O/T Speculation, How it Works

IndianaRed · May 14, 2011

This comes up in discussion quite a bit and I found an article that explains it quite well. I knew speculation is important to the economy, now I know why.

Walter William Story -

Here's a non-rocket science question: If you expect a reduced harvest of wheat, corn, rice or any other commodity some time in the future, what would be the wise thing to do about your consumption today? I bet that the average person would answer: Consume less now so that more will be available in the future.

But how in the world can people be encouraged to consume less now? Enter the futures market, which consists of a worldwide group of millions upon millions of traders, often called speculators. Speculators, betting on a future shortage, buy up wheat, corn and rice today in the hopes of making money selling it for a higher price when the bad harvest hits. As speculators buy more and more wheat, corn and rice, they drive up today's prices. As today's price gets higher, people consume less, but more importantly, people do the intelligent thing without bureaucratic edicts. The vital role of the futures trader, or speculator, is to allocate goods over different time periods. And, it's not just wheat, corn and rice that must be allocated over time but all commodities including oil.

Rest of the story at link.
Story

The Dukester · May 14, 2011

Yep, Williams has it figured out pretty good I think. Our President and apparently a majority of our senators and represenatives are doing just what they shouldn't do if they really want to help our economy out of the doldrums..Banning the exploration and developement of our oil resources is just plain cruel and punishing to our enterprising population that utilizes fossil fuels in so many ways to sustain productivity and live in relative comfort and happiness. Ignoring or defying this fact will certainly lead to our eventually becoming a second rate nation because our economic structure, being in jeopardy so long, will ultimately sap the nation's overall strength. We will NEVER be able to pay off our nation's ever increasing debts if we don't use the resources we have instead of draining our wealth paying for petroleum from foreign sources. Conservation efforts and developement of other energy sources will NEVER eliminate the need we will have for foreign oil in the future. Only a total economic collapse would ever eliminate our need for this vital raw material to that level. It would seem that that is apparently what our President and his collaborating members of congress actually want.

Anonymous-0 · May 14, 2011

We won't ever see oil at a dollar a gallon in the future. Oil companies would not profit at that price and would stop producing/drilling just like farmers would not produce corn at 1.00 /bushel because that is below the cost of production.

Wardner · May 14, 2011

I don't have a problem with speculation and trying to forecast the future but it would work alot better if the government would stop bailing out everybody including the big banks and those able bodies who refuse to work and pay for their upkeep.

Walter William's article was written in response to last week's Congressional hearings regarding oil pricing. That dog and pony show is always good for some evening news coverage. Don't know why the big oil CEO's show up. They should send their secretaries.

High oil prices will assure availability for essential uses into the future. West Africa and Brazil are ramping up but will need more investment capital, much of which will come from China. Non essential uses like air travel and energy inefficient housing and cars will become as obsolete as our tractors.

It isn't surprising that precious metals are high. They are three to four times above their cost of production. People are paying the premium so that they can reduce their exposure to paper currency which can be printed to infinity. And it will be as long as the govt continues to pile on debt while subsidizing everything.

We don't have an entirely free market and that is one of the reasons why commodity prices are high. Williams is right in advocating the increased development of our domestic resources.

tlak · May 14, 2011

Without reading the article the first part is all the investors are not millions of speculators, second I don't view a "speculator" as your average investment counselor, the speculator is trying to make an obscene profit off the goods. He in no way is trying to help or fix anything.
The oil companies have been running ads that you may own an oil company, fuel has went up twice the price, but I bet 401k and investments hadn't doubled

rustyfarmall · May 14, 2011

(quoted from post at 10:18:39 05/14/11) This comes up in discussion quite a bit and I found an article that explains it quite well. I knew speculation is important to the economy, now I know why.

Walter William Story -

Here's a non-rocket science question: If you expect a reduced harvest of wheat, corn, rice or any other commodity some time in the future, what would be the wise thing to do about your consumption today? I bet that the average person would answer: Consume less now so that more will be available in the future.

But how in the world can people be encouraged to consume less now? Enter the futures market, which consists of a worldwide group of millions upon millions of traders, often called speculators. Speculators, betting on a future shortage, buy up wheat, corn and rice today in the hopes of making money selling it for a higher price when the bad harvest hits. As speculators buy more and more wheat, corn and rice, they drive up today's prices. As today's price gets higher, people consume less, but more importantly, people do the intelligent thing without bureaucratic edicts. The vital role of the futures trader, or speculator, is to allocate goods over different time periods. And, it's not just wheat, corn and rice that must be allocated over time but all commodities including oil.

Rest of the story at link.
Story

In other words, the best way to increase the price of any given commodity is to convince the general public there is a shortage, and if that shortage did not occur naturally, then the speculators create a shortage. Kinda like Al Capone and his boys did back in the 20s and 30s.

