price gouging and all that stuff going on. For sure it will. But that affects prices at the margin. That doesn't cause prices to double or triple, but will take a little off the top of whatever that price is, disguised by the rapidly rising prices. But I digress. In summary, do specualtors matter? In the short term, yes. In the long

Posted at 11:03AM on Aug 28th 2006 by Andre

7. One correction to my previous post. When I said OPEC is irrelevant, that's untrue. They are now powerless to flood the market with oil and depress prices, but they are very relevant in the sense that they can easily cause a dramatic upward spike in oil by witholding even a small portion of those barrels of oil that they produce that are globally important now; not that I'm suggesting that will happen. Obvious political ramifications, but I won't go there. And here's a link that's just a few days old that talks about the current oil situation and that doesn't mention the word "speculator" even once. There's some hyperbole within, but for the most part presents many useful and eye-opening facts. http://www.financialsense.com/stormwatch/2005/1014.html

Posted at 11:03AM on Aug 28th 2006 by Andre

8. I can't do the code but this speaks volumes (the graphic) - It finally thanks W Finally - placing the blame where it belongs! www.thanksalotw.com

Posted at 11:03AM on Aug 28th 2006 by Roycew

9. The concept of leaving the market only to those who can accept and deliver product means that as long as there is liquidity, the market finds its level on a daily basis. And right now there is liquidity. If there isn’t,you remove the circuit breakers so instead of screaming, think it through.

Posted at 11:03AM on Aug 28th 2006 by flash

10. How about we have price controls so Exxon-Mobil can't make 9.9 billion in profit per quarter.

Posted at 11:03AM on Aug 28th 2006 by gas fireplaces blog

11. How about we get our government to give incentives to corporations for developing fuel-efficient vehicles instead of gas guzzling fuck-u-mobiles.

Posted at 11:03AM on Aug 28th 2006 by gas nation

12. Rex - your ice cream example is flawed. If you owned an ice cream store, and you were selling ice cream to a "speculator" at 50 cents, who was then re-selling it unchanged for two dollars and pocketing $1.50 in profits - you would raise your prices. That's how a marketplace works, the seller's price ultimately meets the buyer's willingness to pay. The volume of buying and selling added by speculators makes that demand-based price discovery happen faster and with more precision.

Posted at 11:03AM on Aug 28th 2006 by David

13. These comments about socialism miss the mark. Every market needs some government regulation to limit externalities and to function efficiently. In addition, the initial proposition did not advocate price controls, it regulated entry and exit of the market. While the criticisms may be correct about needing speculators for hedging to work, the problem with the proposal is not ideological, it is effectiveness.

Posted at 11:03AM on Aug 28th 2006 by Eric Truett

14. Midwest Gas Price Investigation - Investigation Likely To Continue The Federal Trade Commission (FTC) issued an interim report to Congress on its investigation into Midwest gas price increases that was cited at the reasons that the FTC launched the investigation. It also provides a status report on the continuing investigation, including progress and a description of the work not yet done. The report details the history of the price spikes of reformulated gasoline (RFG) in the Midwestern part of the country and how these increases caused Commission staff to initiate a preliminary investigation in June and prompted the Commission to begin a formal investigation during the latter part of July. The report analyzes many conditions reported as potential causes of the gas price spikes - ranging from higher than normal crude oil prices, to the expectation of compliance with EPA Phase II regulations for summer-blend reformulated gasoline in high-ozone urban areas, to the damage to the critically important Explorer pipeline during March. However, the report says that "although it is likely that each of these supply factors contributed to the dramatic recent price spikes in the Midwest, no single factor appears from staff's preliminary investigation to be likely to provide a full explanation, and staff does not yet have sufficient information to assess the impact of these factors in combination." In accordance with the report, Commission staff is investigating "the possibility of collusion or tacit coordination, conduct that could be illegal under Section 5 of the Federal Trade Commission Act." Due to the abundance of potential interwoven causes as well as the monstrous amount of evidential information being collected for the course of the investigation, the report also states that "this investigation is likely to consume, at a minimum, another three or four months." The report shows that on June 29, Commission staff issued the first round of subpoenas to the nine refiners that currently supply the Midwestern markets and that within the month, staff has accepted and logged approximately 200 boxes of documentation. Around mid August, most documents requested from the first round of subpoenas will be delivered to the Commission offices. The Commission also issued a second round of subpoenas to other refiners last week, and has issued Civil Investigative Demands (CIDs) to the refiners recently, requesting that the refiners compile data and answers to all of the Commissions written questions. Commission staff issued another set of subpoenas on July 25 to the entities that own or control the gas transportation pipelines serving the Midwest markets of the United States. Documents from that set of subpoenas are expected to begin arriving shortly at Commission offices. The report further details the Commission’s plan to conduct a series of in depth interviews as part of the investigation. Staff has already conducted nearly 15 interviews with market participants, consumers, corporate consumers and many others with knowledge of investigation relevant information, and continues the process of capturing pertinent industry-wide data from the Oil Price Information Service (OPIS). After the documentary evidence has been reviewed and analyzed, staff will take depositions under oath of key participating personnel throughout the gasoline distribution chain in the Midwest United States. Federal Trade Commission staff will also coordinate all of the investigative efforts with the Attorney General of Michigan, Ohio, Wisconsin, Illinois, Iowa, Minnesota, Kentucky, South Dakota, Indiana, Missouri, and West Virginia. You can find more information on this and other current events topics at http://www.lookster.com This article and one-way link advertisement provided by http://www.LinkAcquire.com David C Skul - CEO LinkAcquire.com and Relativity, Inc. is pleased to serve his clients through traffic generating articles and one way links

