Thursday, July 10, 2008

Joseph was a foreign speculator 

Chad alerts us to a new site being promoted inter alia by Northwest Airlines, the folks who are making tipping the skycap mandatory. The site: Stop Oil Speculation Now.

Every time you buy products such as food or gas, you are impacted by unregulated, secretive and often foreign commodities futures markets. Speculators in these markets are increasingly buying and selling commodities such as oil to sell again, rather than to use. As largely unregulated speculators pocket billions of dollars at your expense, the price of commodities has increased out of proportion to marketplace demands.

As speculators continue to dominate the market, the volume of oil traded �on paper� has been as high as 22 times greater than the volume of oil consumed. As prices rise, institutional investors have become active traders, turning commodities into just another asset class. This has caused severe market imbalance and upset the natural relationship between supply and demand. As a result, legitimate customers such as trucking companies, airlines, and consumers have been forced to purchase oil at unnecessarily higher prices. This has dramatically raised costs, resulting in needlessly high prices for American consumers and businesses.

Lovely. Foreign speculators. It takes a special kind of chutzpah for someone to practice xenophobia while selling you a plane ticket to Asia. (Now with an extra $100 processing fee for using your frequent flyer miles, too!) Foreign speculation has been done for a long time, even going back to Biblical times. Does it matter? Do we think the price would be less if speculation was restricted to Wall Street firms? (Such firms, by the way, often use foreign futures markets for their trading, just a small quibble.)

The site provides a definition for a speculator:
In commodity futures, an individual who does not hedge, but who trades with the objective of achieving profits through the successful anticipation of price movements.
That begs the question, what do they mean by hedge?
Hedging: Taking a position in a futures market opposite to a position held in the cash market to minimize the risk of financial loss from an adverse price change; or a purchase or sale of futures as a temporary substitute for a cash transaction that will occur later. One can hedge either a long cash market position (e.g., one owns the cash commodity) or a short cash market position (e.g., one plans on buying the cash commodity in the future).
So someone who is minimizing risk is hedging. But risk doesn't disappear when a futures contract is purchased or sold. It can only be transferred from the seller of the contract to the buyer. The speculator, in buying futures contracts, is accepting the risk that the price will be lower in the future; he loses money if the spot price for oil in the future is below the contracted price in the futures contract. The airlines are of course trying to reduce their exposure to oil price fluctuations, so they pay speculators to transfer that risk. Who did they think they were doing business with before, just oil companies?

Northwest and others are seeking relief from Congress, to which Chad writes:
One obvious question is how the UNITED STATES CONGRESS plans to "act" to do something about these "foreign" commodities futures markets. The arrogance and ignorance that leads these bozos to believe that global oil markets will bow to the whims of Congress is rather astounding.

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