The old law of supply and demand really did work quite well. Let's get back to it.

Welding man · May 14, 2011

My dad, grew up in the depression, he had a name for all crooks and politians and he put them in the same class. He called them racketeers.I used to laugh at him for saying this. Now I don't.

TomH in PA · May 14, 2011

"fuel has went up twice the price, but I bet 401k and investments hadn't doubled"

Well, Exxon stock was around $56 last summer, it was close to $90 a few weeks ago. So if you had invested in it 9 months ago you could've paid for a lot of gas with your profit.

tlak · May 14, 2011

How do you pick the one stock that goes up? All my money is already invested in fuel with no payback.

Traditional Farmer · May 14, 2011

Why not blame the farmers? If they didn't future contract and waited until they had their crops in hand to sell the speculators or future traders wouldn't have anything to trade.

rlp in Co. · May 14, 2011

Speculators are not the problem. The decrease in the value of the dollar is the problem. In 1969 I bought a new car for around $3000. Today that same car would cost around $15,000, or 5 times more dollars. I think gas was around $.75. Five times $.75 is $3.75; exactly where it is today where I live. Who is to blame? The speculators? I think not, it's our govt., but the govt. wants you to blame the speculators. Americans need to wake up and quit letting the news media lead them around like little sheep on a rope.
Why are we borrowing money that we don't have to give to other countries in foreign aid? Why are we in three wars? The only canidate that talks any sense is Ron Paul.

tlak · May 14, 2011

That's 42 years and gas would have risen $.07 a gallon a year. And if it rose that way income, inflation and everything else would have adjusted along with it, and that's probably how it would have went under Gov' regulation instead doubling in 6 months.

IndianaRed · May 14, 2011

Very good points.

Gun guru · May 14, 2011

In 1969 Gasoline at the retail level was 25 cents per gallon.....It went to 45 cents per gallon in 1973. The first Arab oil embargo.

Then gas went up again in 1979 during the Iranian hostage crisis, then was steady for 20 years at $1 or so per gallon then started going up in 2001.

Too many weasels in the US government to allow for more oil drilling here. Our largest oil importer is Canada, with their Alberta tar sands. Canada has the 2nd largest oil reserves in the world after Saudi Arabia.
The Saudis have 270 billion barrels of estimated reserves.

Canada has 170 billion barrels of estimated reserves.

LAA · May 14, 2011

You make good sense Gun Guru but one fact that is not common knowledge is that the USA has the largest proven oil reserves in the world.

LAA · May 14, 2011

Thats the point, tlak, for 20 years, from 1983 to 2003, oil prices remained flat, no adjustment for inflation, which means the price actually went down over that time period. All you have to remember is the definition of commidity, goods that people and companies have to expend capital and labor to produce. Russia, Cuba, Vietnam and China, to name a few, starved tens of millions of people to death during their respective ''revolutions'' because surprise, producers would not produce or deliver their commodities for a negative return. These are historical facts that leftist historians and media elite have not figured out a way to whitewash, as yet.

scotc · May 14, 2011

The problem with speculation, is that today, they have no limits on how much you can speculate. Until Ragaen de-regulated in the 80s, there were limits on how much you could play the futures markets, and basically, if you weren't a large producer, processor, transporter, or retailer/end user, you didn't do much. That ensured that the markets would be a tool to make sure supply and demand could be matched, and that the prices would be set by the people who handled the largest amounts of the commodity. Today, you can buy and sell any amount of a commodity that you have the money to do so, with no intention of ever taking delivery of that commodity. Which has taken the balance between supply and demand out of the equation determining the price. If they would enforce those limits again, or make people who buy futures, take delivery of the commodity, the prices would stabilize where they should be. There is no reason oil prices should be rising while stocks of both refined and unrefined product are at near-record highs and growing.

You'll never hear that on talk radio. I'd like to know just how much the big-name hosts make a year in the commodities markets. That's why you will never hear it from them, they make too much money doing it while giving you a line of BS about how the markets are driven purely by supply and demand.

IndianaRed · May 15, 2011

Thanks, my head is fuller now.

IndianaRed · May 15, 2011

"There is no reason oil prices should be rising while stocks of both refined and unrefined product are at near-record highs and growing".

Oil is traded in dollars. Dollars are being printed at record pace. More dollars - worth less. Oil costs more. Yet, this fact was somehow missing in your post? To you it's all about Reagan, deregulation, and people freely investing their own money in their own way.

Therefore, I rate your posting and postition as a FAIL!

Anonymous-0 · May 15, 2011

Apparently they are listening to you after hearing today's announcement from the Prez..

Rick(MN) · May 15, 2011

Guess that makes you a poor investor....which in turn explains why no one here heeds your advice. Just sayin....

O/T Speculation, How it Works

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