Posted at 11:03AM on Aug 28th 2006 by DAVID SKUL

15. Andre - Great defense. Just to add a little twist to the conversation... "everyone in this country is the loser with higher gas and oil prices" It's my hope that we will all end up winners as a result of the increased interest in the development of alternative energy, and other fuel sources for automobiles.

Posted at 11:03AM on Aug 28th 2006 by Six figure jobs

16. I agree 100% with your comments.

Posted at 11:03AM on Aug 28th 2006 by Pol

17. GAS PRICES AREN’T SO BAD Have you noticed that a lot of people are moaning and complaining about the price of gasoline these days? I have to admit, I used to be one of ‘em until something changed my mind the other day. You see, my wife and I went to the mall so she could buy a new bottle of her favorite perfume. On the way home, we stopped for gas. As I was pumping 15 gallons of regular into her white mini-van, I started thinking about the transaction my wife had just completed at the mall and, all of the sudden, it hit me! She had just paid $50 plus tax for a 3.4-ounce spray bottle of perfume. That’s almost $15 per ounce! Of course, she let me know that it normally cost $80 per bottle, so she was getting it at a huge discount. Some discount. If I had to pay that much for gasoline to fill up my 1,920-ounce tank each week, it would cost me $1,497,600 a year at the pump! Makes you feel a lot better about the price of gas now, doesn’t it? If you enjoyed this humor, more are available at http://bobmccartyhumor.blogspot.com.

Posted at 11:03AM on Aug 28th 2006 by Bob McCarty

18. Simply, OPEC should increase production of oil as long as the demand is increasing at this rate.

Posted at 11:03AM on Aug 28th 2006 by Computational

19. You are mistaken that people would praise energy traders if they lost money and drove down prices. That would be the ultimate sin a party could commit against the citizenry. Remember the hue and cry when Enron did that? They drove prices to all time lows while losing billions of their own money (yes - their money. The shareholders owned the company and took the loss.) Thank god the admin. Issued them a "death sentence" barring them from competing with Exxon for ten years. For those who complain the industry is too consolidated in the hands of few companies, which allows them to commit two atrocities: 1-Charge above market prices - to make big profits. 2-Charge below market prices - to prevent competition. This complaint is followed by demanding the government to interven with and regulate who / where / and how much companies can do, enact price controls, and limit demand. This rhetoric eminates from npo's claiming to represent the people, but that I suspect are funded by wealty shareholders of the energy sector. These proposals, individually and collectively,ensure consistent above market prices while eliminating any threat of competition. Would you build a new refinery in the face of strict regulation, price controls, and falling demand?

Posted at 11:03AM on Aug 28th 2006 by Rich Truxel

20. very good!

Posted at 11:03AM on Aug 28th 2006 by 11nong