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Gasoline and Onions

Comment

The speculators are ripping us off!

"The skyrocketing price of gas and oil has nothing to do with the fundamentals of supply and demand, and has everything to do with Wall Street firms that are artificially jacking up the price of oil in the energy futures markets. ... (T)he same Wall Street speculators that caused the worst financial crisis since the 1930s through their greed, recklessness and illegal behavior are ripping off the American people again by gambling that the price of oil and gas will continue to go up."

Here we go again. That quote was Sen. Bernie Sanders doing what some always do when the price of oil spikes: complain about speculators. Now, President Obama says he'll investigate them: "We are going to make sure that no one is taking advantage of the American people for their own short-term gain." I assume that his new Financial Fraud Enforcement Working Group, like its predecessors, will uncover nothing untoward.

In America, we don't have a free market — we have a government-saturated economy in which oil companies and other corporations have a cozy relationship with politicians and bureaucrats. That's wrong, but even that can't explain the recent run-up in prices. Oil companies today are no more greedy or clever than they have been all along.

We have to look for a better explanation — and it isn't hard to find. Demand for oil rises with the growth of China, India and other developing countries. When poor people get a little richer, they buy cars, computers and refrigerators. They burn more fuel to make them and to run them. Rising demand, other things being equal, increases prices.

And other things have not been equal. Japan's nuclear plants are out of commission, and Libya, which accounts for about 2 percent of world oil production, is wracked by civil war. This is small compared to previous disruptions in the region, but it still affects the price.

The evil oil-speculator theory also runs up against the fact that the Federal Reserve's inflationary policies (QE2) and other factors have continued the dollar's slide against foreign currencies — to a three-year low. As the dollar loses value, oil sellers demand more for their product.

"Commodities, along with most traded goods globally, are priced in dollars," former Federal Reserve official Gerald P. O'Driscoll of the Cato Institute writes. "It is the old story of too much money chasing too few goods."

If Sanders and other economic illiterates get their way, we'll have new laws banning "speculation." That will raise prices further. Don't believe me? Think back to a previous time when a Senate committee said that "speculative activity causes severe and unwarranted fluctuations in the price. ..." That was in 1958, when people got upset about the price of onions. Fools in Congress addressed that problem by banning speculation on onion prices.

The result? A Financial Times analysis found that the ban made prices less stable. This year, the retail price of onions rose more than the price of gasoline — 36 versus 24 percent. Most years, the price of onions fluctuates more than other goods. No mystery there. Speculators help keep prices stable. When they foresee a future oil shortage — that is, when prices are lower than anticipated in the future — speculators buy lots of it, store it and then sell it when the shortage hits. They know they can charge more when there's relatively little oil on the market. But their selling during the shortage brings prices down from what they would have been had speculators not acted.

Speculators are like the ants in Aesop's "Ants and the Grasshopper" fable: They save resources for lean times. Everyone benefits because everyone has a chance to buy from them in those lean times.

Speculators don't "artificially jack up the price of oil" — they take risks. Those who guess wrong lose a lot of money.

Historically, speculators have been convenient scapegoats, and they have suffered greatly for it. So have the rest of us.

While government should never create political opportunities for speculation, it should also stop interfering with its legitimate economic function.

We all are harmed when central planners take charge.

John Stossel is host of "Stossel" on the Fox Business Network. He's the author of "Give Me a Break" and of "Myth, Lies, and Downright Stupidity." To find out more about John Stossel, visit his site at <a href="http://www.johnstossel.com" <http://www.johnstossel.com>>johnstossel.com</a>. To read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate Web page at www.creators.com.

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Comments

12 Comments | Post Comment
These people are buying goods they don't want and can't use for the hopes of selling them at a higher price in the future. You paint them as heroes, helping us when the oil dries up, but the oil doesn't dry up, it won't dry up anytime in the near future. There is no shortage. I've never gone to the gas station and seen an "out of gas sign", not even two years ago when we hit the previous record highs. No one's seen one of those signs since the 70's (save for during natural disasters). Speculators are creating a shortage by buying up the oil today and selling it tomorrow when it would be better off to just use it today.

Speculators are an injected middle-man. If there really is an oil shortage, why would the oil companies themselves not be holding-back production? It makes more sense for BP or Exxon to hold-back production now, so that they actually have product in the future to sell. But there is no impending shortage. The oil companies are happy to keep producing oil because they know the supply won't dry up. They'll make record profits while the prices keep soaring, and then, when the oil they produced starts to overfill the storage tanks, THEN they will cut back production, and use those record profits to hold back their greed until the next cycle of price hikes and speculation begins.

