April 27, 2011 by staff
Gas Prices, On Thursday, speaking in Reno, Nevada, and Obama announced that the Justice Department would review the role of “traders and speculators in the markets for gasoline and oil,” and how they contribute to gas prices.
The Attorney General [is] to assemble a team whose job is to eradicate cases of fraud or manipulation in oil markets that could affect gas prices, and includes the role of traders and speculators. Let’s make sure that nobody is taking advantage of American consumers for their own benefit in the short term.
What are the speculators? Here is a convincing explanation of Victor Niederhoffer, a well-known speculator and author of The Education of a speculator:
When the harvest is too small to satisfy consumption at its normal rate, speculators entering, hoping to capitalize on the scarcity by buying. Their purchases raise the price, so check the consumption so that the smaller supply will last longer.
Producers encouraged by the [attempt] high prices reduce the shortage by growing or importing [product] to reduce [its] shortage.
On the other hand, when the price is higher than the speculators that the order of events, which they sell. This reduces prices, encouraging consumption [helping] to reduce the surplus.
In other words, in a free market solution to high prices is high prices! As the price of the commodity in question rises, consumers buy less of it, or find alternatives. Producers invest their capital in order to take advantage of high prices, soon (or eventually, depending on the product) increases the supply, raising prices.
Market speculators provide a vital role in providing signals that consumers and owners of capital can be used to make profitable decisions. These signals are the prices.
Speculators also provide liquidity. A simple example will do: A farmer is planning the planting season, based on prices in the future. By making a contract with a third party (a futures contract with a speculator), the farmer is assured a certain price, and can make their plans accordingly. The speculator is willing to provide security in the hope of making a profit by selling the contract to end users in the harvest.
Speculators also “reduce the spread” in the market. If only the producers and consumers met in the market, the difference between the seller of the “selling price” and the buyer “bid price” could be substantial – the seller wants more than the buyer is willing to pay. With vendors competing with a group of other sellers of dollars to speculators “, are forced to take a lower price to ask. The fall in spreads, making the market more efficient and ultimately less costly for the end user.
Major airlines to speculate in oil prices through the buying and selling futures contracts for the same reason. The president of a major airline recently stated that almost half of its anticipated purchases of oil was “covered” for the airline would be protected if the price of oil shot up unexpectedly, and therefore consumers who enjoy the lowest rates competitive. All this means speculators willing to take risks in order to more predictable market for producers and consumers.
In a sense, everyone who makes an investment is a speculator, hoping that the proceeds of the planned investment will offset the risk of losing the capital invested in the meantime. A strong case can cause the Federal Reserve, which has a monopoly on the price of money (interest rates), is currently giving incorrect signals to the market. Because Great Recession was based on many investors with faulty signals (low interest rates) to finance new investments in housing that later proved to be very expensive, investors are unwilling to believe that the Fed now. House prices continue to fall, as the latest Case-Schiller index showed, with housing prices in 19 of the 20 cities surveyed showing declines continuing. Low interest rates in the market forced false are ignored because many believed they were accurate a few years ago, and have learned the hard way that they were not.
As a politician, Obama is adept at deflecting attention to take the heat of its own interventionist policies are increasingly responsible for gasoline prices. Oil prices and gas prices have increased dramatically since the first day of the year, and the predictable response from Obama is pointing the finger elsewhere.
What then is the cause of oil and gasoline prices if the blame cannot be fixed to the speculators? Three examples of government interference in the free market for oil will suffice: ANWR (Arctic National Wildlife Refuge), the accident of British Petroleum in the Gulf of Mexico’s statement of yesterday and Obama want to remove tax incentives oil companies which he described as “wasteful subsidies.” In other words, always and forever the response of politicians to provide adequate resources for long-term oil is to prevent, reduce, prevent, and excoriate efforts to provide more oil. ANWR could be developed efficiently with little measurable impact on the environment, but there is no political will to allow it. Leases to drill in the Gulf of Mexico that is still in limbo by the same politicians who have no interest in increasing oil supplies. And tax subsidies only encourage oil companies to increase their efforts to find more oil. The plans of the elite increasingly appears that the price of oil and gasoline at levels so high that the environment clean energy makes economic sense, but because of the physics involved in the production of alternative energies, there is currently no evidence that solar or wind power can replace any conventional power source for industrial use.
So, in short, is that speculators are driving the price of oil and gasoline. Speculators are doing their best to provide liquidity and predictability in a market characterized by heavy government interference and growing. The real cause of high oil prices? The decision to wean U.S. taxpayer’s oil and gas, and the strength of them, rather than change their energy habits. That’s the dirty little secret hiding politician to point to the speculators as the cause of the fumes from high oil prices.
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