Oil does not follow supply and demand. First, demand can not be satiated. Oil is necessary for every day life. People HAVE to get to work. Goods HAVE to get to stores. Regardless of price, oil will be purchased. Like water and electricity, oil is a necessity (but unlike oil and electricity, it's not regulated). Second, most of the world's oil comes from OPEC countries, and OPEC is a cartel. In case you aren't familiar, cartels are illegal in the U.S. because they conspire to fix price and limit supply. Cartels go against a free-market, where the consumers are allowed to decide with their wallets. To argue that the "free market" should be allowed to regulate the oil industry when the free market plays no part is absurd.

Speculators are like those people that buy 1000 tickets to a Hannah Montana concert just to re-sell them on Ebay. Are they protecting the public from a shortage in Hannah Montana tickets? No! There are a finite number of tickets to be purchased. Those tickets will run out today or tomorrow, but they will run out. Oil is the same way, if a shortage is coming, it's coming, nothing we can do about that. Either my car runs out today or next week, but the only thing a speculator is going to do is make it more expensive in the near-term. Speculators do not CREATE goods, they simply profit from those goods.

You mention that Onion price fluctuated more than Oil, but how sustained was the fluctuation? Gas has done nothing but steadily rise this year. Maybe onions are $1/lb one day, then $2/lb the next, but then the third day they return to $1/lb. That's a high fluctuation, but the market corrected itself. Oil is $100/barrel today, tomorrow it will be $105, the next day $110. It might take a month or more to get to $200. It's the same PERCENTAGE of fluctuation, but the sustained damage brought on by speculators drawing out the process is far far worse. Speculators keep the price stable, stable at a higher price. It would be better if the price climbed to $200 tomorrow, because that price is not stable, and it would immediately begin to fall. Instead, it will take a slow steady climb, and consumers, who have no say in the matter, will be left footing the bill.
Comment: #1
Posted by: Nathan H.
Wed May 4, 2011 2:13 PM
Nathan, I don't think you even bothered to read the post. Yes, speculators purchase goods they don't want because they think the price will go up in the future. When they sell again (in the future) that will increase the supply and (all things equal) bring down the price. In addition, your final analogy of the prices of onions is correct. The price of gas may go up consistently, but it won't ride a roller-coaster if people are allowed to speculate. Without speculation, you have huge swings in the price of a commodity. Do you want to go to the gas station one week and pay $4/gallon and then return the week after and pay $7/gallon then return the next month to $5/gallon? If the price is rising, at least it's rising slowly and methodically. This makes it predictable so you know you should reduce your consumption.
Comment: #2
Posted by: ChrisT
Wed May 4, 2011 4:53 PM
I'm not sure whether the onion analogy is really appropriate. Onion isn't a real necessity while oil is absolutely critical in our lives. I'm also not sure that you can categorize the rising oil prices is slow and methodical. The price rise has no supply and demand basis and has been rising very quickly. The rise may be "predictable" but it is nevertheless rising to a high value. I complelely understand that if there is in fact a real shortage, prices will go up. Let's put it this way, if I have to choose between fluctuations and consistently high prices, I'd take price fluctuation any day. Because we're not talking about onions here, we critically need oil every single day.
Comment: #3
Posted by: David
Wed May 4, 2011 6:33 PM
I dispute that oil is a 'critical' need. Maybe 'energy' is a critical need but not oil. Fortunately, the free market has given humans many many ways to produce energy oil being one of the most popular, but hardly a monopoly on the energy market. You may depend on oil to get to work today but within a few weeks you could easily start taking a natural gas bus or riding your bike. Besides, oil as a source of energy is cheap! Gas (at the pump) is about $0.03/KWH but solar is anywhere from $0.13 to $0.38 (depending on thing like average peak hours of sunlight and government subsidies).
Comment: #4
Posted by: ChrisT
Thu May 5, 2011 2:03 PM
A commodity is a commodity. It doesn't matter "how necessary" it is.

Actually, the "speculators" don't take possession of oil. They trade in future contracts and one contract is offset with another contract, so futures traders never actually take possession of a barrel of oil. The future's price though, is a signal to suppliers of oil in the spot market to hold back current inventory so that they can sell it later at the future's price.

Futures traders are really just the messenger. Based on rational expectations of the future, they believe the price will increase or decrease. If OPEC reduces supply, if world demand is increasing due to economic growth, if the money supply is increasing relative to real production, or if Congress and/or the President is restricting offshore drilling (e.g., the Gulf of Mexico) or drilling in Alaska, then a rational investor will expect the future price will increase. It's the same reasoning why investors buy stocks, because they believe those stocks will increase in value. If more people buy a stock than sell a stock, the stock price will increase. It would be irrational for an investor to buy a stock if he/she expected it to decrease in price. Futures are no different.

As to gas stations running out of gas. That would only happen if the price were kept artificially low, i.e., the price wasn't allowed to increased with increasing demand and/or decreasing supply. As supply and demand change, prices increase and decrease accordingly. It is a natural market response, so that resources are allocated efficiently.
Only when the government tries to institute price controls, do shortages occur. That's why you had long lines in the 1970's because Jimmy Carter put in place a price ceiling, which means more gas will be demanded than what is available. Often under price controls, not only does demand stay artificially high, but supply tends to decrease since suppliers will be less willing to supply at a below equilibrium price.

It really is just Economics 101. The definition of economics, is the efficient allocation of scarce resources and alternatives for those scarce resources. Price (current price and the future expected price) is determined by the intersection of demand and supply and is the mechanism by which those scarce resources are allocated.
Comment: #5
Posted by: Kurt
Thu May 5, 2011 2:19 PM
Kurt: Very nice post. The only thing I would add is that oil is a physical source of value, like gold. When the Fed is printing dollars far in excess of the amount of physical goods produced in the US, each physical unit of value MUST have a higher price if demand remains the same. It is called inflation. Inflation is caused by government. It is a tax on people who currently have the money to buy things. The proceeds of the inflation tax are given to those who do not produce.
Comment: #6
Posted by: Mike
Sun May 8, 2011 8:41 AM
Blaming speculators for the price of oil is akin to blaming oddsmakers in Vegas for the outcome of the Superbowl. They essentially function the same way. True, if all the oddsmakers conspired together, they could affect the way the rest of us bet on the game by setting unrealistic odds. But this NEVER happens because each oddsmaker (and each speculator) is trying to maximize their own profit (pure evil to liberals, I know) by being as correct as possible to the eventual outcome. What people like Bernie Sanders fail to tell you is that the speculators lose money when they are wrong. If they bet that the price of a commodity is going to skyrocket, they had better be right or they will lose tons of money. Bottom line is that the politicians like to sell voters on the idea that they are going after the boogeymen that are screwing them, all the while it is really they that are screwing us.
Comment: #7
Posted by: Neil
Mon May 9, 2011 1:04 PM
John Stossel is way off I am sorry to say. Oil speculators don't store oil. They do restrict oil consumption by driving up the price. Oil prices are set by the Saudis in dollars. They want the price to be 80$/barrel. The problem is speculators buying 'paper barrels' for the sole purpose of selling them for a profit. That's a 30-40$/barrel premium above the Saudi price. All QE2 did was throw more money in the market for the hedge funds, pension funds, and ETF's and investment banks to use to drive up the price by investing in oil. No economic recovery until this is resolved at the CTFC, FTC, antitrust level.
Comment: #8
Posted by: soreloser
Mon May 9, 2011 1:08 PM
I like J. Stossel's reporting. I think he is one of the most honest investigative reporters, obtaining and reporting on the whole story. However, I have been told about what may be a missing piece of this story. I would like clarification if possible. I have been told that oil futures trading does not require the same financial commitment as other futures. As the rumor has it, most futures speculators much put up say 90% against their bet, whereby oil speculators only have to put up 5% cash against their bet. If this is the case, then the speculator only risks 5% of the contract and really cant lose. Please confirm the facts and the nature of this rumor.
Comment: #9
Posted by: Micheal
Mon May 9, 2011 2:28 PM
Ohhhh, and by the way soreloser. YOU are way off and I am not sorry to say. Your grasp of macroeconomics, facts, and cause and effect, is tenuous at best.
Comment: #10
Posted by: RetREMF
Mon May 9, 2011 5:59 PM
In most cases, speculators are on both sides of future contracts: one group betting the price will go up and the other group betting it will go down. On net, no one "profits." In other cases, suppliers of oil sell contracts while speculators buy them. If speculators bought a lot of contracts, bidding the future price of oil up, suppliers of oil would produce and supply more oil. Increasing the supply of oil will lower the price of oil! Only if speculators somehow bought oil and stored it (which is laughable) could they raise the price of oil when the contracts came due. When someone says speculators increase the price of oil, ask them "how?".
Comment: #11
Posted by: Walter
Tue May 17, 2011 4:23 PM
ChrisT
YOU may be able to take a natural gas bus to work or even ride your bike. YOU most likely also live in a very urban area, probably even a metropolitan like New York or LA. HOWEVER, a vast majority of us live in more rural areas that have almost no form of public transportation. I use the disclaimer of "almost" because a gas burning bus is used to transport the elderly that sign up for the program. The rest of drive anywhere from 10-50 miles (sometimes more) to go to work everyday. These are not roads that have sidewalks or wide lanes for cyclists. These are narrow, curvy roads on rolling hills. For US, Gas is absolutely a critical need! Not to mention, the average income in such rural areas can range from $30k-50k/year (with more below those numbers than above). Suffice to say, these high gas prices really hurt us in the wallet region.
Comment: #12
Posted by: JessieB
Sun May 22, 2011 6:27 AM
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